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 Companys 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 Annes County, Maryland.
The Bank has built its reputation on exemplary customer service and
outreach to the communities surrounding each of the Banks 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 Annes County, Maryland. The Banks lending operations are centered in Anne
Arundel County, but extend throughout Central and Southern Maryland.
6
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 Companys 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.
7
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.
8
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.
9
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 Companys 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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.
11
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
propertys 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 propertys 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 Banks 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 Banks 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 Banks allowance for credit losses is established through a provision for loan losses based on managements 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 Banks historical loss experience and ten
(10) qualitative factors for specific categories and types of loans. The Banks 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 Banks limited historical loss experience, the loss
experience factor was the greater of either the Banks historical loss experience or the peer group average historical loss experience.
12
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Banks 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 banks 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.
|
14
|
|
|
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 managements 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 managements 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
16
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
measured based on the present value of expected future cash flows discounted at the loans effective interest rate, except that as a practical expedient, the Bank may measure impairment
based on a loans 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 Companys 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
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
borrowers 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.
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 FASBs 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.
21
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 entitys 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 liabilitys 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 Companys 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 Companys 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
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 Moodys 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
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
|
|
|
Moodys
|
|
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
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.
25
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 flows discounted at the loans 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 Companys 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 Companys time deposit liabilities do not take into consideration the value of the Companys long-term relationships with depositors, which
may have significant value.
26
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 Companys 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 tables present information about the
Companys 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
27
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.
28
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 Companys 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 Companys 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 Companys 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.
29
Under the terms of the Merger Agreement, the Companys 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 Companys common stock they own, dependent on the Companys ability to resolve an agreed-upon credit matter. The Merger Agreement also provides that all options to purchase the Companys 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 Companys 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 Companys 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 Companys 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.
30