10-Q 1 d398491d10q.htm FORM 10-Q Form 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 0-22961

 

 

ANNAPOLIS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   52-1595772

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

1000 Bestgate Road, Annapolis, Maryland 21401

(Address of principal executive offices)

(410) 224-4455

(Registrants telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

At October 31, 2012, the Registrant had 3,975,601 shares of common stock outstanding.

 

 

 


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TABLE OF CONTENTS

 

 

     PAGE  

PART I - FINANCIAL INFORMATION

  

Item 1 – Financial Statements

  

Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011

     1   

Consolidated Statements of Operations for the Three and Nine Month Periods Ended September  30, 2012 and 2011 (unaudited)

     2   

Consolidated Statements of Comprehensive Income for the Three and Nine Month Periods Ended September  30, 2012 and 2011 (unaudited)

     3   

Consolidated Statements of Cash Flows for the Nine Month Periods Ended September  30, 2012 and 2011 (unaudited)

     4-5   

Notes to Consolidated Financial Statements (unaudited)

     6-30   

Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31-42   

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

     42   

Item 4 – Controls and Procedures

     42   

PART II - OTHER INFORMATION

  

Item 1 – Legal Proceedings

     43   

Item 1A – Risk Factors

     43   

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 3 – Defaults Upon Senior Securities

     43   

Item 4 – Mine Safety Disclosures

     43   

Item 5 – Other Information

     43   

Item 6 – Exhibits

     44-45   

SIGNATURES

     46   

CERTIFICATIONS

  

This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Report and include all statements regarding the intent, belief or current expectations of Annapolis Bancorp, Inc. (the “Company”), its directors or its officers with respect to, among other things: (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition, results of operations; plans and objectives (iii) the Company’s growth strategy; (iv) the Company’s future performance and business, including, but not limited to statements with respect to the adequacy of the allowance for credit losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Company’s financial condition and results of operations; and (v) the declaration and payment of dividends. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of


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future performance and involve certain risks and uncertainties which could cause actual results to differ materially from those expressed in forward-looking statements. Factors that might cause such a difference may, include, but are not limited to: (i) the rate of declining growth in the economy and employment levels, as well as general business and economic conditions; (ii) changes in interest rates, as well as the magnitude of such changes; (iii) the fiscal and monetary policies of the federal government and its agencies; (iv) changes in federal bank regulatory and supervisory policies, including required levels of capital; (v) the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market; (vi) the performance of the stock and bond markets; (vii) competition in the financial services industry, (viii) possible legislative, tax or regulatory changes, and such other risks and uncertainties as set forth in the Company’s filings with the Securities and Exchange Commission. All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to the Company as of the date of this report, and other than to the extent required by applicable law, including the requirements of applicable securities laws, the Company undertakes no obligation to publicly release the results of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.


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PART I - FINANCIAL INFORMATION

Item 1- Financial Statements

Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

as of September 30, 2012 and December 31, 2011

(in thousands)

 

     (Unaudited)
September 30, 2012
     (Audited)
December 31, 2011
 

Assets

     

Cash and due from banks

   $ 1,951       $ 2,026   

Interest bearing balances with banks

     39,996         18,288   

Federal funds sold and other overnight investments

     11         26,583   

Investment securities available for sale, at fair value

     91,777         87,549   

Federal Reserve and Federal Home Loan Bank stock

     2,864         2,992   

Loans, less allowance for credit losses of $6,647 and $7,182

     278,102         283,284   

Premises and equipment, net

     9,797         8,418   

Accrued interest receivable

     1,350         1,279   

Deferred income taxes

     2,390         2,617   

Investment in bank owned life insurance

     5,783         5,624   

Prepaid FDIC Insurance

     954         1,198   

Real estate owned

     697         1,222   

Other assets

     683         490   
  

 

 

    

 

 

 

Total Assets

   $ 436,355       $ 441,570   
  

 

 

    

 

 

 

Liabilities and Stockholders’ Equity

     

Deposits

     

Noninterest bearing

   $ 57,314       $ 56,664   

Interest bearing

     281,501         293,717   

Securities sold under agreements to repurchase

     18,895         11,344   

Long-term borrowings

     35,000         35,000   

Guaranteed preferred beneficial interests in junior subordinated debentures

     5,000         5,000   

Accrued dividends and interest payable

     188         219   

Other liabilities

     2,381         2,258   
  

 

 

    

 

 

 

Total liabilities

     400,279         404,202   
  

 

 

    

 

 

 

Stockholders’ Equity

     

Preferred stock, par value $0.01 per share; authorized 5,000,000 shares; Series A, $1,000 per share liquidation preference, shares issued and outstanding 4,076 shares at September 30, 2012 and 8,152 at December 31, 2011, net of discount of zero and $6

     4,076         8,146   

Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 3,975,471 shares at September 30, 2012 and 3,958,293 at December 31, 2011

     40         39   

Warrants

     234         234   

Paid in capital

     11,847         11,779   

Retained earnings

     18,815         16,179   

Accumulated other comprehensive income

     1,064         991   
  

 

 

    

 

 

 

Total stockholders’ equity

     36,076         37,368   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 436,355       $ 441,570   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

for the Three and Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

(in thousands, except Shares and Per Share data)

 

     For the Three Months
Ended September 30,
     For the Nine Months
Ended September 30,
 
     2012     2011      2012     2011  

Interest and dividend income

         

Loans, including fees

   $ 4,338      $ 4,348       $ 12,817      $ 12,807   

Interest bearing balances with banks

     9        4         24        13   

Federal funds sold and other overnight investments

     9        12         31        27   

Mortgage-backed securities

     264        363         863        1,081   

U. S. Government agencies securities

     219        245         635        870   

State and municipal securities

     9        11         32        33   

Equity securities

     21        21         71        60   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     4,869        5,004         14,473        14,891   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

         

Certificates of deposit, $100,000 or more

     140        144         435        415   

Other deposits

     227        397         768        1,314   

Securities sold under agreements to repurchase

     13        18         36        59   

Interest on long-term borrowings

     330        328         985        974   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     710        887         2,224        2,762   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     4,159        4,117         12,249        12,129   

Provision for credit losses

     29        338         306        1,574   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for credit losses

     4,130        3,779         11,943        10,555   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income

         

Service charges and fees on deposits

     309        322         903        938   

Mortgage banking fees

     111        59         207        76   

Other fee income

     130        229         313        227   

Gain on sale of loans

     0        18         0        165   

(Loss) gain on sale of real estate owned and repossessed assets

     (41     31         (12     8   

Loss on disposal of fixed assets

     0        0         0        (31
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     509        659         1,411        1,383   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expense

         

Personnel

     1,620        1,826         4,927        5,301   

Occupancy and equipment

     361        360         1,108        1,204   

Data processing

     209        214         629        635   

Legal and professional fees

     117        138         385        363   

Marketing

     50        63         267        295   

FDIC Insurance

     88        57         256        338   

Other operating expenses

     403        737         1,207        1,518   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     2,848        3,395         8,779        9,654   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     1,791        1,043         4,575        2,284   

Income tax expense

     680        375         1,719        782   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     1,111        668         2,856        1,502   

Preferred stock dividend and discount accretion

     51        123         220        367   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common shareholders

   $ 1,060      $ 545       $ 2,636      $ 1,135   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per common share

   $ 0.27      $ 0.14       $ 0.66      $ 0.29   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic weighted average shares

     3,975,395        3,952,772         3,973,132        3,947,233   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.26      $ 0.14       $ 0.65      $ 0.29   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted weighted average shares

     4,122,664        3,954,688         4,084,417        3,954,842   
  

 

 

   

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

for the Three and Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

(dollars in thousands)

 

     For the Three Months Ended
September 30,
 
     2012      2011  

Net income

   $ 1,111       $ 668   

Unrealized net holding gains, on

     

Available-for-sale portfolios, net of tax of $49 and $311, respectively

     77         477   
  

 

 

    

 

 

 

Comprehensive income

   $ 1,188       $ 1,145   
  

 

 

    

 

 

 
     For the Nine Months Ended
September 30,
 
     2012      2011  

Net income

   $ 2,856       $ 1,502   

Unrealized net holding gains, on

     

Available-for-sale portfolios, net of tax of $47 and $497, respectively

     73         763   
  

 

 

    

 

 

 

Comprehensive income

   $ 2,929       $ 2,265   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

for the Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

(in thousands)

 

     For the Nine Months Ended
September 30,
 
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 2,856      $ 1,502   

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization

     371        466   

Amortization of premiums and accretions of discounts, net

     197        230   

Provision for credit losses

     306        1,574   

Provisions for loss, other real estate owned

     28        37   

Origination of loans held for sale

     0        (8,186

Proceeds from sale of loans held for sale

     0        9,730   

Stock based compensation

     64        87   

Deferred income taxes

     180        (321

Earnings on life insurance policies

     (159     (137

Gain on sale of loans held for sale

     0        (165

Loss (gain) on sale of real estate owned and repossessed assets

     12        (8

Loss on write-down and disposal of fixed assets

     0        230   

(Increase) decrease in:

    

Accrued interest receivable

     (71     264   

Prepaid FDIC insurance

     244        351   

Other assets

     (217     423   

Increase (decrease) in:

    

Accrued interest payable

     (31     (10

Accrued income taxes, net of taxes refundable

     (78     403   

Deferred loan origination fees

     5        (123

Other liabilities

     201        428   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,908        6,775   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from sales and maturities of securities available for sale

     29,347        35,468   

Purchase of securities available for sale

     (33,524     (23,042

Net decrease (increase) in federal funds sold

     26,572        (9,640

Net (increase) decrease in interest bearing balances with banks

     (21,708     178   

Net decrease (increase) in loans receivable, net

     4,485        (16,411

Improvements to other real estate owned and repossessed assets

     (41     0   

Purchase of premises and equipment, net of disposals

     (1,778     (365

Proceeds from sales of real estate owned and repossessed assets

     964        502   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     4,317        (13,310
  

 

 

   

 

 

 

 

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Annapolis Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (continued)

for the Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

(in thousands)

(continued)

 

     For the Nine Months Ended
September 30,
 
     2012     2011  

Cash flows from financing activities

    

Net (decrease) increase in:

    

Time deposits

     (7,244     1,349   

Other deposits

     (4,322     (2,179

Securities sold under agreements to repurchase

     7,551        1,597   

Redemption of preferred stock

     (4,076     0   

Proceeds from stock options exercised

     0        14   

Proceeds from issuance of common stock

     5        6   

Payment of preferred stock dividend

     (214     (305
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (8,300     482   
  

 

 

   

 

 

 

Net decrease in cash

     (75     (6,053

Cash and cash equivalents, beginning of period

     2,026        7,854   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 1,951      $ 1,801   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Interest paid, including interest credited to accounts

   $ 2,468      $ 3,078   

Income taxes paid

   $ 1,862      $ 1,167   

Non-cash investing activities

    

Transfers from loans to real estate owned

   $ 288      $ 25   

Transfers from loans to other assets

   $ 98      $ 20   

The accompanying notes are an integral part of these financial statements.

 

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Annapolis Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

for the Nine Month Periods Ended September 30, 2012 and 2011

(unaudited)

Note A – Basis of Presentation

 

The accompanying unaudited consolidated financial statements of Annapolis Bancorp, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required for complete financial statements. In the opinion of management, all adjustments and reclassifications that are normal and recurring in nature and are considered necessary for fair presentation have been included. Operating results for the nine month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012 or any other period. These unaudited consolidated financial statements should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2011, which includes the consolidated financial statements and footnotes. Certain reclassifications have been made to amounts previously reported to conform to the classifications made in 2012.

Note B – Business

 

The Company was incorporated on May 26, 1988, under the laws of the State of Maryland, to serve as a bank holding company for BankAnnapolis (formerly known as Annapolis National Bank) (the “Bank”). The Company (as a bank holding company) and the Bank are subject to governmental supervision, regulation, and control.

The Bank currently conducts a general commercial and retail banking business in its market area, emphasizing the banking needs of small businesses, professional concerns and individuals from its headquarters in Annapolis, its six other branches located in Anne Arundel County, Maryland and one branch located on Kent Island in Queen Anne’s County, Maryland.

The Bank has built its reputation on exemplary customer service and outreach to the communities surrounding each of the Bank’s locations. The Bank is committed to offering products and services that focus on relationship banking and provide an alternative to the large multi-regional financial institutions that are so pervasive in the markets the Bank serves. The Bank attracts most of its customer deposits from Anne Arundel County, Maryland, and to a lesser extent, Queen Anne’s County, Maryland. The Bank’s lending operations are centered in Anne Arundel County, but extend throughout Central and Southern Maryland.

 

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Note C – Stock Based Compensation

 

Stock based-compensation expense for the nine month periods ended September 30, 2012 and 2011 was $64,400 and $87,000, respectively. Stock-based compensation expense recognized in the consolidated statements of income for the first nine months of 2012 and 2011 reflects estimated forfeitures.

For the three month period ended September 30, 2012, $24,300 of expense was recognized on the remaining outstanding options, restricted shares and restricted share units. During the same period of 2011, $30,000 of expense was recognized on the remaining outstanding options, restricted shares and restricted share units.

During the first three quarters of 2012 and 2011, there were no options granted to employees or directors of the Company or Bank. On April 27, 2012 an option to purchase a total of 8,888 shares at a price of $9.30 per share was forfeited when a non-employee director, resigned from the board of directors of the Company and its subsidiary BankAnnapolis.

Stock option activity for the nine months ended September 30, 2012 and 2011 was as follows:

 

     Shares     Weighted Average
Exercise Price
     Weighted Average
Remaining
Contractual Term
     Aggregate
Intrinsic  Value

($000)
 

Outstanding at December 31, 2011

     92,302      $ 7.22         

Grants

     0        0.00         

Exercised

     0        0.00         

Forfeitures

     (8,888     9.30         

Expired

     0        0.00         
  

 

 

         

Outstanding as of September 30, 2012

     83,414      $ 7.00         
  

 

 

         

Exercisable at September 30, 2012

     83,414      $ 7.00         1.8       $ 97   
  

 

 

         

Outstanding at December 31, 2010

     124,270      $ 6.06         

Grants

     0        0.00         

Exercised

     (5,333     2.64         

Forfeitures

     0        0.00         

Expired

     (22,374     2.64         
  

 

 

         

Outstanding as of September 30, 2011

     96,563      $ 7.05         
  

 

 

         

Exercisable at September 30, 2011

     95,721      $ 7.03         2.8       $ 4   
  

 

 

         

The aggregate intrinsic value in the table above represents the total pre-tax value of the exercisable in-the-money options (that is, the difference between the closing stock price on the last trading day in the first nine months of 2012 and 2011, and the exercise price of the options multiplied by the number of shares) on September 30, 2012 and September 30, 2011. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised was zero for the nine months ended September 30, 2012 and $8,000 for the nine months ended September 30, 2011.

As of September 30, 2012, there were no unrecognized costs related to unvested options. As of September 30, 2011, $2,300 of total unrecognized costs related to unvested options was expected to be recognized over a weighted average period of 0.6 years.

 

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There were no restricted shares awarded to employees during the third quarter of 2012 or 2011.

During the first quarter of 2012, non-employee directors of the Bank were awarded a total of 16,268 shares of restricted stock at a market value of $4.30 per share in lieu of an annual retainer. These shares vest on January 25, 2013. During the first quarter of 2011, an employee of the Bank was awarded 5,000 restricted shares at a market value of $4.45 per share. During the first quarter of 2011, non-employee directors of the Bank were awarded a total of 12,782 shares of restricted stock at a market value of $4.30 per share in lieu of an annual retainer. These shares vested on January 27, 2012.

On January 3, 2012 a total of 2,500 restricted shares and 10,000 restricted share units granted in 2009 were forfeited when an employee of the Bank resigned. On April 27, 2012 a total of 1,162 shares awarded during the first quarter of 2012 to a non-employee director, were forfeited when the director resigned from the board of directors of the Company and its subsidiary BankAnnapolis. Non-compensation related expense of $16,250 and $13,750 was recognized for the three month periods ended September 30, 2012 and 2011, respectively and $48,750 and $41,250 for the nine month periods ending September 30, 2012 and 2011, respectively, relating to the shares issued to non-employee directors.

As of September 30, 2012, 15,000 restricted share units of the 43,606 restricted shares and restricted share units outstanding have vested; the remaining 28,606 restricted shares and restricted share units will vest over a weighted average period of 0.60 years.

Restricted stock activity for the nine months ended September 30, 2012 and 2011 was as follows:

 

     Shares     Weighted Average
Grant Price
 

Outstanding at December 31, 2011

     57,282      $ 3.86   

Grants

     16,268        4.30   

Issued

     (16,282     4.29   

Forfeitures

     (13,662     4.10   
  

 

 

   

Outstanding as of September 30, 2012

     43,606      $ 3.84   
  

 

 

   

Outstanding at December 31, 2010

     68,384      $ 3.66   

Grants

     17,782        4.34   

Issued

     (26,384     3.75   

Forfeitures

     0        0   
  

 

 

   

Outstanding as of September 30, 2011

     59,782      $ 3.86   
  

 

 

   

As of September 30, 2012, $52,000 of total unrecognized costs related to unvested restricted shares and restricted share units is expected to be recognized over a weighted average period of 1.0 years. As of September 30, 2011, $124,500 of total unrecognized costs related to unvested restricted shares and restricted share units was expected to be recognized over a weighted average period of 1.9 years.

 

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Table of Contents

Note D – Earnings Per Share

 

Information regarding earnings per share is summarized as follows:

Computation of Earnings Per Share

(in thousands, except Earnings Per Share and share data)

 

     For the Three Months
Ended
September 30,
     For the Nine Months
Ended
September 30,
 
     2012      2011      2012      2011  

Net income available to common shareholders

   $ 1,060       $ 545       $ 2,636       $ 1,135   

Weighted average common shares outstanding

     3,975,395         3,952,772         3,973,132         3,947,233   

Basic Earnings Per Common Share

   $ 0.27       $ 0.14       $ 0.66       $ 0.29   

Net income available to common shareholders

   $ 1,060       $ 545       $ 2,636       $ 1,135   

Weighted average common shares outstanding

     3,975,395         3,952,772         3,973,132         3,947,233   

Effect of potential dilutive common shares

     147,269         1,916         111,285         7,609   

Total weighted average diluted common shares outstanding

     4,122,664         3,954,688         4,084,417         3,954,842   

Diluted Earnings Per Common Share

   $ 0.26       $ 0.14       $ 0.65       $ 0.29   

Basic earnings per common share are calculated using the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share are calculated using the weighted-average number of shares of common stock plus dilutive potential shares of common stock outstanding during the period. Potential common shares consist of stock options and restricted stock, restricted share units and warrants. For the three months ended September 30, 2012 and 2011, 50,081 and 95,609 shares of common stock, respectively, attributable to outstanding stock options, restricted stock, restricted share units and warrants were excluded from the calculations of diluted earnings per share because their effect was anti-dilutive. For the nine months ended September 30, 2012 and 2011, 50,081 and 395,509 shares of common stock, respectively, attributable to outstanding stock options, restricted stock, restricted share units and warrants were excluded from the calculations of diluted earnings per share because their effect was anti-dilutive.

 

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Note E – Investment Securities

 

Investment securities are summarized as follows:

 

(dollars in thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Estimated Fair
Value
 

September 30, 2012

           

Available for sale

           

U.S. Government agency

   $ 51,603       $ 344       $ 0       $ 51,947   

State and municipal

     961         68         0         1,029   

Residential mortgage-backed securities

     36,821         1,362         68         38,115   

Other equity securities

     635         51         0         686   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 90,020       $ 1,825       $ 68       $ 91,777   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Estimated Fair
Value
 

December 31, 2011

           

Available for sale

           

U.S. Government agency

   $ 47,782       $ 306       $ 56       $ 48,032   

State and municipal

     1,077         59         0         1,136   

Residential mortgage-backed securities

     36,435         1,372         82         37,725   

Other equity securities

     618         38         0         656   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 85,912       $ 1,775       $ 138       $ 87,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated fair value of securities by contractual maturities at September 30, 2012 are shown below. Actual maturities of these securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

 

     September 30, 2012  
     Available for Sale  
     Amortized
Cost
     Estimated
Fair Value
 
(dollars in thousands)              

Due within one year

   $ 0       $ 0   

Due after one through five years

     26,910         27,063   

Due after five through ten years

     23,609         23,911   

Due after ten years

     38,866         40,117   

Equity securities

     635         686   
  

 

 

    

 

 

 
   $ 90,020       $ 91,777   
  

 

 

    

 

 

 

The following table shows the level of the Company’s gross unrealized losses and the fair value of the associated securities by type and maturity for securities available for sale at September 30, 2012 and December 31, 2011.

 

     Less than 12 months      12 months or more      Total  
September 30, 2012    Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
 
(dollars in thousands)                                          

Residential mortgage-backed securities

   $ 3,818       $ 11       $ 1,460       $ 57       $ 5,278       $ 68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,818       $ 11       $ 1,460       $ 57       $ 5,278       $ 68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Less than 12 months      12 months or more      Total  
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
     Estimated
Fair Value
     Unrealized
Losses
 
December 31, 2011                                          
(dollars in thousands)                                          

U. S. Government Agency

   $ 16,044       $ 56       $ 0       $ 0       $ 16,044       $ 56   

Residential mortgage-backed securities

     0         0         1,854         82         1,854         82   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,044       $ 56       $ 1,854       $ 82       $ 17,898       $ 138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized losses that exist are the result of market changes in interest rates since the original purchase. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2012. The Company has used a variety of tools to analyze the contents of its security portfolio and at this time does not believe that the unrealized losses in the portfolio shown in the table above are other than temporary. At September 30, 2012 mortgaged-backed securities with a fair market value of $1.5 million carried bond ratings below investment grade. These securities were evaluated by an independent third-party consulting firm using an expected cash flow model that includes assumptions related to prepayment rates, default trends, and loss severity, and were deemed by management not to be other-than-temporarily impaired at September 30, 2012. At September 30, 2012, both securities were current on both principal and interest payments.

Note F – Loans, Allowance For Credit Losses And Credit Quality

 

Major classifications of loans are as follows:

 

     September 30,
2012
    December 31,
2011
 

Commercial

   $ 43,060      $ 47,683   

Real estate

    

Commercial

     115,455        114,883   

Construction

     37,602        35,026   

One to four-family

     48,052        48,314   

Home equity

     32,942        36,005   

Consumer

     7,958        8,870   
  

 

 

   

 

 

 
     285,069        290,781   
  

 

 

   

 

 

 

Deferred loan fees, net

     (320     (315

Allowance for credit losses

     (6,647     (7,182
  

 

 

   

 

 

 
     (6,967     (7,497
  

 

 

   

 

 

 

Loans, net

   $ 278,102      $ 283,284   
  

 

 

   

 

 

 

The maturity and rate repricing distribution of the loan portfolio is as follows:

 

Repricing or maturing within one year

   $ 91,522       $ 100,804   

Maturing over one to five years

     133,440         132,637   

Maturing over five years

     60,107         57,340   
  

 

 

    

 

 

 
   $ 285,069       $ 290,781   
  

 

 

    

 

 

 

The Company’s goal is to mitigate risks inherent in the loan portfolio. Commercial loans and loans secured by real estate make up the majority of the loan portfolio, accounting for 97% of the portfolio as of September 30, 2012 and December 31, 2011. To mitigate risk, commercial loans are generally secured by receivables, inventories, equipment and other assets of the business. Personal guarantees of the borrowers are generally required.

 

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Loans secured by commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of the property’s value, debt service coverage ratio, and, under certain circumstances, additional collateral. The Bank generally also requires personal guarantees on its commercial real estate loans.

Construction loans are generally considered to involve a higher degree of credit risk than long-term financing of improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the security property’s value upon completion of construction as compared to the estimated costs of construction, including interest. Also, the Bank assumes certain risks associated with the borrowers’ ability to complete construction in a timely and workmanlike manner. If the estimate of value proves to be inaccurate, or if construction is not performed timely or accurately, the Bank may be faced with a project which, when completed, has a value that is insufficient to assure full repayment.

The Bank currently originates one- to four-family residential mortgage loans in amounts typically up to 80% (or higher with private mortgage insurance) of the lower of the appraised value or the selling price of the property securing the loan. The origination of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps to reduce the Bank’s exposure to increases in interest rates. However, adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Periodic and lifetime caps on interest rate increases help to reduce the risks associated with the Bank’s adjustable-rate loans, but also limit the interest rate sensitivity of its adjustable-rate mortgage loans.

Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The Bank’s allowance for credit losses is established through a provision for loan losses based on management’s evaluation of the risks inherent in its loan portfolio and the general economy.

The determination of the allowance for loan losses is based on the Bank’s historical loss experience and ten (10) qualitative factors for specific categories and types of loans. The Bank’s historical loss experience is calculated by aggregating the actual loan losses by category for the previous eight quarters and converting that total into a percentage for each loan category.

Previously (in 2011), due to the Bank’s limited historical loss experience, the loss experience factor was the greater of either the Bank’s historical loss experience or the peer group average historical loss experience.

 

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The following table shows the allowance for credit losses and recorded investment in loans receivable for the three and nine month periods ended September 30, 2012:

Allowance for Credit Losses and Recorded Investment in Loans Receivable

 

     for the Three Months Ended September 30, 2012                      
(Dollars in thousands)    Commercial     Commercial
Real Estate
    Residential     Consumer      Unallocated      Total  

Allowance for credit losses

              

Beginning balance, June 30, 2012

   $ 1,043      $ 3,962      $ 1,647      $ 256       $ 0       $ 6,908   

Charge-offs

     325        0        0        0         0         325   

Recoveries

     4        0        24        7         0         35   

Provision

     (27     (127     (11     194         0         29   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance, September 30, 2012

   $ 695      $ 3,835      $ 1,660      $ 457       $ 0       $ 6,647   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

     for the Nine Months Ended September 30, 2012                       
     Commercial     Commercial
Real Estate
    Residential      Consumer      Unallocated      Total  

Allowance for credit losses

               

Beginning balance, December 31, 2011

   $ 1,387      $ 3,972      $ 1,422       $ 401       $ 0       $ 7,182   

Charge-offs

     357        0        340         230         0         927   

Recoveries

     32        0        35         19         0         86   

Provision

     (367     (137     543         267         0         306   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance, September 30, 2012

   $ 695      $ 3,835      $ 1,660       $ 457       $ 0       $ 6,647   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Period ending amount: Individually evaluated for impairment

   $ 56      $ 1,181      $ 1,009       $ 285       $ 0       $ 2,531   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Period ending amount: Collectively evaluated for impairment

   $ 639      $ 2,654      $ 651       $ 172       $ 0       $ 4,116   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Period ending amount: Loans acquired with deteriorating credit quality

   $ 0      $ 0      $ 0       $ 0       $ 0       $ 0   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Loans individually evaluated for impairment

   $ 856      $ 2,676      $ 2,665       $ 721       $ 0       $ 6,918   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Loans collectively evaluated for impairment

   $ 42,204      $ 150,381      $ 78,329       $ 7,237       $ 0       $ 278,151   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     for the Three Months Ended September 30, 2011                      
(Dollars in thousands)    Commercial      Commercial
Real Estate
     Residential      Consumer     Unallocated      Total  

Allowance for credit losses

                

Beginning balance, June 30, 2011

   $ 1,403       $ 4,077       $ 1,394       $ 398      $ 0       $ 7,272   

Charge-offs

     100         0         0         4        0         104   

Recoveries

     3         0         1         7        0         11   

Provision

     74         214         56         (6     0         338   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance, September 30, 2011

   $ 1,380       $ 4,291       $ 1,451       $ 395      $ 0       $ 7,517   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     for the Nine Months Ended September 30, 2011                      
     Commercial      Commercial
Real Estate
     Residential      Consumer     Unallocated      Total  

Allowance for credit losses

                

Beginning balance, December 31, 2010

   $ 1,868       $ 3,205       $ 1,257       $ 523      $ 0       $ 6,853   

Charge-offs

     872         49         133         140        0         1,194   

Recoveries

     13         0         254         17        0         284   

Provision

     371         1,135         73         (5     0         1,574   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Ending balance, September 30, 2011

   $ 1,380       $ 4,291       $ 1,451       $ 395      $ 0       $ 7,517   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Period ending amount: Individually evaluated for impairment

   $ 113       $ 1,382       $ 507       $ 164      $ 0       $ 2,166   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Period ending amount: Collectively evaluated for impairment

   $ 1,267       $ 2,909       $ 944       $ 231      $ 0       $ 5,351   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Period ending amount: Loans acquired with deteriorating credit quality

   $ 0       $ 0       $ 0       $ 0      $ 0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Loans individually evaluated for impairment

   $ 932       $ 6,664       $ 1,906       $ 297      $ 0       $ 9,799   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Loans collectively evaluated for impairment

   $ 49,122       $ 142,400       $ 84,099       $ 9,025      $ 0       $ 284,646   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Nonaccrual loans totaled approximately $6.1 million at September 30, 2012 and $6.2 million at December 31, 2011. There was one loan for $468,000 past due greater than 90 days and still accruing at September 30, 2012. At December 31, 2011, there were no loans past due greater than 90 days and still accruing. As of September 30, 2012, $2.5 million of loan loss allowances were allocated to all loans classified as impaired with $1.6 million of loan loss allowances allocated to all loans classified as impaired at December 31, 2011.

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management assigns a Risk Assessment Rating (“Risk Rating”) to extensions of credit based upon the degree of risk, the likelihood of repayment and the effect on the Bank’s safety and soundness. The Risk Rating, applied consistently, enables lending personnel and bank management to monitor the loan portfolio. The Risk Rating is an integral part of the bank’s loan loss provision formulation process and, properly maintained, the Risk Rating assessment can provide an early warning signal of deterioration in a credit.

The Company uses a risk rating matrix to assign a risk grade to each loan. The Risk Ratings are divided into five general categories:

 

  1. Risk Ratings 1 - 6 are assigned to “Pass” credits.

 

  2. Risk Rating 7 is assigned to “Pass” credits that are also considered “Watch” credits.

 

  3. Risk Rating 8 is assigned to “Criticized” credits.

 

  4. Risk Ratings 9 and 10 are assigned to “Classified” credits.

 

  5. Risk Rating 11 is assigned to “Loss” credits.

A general description of the characteristics of the risk ratings are described below:

 

   

Risk ratings 1, 2 and 3 – these ratings have the highest degree of probability of repayment. Borrowers in this category are established entities, well-positioned within their industry with a proven track record of solid financial performance. These ratings are usually reserved for the strongest customers of the Bank, who have strong capital, stable earnings and alternative sources of financing.

 

   

Risk ratings 4 and 5 – these ratings have a below and average degree of risk. The customers have, generally strong to adequate net worth, stable earnings trends and strong to moderate liquidity.

 

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Table of Contents
   

Risk rating 6 – this category represents an above average degree of risk as to repayment with minimal loss potential. Borrowers in this category generally exhibit adequate operating trends, satisfactory balance sheet trends, moderate leverage and adequate liquidity; however, there is minimal excess operating cushion.

 

   

Risk rating 7 – this rating includes loans on management’s “Watch” list. Borrowers in this category generally exhibit characteristics of an acceptable/adequate credit, but may be experiencing income volatility, negative operating trends, and a more highly leveraged balance sheet.

 

   

Risk rating 8 – this rating is for “Other Assets Especially Mentioned” in accordance with regulatory guidelines. This rating generally includes loans to borrowers with currently protected, but potentially weak assets that deserve management’s close attention.

 

   

Risk rating 9 – this rating is for loans considered “Substandard” in accordance with regulatory guidelines. This rating represents assets inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness, or weaknesses, that jeopardize liquidation of the debt and are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

 

   

Risk rating 10 – this rating is for loans considered “Doubtful” in accordance with regulatory guidelines. Borrowers in this category have all the weaknesses inherent in a “Substandard” credit with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly improbable.

 

   

Risk rating 11 – this rating is for loans considered “Loss” in accordance with regulatory guidelines. This category represents loans that are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but simply it is neither practical nor desirable to defer writing off all or some portion of the credit, even though partial recovery may be effected in the future.

The following table presents credit quality indicators:

Credit Quality Indicators

as of September 30, 2012

 

(Dollars in thousands)              
            Commercial Real Estate  
     Commercial      Construction      Other  
     2012      2012      2012  

Risk Rating:

        

Pass

   $ 39,110       $ 32,511       $ 98,389   

Other Assets Especially Mentioned

     2,012         2,083         14,802   

Substandard

     1,938         1,856         1,014   

Doubtful

     0         1,152         1,250   
  

 

 

    

 

 

    

 

 

 
   $ 43,060       $ 37,602       $ 115,455   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Residential      Consumer
Installment
 
     2012      2012  

Risk Rating:

     

Pass

   $ 71,732       $ 6,913   

Other Assets Especially Mentioned

     4,514         403   

Substandard

     3,323         623   

Doubtful

     1,425         19   
  

 

 

    

 

 

 
   $ 80,994       $ 7,958   
  

 

 

    

 

 

 

Credit Quality Indicators

as of December 31, 2011

 

(Dollars in thousands)              
            Commercial Real Estate  
     Commercial      Construction      Other  
     2011      2011      2011  

Risk Rating:

        

Pass

   $ 41,899       $ 29,456       $ 102,495   

Other Assets Especially Mentioned

     2,181         2,432         7,944   

Substandard

     3,571         1,986         3,194   

Doubtful

     32         1,152         1,250   
  

 

 

    

 

 

    

 

 

 
   $ 47,683       $ 35,026       $ 114,883   
  

 

 

    

 

 

    

 

 

 

 

     Residential      Consumer
Installment
 
     2011      2011  

Risk Rating:

     

Pass

   $ 78,402       $ 8,017   

Other Assets Especially Mentioned

     1,867         290   

Substandard

     2,632         348   

Doubtful

     1,418         215   
  

 

 

    

 

 

 
   $ 84,319       $ 8,870   
  

 

 

    

 

 

 

 

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Table of Contents

The following table presents an age analysis of past due loans receivable:

Age Analysis of Past Due Loans Receivable

As of September 30, 2012

 

(Dollars in thousands)    30-59
Days

Past Due
     60-89
Days Past
Due
     Greater
than 90
Days
     Total Past
Due
     Current      Total
Loans
     Recorded
Investment
90 Days
and
Accruing
 

2012

                    

Commercial

   $ 4,404       $ 225       $ 147       $ 4,776       $ 38,284       $ 43,060       $ 0   

Commercial Real Estate

                    

Construction

     174         0         1,152         1,326         36,276         37,602         0   

Other

     868         0         0         868         114,587         115,455         0   

Residential

     538         316         2,461         3,315         77,679         80,994         468   

Consumer

     67         75         598         740         7,218         7,958         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,051       $ 616       $ 4,358       $ 11,025       $ 274,044       $ 285,069       $ 468   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Age Analysis of Past Due Loans Receivable

As of December 31, 2011

 

(Dollars in thousands)    30-59
Days
Past Due
     60-89
Days Past
Due
     Greater
than 90
Days
     Total Past
Due
     Current      Total
Loans
     Recorded
Investment
90 Days
and
Accruing
 

2011

                    

Commercial

   $ 0       $ 32       $ 178       $ 210       $ 47,473       $ 47,683       $ 0   

Commercial Real Estate

                    

Construction

     229         0         1,152         1,381         33,645         35,026         0   

Other

     482         0         0         482         114,401         114,883         0   

Residential

     687         0         1,972         2,659         81,660         84,319         0   

Consumer

     23         0         342         365         8,505         8,870         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,421       $ 32       $ 3,644       $ 5,097       $ 285,684       $ 290,781       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans at September 30, 2012 increased $5.9 million to $11.0 million from $5.1 million as of December 31, 2011. The increase was primarily attributed to loans newly considered past due totalling $9.1 million and included one loan for $4.4 million that was past due at September 30, 2012 and current at December 31, 2011. Offsetting a portion of the increase in past due loans were payoffs and the return of loans to performing totaling $1.9 million, charge-offs of loans deemed uncollectible of $839,000 and transfers to real estate owned and repossessed assets of $378,000.

Loans are considered impaired when, based on current information it is probable that the Bank will not collect all principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal and interest payments are past due and they are placed on non-accrual. When a loan is placed on nonaccrual status, the Bank shall debit all accrued and unpaid income outstanding on the account. Management also considers the financial condition of the borrower, cash flows of the loan and the value of the related collateral. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate and consumer installment loans, which are evaluated collectively for impairment. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (usually ninety days or less) provided eventual collection of all amounts due is expected. Impaired loans are

 

17


Table of Contents

measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Bank may measure impairment based on a loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. Interest payments on impaired loans are typically applied to principal unless collectability is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans or portions thereof, are charged-off when deemed uncollectible.

The Company’s policy states that when the probability for full repayment of a loan is unlikely, the Bank will initiate a full charge-off or a partial write-down of the asset based upon the status of the loan.

Consumer loans less than $25,000 for which payments of principal and/or interest are past due ninety (90) days are charged-off and referred for collection. Consumer loans of $25,000 or more are evaluated for charge-off or partial write-down at the discretion of Bank management.

Any other loan over 120 days past due is evaluated for charge-off or partial write-down at the discretion of Bank management.

Generally, real estate secured loans are charged-off on a deficiency basis after liquidation of the collateral. Bank management may determine that when the full loan balance is clearly uncollectible and some loss is anticipated a charge-off or write-down is appropriate prior to liquidation of the collateral. An updated evaluation or appraisal of the property may be required to determine the appropriate level of charge-off or write-down.

The following tables presents a summary of impaired loans as of and for the nine months ended September 30, 2012 and as of December 31, 2011 and for the year then ended:

Impaired Loans

as of and for the Nine Month Period Ended September 30, 2012

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded

        

Commercial

   $ 898       $ 898       $ 0   

Commercial real estate

     274         274         0   

Residential real estate

     697         697         0   

Consumer

     71         71         0   
  

 

 

    

 

 

    

 

 

 
     1,940         1,940         0   
  

 

 

    

 

 

    

 

 

 

With an allowance recorded

        

Commercial

     105         105         56   

Commercial real estate

     2,402         2,402         1,181   

Residential real estate

     2,664         2,664         1,009   

Consumer

     722         722         285   
  

 

 

    

 

 

    

 

 

 
     5,893         5,893         2,531   
  

 

 

    

 

 

    

 

 

 

Total

        

Commercial

     1,003         1,003         56   

Commercial real estate

     2,676         2,676         1,181   

Residential real estate

     3,361         3,361         1,009   

Consumer

     793         793         285   
  

 

 

    

 

 

    

 

 

 
   $ 7,833       $ 7,833       $ 2,531   
  

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

Impaired Loans

as of December 31, 2011

 

(Dollars in thousands)    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded

        

Commercial

   $ 242       $ 242       $ 0   

Commercial real estate

     0         0         0   

Residential real estate

     1,074         1,074         0   

Consumer

     195         195         0   
  

 

 

    

 

 

    

 

 

 
     1,511         1,511         0   
  

 

 

    

 

 

    

 

 

 

With an allowance recorded

        

Commercial

     1,156         1,156         195   

Commercial real estate

     2,444         2,444         731   

Residential real estate

     1,981         1,981         475   

Consumer

     289         289         161   
  

 

 

    

 

 

    

 

 

 
     5,870         5,870         1,562   
  

 

 

    

 

 

    

 

 

 

Total

        

Commercial

     1,398         1,398         195   

Commercial real estate

     2,444         2,444         731   

Residential real estate

     3,055         3,055         475   

Consumer

     484         484         161   
  

 

 

    

 

 

    

 

 

 
   $ 7,381       $ 7,381       $ 1,562   
  

 

 

    

 

 

    

 

 

 

The following presents information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2012 and 2011.

 

     Three Months Ended
September 30, 2012
     Three Months Ended
September 30, 2011
 
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded

           

Commercial

   $ 905       $ 4       $ 870       $ 10   

Commercial real estate

     380         4         657         0   

Residential real estate

     382         4         1,542         26   

Consumer

     65         0         199         3   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,732         12         3,268         39   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded

           

Commercial

     324         14       $ 355       $ 1   

Commercial real estate

     2,415         4         5,318         8   

Residential real estate

     2,670         15         1,638         5   

Consumer

     358         3         209         6   
  

 

 

    

 

 

    

 

 

    

 

 

 
     5,767         36         7,520         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

           

Commercial

   $ 1,229         18       $ 1,225       $ 11   

Commercial real estate

     2,795         8         5,975         8   

Residential real estate

     3,052         19         3,180         31   

Consumer

     423         3         408         9   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,499       $ 48       $ 10,788       $ 59   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents
     Nine Months Ended
September 30, 2012
     Nine Months Ended
September 30, 2011
 
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
(Dollars in thousands)                            

With no related allowance recorded

           

Commercial

   $ 504       $ 4       $ 1,095       $ 46   

Commercial real estate

     329         7         795         0   

Residential real estate

     589         8         1,500         60   

Consumer

     70         1         208         7   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,492         20         3,598         113   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded

           

Commercial

     757         59         583         68   

Commercial real estate

     3,711         38         3,037         232   

Residential real estate

     2,407         41         1,593         56   

Consumer

     247         11         210         17   
  

 

 

    

 

 

    

 

 

    

 

 

 
     7,122         149         5,423         373   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

           

Commercial

     1,261         63         1,678         114   

Commercial real estate

     4,040         45         3,832         232   

Residential real estate

     2,996         49         3,093         116   

Consumer

     317         12         418         24   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,614       $ 169       $ 9,021       $ 486   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company considers a loan to be a troubled debt restructuring when for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. The Company may consider granting a concession in an attempt to protect as much of its investment as possible.

The restructuring of a loan may include, but is not necessarily limited to: (1) the transfer from the borrower to the Bank of real estate, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan (2) the issuance or other granting of an equity interest to the Company by the borrower to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt in to an equity interest (3) a modification of the loan terms, such as a reduction of the stated interest rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, or (4) a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement and (5) a reduction of accrued interest. The current outstanding balance of troubled debt restructurings as of September 30, 2012 included $930,000 of loans in accrual status and $1.7 million of loans classified as nonaccrual. During the nine months ended September 30, 2012 no new loans were added to those considered to be troubled debt restructurings and none of the loans currently classified as troubled debt restructurings have defaulted. The following table is a summary of loans determined to be troubled debt restructurings for the twelve months ended December 31, 2011.

 

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Table of Contents
     Modifications made during the year
ended December 31, 2011
 
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Commercial

     3       $ 840       $ 840   

Commercial Real Estate

     2         1,863         1,298   

Residential Real Estate

     3         453         453   

Consumer

     1         46         46   
  

 

 

    

 

 

    

 

 

 
     9       $ 3,202       $ 2,637   
  

 

 

    

 

 

    

 

 

 

 

     Number
of
Contracts
     Recorded
Investment
 

Troubled Debt Restructurings that Subsequently Defaulted

     

Commercial

     0       $ 0   

Commercial Real Estate

     0         0   

Residential Real Estate

     0         0   

Consumer

     0         0   
  

 

 

    

 

 

 
     0       $ 0   
  

 

 

    

 

 

 

Note G – Fair Value Measurements

 

Fair Value Hierarchy

The Company follows FASB’s guidance on “Fair Value Measurements.” The guidance defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The guidance applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

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 all 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 lower of cost or market accounting or write-downs of individual assets.

The guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

 

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Table of Contents

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the assets credit rating, prepayment assumptions and other factors such as credit loss assumptions

An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis. During the nine months ended September 30, 2012, there were no transfers made between Level 1, 2, and 3 inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s assets measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

            Fair Value Measurements of Assets         
(dollars in thousands)       at September 30, 2012 Using     

Description

   Fair Value
September
30, 2012
     Quoted
Prices in
Active
Markets for
Identical
Assets

(Level 1)
     Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Changes in
Fair Values
Included in
Period
Earnings
 

Investment Securities Available for Sale

              

Debt securities

              

Issued by U. S. Government agencies

   $ 51,947       $ 0       $ 51,947       $ 0       $ 0   

Issued by State and municipal

     1,029         0         1,029         0         0   

Mortgage-backed securities issued by Government agencies

     36,655         0         36,655         0         0   

Private label mortgage-backed securities

     1,460         0         0         1,460         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities

     91,091         0         89,631         1,460         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

              

Mutual funds

     686         0         686         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities

     686         0         686         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investment Securities

Available for Sale

   $ 91,777       $ 0       $ 90,317       $ 1,460       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) – Roll Forward at September 30, 2012

 

Investment Securities Available for Sale – Debt Securities

  

Beginning Balance at December 31, 2011

   $ 1,855   

Transfers in to Level 3

     0   

Transfers out of Level 3

     0   

Unrealized gains

     24   

Repayments

     (419
  

 

 

 

Ending Balance at September 30, 2012

   $ 1,460   
  

 

 

 

 

(dollars in thousands)           Fair Value Measurements of Assets
at December 31, 2011 Using
        

Description

   Fair Value
December 31,
2011
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Changes in
Fair Values
Included in
Period
Earnings
 

Investment Securities Available for Sale

              

Debt securities

              

Issued by U.S. Government agencies

   $ 48,032       $ 0       $ 48,032       $ 0       $ 0   

Issued by State and municipal

     1,136         0         1,136         0         0   

Mortgage-backed securities issued by Government agencies

     35,870         0         35,870         0         0   

Private label mortgage-backed securities

     1,855         0         0         1,855         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities

     86,893         0         85,038         1,855         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities

              

Mutual funds

     656         0         656         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity Securities

     656         0         656         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Investment Securities Available for Sale

   $ 87,549       $ 0       $ 85,694       $ 1,855       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) – Roll Forward

at December 31, 2011

 

Investment Securities Available for Sale – Debt Securities

  

Beginning Balance at December 31, 2010

   $ 2,401   

Transfers in to Level 3

     0   

Transfers out of Level 3

     0   

Unrealized gains

     100   

Repayments

     (646
  

 

 

 

Ending Balance at December 31, 2011

   $ 1,855   
  

 

 

 

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 securities below investment grade and asset-backed securities in illiquid markets. Level 3 securities include two private-label residential one to-four family mortgage backed securities. These 2005 senior tranches in a securitization trust were rated “Aa1 and Aaa” by Moody’s when purchased in 2005 and are currently rated “Ca” and “B3”, respectively. The Company engages the service of independent third party valuation professionals to estimate the fair value of these securities. The valuation is meant to be “Level 3” pursuant to FASB ASC Topic 820 – Fair Value Measurements and Disclosures. The valuation uses an expected cash flow model that includes assumptions related to prepayment rates, default trends, and loss severity. At

 

23


Table of Contents

September 30, 2012, both securities were current on both principal and interest payments, and had a fixed weighted average coupon of 5.50%. One security had a weighted average remaining life of less than four months and the other had a weighted average remaining life of less than two years.

The following table details the Level 3 securities:

 

                  Remaining      Current Rating

(in thousands)

   Class      Coupon    Par Value      Moody’s    Fitch

CWHL 2005-21

     A13       5.5% Fixed    $ 104       B3    CC

WFMBS 2005-14

     IA7       5.5% Fixed    $ 1,412       Ca    A*-

We calculated fair value for the two securities by using a present value of future cash flows model, which incorporated assumptions as follows as of September 30, 2012 and December 31, 2011:

 

September 30, 2012    Cumulative
Default (1)
    Weighted
Average
Life (2)
     Modified
Duration (3)
     Yield (4)  

CWHL 2005-21

     3.63     0.29 years         0.27 years         8.00

WFMBS 2005-14

     2.77     1.73 years         1.50 years         8.00

 

(1) The recent three month level of total defaults from the issuer within the pool of performing collateral.
(2) The average number of years that each dollar of principal remains outstanding.
(3) The weighted average of present values for a series of cash flows which accurately indicates the average time until the cash flows are received.
(4) The discount rate obtained from taking a sequence of cash flows and an estimated price.

 

December 31, 2011    3 Month
Cumulative
Default (1)
    Weighted
Average
Life (2)
     Modified
Duration (3)
     Yield (4)  

CWHL 2005-21

     3.04     0.65 years         0.59 years         8.00

WFMBS 2005-14

     3.84     2.10 years         1.80 years         8.00

 

(1) The anticipated level of total defaults from the issuer within the pool of performing collateral as of December 31, 2011.
(2) The average number of years that each dollar of principal remains outstanding.
(3) The weighted average of present values for a series of cash flows which accurately indicates the average time until the cash flows are received.
(4) The discount rate obtained from taking a sequence of cash flows and an estimated price.

The fair value of the Level 3 securities is assessed on a quarterly basis by obtaining an independent third party review of the securities so designated. In addition to using an expected cash-flow model the analysis includes an evaluation of the characteristics and performance of the underlying collateral of each of the securities. Management reviews and compares the results on a quarterly basis to available market information.

The significant unobservable inputs used in the fair value measurement of these private label mortgage-backed securities include prepayment rates, probability of default and loss severity in the event of default. Significant increases or decreases in any of these may result in a lower or higher fair value measurement. A significant increase in default rates could result in a higher level of losses and slower prepayment rates, conversely a lower level of default rates could result in lower levels of losses and increased prepayment rates.

 

24


Table of Contents

The Company may be required from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the following tables.

 

(in thousands)           Fair Value Measurements
at September 30, 2012 Using
        
        

Description

   Fair Value
September 30,
2012
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Changes
in Fair
Values
Included
in Period
Earnings
 

Loans

              

Impaired loans

              

Commercial

   $ 947       $ 0       $ 947       $ 0       $ 0   

Commercial real estate

     890         0         890         0         0   

Residential real estate

     2,352         0         2,352         0         0   

Construction

     606         0         606         0         0   

Consumer

     507         0         507         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

     5,302         0         5,302         0         0   

Real estate owned

     697         0         697         0         0   

Other assets (repossessed assets)

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets Measured at Fair Value on a Nonrecurring Basis

   $ 5,999       $ 0       $ 5,999       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(in thousands)           Fair Value Measurements
at December 31, 2011 Using
        

Description

   Fair Value
December 31,
2011
     Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Changes
in Fair
Values
Included
in Period
Earnings
 

Loans

              

Impaired loans

              

Commercial

   $ 1,202       $ 0       $ 1,202       $ 0       $ 0   

Commercial real estate

     995         0         995         0         0   

Residential real estate

     2,580         0         2,580         0         0   

Construction

     719         0         719         0         0   

Consumer

     323         0         323         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

     5,819         0         5,819         0         0   

Real estate owned

     1,222         0         1,222         0         0   

Other assets (repossessed assets)

     52         0         52         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets Measured at Fair Value on a Nonrecurring Basis

   $ 7,093       $ 0       $ 7,093       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans for which it is probable that the Company will not collect all of principal and interest due according to contractual terms are measured for impairment in accordance with FASB guidance on Accounting by Creditors for Impairment of a Loan. Allowable methods for estimating fair value include using the fair value of the collateral for collateral dependent loans or, where a loan is determined not to be collateral dependent, using the discounted cash flow method. In our determination of fair value, we have categorized both methods of valuation as estimates based on Level 2 inputs.

 

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If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal or utilizing some other method of valuation for the collateral and applying a discount factor to the value based on our loan review policy and procedures.

If the impaired loan is determined not to be collateral dependent, then the discounted cash flow method is used. This method requires the impaired loan to be recorded at the present value of expected future cash flow’s discounted at the loan’s effective interest rate. The effective interest rate of a loan is the contractual interest rate adjusted for any net deferred loan fees or costs, premiums, or discounts existing at origination or acquisition of the loan.

Management establishes a specific reserve for loans that have an estimated fair value below the carrying value. Nonperforming loans had a carrying value of $7.5 million as of September 30, 2012. Of the $7.5 million of nonperforming loans, $5.9 million had specific reserves of $2.5 million.

When there is little prospect of collecting principal or interest, loans, or portions of loans, may be charged-off to the allowance for credit losses. Losses are recognized in the period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though a partial recovery may occur in the future. During the nine months ended September 30, 2012 the Company charged-off $927,000 of impaired loans to the allowance for credit losses.

Property acquired by the Company as a result of foreclosure on a mortgage loan will be classified as “real estate owned.” Personal property acquired through repossession will be classified as “repossessed assets.” Property acquired will be recorded at the lower of the unpaid principal balance or fair value at the date of acquisition and subsequently carried at the lower of cost or net realizable value. Any required write-down of the loan to its net realizable value will be charged against the allowance for credit losses. As of September 30, 2012 and December 31, 2011 the Company held $697,000 and $1.2 million, respectively, in real estate owned as a result of foreclosure. Real estate owned carried at appraised value is considered to be using Level 2 inputs. The $697,000 in real estate owned consisted of a number of undeveloped lots.

The Company records repossessed assets such as boats, automobiles or equipment at the lower of cost or estimated fair value on the acquisition date and at the lower of such initial amount or estimated fair value less selling costs thereafter. Estimated fair value is generally based upon independent values of the collateral obtained through valuation or listing services specifically used for the type of asset repossessed. We consider these collateral values to be estimated using Level 2 inputs. There were no repossessed assets at September 30, 2012 compared to $52,000 at December 31, 2011.

The fair value of the Company’s time deposits was estimated using discounted cash flow analyses. The discount rates used were based on rates currently offered for deposits with similar remaining maturities. The fair value of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

 

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The carrying amount for customer repurchase agreements and variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate Federal Home Loan Bank advances is estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index

The estimated fair values of the Company’s financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

The following table’s present information about the Company’s financial assets and financial liabilities measured at fair value as of September 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

 

     September 30, 2012      December 31, 2011  
(dollars in thousands)    Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 

Financial assets

           

Level 2 inputs:

           

Cash and due from banks

   $ 1,951       $ 1,951       $ 2,026       $ 2,026   

Interest bearing balances with banks

     39,996         39,996         18,288         18,288   

Federal funds sold

     11         11         26,583         26,583   

Investment securities

     90,317         90,317         85,694         85,694   

Federal Reserve and Federal Home Loan Bank stock

     2,864         2,864         2,992         2,992   

Loans and loans held for sale, net

     278,102         278,279         283,284         283,667   

Accrued interest receivable

     1,350         1,350         1,279         1,279   

Bank owned life insurance

     5,783         5,783         5,624         5,624   

Real estate owned

     697         697         1,222         1,222   

Level 3 inputs:

           

Other debt securities

     1,460         1,460         1,855         1,855   

Financial liabilities

           

Level 2 inputs:

           

Noninterest bearing deposits

   $ 57,314       $ 57,314       $ 56,664       $ 56,664   

Interest bearing deposits

     281,501         282,647         293,717         298,788   

Securities sold under agreements to repurchase

     18,895         18,895         11,344         11,344   

Long-term borrowings

     35,000         31,086         35,000         31,357   

Junior subordinated debt

     5,000         5,000         5,000         5,000   

Accrued dividends and interest payable

     188         188         219         219   

The carrying amount of cash and due from banks, federal funds sold and interest bearing balances with banks approximates fair value.

The fair values of U.S. Treasury and Government agency securities and mortgage backed securities are determined using market quotations.

The carrying amount of Federal Reserve stock and Federal Home Loan Bank stock approximates fair value.

The fair value of fixed-rate loans is estimated to be the present value of scheduled payments discounted using interest rates currently in effect. The fair value of variable-rate loans, including loans with a demand feature, is estimated to equal the carrying amount. The

 

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valuation of loans is adjusted for possible credit losses. The fair value of loans held for sale are at the carrying value (lower of cost or market) since such loans are typically committed to be sold (servicing released) at a profit.

The carrying amount of accrued interest receivable approximates fair value.

The fair value of bank owned life insurance is the current cash surrender value which is the carrying value.

The carrying value of real estate owned approximates fair value at the reporting date.

The fair value of noninterest bearing deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards does not permit an assumption of core deposit value.

The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable on demand at the reporting date, since generally accepted accounting standards does not permit an assumption of core deposit value.

The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposits would be accepted.

The carrying amount for customer repurchase agreements and variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate Federal Home Loan Bank advances is estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.

The carrying amount of junior subordinated debentures approximate the fair values at the reporting date.

The carrying amount of accrued interest payable approximates fair value.

Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment made.

Note H – Preferred Stock

 

The Company is authorized to issue up to 5,000,000 shares of preferred stock with a par value of $.01 per share. On January 30, 2009 the Company completed a transaction to participate in the Government sponsored Troubled Asset Relief Program (“TARP”) which resulted in the Treasury purchasing 8,152 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) at a value of $8.2 million. The Series A Preferred Stock qualifies as Tier 1 Capital. On April 18, 2012, Annapolis Bancorp, Inc. (the “Company”) redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000. Following the redemption, 4,076 shares of Series A Preferred Stock remain outstanding totaling $4,076,000. The Series A Preferred Stock pays a dividend of 5% per annum; payable quarterly for five years then pays a dividend of 9% per annum thereafter. Dividends declared for each of the nine months ended September 30, 2012 and 2011 was $214,000 and $305,000, respectively.

 

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The warrant is exercisable at $4.08 per share at any time on or before January 30, 2019. The number of shares of common stock issuable upon exercise of the warrant and the exercise price per share will be adjusted if specific events occur.

Note I – New Accounting Pronouncements

 

All pending but not yet effective Accounting Standards Updates (“ASU”) were evaluated and only those listed below could have a material impact on the Company’s financial condition or results of operation.

In December, 2011 FASB issued ASU 2011-11, “Balance Sheet (Topic 210) - “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 amends Topic 210, “Balance Sheet,” to require an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Company’s financial statements.

In December, 2011 FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU 2011-12 were effective for annual and interim periods beginning after December 15, 2011. The Company has adopted ASU 2011-12 and it did not have a material impact on the Company’s financial statements.

Note J – Subsequent Events

 

Opening of a New Branch

On October 15, 2012, the Bank opened a new branch in Waugh Chapel Towne Centre located in Gambrills, Maryland.

Entry into Agreement and Plan of Merger

On October 22, 2012, the Company and F.N.B. Corporation (“FNB”) the parent company of First National Bank of Pennsylvania (“FNB Bank”), entered into an Agreement and Plan of Merger (“Merger Agreement”) pursuant to which the Company will merge with and into FNB. Promptly following consummation of the merger, it is expected that the Bank will merge with and into FNB Bank.

 

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Under the terms of the Merger Agreement, the Company’s shareholders will receive 1.143 shares (the “Exchange Ratio”) of FNB common stock for each share of common stock they own. In addition, a cash credit related adjustment provides that shareholders of the Company may receive up to an additional $0.36 per share in cash for each share of the Company’s common stock they own, dependent on the Company’s ability to resolve an agreed-upon credit matter. The Merger Agreement also provides that all options to purchase the Company’s stock which are outstanding and unexercised immediately prior to the closing shall be converted into fully vested and exercisable options to purchase shares of FNB common stock, as adjusted for the Exchange Ratio.

The Merger Agreement provides that each outstanding share of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “TARP Preferred”), unless repurchased or redeemed prior to the merger, will be converted into the right to receive one share of FNB preferred stock with substantially the same rights, powers and preferences as the TARP Preferred. The outstanding warrant (the “TARP Warrant”) to purchase the Company’s common stock, which was issued on January 30, 2009 to the United States Department of the Treasury will be converted into a warrant to purchase FNB common stock, subject to appropriate adjustments to reflect the Exchange Ratio. Subject to the receipt of requisite regulatory approvals, the parties have agreed to use their best efforts to have the TARP Preferred either purchased by FNB or one of its subsidiaries, in which case it is expected to be extinguished upon consummation of the merger, or repurchased or redeemed by the Company. FNB also may elect to have the TARP Warrant purchased, redeemed or repurchased.

Consummation of the merger is subject to certain conditions, including, among others, approval of the merger by the Company’s common shareholders, governmental filings and regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and warranties of the other party, effectiveness of the registration statement to be filed by FNB with the SEC to register shares of FNB common stock to be offered to the Company shareholders, absence of a material adverse effect, receipt of tax opinions, and the absence of any injunctions or other legal restraints.

For more information about the merger and Merger Agreement, please see our Current Report on Form 8-K and 8-K/A, filed October 22, 2012 and October 23, 2012, respectively. Further information concerning the proposed merger will be included in a joint proxy statement/prospectus which will be filed with the Securities and Exchange Commission in connection with the merger.

 

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Critical Accounting Policies

 

The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.

Significant accounting policies followed by the Company are presented in Note 1 to the Company’s 2011 consolidated financial statements which can be found in the Company’s Form 10-K and recent accounting provisions adopted have been presented herein in Note I. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts management has identified the determination of the allowance for credit losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The allowance for credit losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the consolidated balance sheet.

Allowance for Credit Losses Methodology

 

The Bank’s allowance for credit losses is established through a provision for loan losses based on management’s evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for credit losses is maintained at an amount management considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. The overall allowance consists of both Accounting Standards Codification (“ASC”) 310 specific reserves for individual loans and ASC 450 general reserves for loan portfolios by specific categories and types. The Bank estimates an acceptable allowance for credit loss with the objective of quantifying portfolio risk into a dollar figure of inherent losses, thereby translating the subjective risk value into an objective number. Emphasis is placed on independent external loan reviews and regular internal reviews. The determination of the allowance for loan losses is based on the Bank’s historical loss experience and ten (10) qualitative factors for specific categories and types of loans. The combination of the loss experience factor and the

 

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total qualitative factors (“Total ALLL Factor”) is expressed as a percentage of the portfolio for specific categories and types of loans to create the inherent loss index for each loan portfolio. Individual loans deemed impaired are separated from the respective loan portfolios and a specific reserve allocation is assigned based upon Bank management’s best estimate as to the loss exposure for each loan. Each Total ALLL Factor is assigned a percentage weight and that total weight is applied to each loan category. The Total ALLL Factor is different for each loan type and for each risk assessment category within each loan type.

 

   

The Bank’s historical loss experience is calculated by aggregating the actual loan losses by category for the previous eight quarters and converting that total into a percentage for each loan category.

Previously (in 2011), due to the Bank’s limited historical loss experience, the loss experience factor was the greater of either the Bank’s historical loss experience or the peer group average historical loss experience.

 

   

Qualitative factors include: levels and trends in delinquencies and non-accruals; trends in volumes and terms of loans; effects of any changes in lending policies; the experience, ability and depth of management; national and local economic trends and conditions (including Peer Group loss experience); concentrations of credit; quality of the bank’s loan review system; and, external factors, such as competition, legal and regulatory requirements.

The total allowance for credit losses changes as the percentage weight assigned to each Total ALLL Factor is increased or decreased due to its particular circumstance, as the various types and categories of loans change as a percentage of total loans and as the aggregate of specific allowances is adjusted due to an increase or decrease in impaired loans.

Management believes this approach effectively measures the risk associated with any particular loan or group of loans. The Bank’s Board of Directors engages an independent loan review consultant to evaluate the adequacy of the Bank’s allowance for credit losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Bank to make additional provisions for estimated credit losses based upon judgments different from those of management. The Bank recorded a total provision for credit losses of $29,000 for the three month period ended September 30, 2012 and $338,000 for the same period in 2011. For the nine month periods ended September 30, 2012 and 2011 the Bank recorded provisions of $306,000 and $1.6 million, respectively. The aggregate provision was based upon the results of quarterly evaluations using a combination of factors including the level of nonperforming loans, the Bank’s growth in total gross loans and the Bank’s net credit loss experience. Total gross loans decreased by $5.7 million for the nine months ended September 30, 2012. For the same period, the Bank recorded charge-offs of $927,000 and recovered $86,000 on previously charged-off loans. As of September 30, 2012, the Bank’s allowance for credit losses was $6.6 million or 2.33% of total loans and 88.4% of nonperforming loans as compared to $7.2 million, or 2.47% of total loans and 102.0% of nonperforming loans as of December 31, 2011.

The Bank continues to monitor and modify its allowance for credit losses as conditions dictate. While management believes that, based on information currently available, the Bank’s allowance for credit losses is sufficient to cover losses inherent in its

 

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loan portfolio at this time, no assurances can be given that the Bank’s level of allowance for credit losses will be sufficient to cover future loan losses incurred by the Bank or that future adjustments to the allowance for credit losses will not be necessary if economic and other conditions differ substantially from economic and other conditions at the time management determined the current level of the allowance for credit losses. Management may in the future increase the level of the allowance as its loan portfolio increases or as circumstances dictate.

Activity in the allowance for credit losses for the nine months ended September 30, 2012 and 2011 is shown below:

 

(dollars in thousands)    For the Nine Months
Ended September 30,
 
     2012     2011  

Total loans outstanding - at September 30

   $ 285,069      $ 294,160   

Average loans outstanding year-to-date

     296,111        288,312   

Allowance for credit losses at beginning of period

   $ 7,182      $ 6,853   
  

 

 

   

 

 

 

Provision charged to expense

     306        1,574   
  

 

 

   

 

 

 

Chargeoffs:

    

Commercial loans

     357        872   

Real estate and construction loans

     340        182   

Consumer and other loans

     230        140   
  

 

 

   

 

 

 

Total

     927        1,194   
  

 

 

   

 

 

 

Recoveries:

    

Commercial loans

     32        13   

Real estate and construction loans

     35        254   

Consumer and other loans

     19        17   
  

 

 

   

 

 

 

Total

     86        284   
  

 

 

   

 

 

 

Net charge-offs

     841        910   
  

 

 

   

 

 

 

Allowance for credit losses at end of period

   $ 6,647      $ 7,517   
  

 

 

   

 

 

 

Allowance for credit losses as a percent of total loans

     2.33     2.56

Net charge-offs (recoveries) as a percent of average loans

     0.28     0.32

The Bank’s nonperforming assets, which are comprised of loans delinquent 90 days or more, non-accrual loans, accruing troubled debt restructurings, loans with repossessed collateral and repossessed assets, totaled $8.2 million at September 30, 2012, compared to $8.3 million at December 31, 2011, a decrease in nonperforming assets of $100,000 or 1.2%. The percentage of nonperforming assets to total assets was 1.88% at September 30, 2012, and at December 31, 2011. The decrease in nonperforming assets was principally attributable to the sales of REO property and repossessed assets of $888,000, payoffs and pay-downs of nonperforming assets of $241,000, the return to performing of $176,000 and to charge-offs and additional write-downs on loans previously classified as nonperforming of $520,000 offset by additions to nonperforming of $1.7 million.

The $8.2 million in nonperforming assets at September 30, 2012 included $6.1 million in nonaccrual loans, $930,000 in accruing troubled debt restructurings, $468,000 of loans past due greater than 90 days and still accruing and $696,000 in other assets. Of the $6.1 million in nonaccrual loans at September 30, 2012, $5.3 million were secured by real estate, $190,000 were commercial loans and $613,000 were consumer and other loans. At December 31, 2011, assets classified as nonperforming totaled $8.3 million and consisted of

 

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$6.2 million in nonaccrual loans and $856,000 in accruing troubled debt restructuring and $1.3 million in other assets. Included in the $6.2 million of nonaccrual loans was $5.3 million of loans secured by real estate, $390,000 of commercial and $484,000 of consumer and other loans.

The following table shows the amounts of nonperforming assets at September 30, 2012 and December 31, 2011:

 

     September 30,
2012
    December 31,
2011
 

Nonaccrual loans:

    

Commercial

   $ 190      $ 390   

Real estate

     5,315        5,308   

Consumer

     613        484   

Accrual loans – past due 90 days

    

Real estate

     468        0   

Restructured loans

     930        856   
  

 

 

   

 

 

 

Total nonperforming loans

     7,516        7,038   

Real estate owned

     697        1,222   

Repossessed assets

     0        52   
  

 

 

   

 

 

 

Total nonperforming assets

   $ 8,213      $ 8,312   
  

 

 

   

 

 

 

Allowance for credit losses to total nonperforming loans

     88.44     102.30

Ratio of nonperforming loans to total loans

     2.64     2.42

Ratio of nonperforming assets to total assets

     1.88     1.88

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

 

Total assets of $436.4 million at September 30, 2012 decreased 1.2% or $5.2 million compared to $441.6 million at December 31, 2011. The contraction of the balance sheet was the result of redeeming 50% of the TARP balance of outstanding Series A Preferred Stock for a total of $4.1 million. Loan demand decreased in the first nine months of 2012, with $285.1 million of gross loans as of September 30, 2012, a decrease of $5.7 million from $290.8 million at December 31, 2011. The decrease resulted primarily from payoffs and payments net of originations of approximately $4.8 million in real estate secured loans and charge-offs of $927,000. Interest bearing balances with banks increased $21.7 million while federal funds sold as of September 30, 2012 decreased $26.6 million from December 31, 2011. Investment securities increased $4.2 million or 4.8% compared to December 31, 2011.

Deposits of $338.8 million at September 30, 2012 decreased $11.6 million or 3.3% from December 31, 2011 deposits of $350.4 million. Savings balances decreased $7.9 million while certificate of deposit balances decreased $7.2 million due to higher rate certificates of deposit maturing and not renewing at current lower yields. Money market balances increased $4.8 million. Securities sold under agreements to repurchase increased $7.6 million.

Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011.

 

General. The Company recorded net income of $2.9 million for the nine months ended September 30, 2012; an increase of $1.4 million, compared to net income of $1.5 million for the nine months ended September 30, 2011, an increase of 90.1%. Net income available to common shareholders for the nine months ended September 30, 2012 was $2.6 million or $0.66 per basic and $0.65 per diluted common shares compared to net income

 

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available to common shareholders of $1.1 million or $0.29 per basic and $0.29 per diluted common shares for the nine months ended September 30, 2011. Net interest income increased by $120,000 or 1.0% for the nine months ended September 30, 2012 compared to the same period in 2011. The provision for credit losses decreased $1.3 million to $306,000 for the nine months ended September 30, 2012 compared to $1.6 million for the nine month period ended September 30, 2011.

Interest Income. Total interest income decreased $418,000 or 2.8% for the nine months ended September 30, 2012 compared to the same period in 2011 as a result of lower yields obtained on new loans and investments. Interest income on investment securities decreased $443,000. The yield on the investment portfolio decreased to 2.36% from 2.98% on balances $1.1 million lower on average over the same period in 2011. Income on the loan portfolio increased $10,000 for the nine months ended September 30, 2012 due to an increase in average loan balances of $7.8 million offset by lower loan yields. The yield on the loan portfolio decreased to 5.78% for the nine months ended September 30, 2012 from 5.94% for the nine months ended September 30, 2011.

Interest Expense. Total interest expense decreased by $538,000 or 19.5% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The decrease was due to reducing the rates paid on the Company’s deposit and repurchase agreement accounts. The Company’s savings accounts, the largest of the deposit balances, had an average balance of $131.8 million for the nine months ended September 30, 2012 and a yield of 0.33% compared to an average balance of $139.0 million and a yield of 0.68% for the nine months ended September 30, 2011. The average rate of interest paid on all interest bearing liabilities was 0.86% for the nine months ended September 30, 2012 compared to 1.06% for the nine months ended September 30, 2011. Interest expense on long-term borrowings and junior subordinated debentures was $985,000 for the nine months ended September 30, 2012 compared to $974,000 for the nine months ended September 30, 2011. The increase resulted from a rise in the yield on the junior subordinated debentures to 3.65% from 3.50%.

Net Interest Income. Net interest income increased by $120,000 or 1.0% for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase was primarily the result of lower overall cost of deposits. The Company’s cost of funds decreased to 0.74% for the nine months ended September 30, 2012 compared to 0.93% for the nine months ended September 30, 2011.

For the nine months ended September 30, 2012, the net interest margin decreased to 3.90% compared to 3.94% for the nine months ended September 30, 2011. The decrease in net interest margin was primarily the result of the decrease in the yield on earnings assets which decreased to 4.60% for the nine months ended September 30, 2012 from 4.84% for the same period in 2011.

Provision for Credit Losses. The Bank recorded a provision for credit losses of $306,000 for the nine months ended September 30, 2012 compared to $1.6 million for the same period in 2011. The provision was based on the composition and credit quality of the loan portfolio as of September 30, 2012 and reflected the qualitative factors used to calculate the allowance for credit losses relating to historical delinquencies and losses and to factors relating to local economic conditions. Total gross loans decreased by $5.7 million for the nine month period ended September 30, 2012 compared to December 31, 2011. The Bank recorded net charge-offs on loans deemed uncollectible of $841,000 for the nine months ended September 30, 2012 compared to $910,000 for the same period in 2011.

 

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Noninterest Income. Total noninterest income for the nine months ended September 30, 2012 increased by $28,000 or 2.0% remaining at $1.4 million for the same period in 2011. The increase in noninterest income was due to higher savings and check cashing fees offset by lower loan related fees as the Company discontinued selling mortgages in 2011. The nine months ended September 30, 2011 included losses of $31,000 on the write-down of fixed assets relating to the closure of a branch office. There were no such write-downs for the nine months ended September 30, 2012.

Noninterest Expense. Total noninterest expense decreased by $875,000 or 9.1% for the nine months ended September 30, 2012 compared to the same period in 2011. The decrease in total noninterest expense during the first nine months of 2012 compared with the same period in 2011 resulted from decreased personnel, occupancy and equipment, FDIC and other expense. Offsetting these decreases in noninterest expense was an increase in legal expense related to loan collections. Personnel expense decreased $374,000 for the nine month period due to vacated staff positions that have not been refilled. Occupancy and equipment expense decreased $96,000 as the same period in 2011 included accelerated depreciation relating to the Market House branch closure. FDIC expense decreased $82,000 for the nine months ended September 30, 2012 compared to September 30, 2011 due to the impact of the changes in the assessment formula. Other expense decreased $311,000 as 2011 expense included a $198,000 write-down on a property held for expansion and a write-off of $36,000 related to a payment due from a service provider. Legal collection fees increased $49,000 for 2012 as 2011 results included the reimbursement of legal costs from the payoff of a loan previously classified as nonperforming.

Income Tax Expense. The Company recorded income tax expense for the nine-month period ended September 30, 2012 of $1.7 million compared to $782,000 for the nine months ended September 30, 2011. The Company’s combined effective federal and state income tax rate was approximately 37.6% for the nine months ended September 30, 2012 versus 34.2% for the nine months ended September 30, 2011.

The table below sets forth certain information regarding changes in interest income and interest expense attributable to (1) changes in volume (change in volume multiplied by the old rate); (2) changes in rates (change in rate multiplied by the old volume); and (3) changes in rate/volume (change in rate multiplied by change in volume).

 

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Rate/Volume Analysis

 

(dollars in thousands)    Nine Months Ended September 30, 2012 vs. 2011  
           Due to Change in  
     Increase or
(Decrease)
    Volume     Rate     Rate/
Volume
 

Interest income on:

        

Loans

   $ 10      $ 347      ($ 328   ($ 9

Investment securities

     (443     (25     (423     5   

Interest bearing balances with banks

     11        0        10        1   

Federal funds sold and other overnight investments

     4        3        1        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     (418     325        (740     (3

Interest expense on:

        

NOW accounts

     (10     0        (10     0   

Money market accounts

     (36     37        (58     (15

Savings accounts

     (381     (36     (364     19   

Certificates of deposit

     (99     (52     (50     3   

Repurchase agreements

     (23     (3     (21     1   

Long-term borrowing

     3        0        3        0   

Junior subordinated debt

     8        0        8        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (538     (54     (492     8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

   $ 120      $ 379      ($ 248   ($ 11
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Consolidated Average Balances, Yields and Rates

 

(dollars in thousands)    Nine Month Periods Ended  
     September 30, 2012     September 30, 2011  
     Average
Balance
     Interest
(1)
     Yield/
Rate
    Average
Balance
     Interest
(1)
     Yield/
Rate
 

Assets

                

Interest earning assets

                

Federal funds sold and other overnight investments

   $ 17,460       $ 31         0.24   $ 15,930       $ 27         0.23

Interest bearing balances with banks

     15,709         24         0.20     15,087         13         0.12

Investment securities (1)

     90,691         1,601         2.36     91,822         2,044         2.98

Loans (2)

     296,111         12,817         5.78     288,312         12,807         5.94
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest earning assets

     419,971         14,473         4.60     411,151         14,891         4.84

Noninterest earning assets

                

Cash and due from banks

     7,393              7,582         

Other assets

     14,282              15,211         
  

 

 

         

 

 

       

Total Assets

   $ 441,646            $ 433,944         
  

 

 

         

 

 

       

Liabilities and Stockholders’ Equity

                

Interest bearing deposits

                

NOW accounts

   $ 32,822       $ 22         0.09   $ 32,892       $ 32         0.13

Money market accounts

     52,781         113         0.29     42,280         149         0.47

Savings accounts

     131,838         323         0.33     138,952         704         0.68

Certificates of deposit

     72,755         745         1.37     77,508         844         1.46

Repurchase agreements

     15,322         36         0.31     16,163         59         0.49

Long-term borrowings

     35,000         846         3.18