Providing personal, prompt, efficient service is the goal of Bank of Walterboro. We are committed to the concept of “Hometown Banking” and hope we can be of service to you. “Strong roots – strong branches.”

  

Contents:
Shareholder Letter	2
Summary of Selected Financial Data	3
Financial Charts	4-7
Management’s Discussion and Analysis	8-23
Management’s Annual Report on Internal Control Over  Financial Reporting	24
Report of Independent Registered Public Accounting Firm	25
Consolidated Balance Sheets	26
Consolidated Statements of Operations	27
Consolidated Statements of Changes in Shareholders’  Equity and Comprehensive Income (Loss)	28
Consolidated Statements of Cash Flows	29
Notes to Consolidated Financial Statements	30-49
Directors, Officers and Staff	50
Corporate Data	51
Services	52

 

Member FDIC

 

 

COMMUNITYCORP AND SUBSIDIARY

 

Dear Shareholder,

 

We are pleased to report the progress of Communitycorp and its subsidiary, the Bank of Walterboro during 2011, as we continue to create value for our shareholders. Our significant accomplishments reflect the loyalty of our customers and the dedication of our directors, management, and staff.

 

We extend our congratulations to W. Roger Crook on his retirement as President and CEO of Bank of Walterboro on December 31, 2011. One of the original organizers of the Bank, he served as President and CEO for 22 years. Under his guidance, the Bank has prospered and forged a strong relationship with our customers and our community. We appreciate his contributions to the Bank's success and remain optimistic as our leadership transition continues.

 

While the banking industry faced persistent challenges in a depressed economic and financial environment, we generated a net income in 2011 of $302,904, or $1.30 per share, compared to a net income of $459,410, or $1.97 per share for 2010, representing a decrease of $156,506, or 34.07%. However, despite this decrease in earnings, we succeeded in maintaining our capital to asset ratio of approximately 11% as of year-end 2011 and 2010.

 

In addition, our total assets increased from $155,828,675 on December 31, 2010, to $159,450,636 as of year-end 2011, an increase of $3,621,961, or 2.32%.

 

Loans receivable decreased from $105,297,684 to $93,808,071, a decrease of $11,489,613, or 10.91%. The allowance for loan losses was 2.10% and 1.92% of gross loans at December 31, 2011 and 2010, respectively.

 

Deposits increased in 2011 and were $140,824,561 at year-end, compared to $137,583,821 at year-end 2010, representing an increase of $3,240,740, or 2.36%.

 

Our net interest margin increased slightly from 3.57% in 2010 to 3.66% in 2011.

 

Please review the financial information presented so that you may become aware of our progress. We believe this Annual Report shows that a local, well-managed independent bank can compete successfully in a deregulated market against national, regional, and statewide banking institutions. Our success can be attributed to the teamwork of our shareholders, directors, officers, and employees. Most importantly, we want to thank our customers for allowing us to be of service to them.

 

The Board of Directors, officers, and employees thank you for your past support. We are committed to earning your ongoing support as we continue our efforts to provide prompt, efficient, and courteous service to our customers. We welcome any suggestions you may have.

 

We invite and encourage you to attend our Annual Meeting on Tuesday, April 24, 2012.

 

Very truly yours,

 

 

/s/ Gwendolyn P. Bunton	/s/ Peden B. McLeod
Gwendolyn P. Bunton	Peden B. McLeod
Acting President

 

 

COMMUNITYCORP AND SUBSIDIARY

SELECTED FINANCIAL DATA

 

The following selected consolidated financial data for the five years ended December 31, 2011 are derived from our consolidated financial statements and other data. The selected consolidated financial data should be read in conjunction with our consolidated financial statements, including the accompanying notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein.

 

Year Ended December 31,		2011				2010				2009				2008				2007
(Dollars in thousands, except per share)
Results of Operations:
Interest income		$	6,895			$	7,661			$	8,753			$	9,958			$	10,392
Interest expense			1,456				2,148				3,290				4,213				4,767
Net interest income			5,439				5,513				5,463				5,745				5,625
Provision for loan losses			1,921				1,866				1,083				400				202
Net interest income after provision for loan losses			3,518				3,647				4,380				5,345				5,423
Noninterest income			793				842				157				691				666
Noninterest expense			4,027				3,977				4,067				3,845				3,533
Income before income taxes			284				512				469				2,191				2,556
Income tax expense (benefit)			(19	)			52				169				699				794
Net income		$	303			$	459			$	300			$	1,492			$	1,762
Balance Sheet Data:
Securities available-for-sale		$	28,236			$	26,955			$	24,620			$	27,815			$	34,585
Securities held-to-maturity			300				300				565				1,320				1,819
Allowance for loan losses			1,967				2,019				2,053				1,982				1,929
Net loans			91,841				103,278				114,405				111,723				112,668
Premises and equipment, net			2,802				2,903				3,090				3,029				2,989
Total assets			159,451				155,829				165,393				164,585				161,320
Noninterest-bearing deposits			13,878				14,078				14,163				15,652				16,461
Interest-bearing deposits			126,947				123,506				132,525				130,062				123,133
Total deposits			140,825				137,584				146,688				145,714				139,594
Short-term borrowings			-				-				-				-				3,068
Total liabilities			141,222				138,190				147,647				146,892				144,583
Total shareholders' equity			18,228				17,639				17,746				17,693				16,736
Per Share Data:
Weighted-average common shares outstanding			233,003				233,251				234,849				239,634				240,708
Net income		$	1.30			$	1.97			$	1.28			$	6.22			$	7.32
Cash dividends paid		$	0.50			$	0.50			$	1.07			$	1.05			$	1.00
Period end book value		$	78.23			$	75.70			$	75.74			$	74.69			$	69.60
Equity and Assets Ratios:
Return on average assets			0.19	%			0.28	%			0.18	%			0.91	%			1.08	%
Return on average equity			1.67	%			2.58	%			1.68	%			8.70	%			11.24	%
Equity to assets ratio			11.43	%			11.32	%			10.73	%			10.75	%			10.37	%
Dividend payout ratio			38.46	%			25.47	%			84.10	%			16.93	%			13.65	%

  

 

 

 

 

 

 

 

 

 

 

 

 

COMMUNITYCORP AND SUBSIDIARY

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

GENERAL

 

Communitycorp is a South Carolina corporation organized on March 13, 1995 to be a bank holding company (the “Company”). The Company’s subsidiary, Bank of Walterboro, (the “Bank”) is a state-chartered commercial bank with four banking locations. The Bank’s main office and operations center is in Walterboro, South Carolina. In addition, the Bank has branches in Ravenel and Ridgeland, South Carolina. The Company’s primary market area includes Colleton, Jasper and Charleston Counties. Depository accounts are insured by the Federal Deposit Insurance Corporation up to the maximum amount permitted by law. The Bank, which received its charter on October 11, 1988, and opened for business on May 1, 1989, is dedicated to providing prompt, efficient, personal service to its customers. The Bank offers a full range of deposit services for individuals and businesses. Deposit products include checking accounts, savings accounts, certificates of deposit, money market accounts, and IRAs.

 

The Company is primarily engaged in the business of attracting deposits from the general public and using these deposits with other funds to make commercial, consumer, and real estate loans. The Company’s operating results depend to a substantial extent on the difference between interest and fees earned on loans, investments, services, and the Company’s interest expense, consisting principally of interest paid on deposits. Unlike most industrial companies, virtually all of the assets and liabilities of financial institutions are monetary. As a result, interest rates have a greater effect on the financial institution’s performance. In addition to competing with other traditional financial institutions, the Company also competes for savings dollars with nontraditional financial intermediaries such as mutual funds. This has resulted in a highly competitive market area, which demands the type of personal service and attention provided by the Bank.

 

The earnings and growth of the banking industry and the Company are and will be affected by general conditions of the economy and by the fiscal and monetary policies of the federal government and its agencies, including the Board of Governors of the Federal Reserve System (the “Board”). The Board regulates money and credit conditions and, as a result, has a strong influence on interest rates and on general economic conditions. The effect of such policies in the future on the business and earnings of the Company cannot be predicted with certainty.

 

As of December 31, 2011, the Company had 38 full-time employees and three part-time employees.

 

This discussion and analysis is intended to assist the reader in understanding the financial condition and results of operations of the Company and its subsidiary, the Bank. This commentary should be read in conjunction with the consolidated financial statements and the related notes and the other statistical information in this report.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The statements contained in this report on Form 10-Q that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We caution readers of this report that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements.

 

Although we believe that our expectations of future performance are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from our expectations.

 

 

 

COMMUNITYCORP AND SUBSIDIARY

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, but not limited to the following:

 

	·	deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;
	·	changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
	·	the failure of assumptions underlying the establishment of reserves for possible loan losses;
	·	changes in political and economic conditions, including the political and economic effects of the current economic downturn and other major developments, including the ongoing war on terrorism and political unrest in the Middle East;
	·	changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including, without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices;
	·	the Company’s ability to comply with any requirements imposed on it or the Bank by their respective regulators, and the potential negative consequences that may result;
	·	fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing;
	·	governmental monetary and fiscal policies, as well as legislative and regulatory changes;
	·	the Company’s participation or lack of participation in governmental programs implemented under the Emergency Economic Stabilization Act (the “EESA”) and the American Recovery and Reinvestment Act (the “ARRA”), including, without limitation, the CPP administered under the Troubled Asset Relief Program, and the Temporary Liquidity Guarantee Program (the “TLGP”) and the impact of such programs and related regulations on the Company and on international, national, and local economic and financial markets and conditions;
	·	the Company’s lack of participation in a “stress test” under the Federal Reserve’s Supervisory Capital Assessment Program; the diagnostic and stress testing we conducted differs from that administered under the Supervisory Capital Assessment Program, and the results of our test may be inaccurate; and
	·	the impact of the EESA and the ARRA and related rules and regulations on the business operations and competitiveness of the Company and other participating American financial institutions, including the impact of the executive compensation limits of these acts, which may impact the ability of the Company to retain and recruit executives and other personnel necessary for their businesses and competitiveness.

  

Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of unanticipated events.

  

RESULTS OF OPERATIONS

 

OVERVIEW

 

Net income for the year ended December 31, 2011 was $302,904, or $1.30 per share, compared to $459,410, or $1.97 per share, for the year ended December 31, 2010, resulting in a decrease of $156,506, or 34.07%. This decrease is primarily attributable to the increase of $172,675 in other real estate owned expenses. Additionally, our 2011 operating results were negatively impacted by the decline in our net interest income of $74,474, the reduction in our other operating income of $48,984, and the increase in our non-interest expenses of $49,791. However, these items were offset by the reduction of our income tax provision of $71,243.

 

NET INTEREST INCOME

 

General – The largest component of total income is net interest income, the difference between the income earned on assets and the interest accrued or paid on deposits and borrowings used to support such assets. The volume and mix of assets and liabilities and their sensitivity to interest rate movement determine changes in net interest income. Net interest margin is determined by dividing annualized net interest income by average earning assets. Net interest spread is derived from determining the weighted-average rate of interest paid on deposits and borrowings and subtracting it from the weighted-average yield on average assets.

 

Net interest income for 2011 was $5,438,379 compared to $5,512,853 for 2010, a decrease of $74,474, or 1.35%. This slight decrease is primarily attributable to the fact that the average volume of our earnings assets declined by 3.75%, while the average volume of our interest-bearing liabilities declined by 2.96%.

 

For 2011, average earning assets totaled $148,602,025, with an annualized average yield of 4.64% compared to $154,385,250 and 4.96%, respectively, for 2010. Average interest-bearing liabilities totaled $125,458,131, with an annualized average cost of 1.16% for 2011 compared to $129,279,114 and 1.66%, respectively, for 2010.

 

Our net interest margin and net interest spread were 3.66% and 3.48%, respectively, for 2011 compared to 3.57% and 3.30%, respectively, for 2010.

 

Our annualized yield on average earning assets decreased 32 basis points for 2011 compared to 2010, while our annualized average cost of our interest-bearing liabilities decreased 50 basis points for 2011 compared to 2010. These decreases were reflective of interest rate environment during 2011.

 

Loans – Because loans often provide a higher yield than other types of average assets, one of our goals is to maintain our loan portfolio as the largest component of total average earning assets. Loans comprised 67.46% and 72.41% of average earning assets for December 31, 2011 and 2010, respectively. Average balances of loans decreased to $100,246,659 during 2011, a decrease of $11,550,126 from the average of $111,796,785 during 2010. Loan interest income for the years ended December 31, 2011 and 2010 was $6,040,189 and $6,806,911, respectively. The annualized average yield on loans was 6.03% and 6.09% for 2011 and 2010, respectively. The slight decrease in the annualized yield on loans for the 2011 compared to 2010 was due mainly to the leveling off of market interest rates during 2011 and to the high volume of fixed-rate loans that we maintained for 2011 and 2010. Fixed-rate loans averaged approximately 96% and 97% of our loan portfolio during 2011 and 2010, respectively. Additionally, our 2011 loan income was negatively impacted by the increase of approximately $575,000 in the average volume of our non-accruing loans for 2011 compared to 2010.

 

Investment Securities – Investment securities averaged $29,856,771, or 20.09% of average earning assets, for December 31, 2011, compared to $23,329,772, or 15.11% of average earning assets, for 2010. Interest earned on investment securities amounted to $805,514 for the year ended December 31, 2011, compared to $782,633 for the same period last year. Investment securities yielded 2.70% and 3.35% for the periods ended December 31, 2011 and 2010, respectively.

 

Interest-bearing liabilities – During 2011 and 2010 our only interest-bearing liabilities were interest-bearing deposit accounts. Interest expense on deposit accounts was $1,456,576 and $2,148,412, for the years ended December 31, 2011 and 2010, respectively. The average balance of interest-bearing deposits decreased to $125,458,131 for 2011 from $129,279,114 during the same period last year. The annualized average cost of deposits was 1.16% for the year ended December 31, 2011, compared to 1.66% for the same period in 2010. As our loan demand declined, we correspondingly lowered our rates paid for deposits.

 

 

 

Average Balances, Income, Expenses, Yields, and Rates - The following table sets forth, for the periods indicated, the weighted average yields earned, the weighted average rates paid, the net interest spread, and the net interest margin on average assets. The table also indicates the average balance during the year and the interest income or expense by specific categories.

 

Average Balances, Income, Expenses, and Rates

 

		2011												2010
(Dollars in thousands)		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
Assets:
Average earning assets:
Loans (1)		$	100,246			$	6,040				6.03	%		$	111,797			$	6,807				6.09	%
Securities, taxable			18,726				404				2.16				10,708				330				3.09
Securities, tax-exempt			10,852				399				3.68				12,325				451				3.66
Nonmarketable equity securities			279				2				0.81				296				1				0.34
Other			18,499				50				0.27				19,259				72				0.37
Total average earning assets			148,602				6,895				4.64				154,385				7,661				4.96
Cash and due from banks			4,266												4,140
Allowance for loan losses			(1,976	)											(2,090	)
Premises and equipment			2,851												3,005
Other real estate owned			752												920
Accrued interest			2,832												686
Other assets			1,062												1,441
Total assets			158,389												162,487
Liabilities:
Interest-bearing deposits			125,458				1,457				1.16	%			129,279				2,148				1.66	%
Noninterest-bearing deposits			14,257												14,719
Accrued interest			379												592
Other liabilities			134												80
Shareholders’ equity			18,161												17,817
Total liabilities and equity		$	158,389											$	162,487
Net interest spread											3.48	%											3.30	%
Net interest income						$	5,438											$	5,513
Net interest margin											3.66	%											3.57	%

 

(1)	The effect of loans in nonaccrual status and fees collected is not significant to the computations. All loans and deposits are domestic.

 

 

Analysis of Changes in Net Interest Income – Net interest income can also be analyzed in terms of the impact of changing rates and changing volume. The following table describes the extent to which changes in interest rates and changes in the volume of average assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information on changes in each category attributable to (i) changes due to volume (change in volume multiplied by prior period rate) and (ii) changes due to rates (changes in rates multiplied by prior period volume) are provided as follows:

 

Analysis of Changes in Net Interest Income

 

		2011 Compared to 2010
(Dollars in thousands)		Variance Due to Change in
		Volume				Rate				Total
Earning assets
Loans			(697	)			(70	)			(767	)
Securities, taxable			194				(120	)			74
Securities, tax-exempt			(54	)			2				(52	)
Nonmarketable equity securities			-				1				1
Other			(2	)			(20	)			(22	)
Total interest income			(559	)			(207	)			(766	)
Interest-Bearing Liabilities
Interest-bearing deposits interest expense			(61	)			(630	)			(691	)
Net interest income			(498	)			423				(75	)

 

Interest Sensitivity – We monitor and manage the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The principal monitoring technique employed by us is the measurement of our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to manage the risk and minimize the impact on net interest income of rising or falling interest rates.

 

The following table presents our rate sensitivity at each of the time intervals indicated as of December 31, 2011. The table may not be indicative of our rate sensitivity position at other points in time.

 

Interest Sensitivity Analysis

 

						After Three				After One				Greater
		Within				Within				Within				Than
		Three				Twelve				Five				Five
(Dollars in thousands)		Months				Months				Years				Years				Total
Assets
Earning assets:
Interest bearing deposits		$	18,120			$	-			$	-			$	-			$	18,120
Federal funds sold			7,738				-				-				-				7,738
Time deposits in other banks			250				500				-				-				750
Investment securities			259				204				2,476				25,856				28,795
Loans (1)			9,297				27,892				50,516				713				88,418
Total earning assets			35,664				28,596				52,992				26,569				143,821

 

 

						After Three				After One				Greater
		Within				Within				Within				Than
		Three				Twelve				Five				Five
(Dollars in thousands)		Months				Months				Years				Years				Total
Liabilities
Interest-bearing deposits:
Demand		$	22,622			$	-			$	-			$	-			$	22,622
Savings and money market			21,472				-				-				-				21,472
Time			21,598				51,825				9,393				37				82,853
Total interest-bearing deposits			65,692				51,825				9,393				37				126,947
Period gap		$	(30,028	)		$	(23,229	)		$	43,599			$	26,532
Cumulative gap		$	(30,028	)		$	(53,257	)		$	(9,658	)		$	16,874
Ratio of cumulative gap to total earning assets			(20.88	)%			(37.03	)%			(6.72	)%			11.73	%

 

(1) Excludes nonaccrual loans.

 

The above table reflects the balances of average earning assets and interest-bearing liabilities at the earlier of their repricing or maturity dates. Interest-bearing deposits and overnight federal funds are reflected at the earliest pricing interval due to the immediately available nature of these instruments. Time deposits in other banks are reflected at their contractual maturity date. Scheduled payment amounts of fixed rate amortizing loans are reflected at each scheduled payment date. Scheduled payment amounts of variable rate amortizing loans are reflected at each scheduled payment date until the loan may be repriced contractually; the unamortized balance is reflected at that point. Interest-bearing liabilities with no contractual maturity, such as savings deposits and interest-bearing transaction accounts, are reflected in the earliest repricing period due to contractual arrangements which give us the opportunity to vary the rates paid on those deposits within a thirty-day or shorter period. Fixed rate time deposits, principally certificates of deposit, are reflected at their contractual maturity date. Short-term borrowings are reflected in the earliest repricing period since these borrowings mature daily.

 

We would generally benefit from increasing market rates of interest when it has an asset-sensitive gap and generally would benefit from decreasing market rates of interest when it is liability sensitive. We are currently liability-sensitive over periods with maturity dates of less than twelve months. However, our gap analysis is not a precise indicator of its interest sensitive position. The analysis presents a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. Net interest income is also impacted by other significant factors, including changes in the volume and mix of average assets and interest-bearing liabilities.

 

PROVISION AND ALLOWANCE FOR LOAN LOSSES

 

We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. On a quarterly basis, our Board of Directors reviews and approves the appropriate level for the allowance for loan losses based upon management’s recommendations, the results of our internal monitoring and reporting system, and an analysis of economic conditions in our market. The objective of management has been to fund the allowance for loan losses at a level greater than or equal to our internal risk measurement system for loan risk.

 

Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our statement of operations, are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the potential risk in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.

 

The allowance represents an amount which management believes will be adequate to absorb inherent losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on regular evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in our lending policies and procedures, changes in the local and national economy, changes in volume or type of credits, changes in the volume or severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons.

 

 

More specifically, in determining our allowance for loan losses, we regularly review loans for specific and impaired reserves based on the appropriate impairment assessment methodology. Pooled reserves are determined using historical loss trends measured over a five-year average, adjusted for environmental risk, which is then applied to risk rated loans grouped by Federal Financial Institutions Examination Council (“FFIEC”) call code and segmented by impairment status. The pooled reserves are calculated by applying the appropriate historical loss ratio to the loan categories. Impaired loans greater than a minimum threshold established by management are excluded from this analysis. The sum of all such amounts determines our pooled reserves.

 

We track our portfolio and analyze loans grouped by FFIEC call code categories. The first step in this process is to risk grade each and every loan in the portfolio based on one common set of parameters. These parameters include items such as debt-to-worth ratio, liquidity of the borrower, net worth, experience in a particular field, and other factors such as underwriting exceptions. Weight is also given to the relative strength of any guarantors on the loan.

 

After risk grading each loan, we then segment the portfolio by FFIEC call code groupings, separating out substandard or impaired loans. The remaining loans are grouped into “performing loan pools.” The loss history for each performing loan pool is measured over a specific period of time to create a loss factor. The relevant look back-period is determined by the Bank, regulatory guidance, and current market events. The loss factor is then applied to the pool balance and the reserve per pool calculated. Loans deemed to be substandard but not impaired are segregated and a loss factor is applied to this pool as well. Finally, impaired loans are segmented based upon size; smaller impaired loans are pooled and a loss factor applied, while larger impaired loans are assessed individually using the appropriate impairment measuring methodology. Finally, certain qualitative factors are utilized to assess economic and other trends not currently reflected in the loss history. These factors include concentration of credit across the portfolio, the experience level of management and staff, effects of changes in risk selection and underwriting practice, industry conditions and the current economic and business environment. A quantitative value is assigned to each of the factors, which is then applied to the performing loan pools. Negative trends in the loan portfolio increase the quantitative values assigned to each of the qualitative factors and, therefore, increase the reserve. For example, as general economic and business conditions decline, this qualitative factor’s quantitative value will increase, which will increase the reserve requirement for this factor. Similarly, positive trends in the loan portfolio, such as improvement in general economic and business conditions, will decrease the quantitative value assigned to this qualitative factor, thereby decreasing the reserve requirement for this factor. These factors are reviewed and updated by our risk management committee on a regular basis to arrive at a consensus for our qualitative adjustments.

 

Periodically, we adjust the amount of the allowance based on changing circumstances. We recognize loan losses to the allowance and add subsequent recoveries back to the allowance for loan losses. In addition, on a quarterly basis we informally compare our allowance for loan losses to various peer institutions; however, we recognize that allowances will vary as financial institutions are unique in the make-up of their loan portfolios and customers, which necessarily creates different risk profiles for the institutions. If our allowance was significantly different from our peer group, we would carefully review our assessment procedures again to ensure that all procedures were completed accurately and all environmental risk factors were thoroughly considered. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the overall weakness in the economic environment in our market areas.

 

Various regulatory agencies review our allowance for loan losses through their periodic examinations, and they may require additions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations. Our losses will undoubtedly vary from our estimates, and it is possible that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.

 

As of December 31, 2011 and 2010, the allowance for loan losses was $1,967,069 and $2,019,497, respectively, a decrease of $52,428, or 2.60%, from the 2010 allowance. However, as a percentage of total loans, the allowance for loan losses was 2.10% and 1.92% at December 31, 2011 and 2010, respectively. The decrease in the dollar amount of our allowance for loan losses was driven by the significant reduction of our loan portfolio, while we continue to charge off loan losses once they are identified. We believe the allowance for loan losses at December 31, 2011, is adequate to meet potential loan losses inherent in the loan portfolio, and, as described earlier, maintain the flexibility to adjust the allowance should our local economy and loan portfolio either improve or decline in the future.

 

 

For the years 2011 and 2010, the provision for loan losses was $1,920,500 and $1,866,000, respectively. This represents an increase of $54,500, or 2.92%. The provision expense estimate is the result of a statistical model that is subject to a great degree of volatility and is sensitive to current loss experience and real estate collateral values in the marketplace. While we expect our current period loss experience to be lower than that realized over the past several years, there can be no assurance that this will occur. We are closely monitoring current economic developments and their impact on our loan portfolio.

 

The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge-offs and recoveries for the years ended December 31, 2011 and 2010.

 

		Year Ended December 31,
		2011				2010
Total loans outstanding at end of year		$	93,808,071			$	105,297,684
Average loans outstanding		$	100,246,659			$	111,796,785
Allowance for Loan Losses
Balance of allowance for loan losses at beginning of period		$	2,019,497			$	2,053,340
Loan losses:
Real estate - construction			1,099,563				764,910
Real estate - mortgage			704,590				381,955
Commercial and industrial			132,425				573,932
Consumer			51,990				190,978
Total loan losses			1,988,568				1,911,775
Recoveries of previous loan losses:
Real estate - construction			-				-
Real estate - mortgage			3,750				-
Commercial and industrial			7,679				3,753
Consumer			4,211				8,179
Total recoveries			15,640				11,932
Net charge-offs			(1,972,928	)			(1,899,843	)
Provision charged to operations			1,920,500				1,866,000
Balance of allowance for loan losses at end of year		$	1,967,069			$	2,019,497
Ratios:
Net charge-offs to average loans outstanding			1.97	%			1.70	%
Net charge-offs to loans at end of year			2.10	%			1.80	%
Allowance for loan losses to average loans			1.96	%			1.81	%
Allowance for loan losses to loans at end of year			2.10	%			1.92	%
Net charge-offs to allowance for loan losses			100.30	%			94.08	%
Net charge-offs to provisions for loan losses			102.73	%			101.81	%

 

NONPERFORMING ASSETS

 

Nonperforming Assets - At December 31, 2011 and 2010, loans totaling $5,389,685 and $4,805,658, respectively, were in nonaccrual status. There were no loans ninety days or more overdue and still accruing interest at December 31, 2011 and 2010.

 

The following table sets forth our nonperforming assets at December 31, 2011 and 2010:

 

		2011				2010
Loans 90 days or more past due and still accruing interest		$	-			$	-
Nonaccrual loans
Real estate
Construction			3,479,111				3,009,786
Mortgage			1,783,894				1,532,891
Commercial			116,291				202,986
Consumer and other			10,389				59,995
Total nonaccrual loans			5,389,685				4,805,658
Total nonperforming loans			5,389,685				4,805,658
Other real estate owned			3,290,077				2,764,189
Total nonperforming assets		$	8,679,762			$	7,569,847

 

 

		2011				2010
Percentage of nonperforming loans to total loans			5.75	%			4.56	%
Allowance for loan losses as a percentage of nonperforming loans			36.50	%			42.02	%
Percentage of nonperforming assets to total assets			5.44	%			4.86	%

 

Nonaccrual Loans – Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or the collectability of the principal and/or interest is deemed to be doubtful.  Once a loan is placed in nonaccrual status, all previously accrued and uncollected interest is reversed against interest income.  Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectability is no longer considered doubtful.  Loans are returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  During 2011 and 2010, interest income recognized on nonaccrual loans was $36,678 and $30,654, respectively. If the nonaccrual loans had been accruing interest at their original contracted rates, related income would have been $279,833 and $275,415 for 2011 and 2010, respectively. All nonaccruing loans at December 31, 2011 and 2010 were included in our classification of impaired loans at those dates.

 

Restructured Loans – In situations where, for economic or legal reasons related to a borrower’s financial difficulties, a concession to the borrower is granted that we would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”). The restructuring of a loan may include the transfer of real estate collateral, either through the pledge of additional properties by the borrower or through a transfer to the Bank in lieu of foreclosures. Restructured loans may also include the borrower transferring to the Bank receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan, a modification of the loan terms, or a combination of the above.

 

As of December 31, 2011, there were four loans classified as TDR totaling $1,006,041. Of the four loans, two totaling $400,941 were performing while two totaling $605,099 were not performing. At December 31, 2010, the balance of TDR classified loans consists of four loans totaling $1,060,754, all of which were performing. All restructured loans resulted in either extended maturity or lowered rates and were included in the impaired loan balance.

 

Impaired Loans – We consider a loan to be impaired when, based upon current information and events, we believe it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Our impaired loans include loans identified as impaired through review of the non-homogeneous portfolio and troubled debt restructurings. Specific allowances are established on impaired loans, if deemed necessary, for the difference between the loan amount and the fair market value less estimated selling costs. Impaired loans may be left on accrual status during the period we are pursuing repayment of the loan. Impairment losses are recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair market value of the collateral properties for impaired loans are also recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. When an impaired loan is sold, transferred to other real estate owned, or written-down, the loan is removed from the portfolio through a charge-off to the allowance for loan losses.

 

On a quarterly basis, we analyze each loan that is classified as impaired to determine the potential for possible loan losses. This analysis is focused upon determining the then current estimated value of the collateral, local market condition, and estimated costs to foreclose, repair and resell the property. The net realizable value of the property is then computed and compared to the loan balance to determine the appropriate amount of specific reserve for each loan.

 

The following tables summarize information on our impaired loans at and for the years ended December 31, 2011 and 2010.

 

		2011				2010
Impaired loans with specific allowance		$	2,724,293			$	2,134,648
Impaired loans with no specific allowance			6,169,778				5,568,593
Total impaired loans		$	8,894,071			$	7,703,241
Related specific allowance		$	852,619			$	373,484
Average recorded investment in impaired loans			8,697,564				8,512,074
Impaired loans included in nonaccrual			5,389,685				4,805,658
Allowance for loan losses as a percentage of nonperforming loans			22.12	%			26.22	%

 

At December 31, 2011 real estate or other collateral secured practically all of the loans that were considered impaired. The depressed economy of our local market has resulted in an increase in loan delinquencies, defaults and foreclosures. In some cases, this depression has resulted in a significant impairment to the value of our collateral and ability to sell the collateral upon foreclosure at its appraised value. If collateral values further decline, it is also more likely that we would be required to increase our allowance for loan losses.

 

 

Included in the impaired loans at December 31, 2011, were 12 borrowers that accounted for approximately 75% of the total amount of the impaired loans at that date.

 

The results of our internal review process and applying the allowance model methodology are the primary determining factors in management’s assessment of the adequacy of the allowance for loan losses.

 

Other nonperforming assets - Other nonperforming assets consist of other real estate owned (“OREO”) that was acquired through foreclosure. Other real estate owned is carried at fair market value minus estimated costs to sell. Current appraisals are obtained at time of foreclosure and write-downs, if any, charged to the allowance for loan losses as of the date of foreclosure. On a regular basis, we reevaluate our OREO properties for impairment. Along with gains and losses on disposal, expenses to maintain such assets and subsequent changes in the valuation allowance are included in other noninterest expense.

 

As of December 31, 2011, we had twenty two OREO properties totaling $3,290,077 that were all located in our market area. We had one residential property for $8,000. The remaining properties were commercial and investment properties. While we are diligently trying to dispose of our OREO properties, the currently depressed real estate market affects our ability to do so in a timely manner without experiencing additional losses. Additionally, there can be no assurance that these properties can be sold for their carrying values.

 

NONINTEREST INCOME AND EXPENSE

 

Noninterest Income – Noninterest income for 2011 was $792,536 compared to $841,520 for 2010. The decrease of $48,984 is primarily attributable to the reduction of $35,223 in the gain realized on the sale of available-for-sale securities.

 

Noninterest Expense – Total noninterest expense for 2011 and 2010 was $4,026,624 and $3,976,833, respectively. This represented an increase of $49,791, or 1.25%. Salaries and employee benefits decreased $81,121, or 4.09%, from $1,982,695 for 2010 to $1,901,574 for 2011. Net occupancy and equipment expense was $7,845 higher for 2011 compared to 2010. Other operating expenses increased by $123,067, or 9.01% from $1,365,514 for 2010 to $1,488,581 for 2011. The increase in other operating expense is primarily attributable to the increase of $172,675 in other real estate owned expenses.

 

Income Taxes – The income tax provision for the years ended December 31, 2011 and 2010 reflects an income tax benefit of $19,113 and an income tax expense of $52,130, respectively. The change in our tax provision is due primarily to our net income before income taxes and the relationship of our tax exempt income to net income before taxes.

 

EARNING ASSETS

 

Loans – Loans are the largest category of average assets and typically provide higher yields than other types of average assets. Associated with the higher loan yields are the inherent credit and liquidity risks which management attempts to control and counterbalance. Loans averaged $100,246,659 in 2011 compared to $111,796,785 in 2010, a decrease of $11,550,126, or 10.33%. Total loans were $93,808,071 and $105,297,684 at December 31, 2011 and 2010, respectively, a decrease of $11,489,613, or 10.91%. Fixed rate loans comprised approximately 96% and 97% of our loan portfolio at December 31, 2011 and 2010, respectively.

 

Our ratio of loans to deposits was 66.61% at December 31, 2011, as compared to 76.53% at December 31, 2010. The loan to deposit ratio is used to monitor a financial institution’s potential profitability and efficiency of asset distribution and utilization. Generally, a higher loan to deposit ratio is indicative of higher interest income since loans yield a higher return than alternative investment vehicles. We have concentrated on maintaining quality in the loan portfolio while continuing to increase the deposit base.

 

We extend credit primarily to consumers and small businesses in Walterboro, Ravenel and Ridgeland, South Carolina, and to customers in surrounding areas. Our service area is mixed in nature. Walterboro is a regional business center whose economy contains elements of medium and light manufacturing, higher education, regional health care, and distribution facilities. Outside the incorporated city limits of Walterboro, the economy includes manufacturing, agriculture, timber, and recreational activities. Loan growth in the Ravenel and Ridgeland area is expected to come primarily from consumer loans and small businesses in neighboring Charleston and Jasper Counties. No particular category or segment of the economies previously described is expected to grow or contract disproportionately in 2012. We believe that the loan portfolio is adequately diversified. There are no significant concentrations of loans in any particular individuals, industry, or group of related individuals or industries. We expect the area to remain stable; however, due to the currently depressed markets, we do not expect any material growth in the near future.

 

 

The following table sets forth the composition of the loan portfolio by category at December 31, 2011 and 2010 and highlights our general emphasis on commercial and mortgage lending.

 

Loan Portfolio Composition

 

		2011								2010
						Percent								Percent
		Amount				of Total				Amount				of Total
Real estate
Construction		$	11,684,137				12.46	%		$	12,674,197				12.04	%
Mortgage			69,916,752				74.53				76,149,357				72.32
Commercial and industrial			7,682,631				8.19				11,602,305				11.02
Consumer and other loans			4,524,551				4.82				4,871,825				4.62
Total loans			93,808,071				100.00	%			105,297,684				100.00	%
Allowance for loan losses			(1,967,069	)							(2,019,497	)
Net loans		$	91,841,002							$	103,278,187

 

Real estate construction loans were $11,684,137 and $12,674,197 at December 31, 2011 and 2010, respectively, and represented 12.46% and 12.04% of the total loan portfolio, respectively. Real estate mortgage loans consist of first and second mortgages on single or multi-family residential dwellings and nonresidential mortgage loans, which include commercial loans and other loans secured by multi-family properties and farmland. Real estate mortgage loans totaled $69,916,752 at December 31, 2011, and represented 74.53% of the total loan portfolio, compared to $76,149,357 and 72.32%, respectively, at December 31, 2010. Comparing 2011 with 2010, our real estate construction and mortgage loans declined by $990,060, or 7.81% and $6,232,605, or 8.18%, respectively. Currently, the demand for all types of real estate loans in our market area is very weak because of the economic downturn in our markets.

 

Commercial and industrial loans decreased $3,919,674, or 33.78%, to $7,682,631 at December 31, 2011, from $11,602,305 at December 31, 2010. The decrease is mainly due to the economic downturn in our markets that caused the demand for these types of loans to decrease. At December 31, 2011 and 2010, commercial and industrial loans represented 8.19% and 11.02%, respectively, of the total loan portfolio.

 

Consumer and other loans decreased $347,274, or 7.13%, to $4,524,551 at December 31, 2011, from $4,871,825 at December 31, 2010. At December 31, 2011 and 2010, consumer and other loans represented 4.82% and 4.62%, respectively, of the total loan portfolio. The decrease in the volume in consumer loans is due to the sharp decline in our area consumers’ spending during 2011 due to the economic downturn in our markets.

 

Maturities and Sensitivity of Loans to Changes in Interest Rates

 

The following table summarizes the loan maturity distribution, by type, at December 31, 2011 and related interest rate characteristics:

 

						Over
						One Year
		One Year or				Within				Over Five
		Less				Five Years				Years				Total
Real estate - construction		$	7,885,218			$	3,798,919			$	-			$	11,684,137
Real estate – mortgage			26,100,683				43,189,282				626,787				69,916,752
Commercial and industrial			3,425,809				4,170,460				86,362				7,682,631
Consumer and other			2,044,616				2,437,037				42,898				4,524,551
		$	39,456,326			$	53,595,698			$	756,047			$	93,808,071
Loans maturing after one year with:
Fixed interest rates														$	51,336,691
Floating interest rates															3,015,054
														$	54,351,745

 

 

The information presented in the above table is based on the contractual maturities of the individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval as well as modification of terms upon their maturity. Consequently, management believes the treatment shown in the above table presents fairly the maturity and repricing structure of the loan portfolio.

 

Investment Securities - The investment securities portfolio is a significant component of the Company’s total average assets. Total investment securities, stated at carrying amount, averaged $29,856,771 in 2011, compared to $23,329,772 in 2010. At December 31, 2011, the carrying value of the securities portfolio was $28,794,682. Securities designated as available-for-sale totaled $28,235,661 and were recorded at estimated fair value. Securities designated as held-to-maturity totaled $299,921 and were recorded at amortized cost. Securities designated as nonmarketable equity securities totaled $259,100 and were recorded at cost. Our investment objectives include maintaining and investing in a portfolio of high quality and highly liquid investments with competitive returns. Based on these objectives, our investments primarily consist of obligations of government-sponsored enterprises and obligations of states and local governments.

 

Investment Securities Portfolio Composition

 

The following tables summarize the carrying value of investment securities at December 31, 2011 and 2010 and the weighted average yields of those securities at December 31, 2011.

 

		2011				2010
Available-for-Sale (at estimated fair value)
U.S Government Agencies and Corporations		$	16,149,087			$	13,591,442
Mortgage-backed securities			3,183,989				1,851,266
Municipals			8,702,585				11,312,642
Other			200,000				200,000
Total available-for-sale securities		$	28,235,661			$	26,955,350
Held-to-Maturity (at amortized cost)
Municipals		$	299,921			$	299,885
Nonmarketable Equity Securities (at cost)
Federal Home Loan Bank		$	253,100			$	296,300
Investments in Community Banks			6,000				6,000
Total		$	259,100			$	302,300

 

Nonmarketable equity securities are carried at cost because they have no quoted market value and no ready market exists. However, redemption of the Federal Home Land Bank (the “FHLB”) stock has historically been at par value, since the investment in the FHLB is a condition of borrowing from them, and the stock is pledged to collateralize the borrowings.

 

Investment Securities Maturity Distribution and Yields

 

Available-for-Sale

 

		U.S Government
December 31, 2011		Agencies and
		Corporations								Municipals								Total
(Dollars in thousands)		Amount				Yield				Amount				Yield				Amount				Yield
Due within one year		$	-				0.00	%		$	204				4.00	%		$	204				4.00	%
Due after one year but within five years			512				2.65				1,464				3.55				1,976				3.32
Due after five years but within ten years			5,750				1.56				4,890				3.84				10,640				2.57
Due after ten years			9,887				1.72				2,145				3.27				12,032				1.99
Total securities (1)		$	16,149				1.69	%		$	8,703				3.65	%		$	24,852				2.35	%

 

(1) Excludes mortgage-backed securities totaling $3,183,989 with a yield of 3.17% and other securities totaling $200,000 with a yield of 6.25%.

 

Held-to-Maturity

 

December 31, 2011

 

		Municipals
(Dollars in thousands)		Amount				Yield
Due after one year but within five years		$	300				4.15	%

 

 

Federal Funds Sold - Federal funds sold averaged $4,698,005 in 2011, compared to $2,521,088 in 2010. At December 31, 2011 and 2010, federal funds sold were $7,738,000 and $2,004,000, respectively. These funds are a source of our liquidity and are generally invested in an earning capacity on an overnight basis.

 

DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES

 

Deposits - Deposits account for all of our interest bearing liabilities. Total average deposits decreased from $143,997,977 in 2010 to $139,715,153 in 2011. This represents a decrease of $4,282,824, or 2.97% from the 2010 amount.

 

The following table summarizes our average deposits for the years ended December 31, 2011 and 2010.

  

		2011								2010
						Percent								Percent
						of								of
		Amount				Deposits				Amount				Deposits
Noninterest bearing demand deposits		$	14,257,022				10.20	%		$	14,718,863				10.22	%
Interest bearing demand deposits			21,518,146				15.40				21,563,711				14.98
Savings accounts			20,435,032				14.63				17,249,906				11.98
Time deposits			83,504,953				59.77				90,465,497				62.82
Total		$	139,715,153				100.00	%		$	143,997,977				100.00	%

 

Our actual deposits at December 31, 2011 and 2010 were $140,824,561 and $137,583,821, respectively, representing an increase of $3,240,740, or 2.36%.

 

Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $94,563,744 and $91,441,668 at December 31, 2011 and 2010, respectively. A stable base of deposits is expected to be our primary source of funding to meet both our short-term and long-term liquidity needs in the future.

 

As our loan demand declined, we concurrently lowered our rates for all types of deposits, especially for time deposits. This is the primary reason why our total average time deposits declined by $6,960,544, or 7.69%, from December 31, 2010 to December 31, 2011.

 

Deposits, and particularly core deposits, have been our primary source of funding and have enabled us to meet successfully both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our loan-to-deposit ratio was 66.61% and 76.53% on December 31, 2011 and 2010, respectively.

 

Maturities of Certificates of Deposit of $100,000 or More

 

The maturity distribution of our time deposits of $100,000 or more at December 31, 2011, is shown in the following table.

 

After

After

Three

Six

Within

Within

Within

After

(Dollars in thousands)

Three

Six

Twelve

Twelve

Months

Months

Months

Months

Total

Certificates of Deposit of $100,000 or more

$

13,063

$

11,440

$

17,201

$

4,557

$

46,261

 

Approximately 90% of our time deposits of $100,000 or more had scheduled maturities within one year. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. We expect most certificates of deposits with maturities of less than one year to be renewed upon maturity. However, there is the possibility that some certificates may not be renewed. Should that occur, we believe that the impact would be minimal on our operations and liquidity due to the availability of other funding sources.

 

We had no broker deposits at December 31, 2011 or 2010.

 

 

CAPITAL

 

Total shareholders’ equity increased by $589,585 from $17,638,837 at December 31, 2010 to $18,228,422 at December 31, 2011. The increase is attributable to our net income of $302,904 and the increase in our accumulated other comprehensive income of $403,182. These increases were reduced by the dividends of $116,501 that we paid during 2011.

 

The Bank is subject to various regulatory capital requirements administered by the 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 ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. Total regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

 

As of December 31, 2011, management believes that the Bank is well capitalized under the regulatory framework for prompt corrective action.

 

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.

 

																		To Be Well
																		Capitalized Under
										For Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
(Dollars in Thousands)										Minimum								Minimum
		Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 2011
Total capital (to risk-weighted assets)		$	19,104				18.88	%		$	8,095				8.00	%		$	10,119				10.00	%
Tier 1 capital (to risk-weighted assets)			17,831				17.62				4,048				4.00				6,071				6.00
Tier 1 average ratio			17,831				11.13				6,408				4.00				8,010				5.00
December 31, 2010
Total capital (to risk-weighted assets)		$	19,129				16.49	%		$	9,283				8.00	%		$	11,604				10.00	%
Tier 1 capital (to risk-weighted assets)			17,678				15.23				4,642				4.00				6,962				6.00
Tier 1 capital (to average assets)			17,678				11.15				6,340				4.00				7,925				5.00

 

The Federal Reserve Board has similar requirements for bank holding companies. The Company is currently not subject to these requirements because the Federal Reserve guidelines contain an exemption for bank holding companies with less than $500,000,000 in consolidated assets.

 

LIQUIDITY MANAGEMENT

 

Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities. Adequate liquidity is necessary to meet the requirements of customers for loans and deposit withdrawals in the most timely and economical manner. Some liquidity is ensured by maintaining assets, which may be immediately converted into cash at minimal cost (amounts due from banks and federal funds sold). However, the most manageable sources of liquidity are composed of liabilities, with the primary focus of liquidity management being the ability to obtain deposits within our market area. Core deposits (total deposits, less time deposits of $100,000 and over) provide a relatively stable funding base. At December 31, 2011 and 2010, core deposits represented 67.15% and 66.46%, respectively, of total deposits.

 

The Bank had available at the end of 2011 unused short-term lines of credit to purchase up to $11,500,000 of federal funds from unrelated correspondent institutions. The Bank also has a credit availability agreement with the Federal Home Loan Bank totaling 15 percent of the Bank’s qualifying assets as of any quarter end. As of December 31, 2011, the available credit totaled $23,916,000 and there were no borrowings outstanding. Any borrowings from the FHLB will be secured by a blanket lien on all of the Bank's 1-4 family residential first lien mortgage loans and or investment securities.

 

 

Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold. Available-for-sale securities, particularly those maturing within one year, provide a secondary source of liquidity. In addition, funds from maturing loans are a source of liquidity.

 

Our ability to meet our cash obligations or to pay any possible future cash dividends to shareholders is dependent primarily on the successful operation of the Bank and its ability to pay cash dividends to us. Any of the Bank's cash dividends in an amount exceeding current year-to-date earnings are subject to the prior approval of the South Carolina Commissioner of Banking and are generally allowable only from its undivided profits. In addition, dividends paid by the Bank to us would be prohibited if such payment would cause the Bank's capital to be reduced below applicable minimum regulatory requirements. At December 31, 2011, the Bank's available undivided profits totaled $14,599,293. Under Federal Reserve Board regulations, the amounts of loans or advances from the Bank to us are also restricted.

 

We believe that our overall liquidity sources for us and the Bank are adequate to meet our operating needs in the ordinary course of business.

 

IMPACT OF OFF-BALANCE-SHEET INSTRUMENTS

 

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are legally binding agreements to lend to a customer at predetermined interest rates as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. Our exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. Standby letters of credit often expire without being used. We believe that through various sources of liquidity, they have the necessary resources to meet obligations arising from these financial instruments.

 

We use the same credit underwriting procedures for commitments to extend credit and standby letters of credit as we do for our on-balance-sheet instruments. The credit worthiness of each borrower is evaluated and the amount of collateral, if deemed necessary, is based on the credit evaluation. Collateral held for commitments to extend credit and standby letters of credit varies, but may include accounts receivable, inventory, property, plant, equipment, and income-producing commercial properties.

 

There are no off-balance-sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments or that could significantly impact earnings.

 

Through its operations, the Bank has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to the Bank’s customers at predetermined interest rates for a specified period of time. At December 31, 2011, the Bank had issued commitments to extend credit of $5,685,949 and standby letters of credit of $847,000 through various types of commercial lending arrangements. Approximately $284,500 of these commitments to extend credit had variable rates.

 

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at December 31, 2011.

 

										After
						After One				Three
		Within				Through				Through				Within				Greater
(Dollars in Thousands)		One				Three				Twelve				One				Than
		Month				Months				Months				Year				One Year				Total
Unused commitments to extend credit		$	184			$	1,258			$	3,002			$	4,444			$	1,242			$	5,686
Standby letters of credit			10				242				595				847				-				847
Totals		$	194			$	1,500			$	3,597			$	5,291			$	1,242			$	6,533

 

 

The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on its credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.

 

IMPACT OF INFLATION

 

The consolidated financial statements and related financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does the effect of inflation.

 

While the effect of inflation on a bank is normally not as significant as its influence on those businesses that have large investments in plant and inventories, it does have an effect. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. While interest rates have traditionally moved with inflation, the effect on income is diminished because both interest earned on assets and interest paid on liabilities vary directly with each other. Also, increases in the price of goods and services will generally result in increased operating expenses.

 

ACCOUNTING AND FINANCIAL REPORTING ISSUES

 

We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of its consolidated financial statements. The significant accounting policies are described in the footnotes to the financial statements at December 31, 2011, as filed in the Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions used are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations.

 

Of these significant accounting policies, we consider that our policies regarding the allowance for loan losses (the “Allowance”) to be its most critical accounting policy due to the significant degree of our judgment involved in determining the amount of the Allowance. We have developed policies and procedures for assessing the adequacy of the Allowance, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which is not known to management at the time of the issuance of the consolidated financial statements. Refer to the discussion under Provision and Allowance for Loan Losses for a detailed description of our estimation process and methodology related to the allowance for loan losses.

 

EFFECT OF GOVERNMENTAL POLICIES

 

We are affected by the policies of regulatory authorities, including the Federal Reserve Board and the FDIC. An important function of the Federal Reserve Board is to regulate the national money supply. Among the instruments of monetary policy used by the Federal Reserve Board are: purchase and sale of U.S. Government securities in the market place; changes in the discount rate, which is the rate any depository institution must pay to borrow funds from the Federal Reserve; and changes in the reserve requirements of depository institutions. These instruments are effective in influencing the economic and monetary growth, interest rate levels and inflation.

 

The monetary policies of the Federal Reserve Board and other governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the national and international economy and in the money markets, as well as the result of actions by monetary and fiscal authorities, it is not possible to predict with certainty any future changes in interest rates, deposit levels or loan demand or whether the changing economic conditions will have a positive or negative effect on operations and earnings.

 

Legislation from time to time is introduced into the United States Congress and the South Carolina Legislature and other state legislatures, and regulations are proposed by the regulatory agencies that could affect our business. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which our business may be affected thereby.

 

 

COMMUNITYCORP AND SUBSIDIARY

 

MANAGEMENT'S ANNUAL REPORT ON INTERNAL

CONTROL OVER FINANCIAL REPORTING

 

Our Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are executed in accordance with appropriate management authorization and accounting records are reliable for the preparation of financial statements 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.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. Management based this assessment on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.” Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Board of Directors. Based on this assessment, management believes that Communitycorp maintained effective internal control over financial reporting as of December 31, 2011.

 

This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

 

 

COMMUNITYCORP AND SUBSIDIARY

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and Board of Directors

Communitycorp and subsidiary

Walterboro, South Carolina

 

I have audited the accompanying consolidated balance sheets of Communitycorp and subsidiary as of December 31, 2011 and 2010 and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company’s management. My responsibility is to express an opinion on these consolidated financial statements based on my audits.

 

I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor was I engaged to perform an audit of its internal control over financial reporting. My audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, I express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.

 

In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Communitycorp and subsidiary as of December 31, 2011 and 2010 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/Clifton D. Bodiford

Clifton D. Bodiford

Certified Public Accountant

 

Columbia, South Carolina

March 9, 2012

 

 

 

COMMUNITYCORP AND SUBSIDIARY

 

Consolidated Balance Sheets

 

		December 31,
		2011				2010
Assets:
Cash and cash equivalents:
Cash and due from banks		$	4,359,616			$	4,206,974
Interest bearing deposits			18,119,554				9,966,826
Federal funds sold			7,738,000				2,004,000
Total cash and cash equivalents			30,217,170				16,177,800
Time deposits with other banks			750,000				1,000,000
Investment securities:
Securities available-for-sale			28,235,661				26,955,350
Securities held-to-maturity (estimated fair value of $308,955  in 2011 and $309,023  in 2010)			299,921				299,885
Nonmarketable equity securities			259,100				302,300
Total investment securities			28,794,682				27,557,535
Loans receivable			93,808,071				105,297,684
Less allowance for loan losses			(1,967,069	)			(2,019,497	)
Loans receivable, net			91,841,002				103,278,187
Premises and equipment, net			2,801,575				2,903,212
Accrued interest receivable			664,266				785,859
Other real estate owned			3,290,077				2,764,189
Other assets			1,091,864				1,361,893
Total assets		$	159,450,636			$	155,828,675
Liabilities:
Deposits:
Noninterest-bearing transaction accounts		$	13,878,196			$	14,077,860
Interest-bearing transaction accounts			22,621,602				21,295,198
Money market savings accounts			4,865,739				4,116,167
Savings			16,606,425				14,452,567
Time deposits $100,000 and over			46,260,817				46,142,153
Other time deposits			36,591,782				37,499,876
Total deposits			140,824,561				137,583,821
Accrued interest payable			279,389				451,331
Other liabilities			118,264				154,686
Total liabilities			141,222,214				138,189,838
Commitments and contingencies - Notes 4 and 10
Shareholders’ Equity:
Preferred stock, $5 par value, 3,000,000 shares authorized and unissued			-				-
Common stock, $5 par value, 3,000,000 shares authorized; 300,000 shares issued			1,500,000				1,500,000
Capital surplus			1,737,924				1,737,924
Retained earnings			18,969,210				18,782,807
Accumulated other comprehensive income (loss)			338,430				(64,752	)
Treasury stock (66,997 shares in 2011 and 2010)			(4,317,142	)			(4,317,142	)
Total shareholders’ equity			18,228,422				17,638,837
Total liabilities and shareholders’ equity		$	159,450,636			$	155,828,675

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

COMMUNITYCORP AND SUBSIDIARY

 

Consolidated Statements of Operations

 

		Years Ended December 31,
		2011				2010
Interest Income
Loans, including fees		$	6,040,189			$	6,806,911
Securities
Taxable securities			404,232				330,358
Tax-exempt			399,015				451,266
Nonmarketable			2,267				1,009
Other			49,252				71,721
Total interest income			6,894,955				7,661,265
Interest Expense
Deposit accounts			1,456,576				2,148,412
Net Interest Income			5,438,379				5,512,853
Provision for Loan Losses			1,920,500				1,866,000
Net Interest Income after Provision for Loan Losses			3,517,879				3,646,853
Other Operating Income
Service charges on deposit accounts			439,586				448,429
Commissions on credit life insurance			3,080				8,254
Other charges, fees, and commissions			101,834				96,017
Gain on sale of available-for-sale securities			226,788				262,011
Other			21,248				26,809
			792,536				841,520
Non-Interest Expenses
Salaries and employee benefits			1,901,574				1,982,695
Net occupancy expense			274,251				271,063
Equipment expense			362,218				357,561
Other operating			1,488,581				1,365,514
Total noninterest expenses			4,026,624				3,976,833
Income Before Income Taxes			283,791				511,540
Income tax expense (benefit)			(19,113	)			52,130
Net Income		$	302,904			$	459,410
Earnings per Share
Weighted average common shares outstanding			233,003				233,251
Basic earnings per share		$	1.30			$	1.97

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

COMMUNITYCORP AND SUBSIDIARY

 

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)

For the years ended December 31, 2011 and 2010

 

														Accumulated
														Other
														Comprehensive
		Common stock								Capital				Income				Retained				Treasury
		Shares				Amount				Surplus				(Loss)				Earnings				Stock				Total
Balance, December 31, 2009			300,000			$	1,500,000			$	1,737,924			$	286,072			$	18,440,398			$	(4,218,741	)		$	17,745,653
Net income																			459,410								459,410
Other comprehensive loss, net of tax benefit of $184,785															(350,824	)											(350,824	)
Comprehensive income																											108,586
Cash dividends paid ($0.50 per share)																			(117,001	)							(117,001	)
Purchase of treasury stock																							(98,401	)			(98,401	)
Balance, December 31, 2010			300,000			$	1,500,000			$	1,737,924				(64,752	)		$	18,782,807			$	(4,317,142	)		$	17,638,837
Net income																			302,904								302,904
Other comprehensive income, net of tax expense of $212,362															403,182												403,182
Comprehensive income																											706,086
Cash dividends paid ($0.50 per share)																			(116,501	)							(116,501	)
Balance, December 31, 2011			300,000			$	1,500,000			$	1,737,924			$	338,430			$	18,969,210			$	(4,317,142	)		$	18,228,422

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

COMMUNITYCORP AND SUBSIDIARY

 

Consolidated Statements of Cash Flows

 

		Years Ended December 31,
		2011				2010
Cash flows from operating activities:
Net income		$	302,904			$	459,410
Adjustments to reconcile net income to net cash  provided by operating activities:
Provision for loan losses			1,920,500				1,866,000
Depreciation expense			211,833				238,346
Premium amortization less discount accretion on investment securities			22,533				45,951
Gain on sale of securities available-for-sale			(226,788	)			(262,011	)
Loss (gain) on sale of other real estate owned			(96,084	)			17,000
Deferred income tax benefit			(9,598	)			(153,660	)
Write down of other real estate owned			164,864				-
Net amortization of loan fees and costs			(10,311	)			(4,357	)
Decrease in accrued interest receivable			121,593				192,641
Decrease in accrued interest payable			(171,942	)			(250,648	)
Decrease in other assets			67,265				723,795
Increase (decrease) in other liabilities			(36,423	)			47,938
Net cash provided by operating activities			2,260,346				2,920,405
Cash flows from investing activities:
Proceeds from maturities of securities available-for-sale			15,448,820				9,404,344
Proceeds from sale of securities available-for-sale			3,268,863				4,562,437
Purchases of securities available-for-sale			(19,178,231	)			(16,621,567	)
Proceeds from maturities of securities held-to-maturity			-				265,000
Net decrease  in nonmarketable equity securities			43,200				-
Proceeds from maturities of time deposits with other banks			250,000				500,000
Proceeds from sale of other real estate owned			1,111,649				50,000
Net decrease in loans to customers			7,820,680				6,774,121
Purchases of premises and equipment			(110,196	)			(51,629	)
Net cash provided by investing activities			8,654,785				4,882,706
Cash flows from financing activities:
Net increase (decrease) in demand deposits, interest-bearing transaction accounts and savings accounts			4,030,170				(217,476	)
Net decrease in time deposits			(789,430	)			(8,886,699	)
Cash dividends paid			(116,501	)			(117,001	)
Purchase of treasury stock			-				(98,401	)
Net cash provided (used) by financing activities			3,124,239				(9,319,577	)
Net increase (decrease) in cash and cash equivalents			14,039,370				(1,516,466	)
Cash and cash equivalents, beginning of year			16,177,800				17,694,266
Cash and cash equivalents, end of year		$	30,217,170			$	16,177,800
Cash paid during the year for:
Income taxes		$	66,000			$	13,000
Interest			1,628,518				2,399,060
Supplemental non cash activities
Changes in unrealized gains on securities available-for-sale		$	403,182			$	(350,824	)
Foreclosures on loans			1,706,317				2,491,189

 

The accompanying notes are an integral part of the consolidated financial statements.

  

 

COMMUNITYCORP AND SUBSIDIARY

Notes to Consolidated Financial Statements

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation - Communitycorp, a bank holding company, (the “Company”), and its subsidiary, Bank of Walterboro (the Bank), provide commercial banking services to domestic markets principally in Colleton, Charleston, and Jasper counties South Carolina. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions.

 

Disclosure Regarding Segments - The Company reports as one operating segment, as the chief operating decision-maker reviews the results of operations of the Company as a single enterprise.

 

Management’s Estimates - The preparation of consolidated 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 income 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 losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the value of foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

 

While management uses available information to recognize losses on loans, future additions to the allowance 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 Company’s allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is possible that the allowance for losses on loans and may change in the near term.

 

Securities Available-for-Sale - Investment securities available-for-sale are carried at amortized cost and adjusted to estimated fair value by recognizing the aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded in shareholders’ equity net of deferred income taxes. Reductions in fair value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security. The adjusted cost basis of securities available-for-sale is determined by specific identification and is used in computing the gain or loss upon sale.

 

Securities Held-to-Maturity - Investment securities held-to-maturity are stated at cost, adjusted for amortization of premium and accretion of discount computed by the straight-line method. The Company has the ability and management has the intent to hold designated investment securities to maturity. Reductions in market value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security.

 

Nonmarketable Equity Securities – At December 31, 2011 and 2010, non-marketable equity securities consist of the following:

 

		December 31,
		2011				2010
Federal Home Loan Bank		$	253,100			$	296,300
Investments in Community Banks			6,000				6,000
Total		$	259,100			$	302,300

 

Nonmarketable equity securities are carried at cost since no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. Dividends received on nonmarketable equity securities are included as a separate component of interest income.

  

 

Impairment of Investment Securities – Declines in the fair value of individual securities classified as either held-to-maturity or available-for-sale below their amortized cost that are deemed to be other-than-temporary result in write-downs included in operations as realized losses. In estimating other-than-temporary impairment, manage considers (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 an anticipated recovery in fair value.

 

Loans Receivable and Interest Income – Loans are stated at the amount of unpaid principal reduced by an allowance for loan losses. Interest income on all loans is computed based upon the unpaid principal balance. Interest income is computed using the simple interest method and is recorded in the period earned.

 

The Company determines a loan to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest income is discontinued when a loan becomes 90 days past due as to principal or interest. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest.

 

Loan origination and commitment fees and certain direct loan origination costs (principally salaries and employee benefits) are being deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the level yield method.

 

Allowance for Loan Losses - 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 management believes the uncollectibility of a loan balance is confirmed. 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 collectibility 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 specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also 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. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, 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.

 

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 construction 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.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

 

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, a concession to the borrower is granted that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring. The restructuring of a loan may include the transfer from the borrower to the Company of real estate, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan, modification of the loan terms, or a combination of the above.

 

 

Loan Fees and Costs - Nonrefundable fees and certain direct costs associated with the origination of loans are deferred and recognized as a yield adjustment over the contractual life of the related loans, or if the related loan is held for resale, until such time that the loan is sold. As of December 31, 2011 and 2010 the Bank did not have any loans held for sale. Recognition of deferred fees and costs is discontinued on nonaccrual loans until they return to accrual status or are charged-off.

 

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

 

The Company makes loans to individuals and small businesses for various personal and commercial purposes principally in Colleton, Charleston, and Jasper counties South Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.

 

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

 

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

 

Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method. Rates of depreciation are generally based on the following estimated useful lives: buildings - 40 years; furniture and equipment - 5 to 10 years. The cost of assets sold or otherwise disposed of, and the related accumulated depreciation are eliminated from the accounts and the resulting gains or losses are reflected in the income statement. Maintenance and repairs are charged to current expense as incurred, and the costs of major renewals and improvements are capitalized.

 

Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is initially recorded at the lower of cost (principal balance of the former loan plus costs of improvements) or estimated fair value. Any write-downs at the dates of acquisition are charged to the allowance for loan losses. Expenses to maintain such assets, subsequent write-downs and gains and losses on disposal are included in other expenses.

 

FairValue Measurements - The Company follows the guidance for Financial Instruments and Fair Value Measurements and Disclosures. This guidance permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This guidance clarifies that fair value is an exit price, representing the amount that would be received to sell and asset or paid to transfer a liability in an orderly transaction between market participants. Under this guidance, fair value measurements are not adjusted for transaction costs. This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

 

Income and Expense Recognition - The accrual method of accounting is used for all significant categories of income and expense. Immaterial amounts of insurance commissions and other miscellaneous fees are reported when received.

 

 

Advertising - Advertising, promotional, and other business development costs generally are expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent. Expenses charged for advertising were $41,158 and $31,221 at December 31, 2011 and 2010, respectively.

 

Income Taxes - Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. In addition, deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We recognize interest and penalties related to income tax matters in income tax expense.

 

Retirement and Deferred Compensation Plans - The Company has a trusteed noncontributory profit-sharing plan which provides retirement and other benefits to all full-time employees who have worked 1,000 or more hours during the calendar year and have put in one year of service. All eligible employees must be at least age 21. Contributions are determined annually by the Board of Directors. Expenses charged to earnings for the profit-sharing plan were $81,470 and $67,252 in 2011 and 2010, respectively. The Company’s policy is to fund contributions to the profit-sharing plan in the amount approved by the Board of Directors. In addition, the plan includes a “salary reduction” feature pursuant to Section 401(k) of the Internal Revenue Code. Under the plan and present policies, participants are permitted to make discretionary contributions up to 10% of annual compensation. The Company makes no matching contributions to this plan.

 

Additionally, the Company has a nonqualified voluntary salary deferral plan for certain officers of the Company. Under the plan, these officers may defer up to 25% of their compensation and earn interest on the deferred amount. Upon retirement, the total amount deferred and interest earned is to be paid to each participant over a period not to exceed fifteen years. The total amount deferred and unpaid under this plan was $436,442 and $431,710 at December 31, 2011 and 2010, respectively. No expenses were charged to earnings for the salary deferral plan in either 2011 or 2010. The Company does not provide post employment benefits to employees beyond the plans described above.

 

Earnings Per Share - Earnings per share is calculated by dividing earnings by the weighted-average number of common shares outstanding during the year. The Company has no instruments which are considered common stock equivalents and therefore, dilutive earnings per share is not presented.

 

Statement of Cash Flows - For purposes of reporting cash flows, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks, federal funds sold, and securities purchased under agreements to resell.

 

Comprehensive Income - Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains, and losses be included in net income. 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 sheet, such items, along with net income, are components of comprehensive income.

 

The components of other comprehensive income and related tax effects are as follows:

 

		Year Ended December 31,
		2011				2010
Net unrealized gains (losses) on available-for-sale securities arising  during the period		$	764,090			$	(363,992	)
Less, reclassification adjustment for gained realized in net income, net of tax			148,546				171,617
Net unrealized gains on securities			615,544				(535,609	)
Tax expense (benefit)			212,362				(184,785	)
Net-of-tax amount		$	403,182			$	(350,824	)

 

Off-Balance-Sheet Financial Instruments - In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and standby letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.

 

 

Recently Issued Accounting Pronouncements - The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.

 

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in its interim and annual financial statements.

 

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present. Disclosures related to TDRs under ASU 2010-20 are presented in Note 4.

 

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments are effective for the Company beginning January 1, 2012, but are not expected to have a material effect on the financial statements.

 

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments will be effective for the Company beginning January 1, 2012, but are not expected to have a material effect on the financial statements.

 

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity. The amendment requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively.

 

Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board (the “FASB”) or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Reclassifications - Certain captions and amounts in the consolidated financial statements of 2010 were reclassified to conform with the 2011 presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity.

 

NOTE 2 - CASH AND DUE FROM BANKS

 

The Company is required by regulation to maintain an average cash reserve balance based on a percentage of deposits. The average amounts of the cash reserve balances at December 31, 2011 and 2010 were $673,000 and $623,000, respectively. These requirements were satisfied by vault cash.

 

 

NOTE 3 - INVESTMENT SECURITIES

 

Securities Available-for-Sale

 

The amortized cost and estimated fair values of securities available-for-sale were:

 

		Amortized				Gross Unrealized								Estimated
		Cost				Gains				Losses				Fair Value
December 31, 2011
U.S. Government agencies		$	16,141,338			$	25,671			$	17,922			$	16,149,087
Mortgage-backed securities			3,082,769				102,153				933				3,183,989
Municipals			8,294,866				411,881				4,162				8,702,585
Other			200,000				-				-				200,000
Total		$	27,718,973			$	539,705			$	23,017			$	28,235,661
December 31, 2010
U.S. Government agencies		$	13,891,989			$	11,473			$	312,020			$	13,591,442
Mortgage-backed securities			1,842,249				24,286				15,269				1,851,266
Municipals			11,119,970				247,905				55,233				11,312,642
Other			200,000				-				-				200,000
Total		$	27,054,208			$	283,664			$	382,522			$	26,955,350

 

The following table shows 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 December 31, 2011 and December 31, 2010.

 

		December 31, 2011								December 31, 2010
		Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses
Less Than 12 Months
U.S Government agencies		$	5,128,646			$	17,922			$	13,344,043			$	327,289
Mortgage-backed securities			507,650				933				-				-
Municipals			603,319				4,162				2,151,511				55,233
		$	6,239,615			$	23,017			$	15,495,554			$	382,522

 

The Company believes that the deterioration in value is attributable to changes in market interest rates and not in credit quality and considers these losses temporary. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized costs. No available-for-sale securities were in a loss position 12 months or more at December 31, 2011 or 2010. Management evaluates investment securities in a loss position based on length of impairment, severity of impairment and other factors.

 

The amortized cost and estimated fair values of securities available-for-sale based on their contractual maturities are summarized below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalty.

 

		December 31, 2011
		Amortized				Estimated
		Cost				Fair Value
Due within one year		$	200,000			$	203,940
Due after one year but within five years			1,902,453				1,976,281
Due after five years but within ten years			10,590,806				10,840,401
Due after ten years			11,942,945				12,031,050
			24,636,204				25,051,672
Mortgage-backed securities			3,082,769				3,183,989
Total		$	27,718,973			$	28,235,661

 

During 2011 gross proceeds from the sale of available-for-sale securities were $3,268,863 resulting in gains of $226,788. Gross proceeds from the sale of available-for-sale securities were $4,562,437 resulting in gains of $262,011 during 2010.

 

 

Securities Held-To-Maturity

 

The amortized cost and estimated fair values of securities held-to-maturity were:

 

		Amortized				Gross Unrealized								Estimated
		Cost				Gains				Losses				Fair Value
December 31, 2011
Municipals		$	299,921			$	9,034			$	-			$	308,955
December 31, 2010 -
Municipals		$	299,885			$	9,138			$	-			$	309,023

 

The amortized cost and estimated fair values of securities held-to-maturity based on their contractual maturities are summarized below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations without penalty.

 

		December 31, 2011
		Amortized				Estimated
			Cost				Fair Value
Due after one year but within five years		$	299,921			$	308,955

 

At December 31, 2011 and 2010, investment securities with an amortized cost of $14,009,680 and $12,098,918, respectively, and a fair value of $14,374,797 and $12,220,375, respectively, were pledged as collateral to secure public deposits and short-term borrowings.

 

NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

 

Major classifications of loans receivable are summarized as follows:

 

		December 31,
		2011				2010
Real estate – construction		$	11,684,137			$	12,674,197
Real estate – mortgage			69,916,752				76,149,357
Commercial and industrial			7,682,631				11,602,305
Consumer and other			4,524,551				4,871,825
Total gross loans		$	93,808,071			$	105,297,684
The loan portfolio consisted of loans having:
Variable rates loans		$	4,085,650			$	3,206,699
Fixed rates			89,722,421				102,090,985
Total gross loans		$	93,808,071			$	105,297,684
Included in the gross loans above are:
Nonaccrual loans		$	5,389,684			$	4,805,658
Loans past due 90 days still accruing interest			-				-

 

Transactions in the allowance for loan losses are summarized below:

 

		Years Ended December 31,
		2011				2010
Balance, beginning of year		$	2,019,497			$	2,053,340
Provision charged to operations			1,920,500				1,866,000
Recoveries on loans previously charged-off			15,640				11,932
Loans charged-off			(1,988,568	)			(1,911,775	)
Balance, end of year		$	1,967,069			$	2,019,497

 

 

The following is an analysis of the allowance for loan losses by class of loans for the years ended December 31, 2011 and 2010.

 

December 31, 2011

 

						Real Estate Loans
														Total
														Real
(Dollars in Thousands)														Estate								Consumer
		Total				Construction				Mortgage				Loans				Commercial				and Other
Beginning Balance		$	2,019			$	807			$	404			$	1,211			$	606			$	202
Provisions			1,921				1,062				680				1,742				128				51
Recoveries			16				-				4				4				8				4
Charge-offs			(1,989	)			(1,100	)			(704	)			(1,804	)			(133	)			(52	)
Ending balance		$	1,967			$	769			$	384			$	1,153			$	609			$	205

 

December 31, 2010

						Real Estate Loans
														Total
														Real
(Dollars in Thousands)														Estate								Consumer
		Total				Construction				Mortgage				Loans				Commercial				and Other
Beginning Balance		$	2,053			$	826			$	413			$	1,239			$	616			$	198
Provisions			1,866				746				373				1,119				560				187
Recoveries			12				-				-				-				4				8
Charge-offs			(1,912	)			(765	)			(382	)			(1,147	)			(574	)			(191	)
Ending balance		$	2,019			$	807			$	404			$	1,211			$	606			$	202

 

At December 31, 2011 and 2010, the allocation of the allowance for loan losses and the recorded investment in loans summarized on the basis of the Company’s impairment methodology was as follows:

 

December 31, 2011

 

						Real Estate Loans
														Total
														Real
(Dollars in Thousands)														Estate								Consumer
		Total				Construction				Mortgage				Loans				Commercial				and Other
Allowance for Loan Losses
Examined for Impairment
Individually		$	853			$	389			$	269			$	658			$	195			$	-
Collectively			1,114				380				115				495				414				205
Allowance for Loan Losses		$	1,967			$	769			$	384			$	1,153			$	609			$	205
Total Loans
Examined for Impairment
Individually		$	8,894			$	3,585			$	3,236			$	6,821			$	2,063			$	10
Collectively			84,914				8,099				66,681				74,780				5,620				4,514
Total Loans		$	93,808			$	11,684			$	69,917			$	81,601			$	7,683			$	4,524

 

 

December 31, 2010

 

						Real Estate Loans
														Total
														Real
(Dollars in Thousands)														Estate								Consumer
		Total				Construction				Mortgage				Loans				Commercial				and Other
Allowance for Loan Losses
Examined for Impairment
Individually		$	373			$	296			$	25			$	321			$	40			$	12
Collectively			1,646				511				379				890				566				190
Allowance for Loan Losses		$	2,019			$	807			$	404			$	1,211			$	606			$	202
Total Loans
Examined for Impairment
Individually		$	7,703			$	3,162			$	4,121			$	7,283			$	303			$	117
Collectively			97,595				9,512				72,029				81,541				11,299				4,755
Total Loans		$	105,298			$	12,674			$	76,150			$	88,824			$	11,602			$	4,872

 

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal delay occurs and all amounts due including accrued interest at the contractual interest rate for the period of delay are expected to be collected.

 

The following summarizes the Company’s impaired loans by class as of December 31, 2011 and 2010.

 

December 31, 2011

 

						Unpaid
(Dollars in Thousands)		Recorded				Principal				Related
		Investment				Balance				Allowance
With no related allowance recorded:
Real estate
Construction		$	2,205			$	3,099			$	-
Mortgage			2,104				2,369				-
Total real estate loans			4,309				5,468				-
Commercial			1,851				1,894				-
Consumer and other			10				10				-
			6,170				7,372				-
With an allowance recorded:
Real estate
Construction		$	1,380			$	1,445			$	389
Mortgage			1,132				1,386				269
Total real estate loans			2,512				2,831				658
Commercial			212				212				195
Consumer and other			-				-				-
			2,724				3,043				853
Total
Real estate
Construction		$	3,585			$	4,544			$	389
Mortgage			3,236				3,755				269
Total real estate loans			6,821				8,299				658
Commercial			2,063				2,106				195
Consumer and other			10				10				-
Total		$	8,894			$	10,415			$	853

 

 

December 31, 2010

 

						Unpaid
(Dollars in Thousands)		Recorded				Principal				Related
		Investment				Balance				Allowance
With no related allowance recorded:
Real estate
Construction		$	1,326			$	1,294			$	-
Mortgage			4,016				4,196				-
Total real estate loans			5,342				5,490				-
Commercial			218				249				-
Consumer and other			62				61				-
			5,622				5,800				-
With an allowance recorded:
Real estate
Construction		$	1,836			$	1,879			$	296
Mortgage			105				103				25
Total real estate loans			1,941				1,982				321
Commercial			85				741				40
Consumer and other			55				53				12
			2,081				2,776				373
Total
Real estate
Construction		$	3,162			$	3,173			$	296
Mortgage			4,121				4,299				25
Total real estate loans			7,283				7,472				321
Commercial			303				990				40
Consumer and other			117				114				12
Total		$	7,703			$	8,576			$	373

 

The following tables summarize information on impaired loans at and for the years ended December 31, 2011 and 2010.

 

		2011				2010
Impaired loans with specific allowance		$	2,724,293			$	2,134,648
Impaired loans with no specific allowance			6,169,778				5,568,593
Total impaired loans – year end		$	8,894,071			$	7,703,241
Related specific allowance – year end		$	852,619			$	373,484
Average recorded investment in impaired loans – year end		$	8,697,564			$	8,512,074
Impaired loans included in nonaccrual		$	5,389,685			$	4,805,658

 

Interest income on impaired loans other than nonaccrual loans is recognized on an accrual basis. Interest income on nonaccrual loans is recognized only as collected. During 2011 and 2010, interest income recognized on nonaccrual loans was $36,678 and $30,674, respectively. If the nonaccrual loans had been accruing interest at their original contracted rates, related income would have been $279,833 and $275,415 for 2011 and 2010, respectively.

 

A summary of current, past due and nonaccrual loans as of December 31, 2011 was as follows:

 

		Past Due				Past Due Over 90 days
(Dollars in Thousands)		30-89				and				Non-				Total								Total
		Days				Accruing				Accruing				Past Due				Current				Loans
Real estate
Construction		$	1,379			$	-			$	3,479			$	4,858			$	6,826			$	11,684
Mortgage			1,969				-				1,784				3,753				66,164				69,917
Total real estate loans			3,348				-				5,263				8,611				72,990				81,601
Commercial			547				-				116				663				7,020				7,683
Consumer and other			148				-				11				159				4,365				4,524
Totals		$	4,043			$	-			$	5,390			$	9,433			$	84,375			$	93,808

 

 

A summary of current, past due and nonaccrual loans as of December 31, 2010 was as follows:

 

		Past Due				Past Due Over 90 days
(Dollars in Thousands)		30-89				and				Non-				Total								Total
		Days				Accruing				Accruing				Past Due				Current				Loans
Real estate
Construction		$	397			$	-			$	3,010			$	3,407			$	9,267			$	12,674
Mortgage			768				-				1,533				2,301				73,849				76,150
Total real estate loans			1,165				-				4,543				5,708				83,116				88,824
Commercial			99				-				203				302				11,300				11,602
Consumer and other			63				-				60				123				4,749				4,872
Totals		$	1,327			$	-			$	4,806			$	6,133			$	99,165			$	105,298

 

At December 31, 2011 and December 31, 2010 there were no loans past due over 90 days and still accruing interest

 

Loans totaling $5,389,685 and $4,805,658 were in nonaccruing status at December 31, 2011 and December 31, 2010, respectively. When the ultimate collectability of a nonaccrual loan principal is in doubt, wholly or partially, all cash receipts are applied to the principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement.

 

Included in the loans above are particular loans that have been modified in order to maximize the collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, the Company grants a concession compared to the original terms and conditions on the loan, the modified loan is classified as a troubled debt restructuring (“TDR”).

 

During the third quarter of 2011, the Company adopted Accounting Standards Update (“ASU”) 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (Topic 310), which modified guidance for identifying restructurings of receivables that constitute a TDR.  In complying with the provisions of the ASU, the Company did not identify any new TDRs.

 

As of December 31, 2011 there were four loans classified as TDR totaling $1,006,041. Of the four loans, two totaling $400,941 were performing while two totaling $605,099 were not performing. At December 31, 2010, the balance of TDR classified loans consists of four loans totaling $1,060,754, all of which were performing. All restructured loans resulted in either extended maturity or lowered rates and were included in the impaired loan balance.

 

All loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, are considered in determining an appropriate level of allowance for credit losses.

 

Credit Indicators

 

Loans are categorized 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 following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:

 

Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

 

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. 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 inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

As of December 31, 2011 and 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

December 31, 2011

 

						Real Estate Loans
														Total
														Real
(Dollars in Thousands)														Estate								Consumer
		Total				Construction				Mortgage				Loans				Commercial				and Other
Pass		$	83,826			$	7,964			$	66,005			$	73,969			$	5,492			$	4,365
Special mention			3,989				1,563				1,579				3,142				769				78
Substandard			5,863				2,057				2,333				4,390				1,392				81
Doubtful			130				100				-				100				30				-
Total		$	93,808			$	11,684			$	69,917			$	81,601			$	7,683			$	4,524

 

December 31, 2010

 

						Real Estate Loans
														Total
														Real
(Dollars in Thousands)														Estate								Consumer
		Total				Construction				Mortgage				Loans				Commercial				and Other
Pass		$	98,620			$	8,847			$	76,150			$	84,997			$	9,793			$	3,830
Special mention			1,378				681				-				681				551				146
Substandard			5,300				3,146				-				3,146				1,258				896
Doubtful			-				-				-				-				-				-
Total		$	105,298			$	12,674			$	76,150			$	88,824			$	11,602			$	4,872

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are legally binding agreements to lend to a customer at predetermined interest rates as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. Standby letters of credit often expire without being used. The Company believes that through various sources of liquidity, it has the necessary resources to meet obligations arising from these financial instruments.

 

The Company uses the same credit underwriting procedures for commitments to extend credit and standby letters of credit as it does for on-balance sheet instruments. The credit worthiness of each borrower is evaluated and the amount of collateral, if deemed necessary, is based on the credit evaluation. Collateral held for commitments to extend credit and standby letters of credit varies but may include accounts receivable, inventory, property, plant, equipment, and income-producing commercial properties.

 

The Company is not involved in off-balance-sheet contractual relationships, other than those disclosed in this report that could result in liquidity needs or other commitments or could significantly impact earnings.

 

The following table summarizes the Company’s off-balance-sheet financial instruments whose contractual amounts represent credit risk:

 

		December 31,
		2011				2010
Commitments to extend credit		$	5,685,949			$	5,855,857
Standby letters of credit			847,000				850,000

 

 

Management is not aware of any significant concentrations of loans to classes of borrowers or industries that would be affected similarly by economic conditions. At December 31, 2011, the Company was not committed to lend additional funds to borrowers having loans in nonaccrual status.

 

NOTE 5 - PREMISES AND EQUIPMENT

 

Premises and equipment consisted of the following:

 

		December 31,
		2011				2010
Land		$	710,605			$	710,605
Building and land improvements			2,670,688				2,581,459
Furniture and equipment			2,715,052				2,694,085
Total			6,096,345				5,986,149
Less, accumulated depreciation			(3,294,770	)			(3,082,937	)
Premises and equipment, net		$	2,801,575			$	2,903,212

 

Depreciation expense totaled $211,833 and $238,346 in 2011 and 2010, respectively.

 

NOTE 6 - OTHER REAL ESTATE OWNED

 

Transactions in other real estate owned for the years ended December 31, 2011 and 2010 are summarized below:

 

		December 31,
		2011				2010
Balance, beginning of year		$	2,764,189			$	340,000
Additions			1,706,317				2,491,189
Write downs			(164,864	)			-
Sales			(1,015,565	)			(67,000	)
Balance, end of year		$	3,290,077			$	2,764,189

 

The Company recognized a net gain of $96,084 and a net loss of $17,000 on the sale of other real estate owned for the year ended December 31, 2011 and 2010, respectively.

 

Other real estate owned expense for 2011 and 2010 was $240,341 and $67,666, respectively, which includes gains and losses on sales.

 

NOTE 7 - DEPOSITS

 

At December 31, 2011, the scheduled maturities of time deposits were as follows:

 

Maturing in		Amount
2012		$	73,423,235
2013			8,895,936
2014			318,350
2015			178,369
2016			36,709
Total		$	82,852,599

 

There were no brokered deposits included in time deposits at December 31, 2011 or 2010.

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

Certain parties (principally certain directors and officers of the Company, their immediate families and business interests) were loan customers of, and had other transactions in the normal course of business with the Company. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of loans to related parties was $3,391,117 and $3,755,550 at December 31, 2011 and 2010, respectively. During 2011 and 2010, $105,576 and $380,506 of new loans were made to related parties, respectively, and repayments totaled $470,009 and $1,155,604, respectively.

 

 

Legal services were provided to the Company in the ordinary course of business by a law firm in which two of the partners are directors of the Company. The amount paid to this law firm for services rendered during 2011 and 2010 was $89,855 and $40,542, respectively.

 

NOTE 9- UNUSED LINES OF CREDIT

 

The Bank had available at the end of 2011 unused short-term lines of credit to purchase up to $11,500,000 of federal funds from unrelated correspondent institutions. The Bank also has a credit availability agreement with the Federal Home Loan Bank totaling 15 percent of the Bank’s qualifying assets as of any quarter end. As of December 31, 2011, the available credit totaled approximately $23,916,000 and there were no borrowings outstanding. Any borrowings from the FHLB will be secured by a blanket lien on all of the Bank's 1-4 family residential first lien mortgage loans and/or investment securities and the Federal Home Loan Bank stock that has a carrying value of $253,100 as of December 31, 2011.

 

NOTE 10 - COMMITMENTS AND CONTINGENCIES

 

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. At December 31, 2011, management is not aware of any pending or threatened litigation or unasserted claims that could result in losses, if any, that would be material to the financial statements and should be disclosed.

 

The Company makes loans to individuals and small businesses for various personal and commercial purposes. Although the Company’s loan portfolio is diversified, a substantial portion of its borrowers’ ability to honor the terms of their loans is dependent on business and economic conditions in Colleton, Charleston, and Jasper counties and surrounding areas. The Company’s loan portfolio is not concentrated in loans to any single borrower or in a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.

 

NOTE 11 - SHAREHOLDERS’ EQUITY

 

At December 31, 2011 and 2010, the Company had 66,997 shares, held in treasury stock. During 2011 the Company did not purchase or sell any treasury stock. During 2010, the Company purchased 1,300 and shares. The Company did not sell any shares in 2010.

 

The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds to Communitycorp in the form of cash dividends. Dividends to the Company are payable only from the undivided profits of the Bank. At December 31, 2011, the Bank’s undivided profits were $14,599,293. The Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Commissioner of Banking provided that the Bank received a composite rating of one or two at the last Federal or State regulatory examination. Under Federal Reserve Board regulations, the amounts of loans or advances from the Bank to the parent company are also restricted.

 

NOTE 12 - OTHER OPERATING EXPENSES

 

Other operating expenses are summarized as follows:

 

		Years Ended December 31,
		2011				2010
Stationary, printing, and postage		$	187,718			$	184,413
Federal deposit insurance premiums			206,440				233,017
Professional fees			260,032				294,436
Directors’ fees			89,600				89,600
Telephone expenses			78,577				79,795
ATM surcharges			61,271				29,481
Other real estate owned expenses			240,341				67,666
Other			364,602				387,106
Total		$	1,488,581			$	1,365,514

 

NOTE 13 - INCOME TAXES

 

Income tax expense included in the consolidated statements of operations is summarized as follows:

 

 

		Years Ended December 31,
		2011				2010
Currently payable:
Federal		$	(23,146	)		$	184,640
State			13,631				21,150
Total current			(9,515	)			205,790
Deferred income tax benefit			(9,598	)			(153,660	)
Income tax expense (benefit)		$	(19,113	)		$	52,130

 

The components of deferred tax assets and deferred tax liabilities are as follows:

 

		Years Ended December 31,
		2011				2010
Deferred tax assets:
Allowance for loan losses		$	399,251			$	498,604
Deferred compensation			148,390				146,781
Capital loss carryforward			72,058				72,058
Nonaccrual loan interest income			225,482				164,355
Securities available-for-sale			-				34,106
Federal tax credits			67,403				67,403
Other			61,877				9,328
Total deferred tax assets			974,461				992,635
Less, valuation allowance			(70,358	)			(70,358	)
Net deferred tax assets			904,103				922,277
Deferred tax liabilities:
Securities available-for-sale			178,257				-
Accumulated depreciation			170,918				165,537
Other			54,492				53,539
Total deferred tax liabilities			403,667				219,076
Net deferred tax asset recognized		$	500,436			$	703,201

 

Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. As of December 31, 2011, management has determined that it is more likely than not that the total deferred tax asset will be realized except for the deferred tax asset associated with the capital loss carryforward and, accordingly, has established a valuation allowance only for this item. Net deferred tax assets are included in other assets at December 31, 2011 and 2010.

 

A reconciliation between the income tax expense and the amount computed by applying the Federal statutory rate of 34% to income before income taxes follows:

 

		Years Ended December 31,
		2011				2010
Tax expense at statutory rate		$	96,489			$	173,924
State income tax, net of federal income tax benefit			8,996				13,959
Tax-exempt interest income			(141,138	)			(159,344	)
Disallowed interest expense			12,723				15,905
Other, net			3,817				7,686
Total		$	(19,113	)		$	52,130

 

It is the Company’s policy to recognize interest and penalties associated with uncertain tax positions as components of income taxes. The Company had analyzed the tax positions taken or expected to be taken in its tax returns and concluded that it has no liability related to uncertain tax positions. The federal and state tax returns are subject to examination for the years 2008, 2009 and 2010.

 

NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

 

 

Cash and Due from Banks and Interest-bearing Deposits with Other Banks - The carrying amount is a reasonable estimate of fair value.

 

Federal Funds sold - The carrying amount is a reasonable estimate of fair value because these instruments typically have terms of one to seven days.

 

Time Deposits in other Banks - The carrying amount is a reasonable estimate of fair value.

 

Securities Available-for-Sale - The fair values of securities available-for-sale equal the carrying amounts, which are the quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.

 

Securities Held to Maturity - securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. The fair values of securities held-to-maturity are based on quoted market prices.  If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.

 

Nonmarketable Equity Securities - The carrying amount of nonmarketable equity securities is a reasonable estimate of fair value since no ready market exists for these securities.

 

Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts.  The fair value of other types 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.

 

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date.  The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

 

Accrued Interest Receivable and Payable - The carrying value of these instruments is a reasonable estimate of fair value.

 

Off-Balance Sheet Financial Instruments - Fair values of off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

The carrying values and estimated fair values of the Company’s financial instruments were as follows:

 

		December 31, 2011								December 31, 2010
		Carrying				Estimated Fair				Carrying				Estimated Fair
		Amount				Value				Amount				Value
Financial Assets:
Cash and due from banks		$	4,359,616			$	4,359,616			$	4,206,974			$	4,206,974
Interest-bearing deposits with other banks			18,119,554				18,119,554				9,966,826				9,966,826
Federal funds sold			7,738,000				7,738,000				2,004,000				2,004,000
Time deposits in other banks			750,000				750,000				1,000,000				1,000,000
Securities available-for-sale			28,235,661				28,235,661				26,955,350				26,955,350
Securities held-to-maturity			299,921				308,955				299,885				309,023
Nonmarketable equity securities			259,100				259,100				302,300				302,300
Loans receivable, gross			93,808,071				93,635,540				105,297,684				105,748,184
Accrued interest receivable			664,266				664,266				785,859				785,859
Financial Liabilities:
Demand deposit, interest-bearing transaction, money market and savings accounts		$	57,971,962			$	57,971,962			$	53,941,792			$	53,941,792
Time deposits			82,852,599				83,081,840				83,642,029				84,001,754
Accrued interest payable			279,389				279,389				451,331				451,331
			Notional								Notional
			Amount								Amount
Off-Balance Sheet Financial Instruments:
Commitments		$	5,685,949							$	5,855,857
Standby letters of credit s			847,000								850,000

 

 

Generally accepted accounting principles (GAAP)1 provide a framework for measuring and disclosing fair value that requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

 

Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities, available-for-sale, are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or the writing down of individual assets.

 

Fair Value Hierarchy

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:

 

Level 1 -

Valuation is based upon quoted prices for identical instruments traded in active markets.

 

Level 2 -

Valuation is based upon quoted prices for similar instruments 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 -

Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

 

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

 

Securities Available for Sale - Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

Impaired Loans - The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures the impairment. The fair value of impaired loans is estimated using one of several valuation methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At December 31, 2011 and December 31, 2010, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

 

 

Other Real Estate Owned - Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

 

The table below presents the Company’s assets measured at fair value on a recurring basis as of December 31, 2011, and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

		Total				Level 1				Level 2				Level 3
December 31, 2011
Securities available for sale:
Government-sponsored enterprises		$	16,149,087			$	-			$	16,149,087			$	-
Mortgage-backed securities			3,183,989				-				3,183,989				-
Obligations of state and local governments			8,702,585				-				8,702,585				-
Other			200,000				-				200,000				-
Total		$	28,235,661			$	-			$	28,235,661			$	-
December 31, 2010
Securities available for sale:
Government-sponsored enterprises		$	13,591,442			$	-			$	13,591,442			$	-
Mortgage-backed securities			1,851,266				-				1,851,266				-
Obligations of state and local governments			11,312,642				-				11,312,642				-
Other			200,000				-				200,000				-
Total		$	26,955,350			$	-			$	26,955,350			$	-

 

There were no liabilities measured at fair value on a recurring basis at December 31, 2011 or December 31, 2010.

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets measured at fair value on a nonrecurring basis at December 31, 2011 and December 31, 2010, aggregated by level in the fair value hierarchy within which those measurements fall.

 

		Total				Level 1				Level 2				Level 3
December 31, 2011
Impaired loans, net of specific allowance		$	8,041,452			$	-			$	8,041,452			$	-
Other real estate owned			3,290,077				-				3,290,077				-
Total assets at fair value		$	11,331,529			$	-			$	11,331,529			$	-
December 31, 2010
Impaired loans, net of specific allowance		$	7,329,757			$	-			$	7,329,757			$	-
Other real estate owned			2,764,189				-				2,764,189				-
Total assets at fair value		$	10,093,946			$	-			$	10,093,946			$	-

 

There were no liabilities measured at fair value on a nonrecurring basis at December 31, 2011 or December 31, 2010.

 

Impaired loans which are measured for impairment using the fair value of collateral for collateral dependent loans, had a carrying value of $8,894,071 at December 31, 2011 with a valuation allowance of $852,619. Impaired loans had a carrying value of $7,703,241 at December 31, 2010 with a valuation allowance of $373,484.

 

Other real estate owned, which is measured at the lower of carrying amount or fair value less costs to sell, had a net carrying value of $3,290,077 and $2,764,189 at December 31, 2011 and December 31, 2010, respectively. The write down of other real estate owned for the year ended December 31, 2011 was $164,864. For the year ended December 31, 2010 there was no write down of other real estate owned.

 

The Company has no assets or liabilities whose fair values are measured using level 3 inputs.

 

 

NOTE 15 - REGULATORY MATTERS

 

The Bank is subject to various regulatory capital requirements administered by the 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 ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. Total regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

 

As of December 31, 2011 and 2010, management believes that the Bank is well capitalized under the regulatory framework for prompt-corrective action.

 

The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.

 

																		To Be Well
																		Capitalized Under
										For Capital								Prompt Corrective
		Actual								Adequacy Purposes								Action Provisions
(Dollars in Thousands)										Minimum								Minimum
		Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 2011
Total capital (to risk-weighted assets)		$	19,104				18.88	%		$	8,095				8.00	%		$	10,119				10.00	%
Tier 1 capital (to risk-weighted assets)			17,831				17.62				4,048				4.00				6,071				6.00
Tier 1 average ratio			17,831				11.13				6,408				4.00				8,010				5.00
December 31, 2010
Total capital (to risk-weighted assets)		$	19,129				16.49	%		$	9,283				8.00	%		$	11,604				10.00	%
Tier 1 capital (to risk-weighted assets)			17,678				15.23				4,642				4.00				6,962				6.00
Tier 1 capital (to average assets)			17,678				11.15				6,340				4.00				7,925				5.00

 

The Federal Reserve Board has similar requirements for bank holding companies. The Company is currently not subject to these requirements because the Federal Reserve guidelines contain an exemption for bank holding companies with less than $500,000,000 in consolidated assets.

 

NOTE 16 - COMMUNITYCORP (PARENT COMPANY ONLY)

 

Presented below are the condensed financial statements for Communitycorp (Parent Company Only).

 

Condensed Balance Sheets

 

		December 31,
		2011				2010
Assets
Cash		$	49,197			$	15,698
Investment in banking subsidiary			18,169,430				17,613,344
Non-marketable equity securities			6,000				6,000
Other assets			3,795				3,795
Total assets		$	18,228,422			$	17,638,837
Shareholders’ equity		$	18,228,422			$	17,638,837

 

 

Condensed Statements of Income

 

		Years Ended December 31,
		2011				2010
Income
Dividends from banking subsidiary		$	150,000			$	150,000
Other income			-				13
Total income			150,000				150,013
Expenses			-				410
Income before income taxes and equity in undistributed earnings of banking subsidiary			150,000				149,603
Income tax expense (benefit)			-				(130	)
Equity in undistributed earnings of banking subsidiary			152,904				309,677
Net income		$	302,904			$	459,410

 

Condensed Statements of Cash Flows

 

		Years Ended December 31,
		2011				2010
Cash flows from operating activities
Net income		$	302,904			$	459,410
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of banking subsidiary			(152,904	)			(309,677	)
(Increase) decrease in other assets			-				(130	)
Net cash provided by operating activities			150,000				149,603
Cash flows from financing activities
Cash dividends paid			(116,501	)			(117,001	)
Purchases of treasury stock			-				(98,401	)
Net cash used by financing activities			(116,501	)			(215,402	)
Increase (decrease) in cash			33,499				(65,799	)
Cash, beginning of year			15,698				81,497
Cash, ending of year		$	49,197			$	15,698

 

NOTE 17 – SUBSEQUENT EVENTS

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.  Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.  Management has reviewed events occurring through the date the financial statements were issued and no subsequent events occurred, requiring accrual or disclosure.

 

 

COMMUNITYCORP AND SUBSIDIARY

BOARD OF DIRECTORS

 

 

George W. Cone		J. Barnwell Fishburne
Attorney		Owner, Fishburne & Co
McLeod, Fraser & Cone		Real Estate
Steven Murdaugh		Peden B. McLeod
Attorney		Chairman of the Board
Peters, Murdaugh, Eltzroth &Derrick, PA		and CEO
		McLeod, Fraser & Cone Attorney
Harold M. Robertson		Harry L. Hill
Retired		Retired
J. Reaves McLeod
Attorney
McLeod, Fraser & Cone

  

OFFICERS

 

Gwendolyn P. Bunton		E. Lawton Huggins
Acting President & Cashier		Vice President and
		Senior Lending Officer
James M. Bunton, Jr.		Lynn H. Murdaugh
Assistant Vice President and		Assistant Vice President
Lending Office		and Lending Officer
Cynthia Mills, Branch Manager and	Joanne Herndon, Branch Manager	Bruce Tate
Lending Officer	Lending Officer	Collections Officer and
		Lending Officer
Rose Walker	Pamela Nelson	Marianne Hawkins
Branch Manager	Internal Auditor	Loan Officer

  

STAFF MEMBERS

 

Annette Lyons
Tanya Hickman	Sharon Milligan
Danielle McCaskill	Jacqueline Hodgson
Casey Beach	Debra Bowers
Carolyn Brant	Lynn Hiott
Dorothy Brunson	Lindsey Turner
Natalie Powers	Rodneshia Walker
Jennifer Crosby	Pam O’Quinn
Rachel Jacques	Kelly Strickland
Melissa T. Smyly	Jeanne Raven
Sarah Herndon	Tracy Valentine
Sharon Hillier	Candice Kubik
Carolyn Rahn	Louie Whidden
Stephanie Kelly	Jessica Pahl
Kathy Breland	Erin Leming
Stephanie Strickland	Melissa McMillan

 

 

COMMUNITYCORP AND SUBSIDIARY

 

CORPORATE DATA

 

ANNUAL MEETING:

 

The Annual Meeting of Shareholders of Communitycorp will be held at 6 p.m. on Wednesday, April 24, 2012, at Bank of Walterboro, 1100 North Jefferies Boulevard, Walterboro, South Carolina.

 

CORPORATE OFFICE:	GENERAL COUNSEL:
P.O. Box 1707	McLeod, Fraser & Cone
1100 North Jefferies Blvd.	P.O. Box 230
Walterboro, S.C.  29488	Washington Street
(843) 549-2265	Walterboro, S.C. 29488
	INDEPENDENT REGISTERED
STOCK TRANSFER DEPARTMENT:	PUBLIC ACCOUNTING FIRM:
Bank of Walterboro	Clifton D. Bodiford
P.O. Box 1707	Certified Public Accountant
Walterboro, S.C. 29488	4406-B Forest Dr. Suite 301
	Columbia, S.C.  29260-6556

STOCK INFORMATION:

 

The Common Stock of Communitycorp is not listed on any exchange, nor is there a recognized or established market. There is limited trading in the Company’s shares of Common Stock. Management believes that the Common Stock has traded between $50.00 to $75.00 per share, during the past two years. There were 551 shareholders of record as of December 31, 2011.

  

The ability of Communitycorp to pay cash dividends is dependent upon receiving cash in the form of dividends from Bank of Walterboro. However, certain restrictions exist regarding the ability of the Bank to transfer funds to Communitycorp in the form of cash dividends. All of the Bank’s dividends to the Company are payable only from the undivided profits of the Bank.

 

FORM 10-K

 

The Company will furnish upon request, free of charge, copies of the Annual Report and the Company’s Report to the Securities and Exchange Commission (Form 10-K) by contacting Gwen P. Bunton, Vice President, Communitycorp, P.O. Box 1707, Walterboro, South Carolina 29488.

 

This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT furnished pursuant to Part 350 of the Federal Deposit Insurance Corporation’s Rules and Regulations. THIS STATEMENT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.

 

 

COMMUNITYCORP AND SUBSIDIARY

 

SERVICES

 

All Day Banking

American Express Travelers Checks

ATM Service

Bank By Mail

Business Checking

Image of Canceled Checks Returned with Statement

Cashiers Checks

Certificates of Deposit

Christmas Clubs

Collection Items

Commercial Loans

Debit Cards

Direct Deposits

Discount Brokerage Service

Drive-In Service

Individual Retirement Accounts

Interest Checking

Internet Banking

Letters of Credit

Money Market Accounts

Mortgage Loans

Night Depository

Overdraft Protection

Personal Checking

Personal Lines of Credit

Personal Loans

Regular Savings

Safe Deposit Boxes

Senior Checking

U.S. Savings Bonds

Visa and Master Card

Wire Transfers

 

 

§

 

 

110 Forest Hills Road, Walterboro, S.C. 29488

1100 North Jefferies Boulevard, Walterboro, S.C. 29488

6225 Savannah Highway, Ravenel, S.C. 29470

8058 East Main Street, Ridgeland, SC 29936

Member FDIC