Bank of McKenney Turns In Solid 2012 Results, Records Record 4th Quarter Earnings, And Reports Substantial Reduction Of Nonperforming Loans

MCKENNEY, Va., Jan. 16, 2013 /PRNewswire/ -- Bank of McKenney (OTCBB: BOMK) today announced record fourth quarter 2012 earnings of $499,000 representing a $147,000 or 41.76% increase over the 2011 fourth quarter earnings of $352,000.  Fourth quarter earnings per basic and diluted common share for 2012 of $0.26 were reported as compared to $0.18 recorded during the 2011 fourth quarter.  For the year ended December 31, 2012, net income amounted to $1,208,000 compared to net income of $1,396,000 for the same period in the prior year.  Basic and diluted earnings per common share were $0.63 for the year ended December 31, 2012 compared to the prior year earnings per share of $0.73 per common share.  Weighted average shares outstanding for 2012 equaled 1,893,924 while weighted average shares outstanding during 2011 equaled 1,893,672.  Annual net earnings declined $188,000 or 13.47%, and this is primarily attributable to efforts during the second and third quarters to reduce nonperforming loans and rid the balance sheet of problematic credits.  These liquidations resulted in significant charges to reserves that prompted corresponding provision allocations to said reserves.  Return on average equity for the period ended December 31, 2012 was 5.75% compared to 6.89% in 2011.  Return on average assets for the period ended December 31, 2012 was 0.58% compared to 0.70% in 2011.

Total assets amounted to $211.9 million on December 31, 2012, an increase of 3.37% or $6.9 million over the December 31, 2011 level of $205.0 million.  Total loans, as of December 31, 2012, grew to $151.9 million compared to $149.1 million as of December 31, 2011.  The loan portfolio was up $2.8 million or 1.88% over the December 31, 2011 level.  At year-end 2012, the investment portfolio stood at $20.0 million, which represents a $4.8 million or 19.35% decrease when compared to the $24.8 million prior year-end balance.  On December 31, 2012, interest-bearing time deposits in other banks stood at $3.0 million representing a 50.00% increase over the $2.0 million interest-bearing time deposit investments as of December 31, 2011.  Overnight federal funds sold grew $4.2 million or 44.21% from $9.5 million on December 31, 2011 to $13.7 million on December 31, 2012.  Cumulatively, these earning assets grew $3.2 million or 1.73% during 2012 and represent 89.00% of total assets.  Total deposits amounted to $187.2 million as of December 31, 2012, which represents a $6.8 million or 3.77% increase from the $180.4 million level as of December 31, 2011.  Total noninterest-bearing demand deposits were $34.8 million as of December 31, 2012, an increase of $4.5 million or 14.85% from the December 31, 2011 $30.3 million level.  During this same period, interest-bearing deposits climbed $2.3 million or 1.53% from $150.1 million to $152.4 million.  Total borrowings from the Federal Home Loan Bank of Atlanta (the "FHLB") decreased $0.3 million from $2.3 million on December 31, 2011 to $2.0 million as of December 31, 2012.  There was no additional borrowing through the FHLB during 2012.

The Bank continues to focus on delinquencies and nonperforming loans within the portfolio.  In 2011, certain credits demonstrated further deterioration as the economy struggled to maintain stability.  As a result, management initiated a plan to liquidate nonperforming loans in 2012 thereby significantly improving the credit quality of the overall loan portfolio.  By year-end 2012, nonperforming loans were reduced to $1.5 million, down from the $3.7 million year-end 2011 level.  As of December 31, 2012, past due loans and non-performing loans as a percentage of total loans of 0.71% and 0.98% respectively were recorded.  These ratios, at December 31, 2011, stood at 1.84% and 2.47%, respectively.   December 31, 2012 total nonperforming assets as a percentage of total assets stood at 1.81% and represented a 33 basis point drop over the December 31, 2011 2.14% level.  Management feels comfortable that further losses will be minimal and anticipates 2013 will represent further improvement to more normal, pre-recession levels of problematic assets.  Management also expects additions to loan reserves to return to normal levels.    

The allowance for loan losses was $2,300,000 as of December 31, 2012, or 1.51% of loans outstanding, compared to $2,250,000 as of December 31, 2011 or 1.51% of outstanding loans.  Net charges to the reserve account for loan losses amounted to $1,376,000 as of December 31, 2012 or 0.91% of average outstanding loans for 2012.  For the 2011 period, net charges to the reserve of $625,000 were taken representing 0.44% of average loans outstanding for the period.  Allocations to the reserve account of $1,426,000 were provisioned for 2012 compared to provision allocations of $825,000 for the same period of 2011. 

The net interest income for the year ended December 31, 2012 was $8.6 million, a 6.17% increase when compared to the December 31, 2011 level of $8.1 million.  The average loan portfolio increased $9.2 million to $151.3 million for the current fiscal year, representing a 6.47% hike over the average loan portfolio assets of $142.1 million for the same period in 2011.  The related interest income from loans was $9.7 million in 2012, up 4.30% from the related interest income of $9.3 million in 2011.  The average yield on loans decreased from 6.56% in 2011 to 6.39% in 2012.  Average investments dipped $1.6 million to $21.3 million for the current fiscal year, representing a 6.99% decrease below the average investment portfolio of $22.9 million in 2011.  The investment securities and other earning assets (such as federal funds sold) contributed $0.5 million to the interest income level of $10.2 million in 2012.  The yield on earning assets was 5.50% in 2012 and 5.68% in 2011.  Average demand deposits increased 16.49% during 2012 to $33.2 million when compared to $28.5 million for the same period in 2011.  Average interest-bearing deposits were $151.0 million through the year ended December 31, 2012, and represented an increase of $4.2 million or 2.86% over the average 2011 level of $146.8 million.  Finally, average borrowed funds decreased $0.3 million from the December 31, 2011 level of $2.5 million to the December 31, 2012 level of $2.2 million.  Cumulatively, average interest bearing funding sources (deposit and purchased funds) grew to $153.2 million in 2012 which was $3.9 million or 2.61% greater than the 2011 level of $149.3 million.  Interest expense for all interest bearing liabilities totaled $1.6 million in 2012 which was 20.00% or $0.4 million less than the 2011 level of $2.0 million.  Cost of interest bearing liabilities was 1.04% during 2012 or 28 basis points lower than the 2011 level of 1.32%, the decrease being attributable to the effects of a prolonged period of historically low interest rates.  The interest spread expanded for the twelve months of 2012 by 10 basis points to 4.46%.  Likewise, the net interest margin grew for the twelve months of 2012 to 4.65%, up 7 basis points from the 4.58% margin recorded for the same period in 2011.  The increase in the net interest margin is due to continued cost of funds reductions that outpace reductions in earning asset yields.  Though a large segment of the loan portfolio is prime based, the Bank has prudently structured most of its loan relationships to include floors.  This has promoted stability in yields on earning assets during the abnormally low and lengthy rate cycle. 

For the year ended December 31, 2012, noninterest income, exclusive of securities transactions, grew $306,000 to $1,935,000, representing an 18.78% increase from the 2011 level of $1,629,000.  Service charges on deposits grew 2.53% during the year and ended with a revenue increase of $24,000 to $971,000.  Signs of slight improvement in housing are emerging.  As a result, income generated by the Bank's fixed rate mortgage department stabilized and ended the 2012 fiscal year with a $1,000 or 0.36% increase from $275,000 in 2011 to $276,000 in 2012.  Income generated on bank-owned life insurance dipped $2,000 to $127,000 during 2012 while other income jumped $283,000 or 101.80% from $278,000 on December 31, 2011 to $561,000 on December 31, 2012.  This increase in other income stemmed largely from a tax-fee gain of $272,000 recorded as a result of the death benefit received on one of the bank-owned life insurance policies covering a deceased employee.  Noninterest expense in the 2012 fiscal year amounted to $7,796,000 compared to the 2011 level of $7,209,000.  The increase is directly related to normal growth of the institution.  The largest component of noninterest expense is salaries and benefits.  Salaries and benefits expense for the year ended December 31, 2012 grew $111,000 or 2.69% from $4,132,000 in the prior year to $4,243,000.  Personnel expenses increased with the addition of a seasoned compliance officer, and nominal annual increases in benefits costs.  Occupancy and furniture and equipment costs grew $59,000 or 6.08% over the $970,000 2011 level to $1,029,000 in 2012.  Other overhead costs increased $439,000 or 20.49% during 2012 to $2,582,000, up from the 2011 level of $2,143,000.  Other overhead expense grew primarily from a $356,000 increase in expenses and valuation adjustments on other real estate held by the Bank.  Such costs were recorded at $400,000 during 2012 as compared to $44,000 in 2011.  Also affecting other overhead expense was the outsourcing of certain network management functions formerly performed in-house as well as costs associated with a full year of experience with the Rivers Bend office opened during the third quarter of 2011.

Richard M. Liles, President and Chief Executive Officer, stated, "2012 would best be described as a year of painful necessity.  We entered the year with one primary focus, cleaning up the problematic credits in the loan portfolio.  Through liquidations, write offs and foreclosures, we successfully reduced nonperforming loans by 60%, and over 66% of the $1.5 million remaining year-end nonperforming loans are under contract and expected to close by the end of the second quarter of 2013.  The painful part was $1.4 million in additions to reserves to offset an equivalent amount of charges against it.  Despite the aforementioned, we had another solid year during 2012, and we have taken the losses necessary to significantly clean up our loan portfolio.  We are forecasting a return to normal reserve allocations as well as pre-recession levels of non-performing assets for 2013, both of which should foster extensive growth in earnings.  Now our biggest challenge shifts to how to comply with hundreds of emerging new regulations."

Bank of McKenney is a full-service community bank headquartered in McKenney, Virginia with seven branches serving Southeastern Virginia and assets totaling $211.9 million.

Certain statements in this document are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors. More information about these factors is contained in Bank of McKenney's filings with the Board of Governors of the Federal Reserve.

SOURCE Bank of McKenney