Item 1B.
Unresolved Staff Comments.
Not applicable.
Properties
The Company conducts business from Bank of Ruston’s main office and one full-service banking office. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to the our offices at December 31, 2010.
The Company is not presently involved in any legal proceedings of a material nature. From time to time, we are a party to legal proceedings incidental to our business to enforce our security interest in collateral pledged to secure loans made by Bank of Ruston.
PART II
Item 5.
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Century Next Financial’s common stock is quoted on the OTC Bulletin Board under the symbol “CTUY”. The common stock was issued at a price of $10.00 per share in connection with the Bank’s mutual to stock conversion and the initial public offering of the Company’s common stock and commenced trading on October 1, 2010. As of March 29, 2011, there were 1,058,000 shares of common stock outstanding, held by approximately 189 shareholders of record, not including the number of persons or entities whose stock is held in nominee or “street” name through various brokerage firms and banks.
Presented below is the high and low bid information for Century Next Financial’s common stock for the quarter ended December 31, 2010. The over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Information relating to bid quotations has been obtained from the Nasdaq Stock Market, Inc. The Company has not declared or paid any cash dividends.
(b) Not applicable.
(c) Not applicable.
Item 6.
Item 6.
Selected Financial Data.
Set forth below is selected summary historical financial and other data of Century Next Financial Corporation. We have prepared this information using the consolidated financial statements of Century Next Financial and its subsidiary, Bank of Ruston for the two years ended December 31, 2010. When you read this summary historical financial data, it is important that you also read the historical financial statements and related notes contained in Item 8 of this Form 10-K, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(1)
With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods. Ratios for the three month periods are annualized.
(2)
Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities, and net interest margin represents net interest income as a percentage of average interest-earning assets.
(3)
The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income.
(4)
Asset quality ratios are end of period ratios, except for net charge-offs to average loans receivable.
(5)
Non-performing loans consist of all loans 90 days or more past due and all non-accruing loans. Non-performing assets consist of non-performing loans and other repossessed assets.
(6)
Capital ratios are end of period ratios.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Century Next Financial’s profitability depends primarily on net interest income, which is the difference between interest income earned on interest-earning assets, principally loans, and interest expense paid on interest-bearing liabilities, principally deposits. Net interest income is dependent upon the level of interest rates and the extent to which such rates are changing. Century Next Financial’s profitability also depends, to a lesser extent, on interest-earning deposits in other institutions, non-interest income, borrowings from the Federal Home Loan Bank of Dallas, provision for loan losses, non-interest expenses and federal income taxes.
For our portfolio loans, we originate principally short-term loans of three to five years which amortize over longer periods up to 30 years and require the payment of principal at stated maturity. Most of such loans are refinanced with Bank of Ruston at the end of their term due to a renewal process with reduced fees and costs. It has been our policy to renew such loans at a rate no greater than 2% over the prior rate.
We sell a substantial amount of our long-term, fixed rate single-family residential mortgage loans into the secondary market, although we also retain some of such loans for portfolio. In recent years, we have emphasized commercial real estate lending and lines of credit which amounted to $12.9 million, or 17.9% of our total loans, at December 31, 2010. Typically, single-family loans involve a lower degree of risk and carry a lower yield than commercial real estate, construction, commercial business and consumer loans. Our loans are primarily funded by certificates of deposit, which typically have a higher interest rate than savings accounts. At December 31, 2010, certificates of deposit amounted to $38.7 million, or 49.7% of total deposits. Our certificates of deposit decreased $5.6 million at December 31, 2010 compared to the prior year, while our transaction accounts increased $7.5 million over the same period as we implemented our strategy to grow retail core deposits. We had $415,000 in borrowings outstanding from the Federal Home Loan Bank of Dallas as of December 31, 2010, compared to none at December 31, 2009. Although we will attempt to diversify into other deposit products in order to improve our net interest margin, we anticipate that certificates of deposit will continue to be a primary source of funding for our assets in the near term.
Our results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially affect our financial condition and results of operations.
Business Strategy
Our business strategy is focused on operating a growing and profitable community-oriented financial institution. Below are certain of the highlights of our business strategy:
•
Growing Our Loan Portfolio. We plan to expand our origination of commercial real estate loans secured by owner-occupied commercial real estate and investment real estate with strong guarantor support. We plan to continue to emphasize originating short-term one-to four family residential loans for portfolio and selling a significant amount of our one-to four-family residential loans having longer terms into the secondary market. We plan to build on our banking relationships with small- and medium-sized businesses in our local market area. As a local community bank with a senior management team that has significant commercial banking experience in Lincoln Parish and the contiguous communities, Bank of Ruston is positioned to more effectively meet the commercial banking needs of local businesses that are currently underserved by larger financial institutions that place more of an emphasis on developing large commercial banking relationships. Bank of Ruston’s ability to provide small- and medium-sized commercial banking customers with local decision-making and superior service will be a core marketing focus in competing for commercial real estate loans and deposits. We will continue to pursue residential lending which we expect will also be a potential source of core deposit growth in our local market and originating loans throughout the state of Louisiana.
•
Growing our Retail Core Deposits. We plan to grow our retail deposits by emphasizing transactional deposit accounts. According to the market share report of the Federal Deposit Insurance Corporation, as of June 30, 2010, the most recent date for which information is available, Bank of Ruston had 9.7% of the market in Lincoln Parish which was the fourth largest, following one bank that operates nationally and two regional banks. Growth of retail core deposits will be pursued through offering products and services that meet the full service banking needs of all age groups and developing more of a sales culture in the branches. Advertising, promotions and offering attractive rates on certain transaction accounts may also be utilized as means to increase retail core deposits.
•
Maintaining High Asset Quality. We continue to maintain high levels of asset quality. At December 31, 2010, we had $774,000 of non-performing loans in our portfolio and no real estate acquired in foreclosure. We attribute our high asset quality to our prudent and conservative underwriting practices, which include low loan-to-value ratios, personal guarantees, cross-collateralization and tailoring loan terms for the individual customer. We intend to maintain high asset quality, even as we grow Bank of Ruston.
•
Continuing to Provide Exceptional Customer Service. As a community oriented savings bank, we take pride in providing exceptional customer service as a means to attract and retain customers. We deliver personalized service to our customers that distinguishes us from the large regional banks operating in our market area. Our management team has strong ties to, and deep roots in, the community. We believe that we know our customers’ banking needs and can respond quickly to address them.
Critical Accounting Policies
In reviewing and understanding financial information for Century Next Financial, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our consolidated financial statements. The accounting and financial reporting policies of Century Next Financial conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.
Allowance for Loan Losses. The allowance for loan losses is maintained at a level to provide for probable credit losses related to specifically identified loans and for losses inherent in the loan portfolio that have been incurred as of the balance sheet date. The allowance for loan losses is comprised of specific allowances and a general allowance. Specific provisions are assessed for each loan that is reviewed for impairment or for which a probable loss has been identified. The allowance related to loans that are identified as impaired is based on discounted expected future cash flows using the loan’s initial effective interest rate, the observable market value of the loan, or the estimated fair value of the collateral for certain collateral dependent loans. Factors contributing to the determination of specific provisions include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions. General allowances are established based on historical charge-offs considering factors that include risk rating, concentrations and loan type. For the general allowance, management also considers trends in delinquencies and non-accrual loans, concentrations, volatility of risk ratings and the evolving mix in terms of collateral, relative loan size and the degree of seasoning within the various loan products.
Our allowance levels may be impacted by changes in underwriting standards, credit administration and collection policies, regulation and other factors which affect the credit quality and collectability of the loan portfolio also impact the allowance levels. The allowance for loan losses is based on management’s estimate of probable credit losses inherent in the loan portfolio; actual credit losses may vary from the current estimate. The allowance for loan losses is reviewed periodically, taking into consideration the risk characteristics of the loan portfolio, past charge-off experience, general economic conditions and other factors that warrant current recognition. As adjustments to the allowance for loan losses become necessary, they are reflected as a provision for loan losses in current-period earnings. Actual loan charge-offs are deducted from and subsequent recoveries of previously charged-off loans are added to the allowance.
Other-Than-Temporary Impairment. We review our investment portfolio on a quarterly basis for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer including any specific events that may influence the operations of the issuer, and the intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market. Inherent in this analysis is a certain amount of imprecision in the judgment used by management.
We recognize credit-related other-than-temporary impairment on debt securities in earnings while noncredit-related other-than-temporary impairment on debt securities not expected to be sold is recognized in accumulated other comprehensive income. We assess whether the credit loss existed by considering whether (a) we have the intent to sell the security, (b) it is more likely than not that we will be required to sell the security before recovery, or (c) we do not expect to recover the entire amortized cost basis of the security. We may bifurcate the other-than-temporary impairment on securities not expected to be sold or where the entire amortized cost of the security is not expected to be recovered into the components representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss is recognized through earnings.
Corporate debt securities are evaluated for other-than-temporary impairment by determining whether it is probable that an adverse change in estimated cash flows has occurred. Determining whether there has been an adverse change in estimated cash flows involves the calculation of the present value of remaining cash flows compared to previously projected cash flows. We consider the discounted cash flow analysis to be our primary evidence when determining whether credit-related other-than-temporary impairment exists on corporate debt securities.
Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws. Realizing our deferred tax assets principally depends upon our achieving projected future taxable income. We may change our judgments regarding future profitability due to future market conditions and other factors. We may adjust our deferred tax asset balances if our judgments change.
Use of Estimates. In preparing the financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the Company’s financial condition, results of operations, changes in stockholders’ equity and cash flows for the periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions. Certain amounts reported in prior periods have been reclassified to conform to the current period presentation. Such reclassifications had no effect on previously reported equity or net income.
Comparison of Financial Condition at December 31, 2010 and December 31, 2009
Century Next Financial’s total assets increased $12.2 million, or 14.3%, to $98.1 million at December 31, 2010 compared to $85.9 million at December 31, 2009. This increase was primarily due to increases in loans receivable, net, of $4.6 million, cash and cash equivalents of $2.9 million and investment securities of $4.3 million. The increases in total assets were made possible in large part by the $9.8 million net proceeds raised in the Company’s stock offering completed on September 30, 2010.
Loans receivable, net, increased $4.6 million, or 6.9%, at December 31, 2010 compared to December 31, 2009. The increase in loans receivable, net was due primarily to an increase in land loans of $2.6 million, commercial business loans of $1.5 million and consumer non-real estate loans of $1.4 million. Home equity lines of credit decreased $447,000 and residential construction loans decreased $588,000.
Cash and cash equivalents increased $2.9 million or 62.2% to $7.6 million at December 31, 2010 compared to $4.7 million at December 31, 2009 primarily as a result of normal deposit inflows and the proceeds of the Company’s stock offering. Investment securities increased $4.3 million, or 59.3%, at December 31, 2010 from $7.3 million at December 31, 2009. The increase in investment securities was due primarily to purchases of U.S. Government and agency obligations during fiscal 2010, partially offset by payments received through the maturities of securities.
Total liabilities increased $2.4 million or 3.1% to $79.8 million at December 31, 2010 compared to $77.4 million at December 31, 2009, due primarily to a net increase in interest-bearing deposits of $2.0 million. The Company had FHLB advances in the amount of $415,000 outstanding at December 31, 2010, compared to none at December 31, 2009.
Total equity increased $9.8 million to $18.3 million at December 31, 2010, compared to $8.5 million at December 31, 2009, primarily due to the $9.8 million in net proceeds raised in the Company’s stock offering completed on September 30, 2010, offset partially by the purchase of Employee Stock Ownership Plan Shares for $667,000. Also contributing to the increase in shareholders’ equity at December 31, 2010, were an increase in the Company’s accumulated other income of $3,000 and net income of $656,000 for the year ended December 31, 2010.
The increase in loans receivable, net, at December 31, 2010 compared to December 31, 2009 was funded by the increase in deposits of $2.0 million and in part by the net proceeds raised in the Company’s stock offering. At December 31, 2010, Bank of Ruston had $588,000 of securities sold under agreements to repurchase compared to $907,000 at December 31, 2009.
The increase in total deposits of $2.0 million or 2.6% from December 31, 2009 to December 31, 2010 was due to increases in checking and money market accounts. Checking accounts and money market accounts increased $2.9 million, or 13.8%, and $4.5 million, or 113.7%, respectively, at December 31, 2010 compared to December 31, 2009. Certificate of deposit accounts decreased by $5.6 million, or 12.6%, at December 31, 2010 compared to December 31, 2009.
Comparison of Operating Results for the Years Ended December 31, 2010 and 2009
Century Next Financial’s net income amounted to $656,000 for the year ended December 31, 2010, an increase of $192,000 or 41.4% compared to net income of $464,000 for the year ended December 31, 2009. This increase was primarily due to an increase in interest income of $209,000 and a decrease in interest expense of $292,000.
Net Interest Income. Net interest income amounted to $3.6 million for the year ended December 31, 2010 compared to $3.1 million for the year ended December 31, 2009. The $501,000, or 16.1%, increase was primarily due to an increase of $209,000, or 4.7%, in total interest income as a result of an increase in volume of interest earning assets and a decrease of $292,000, or 22.5%, in interest expense on borrowings and deposits due to an overall decline in the average cost of funds.
The average interest rate spread increased from 3.91% for the year ended December 31, 2009 to 4.05% for the year ended December 31, 2010 while average interest-earning assets increased from $75.0 million to $85.0 million during the same periods. Average interest-earning assets to average interest-bearing liabilities increased from 114.20% for the year ended December 31, 2009 to 116.50% for the year ended December 31, 2010. The increase in the average interest rate spread reflects the decrease in average rate paid on interest-bearing liabilities from 1.97% in fiscal 2009 to 1.38% in fiscal 2010 compared to a decrease in the average yield on interest earning assets from 5.88% in 2009 to 5.43% in 2010. Net interest margin increased 10 basis points from 4.15% to 4.25% at December 31, 2009 and 2010, respectively, primarily due to a decrease of 59 basis points in the average rate paid on interest-bearing liabilities compared to a decrease of 45 basis points in the average yield on interest-earning assets for the periods.
Interest income increased by $209,000, or 4.7%, to $4.6 million for the year ended December 31, 2010 compared to the year ended December 31, 2009. Such increase was primarily due to an increase in average balance of loans receivable from $64.9 million for the year ended December 31, 2009 to $71.0 million for the year ended December 31, 2010, which was offset in part by the decrease in the average yield on loans receivable. The decrease in the average yield on loans from 6.45% in fiscal 2009 to 6.25% in fiscal 2010 reflects changes in the market rates of interest during fiscal 2010.
Interest expense decreased by $292,000 or 22.5%, to $1.0 million for the year ended December 31, 2010 compared to $1.3 million for the year ended December 31, 2009 primarily as a result of a decrease in the average rate paid on certificate of deposit and savings accounts which offset the increase in average balance of such accounts. Such decrease in average rate was due to a decline in cost of certificates of deposit as higher cost certificates of deposit repriced at a lower rate during the fiscal year.
Non-Interest Income. Non-interest income, which includes fees and service charges, realized gains and losses on investments and other operating income, amounted to $900,000 for the year ended December 31, 2010, an increase of $127,000, or 16.4% compared to non-interest income of $773,000 for the year ended December 31, 2009. The increase was due primarily to an increase of $154,000 in loan fees and gains on loans held for sale, and a $53,000 gain on sale of fixed assets as a result of the sale of excess land at the site of our branch office opened in February, 2009, partially offset by a $78,000 decrease in other operating income as a result of a $91,000 decrease in realized income on life insurance which occurred in the year ended December 31, 2009, but not in 2010.
Non-Interest Expense. Non-interest expense increased by $256,000, or 8.0%, to $3.5 million for the year ended December 31, 2010, compared to $3.2 million for the year ended December 31, 2009. The increase was primarily the result of a $155,000 increase in compensation and employee benefits expense, a $17,000 increase in occupancy expense, a $30,000 increase in service bureau expense, a $20,000 increase in advertising expense, and a $85,000 increase in other operating expense. The increase in other operating expense was due to a $26,000 increase in legal and other professional expense and a $59,000 increase in other expense.
Income Tax Expense. Income tax expense amounted to $335,000 and $182,000 for the fiscal years ended December 31, 2010 and 2009, respectively. Our effective tax rate was 33.7% and 28.2% for fiscal 2010 and 2009, respectively.
Average Balances, Net Interest Income, and Yields Earned and Rates Paid. The following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be. The table also reflects the yields on Century Next Financial’s interest-earning assets on costs of interest-bearing liabilities at December 31, 2010 and 2009.
(1)
Calculated net of deferred fees and discounts, loans in process and allowance for loan losses.
(2)
Equals net interest income divided by average interest-earning assets.
Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Provision for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred in our loan portfolio. The allowance for loan losses is maintained at a level to provide for probable credit losses related to specifically identified loans and for losses inherent in the loan portfolio that have been incurred as of the balance sheet date. The allowance for loan losses is comprised of specific allowances and a general allowance.
Specific provisions are assessed for each loan that is reviewed for impairment or for which a probable loss has been identified. The allowance related to loans that are identified as impaired is based on discounted expected future cash flows using the loan’s initial effective interest rate, the observable market value of the loan, or the estimated fair value of the collateral for certain collateral dependent loans. Factors contributing to the determination of specific provisions include the financial condition of the borrower, changes in the value of pledged collateral and general economic conditions. General allowances are established based on historical charge-offs considering factors that include risk rating, concentrations and loan type. For the general allowance, management also considers trends in delinquencies and non-accrual loans, concentrations, volatility of risk ratings and the evolving mix in terms of collateral, relative loan size and the degree of seasoning within the various loan products.
Changes in underwriting standards, credit administration and collection policies, regulation and other factors which affect the credit quality and collectability of the loan portfolio also impact the allowance levels. The allowance for loan losses is based on management’s estimate of probable credit losses inherent in the loan portfolio; actual credit losses may vary from the current estimate. The allowance for loan losses is reviewed periodically, taking into consideration the risk characteristics of the loan portfolio, past charge-off experience, general economic conditions and other factors that warrant current recognition. As adjustments to the allowance for loan losses become necessary, they are reflected as a provision for loan losses in current-period earnings. Actual loan charge-offs are deducted from and subsequent recoveries of previously charged-off loans are added to the allowance.
Loan loss provisions of $43,000 were made to the allowance during the year ended December 31, 2010 compared to a provision of $16,000 in fiscal 2009. To the best of management’s knowledge, the allowance is maintained at a level believed to cover all known and inherent losses in the loan portfolio, both probable and reasonable to estimate.
Exposure to Changes in Interest Rates
Bank of Ruston’s ability to maintain net interest income depends upon its ability to earn a higher yield on assets than the rates it pays on deposits and borrowings. Bank of Ruston’s interest-earning assets consist primarily of residential mortgage loans which have short-term fixed rates of interest for three to five years which amortize up to 30 years and commercial loans which have fixed or, in some limited circumstances, adjustable rates of interest and terms up to five years. Bank of Ruston’s interest-bearing liabilities primarily consist of higher rate certificates of deposit rather than other types of deposit products. Consequently, Bank of Ruston’s ability to maintain a positive spread between the interest earned on assets and the interest paid on deposits and borrowings can be adversely affected when market rates of interest rise. At December 31, 2010, certificates of deposit amounted to $38.7 million or 49.7% of total assets at such date.
Net Portfolio Value Analysis. Our interest rate sensitivity is monitored by management through the use of models which generate estimates of the change in net portfolio value (“NPV”) over a range of interest rate scenarios. NPV represents the market value of portfolio equity, which is different from book value, and is equal to the market value of assets minus the market value of liabilities with adjustments made for off-balance sheet items. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The following table sets forth our NPV as of December 31, 2010 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in NPV requires the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV simulation model above provides an indication of interest rate risk exposure at a particular point in time, such model is not intended to and do not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.
Liquidity and Capital Resources
Century Next Financial maintains levels of liquid assets deemed adequate by management. Century Next Financial adjusts its liquidity levels to fund deposit outflows, repay its borrowings and to fund loan commitments. Century Next Financial also adjusts liquidity as appropriate to meet asset and liability management objectives.
Century Next Financial’s primary sources of funds are deposits, amortization and prepayment of loans and to a lesser extent, funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Bank of Ruston sets the interest rates on its deposits to maintain a desired level of total deposits. In addition, Bank of Ruston invests excess funds in short-term interest-earning accounts and other assets, which provide liquidity to meet lending requirements. Bank of Ruston’s cash and cash equivalents amounted to $7.6 million at December 31, 2010.
A significant portion of Bank of Ruston’s liquidity consists of non-interest earning deposits. Bank of Ruston’s primary sources of cash are principal repayments on loans and increases in deposit accounts. If Bank of Ruston requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Dallas, which provide an additional source of funds. At December 31, 2010, Bank of Ruston had advances of $415,000 from the Federal Home Loan Bank of Dallas and had $41.2 million in borrowing capacity. Additionally, at December 31, 2010, Bank of Ruston was a party to a Master Purchase Agreement with First National Bankers Bank whereby Bank of Ruston may purchase Federal Funds from First National Bankers Bank in an amount not to exceed $2.5 million. There were no amounts purchased under this agreement as of December 31, 2010.
At December 31, 2010, Bank of Ruston had outstanding loan commitments of $3.8 million to originate loans. At December 31, 2010, certificates of deposit scheduled to mature in less than one year totaled $30.1 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In addition, in a rising interest rate environment, the cost of such deposits could be significantly higher upon renewal. Bank of Ruston intends to utilize its liquidity to fund its lending activities.
Bank of Ruston is required to maintain regulatory capital sufficient to meet tier 1 leverage, tier 1 risk-based and total risk-based capital ratios of at least 4.0%, 4.0% and 8.0%, respectively. At December 31, 2010, Bank of Ruston exceeded each of its capital requirements with ratios of 14.6%, 21.1% and 21.4%, respectively.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. Our exposure to credit loss from non-performance by the other party to the above-mentioned financial instruments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. In general, we require collateral or other security to support financial instruments with off-balance sheet credit risk.
Commitments. The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans in process at December 31, 2010.
Contractual Cash Obligations. The following table summarizes our contractual cash obligations, consisting of certificates of deposit, at December 31, 2010.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
[Letterhead of Heard, McElroy & Vestal LLP]
The Board of Directors
Century Next Financial Corporation
Ruston, Louisiana
Report of Independent Registered Public Accounting Report
We have audited the accompanying consolidated balance sheets of Century Next Financial Corporation and Subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Century Next Financial Corporation and Subsidiary as of December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Heard, McElroy & Vestal LLP
March 21, 2011
Shreveport, Louisiana
CENTURY NEXT FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
The accompanying notes are an integral part of the consolidated financial statements.
CENTURY NEXT FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
The accompanying notes are an integral part of the consolidated financial statements.
CENTURY NEXT FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
The accompanying notes are an integral part of the consolidated financial statements.
CENTURY NEXT FINANCIAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of the consolidated financial statements.
CENTURY NEXT FINANCIAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
1.
Summary of Significant Accounting Policies
On September 30, 2010, Bank of Ruston completed its conversion from a federally chartered mutual savings bank to a stock savings bank. In connection with the conversion, Century Next Financial Corporation was formed as the holding company for Bank of Ruston and offered and sold 1,058,000 shares of common stock for a total of $9.8 million in net proceeds. During 2005, Bank of Ruston (formerly, Ruston Building & Loan Association) converted from a state chartered, mutual building and loan association to a federally chartered, mutual savings bank. The change in the entity’s name resulted from this conversion.
a.
Investments in securities
The Bank’s investments in securities are classified in two categories and accounted for as follows:
•
Securities Held to Maturity. Bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized in interest income using the straight-line method over the period to maturity.
•
Securities Available for Sale. Securities available for sale consist of bonds, notes, debentures, and certain equity securities not classified as trading securities nor as securities held to maturity.
Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. No such write-downs were made in fiscal 2010 or fiscal 2009.
Unrealized gains and losses, net of income taxes, on securities available for sale are accounted for in accumulated other comprehensive income as part of retained earnings. Changes in unrealized gains and losses on these securities are separately reported as components of other comprehensive income.
Gains and losses on the sale of securities available for sale are determined using the specific-identification method.
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported 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 losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.
Most of the Bank’s business activity is with customers located within the Ruston, Louisiana area. The loan categories are detailed in Note 3. The economy of the area is diversified but depends on timber, agriculture, and oil and gas. Although these areas of the economy and the economy in general in the area are doing well, they could decline in the future.
1.
Summary of Significant Accounting Policies (Continued)
While management uses available information to recognize losses on loans, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans may change materially in the near future.
c.
Loans and allowance for loan losses
Loans are stated at the amount of unpaid principal, reduced by deferred loan fees and an allowance for loan losses. Deferred loan fees are generally recognized as income under the effective yield method. Interest on loans is calculated by using the simple interest method on daily or monthly balances of the principal amount outstanding. Loans held for sale are reported at the lower of cost or market, with market value determined on the aggregate method.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay.
Accrual of interest is discontinued on a loan after it is 90 days or more past due and when management believes, after considering economic and business conditions and collection efforts, that the borrowers’ financial condition is such that collection of interest is unlikely. Past due status is based on contractual terms of the loan. However, loans may be placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans held for sale are disposed of within sixty days of origination; consequently, cost approximates fair value.
d.
Premises and equipment
Premises and equipment are carried at cost less accumulated depreciation. Depreciation of premises and equipment is provided over the estimated useful lives of the respective assets using straight-line and accelerated methods. Expenditures for major renewals and betterments of premises and equipment are capitalized and those for maintenance and repairs are charged to expense as incurred.
e.
Bank Owned Life Insurance
The Bank has purchased insurance policies on the lives of certain directors and executive officers of the Bank. The Bank purchased the policies to insure the lives of certain key executives and provide additional benefits for their beneficiaries. The cash surrender value of the insurance policies, up to the total amount of premiums paid, is recorded as an asset in the balance sheets and included in other assets. At December 31, 2010 and December 31, 2009, the cash surrender value amounted to $2.5 million, and $1.9 million, respectively. The Bank may not invest more than 25 percent of its total capital in bank-owned life insurance without first notifying and obtaining authorization from the Bank’s OTS Regional Office. The bank-owned life insurance provides an attractive tax-exempt return to the Bank.
1.
Summary of Significant Accounting Policies (Continued)
Deferred income taxes are recognized for the tax consequences of differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Such differences arise primarily from differences in computing the provision for possible loan losses, and differences in recognizing interest expense.
g.
Cash and cash equivalents
For purposes of the statement of cash flows, the Bank considers all cash on hand and demand deposits with other banks to be cash equivalents. The Bank is required to maintain balances on hand or with the Federal Reserve Bank. At December 31, 2010 and 2009, these reserve (in thousands) requirements amounted to $581 and $533, respectively.
Advertising costs are expensed as incurred. Such costs (in thousands) amounted to approximately $139 and $119 for December 31, 2010 and 2009, respectively.
i.
Comprehensive income (loss)
Generally accepted accounting principles (“GAAP”) generally require that recognized revenues, expenses, gains, and losses be included in net earnings. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheets, such items, along with net earnings, are components of comprehensive income. The Company presents comprehensive income in its statements of retained earnings.
j.
Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current period presentation.
k.
Recent accounting pronouncements
In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-01, Topic 105 - Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168 - The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-01 amends the ASC for the issuance of FASB Statement (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-1 includes SFAS 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the Statement. The ASC became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities Exchange Committee (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. As of the effective date of this Statement, September 15, 2009, the ASC supersedes all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC is no longer authoritative. This Statement became effective for the Bank’s financial statements beginning in the interim period ended September 30, 2009.
In April 2009, the FASB issued guidance under ASC Topic 825. The guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance was adopted for interim reporting periods ending after June 15, 2009.
1.
Summary of Significant Accounting Policies (Continued)
The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force (“EITF”) Abstracts. Instead, it now issues Accounting Standards Updates. The FASB does not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates serve only to update the ASC, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the ASC. FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, which became effective on November 13, 2008, identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 arranged these sources of GAAP in a hierarchy for users to apply accordingly. Upon becoming effective, all of the content of the ASC carries the same level of authority, effectively superseding SFAS 162. In other words, the GAAP hierarchy has been modified to include only two levels of GAAP: authoritative and non-authoritative. As a result, this Statement replaces SFAS 162 to indicate this change to the GAAP hierarchy. The adoption of the ASC and ASU 2009-01 did not have any effect on the Bank’s results of operations or financial position. All references to accounting literature included in the notes to the consolidated financial statements have been changed to reference the appropriate sections of the ASC.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 with new disclosure requirements and clarification of existing disclosure requirements. New disclosures required include the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity will be required on a gross rather than net basis. The ASU provides additional guidance related to the level of disaggregation in determining classes of assets and liabilities and disclosures about inputs and valuation techniques. The amendments are effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the reconciliation for level 3 activity on a gross basis which will be effective for fiscal years beginning after December 15, 2010.
2.
Investment Securities
The carrying amounts (in thousands) of investment securities and their approximate fair values at December 31, 2010 and 2009 are as follows:
2.
Investment Securities (Continued)
The following table shows the gross unrealized losses (in thousands) and fair value of the Bank’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010 and 2009.
2.
Investment Securities (Continued)
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Market changes in interest rates and market changes in credit spreads will cause normal fluctuations in the market value of securities and the possibility of temporary unrealized losses. The Company has determined that there was no other-than-temporary impairment associated with these securities at December 31, 2010 and 2009.
The scheduled maturities of debt securities at December 31, 2010 are as follows:
The FHLB stock is a restricted investment security, and is carried at cost. Total (in thousands) at December 31, 2010 was $280; at December 31, 2009, it was $280.
The following table summarizes investment activities (in thousands) for the periods ending December 31, 2010 and 2009:
Loans (in thousands) at December 31, 2010 and 2009, consist of the following:
Changes in the allowance for loan losses (in thousands) are summarized as follows:
Loans on which the accrual of interest has been discontinued amounted to approximately $423 and $248 at December 31, 2010 and 2009, respectively. Had nonaccrual loans been current during the year per their original terms, interest income would have increased by approximately $22 for 2010 and $10 for 2009. Impaired loans are not significant.
The Bank is obligated to repurchase those mortgage loans sold which do not have complete documentation or which experience an early payment default. At December 31, 2010 and December 31, 2009, loans sold (in thousands) for which the Bank is contingently liable to repurchase amounted to approximately $10,793 and $7,919. The Bank also is committed to sell loans (in thousands) approximating $801 and $761 at December 31, 2010 and 2009, respectively.
The Bank grants consumer, commercial and residential loans to customers in Ruston, Louisiana and the surrounding area. Although the Bank has a diversified loan portfolio, a substantial portion of loan repayment is dependent upon the general economic sector.
4.
Premises and Equipment
Premises and equipment (in thousands) at December 31, 2010 and 2009, are summarized as follows:
Depreciation (in thousands) charged to operations amounted to $205 in 2010 and $184 in 2009 for the years ending in December.
The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I and Tangible capital (as defined) to average assets (as defined). Management believes, as of December 31, 2010, that the Bank meets all capital adequacy requirements to which it is subject.
5.
Regulatory Capital (Continued)
As of December 31, 2010, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. The Bank’s actual capital amounts (in thousands) and ratios are also presented in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.
The following is a reconciliation of the Bank’s equity under GAAP to regulatory capital at the dates indicated (dollars in thousands).
6.
Related Party Transactions
At December 31, 2010 and 2009, certain officers, directors, or companies in which they have 10% or more beneficial ownership were indebted to the Bank in the approximate aggregate amounts (in thousands) of $897 and $2,249, respectively. Such parties held deposits (in thousands) in the Bank in the approximate amounts of $3,763 and $4,680 at December 31, 2010 and 2009, respectively. Total principal additions (in thousands) were $582 and $1,716 and total principal payments (in thousands) were $1,934 and $1,805 for the years ended December 31, 2010 and 2009, respectively.
7.
Commitments and Contingencies
In the ordinary course of business, the Bank has outstanding commitments on which management does not anticipate losses. They include, among other things, commitments to extend credit and letters of credit undertaken in the normal course of business. As of December 31, 2010 and December 31, 2009, the Bank had $7,429 and $1,993, respectively, of loan commitments outstanding (in thousands), including loans in process and unused lines of credit. Letters and standby letters of credit (in thousands) outstanding at December 31, 2010 and December 31, 2009 amounted to $159 and $1,036, respectively.
7.
Commitments and Contingencies (Continued)
When entered into, these commitments represent off-balance sheet risk to the Bank, with the contractual notional amount representing the Bank’s exposure to credit loss in the event of nonperformance by the other party to the instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. They generally have fixed expiration dates and require payment of a fee. Since many commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis, and obtains an amount of collateral it deems sufficient.
The Bank is party to agreements for the provision of data processing and imaging services. These agreements generally run until October 2011 at approximately $11,000 (including a $3,000 fixed fee) per month. Certain agreements automatically renew for a successive five year term at market rates at the end of the current term, if no advance notice of termination is given.
Future estimated minimum payments (in thousands) at December 31, 2010 under these agreements are as follows:
As of December 31, 2010 and 2009, the Bank had interest rate lock commitments and corresponding forward sale commitments related to these interest rate lock commitments with notional amounts (in thousands) of $1,278 and $1,483, respectively. The fair value of such commitments offset to zero, and the gross value was immaterial.
Deposits (in thousands) at December 31, 2010 and December 31, 2009 are summarized as follows:
8.
Deposits (Continued)
Scheduled maturities of time deposits, excluding IRA accounts, at December 31, 2010 are as follows:
Time deposits (in thousands) of $100,000 or more amounted to approximately $14,102 and $18,985 at December 31, 2010 and 2009, respectively.
Income tax expense (in thousands) as of December 31, 2010 and 2009 is summarized as follows:
A reconciliation of the federal statutory rate to the effective income tax rate for the years ended December 31, 2010 and 2009 is as follows:
The components of the deferred income taxes (in thousands) included in other assets in the statements of condition are approximately as follows:
9.
Income Taxes (Continued)
These deferred tax assets and liabilities arise from temporary differences related to the allowance for loan losses, accumulated depreciation, accrued interest payable, and unrealized gains or losses on investment securities available for sale. The major difference in reported income tax expense and expected income taxes based upon pretax income results from Community Renewal credits and changes in the cash surrender value of life insurance. Other liabilities at December 31, 2010 and 2009 include income taxes payable (in thousands) of $245 and $21.
The Bank, as required by accounting standards, reviewed its various tax positions taken or expected to be taken in its tax returns and has determined it does not have unrecognized tax benefits, nor does it expect that position to change significantly over the next twelve months. The Bank recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2010, it has not accrued interest or penalties related to uncertain tax positions.
The Bank files an annual U.S. Federal income tax return. Federal income tax returns for the tax years 2008 and beyond remain subject to examination by the Internal Revenue Service.
Foreclosed real estate represents property acquired through foreclosure or deeded in lieu of foreclosure on loans on which the borrowers have defaulted as to payment of principal and interest. The Bank also transfers to this category those loans meeting the applicable criteria for loans considered repossessions insubstance. Amounts are carried at the lower of cost of acquisition or the asset’s fair value less estimated costs to sell. Reductions in the balance at the date of acquisition are charged to the allowance for loan losses. Any subsequent writedowns to reflect current fair value are charged to noninterest expense and credited to foreclosed real estate. Direct costs incurred in foreclosures are also charged to noninterest expense. At December 31, 2010 and 2009, the Bank held no foreclosed real estate.
The Bank participates in a multi-employer, noncontributory defined benefit retirement plan sponsored by Pentegra Defined Benefit Plan for Financial Institutions. Effective March 1, 2007, the Bank elected to freeze the benefits provided under the plan to existing participants, to cease future benefit accruals, and to cease eligibility for future employees. Those participants in the Plan as of March 1, 2007 will receive a benefit equal to the benefit accrued under the Plan as of that date. The Bank incurred pension contribution expense (in thousands) of $60 in 2010 and $60 in 2009.
The Bank also participates in an employee 401(k) retirement plan. Participants may contribute up to 50% of their compensation to the plan, with the Bank matching 75% of the participants’ elective deferrals up to a maximum of 6% of compensation. The Bank’s contribution expense (in thousands) to this plan amounted to $53 and $44 for December 2010 and 2009.
The Company established an Employee Stock Ownership Plan (ESOP) with the initial public offering. Employees are generally eligible to participate in the ESOP after completion of one year of service and attaining the age of 21. The ESOP purchased 66,704 shares which was facilitated by a loan from the Company to the ESOP in the amount of $667,040. The loan is secured by a pledge of the ESOP shares. The shares pledged as collateral are reported as unearned ESOP shares in the Consolidated Balance Sheet. The corresponding note is being repaid in 80 quarterly debt service payments of $11,372 on the last business day of each quarter, beginning December 31, 2010, at a rate of 3.25%
The Company may contribute to the ESOP, in the form of debt service, at the discretion of its board of directors. Cash dividends on the Company’s stock shall be used to either repay the loan, be distributed to the participants in the ESOP, or retained in the ESOP and reinvested in the Company stock. Shares are released for allocation to ESOP participants based on principal and interest payments on the note. Compensation expense is recognized based on the number of shares allocated to ESOP participants each year and the average market price of the stock for the current year. Released ESOP shares become outstanding for earnings per share computations.
As compensation expense is incurred, the Unearned ESOP shares account is reduced based on the original cost of the stock. The difference between the cost and the average market price of shares released for allocation is applied to Additional Paid-In Capital. ESOP compensation expense for the year ended December 31, 2010 was $10,000. Shares released in 2010 were 833.8 and the market value of the unreleased shares (65,870) at December 31, 2010 was $757,507.
The Bank implemented a deferred compensation plan in late 1993 for certain key employees, and in 1996 for certain directors. The plans generally provide for retirement, death or disability payments, payable over 25 years (20 years for directors). The Bank obtained insurance on these individuals to provide for funding of the plan; however, the policies themselves are not pledged against the benefits. The plan limits the ultimate benefits to the cash surrender value (CSV) in the policies, after a certain return is realized by the Bank from those policies. Thus, based upon this limitation, deferred compensation is recognized to the extent of the CSV increase each year, once the Bank realizes its return.
Following is a summary of deferred compensation payable (in thousands) and the related cash values of the life insurance contracts for December 31, 2010 and 2009:
Borrowings include advances from the Federal Home Loan Bank. Such advances are secured by deposit accounts in the Federal Home Loan Bank, Bank-owned capital stock in the Federal Home Loan Bank, and investment securities held in the custody of the Federal Home Loan Bank.
These advances (in thousands) as of December 31, 2010 and 2009 are summarized as follows:
The Bank has borrowing (in thousands) available to it as of December 31, 2010 in the approximate amount of $41,203 under current terms with the Federal Home Loan Bank.
Additional borrowing also is available through another bank for federal funds purchases. As of December 31, 2010, this credit line is for a maximum borrowing limit (in thousands) of $2,500 at the existing federal funds rate of the lender, and expires June 1, 2011. No amounts were outstanding on this credit line at December 31, 2010 or December 31, 2009.
The Bank has overnight repurchase agreements with certain checking account customers, which are shown as securities sold under agreements (“repos”) to repurchase. At December 31, 2010 and December 31, 2009, the amount (in thousands) outstanding was $588 and $907, respectively. Interest expense (in thousands) on the repos was $10 as of December 31, 2010 and $4 as of December 31, 2009. The market value of the collateral was approximately equal to the amounts outstanding. The average balance outstanding (in thousands) as of December 31, 2010 was $951. The maximum balance outstanding (in thousands) for the year ended December 31, 2010 was $1,372.
Accounting standards in the United States of America establish a framework for using fair value to measure assets and liabilities, and define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price).
Under these standards, a fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance. Required disclosures stratify balance sheet accounts measured at fair value based on inputs the Bank uses to derive fair value measurements. These strata include:
•
Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume).
•
Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
•
Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Bank-specific data. These unobservable assumptions reflect the Bank’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models, and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
Items Measured at Fair Value on a Recurring Basis
For the Bank, the only items recorded at fair value on a recurring basis are securities available for sale. These securities consist primarily of mortgage-backed (including Agency) securities. When available, the Bank uses quoted market prices of identical assets on active exchanges (Level 1 measurements). Where such quoted market prices are not available, the Bank typically employs quoted market prices of similar instruments (including matrix pricing) and/or discounted cash flows to estimate a value of these securities (Level 2 measurements). Level 3 measurements include discounted cash flow analyses based on assumptions that are not readily observable in the market place, including projections of future cash flows, loss assumptions, and discount rates.
Items Measured at Fair Value on a Non-Recurring Basis
From time to time, certain assets may be recorded at fair value on a non-recurring basis, typically as a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. The only item recorded at fair value on a non-recurring basis is foreclosed real estate, which is recorded at the lower of cost or fair value less estimated costs to sell. Fair value is determined by reference to appraisals (performed either by the Bank or by independent appraisers) on the subject property, using market prices of similar real estate assets (Level 2 measurements). The Bank held no foreclosed real estate at December 31, 2010 or December 31, 2009.
The Bank is required to evaluate events or transactions that may occur after the balance sheet date for potential recognition or disclosure in the consolidated financial statements. The Bank performed such an evaluation through March 21, 2011, the date which the consolidated financial statements were available to be issued, and noted no such subsequent events.
16.
Conversion and Stock Offering (Continued)
In conjunction with the conversion, the Bank established a liquidation account in an amount equal to the Bank’s retained earnings contained in the final prospectus. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who maintain deposit accounts in the Bank after the conversion.
In the event of a complete liquidation (and only in such event), each eligible account holder and supplemental eligible account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held, before any liquidation distribution may be made with respect to common stock. Except for the payment of dividends by the Bank, the existence of the liquidation account will not restrict the use or application of such retained earnings.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A.
Item 9A.
Controls and Procedures.
(a) Our management evaluated, with the participation of our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2010. Based on such evaluation, our President and Chief Executive Officer and our Senior Vice President and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.
(b) Management’s Report on Internal Control Over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2010.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
(c) No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the fourth fiscal quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required herein is incorporated by reference from the information contained in the sections captioned “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” and “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for the 2011 Annual Meeting of Stockholders to be held in May, 2011 (the “Proxy Statement”).
The Company has adopted a Code of Conduct and Ethics that applies to its principal executive officer and principal financial officer, as well as other officers and employees of the Company and the Bank. A copy of the Code of Ethics is available on the Company’s website at www.bankruston.com.
The information required herein is incorporated by reference from the information contained in the sections captioned “Management Compensation” in the Proxy Statement.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners and Management. The information required herein is incorporated by reference from the information contained in the section captioned “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management” in the Proxy Statement.
The Company had no equity compensation plans as of December 31, 2010.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required herein is incorporated by reference from the information contained in the sections captioned “Management Compensation - Related Party Transactions” and “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” in the Proxy Statement.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The information required herein is incorporated by reference from the information contained in the section captioned “Ratification of Appointment of Independent Registered Public Accounting Firm (Proposal Two) - Audit Fees” in the Proxy Statement.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules.
(a)(1) The following financial statements are incorporated by reference from Item 8 hereof:
(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(3) Exhibits
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
(b)
The exhibits listed under (a)(3) of this Item 15 are filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.