Attached files
file | filename |
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EX-21 - EX-21 - FREDERICK COUNTY BANCORP INC | a11-9355_1ex21.htm |
EX-32.(A) - EX-32.(A) - FREDERICK COUNTY BANCORP INC | a11-9355_1ex32da.htm |
EX-10.(J) - EX-10.(J) - FREDERICK COUNTY BANCORP INC | a11-9355_1ex10dj.htm |
EX-32.(B) - EX-32.(B) - FREDERICK COUNTY BANCORP INC | a11-9355_1ex32db.htm |
EX-31.(A) - EX-31.(A) - FREDERICK COUNTY BANCORP INC | a11-9355_1ex31da.htm |
EX-31.(B) - EX-31.(B) - FREDERICK COUNTY BANCORP INC | a11-9355_1ex31db.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2011
OR
o 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: 000-50407
FREDERICK COUNTY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland |
|
20-0049496 |
(State of other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification No.) |
9 North Market Street
Frederick, Maryland 21701
(Address of registrants principal executive offices)
301.620.1400
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has 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. x Yes o 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 such shorter period that the registrant was required to submit and post such files). o Yes o 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 definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
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). o Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical date. There were 1,476,754 shares of Common Stock outstanding as of April 30, 2011.
FREDERICK COUNTY BANCORP, INC. AND SUBSIDIARY
Frederick County Bancorp, Inc. and Subsidiaries
|
|
March 31, |
|
December 31, |
| ||
(dollars in thousands) |
|
2011 |
|
2010 |
| ||
|
|
(unaudited) |
|
|
| ||
ASSETS |
|
|
|
|
| ||
Cash and due from banks |
|
$ |
1,464 |
|
$ |
1,469 |
|
Federal funds sold |
|
1,304 |
|
1,128 |
| ||
Interest-bearing deposits in other banks |
|
36,269 |
|
39,468 |
| ||
Cash and cash equivalents |
|
39,037 |
|
42,065 |
| ||
Investment securities available-for-sale at fair value |
|
36,875 |
|
30,178 |
| ||
Restricted stock |
|
1,521 |
|
1,521 |
| ||
Loans |
|
207,766 |
|
209,387 |
| ||
Less: Allowance for loan losses |
|
(3,842 |
) |
(3,718 |
) | ||
Net loans |
|
203,924 |
|
205,669 |
| ||
Bank premises and equipment |
|
5,816 |
|
4,968 |
| ||
Other assets |
|
4,537 |
|
4,642 |
| ||
Total assets |
|
$ |
291,710 |
|
$ |
289,043 |
|
|
|
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Noninterest-bearing deposits |
|
$ |
42,549 |
|
$ |
41,244 |
|
Interest-bearing deposits |
|
208,223 |
|
207,380 |
| ||
Total deposits |
|
250,772 |
|
248,624 |
| ||
Short-term borrowings |
|
300 |
|
300 |
| ||
Long-term borrowings |
|
10,000 |
|
10,000 |
| ||
Junior subordinated debentures |
|
6,186 |
|
6,186 |
| ||
Accrued interest and other liabilities |
|
769 |
|
738 |
| ||
Total liabilities |
|
268,027 |
|
265,848 |
| ||
|
|
|
|
|
| ||
Shareholders Equity |
|
|
|
|
| ||
Common stock, per share par value $0.01; 10,000,000 shares authorized; 1,476,754 and 1,469,364 shares issued and outstanding |
|
15 |
|
15 |
| ||
Additional paid-in capital |
|
15,188 |
|
15,069 |
| ||
Retained earnings |
|
8,478 |
|
8,142 |
| ||
Accumulated other comprehensive income (loss) |
|
2 |
|
(31 |
) | ||
Total shareholders equity |
|
23,683 |
|
23,195 |
| ||
Total liabilities and shareholders equity |
|
$ |
291,710 |
|
$ |
289,043 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Frederick County Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
|
|
Three Months Ended |
| ||||
(dollars in thousands, except per share amounts) |
|
March 31, |
|
March 31, |
| ||
Interest income: |
|
|
|
|
| ||
Interest and fees on loans |
|
$ |
3,128 |
|
$ |
3,289 |
|
Interest and dividends on investment securities: |
|
|
|
|
| ||
Interest taxable |
|
160 |
|
115 |
| ||
Interest tax exempt |
|
86 |
|
80 |
| ||
Dividends |
|
12 |
|
12 |
| ||
Other interest income |
|
22 |
|
8 |
| ||
Total interest income |
|
3,408 |
|
3,504 |
| ||
Interest expense: |
|
|
|
|
| ||
Interest on deposits |
|
623 |
|
746 |
| ||
Interest on short-term borrowings |
|
4 |
|
5 |
| ||
Interest on long-term borrowings |
|
79 |
|
114 |
| ||
Interest on junior subordinated debentures |
|
101 |
|
101 |
| ||
Total interest expense |
|
807 |
|
966 |
| ||
Net interest income |
|
2,601 |
|
2,538 |
| ||
Provision for loan losses |
|
115 |
|
400 |
| ||
Net interest income after provision for loan losses |
|
2,486 |
|
2,138 |
| ||
Noninterest income: |
|
|
|
|
| ||
Securities gains |
|
3 |
|
|
| ||
Service fees |
|
79 |
|
91 |
| ||
Other operating income |
|
48 |
|
46 |
| ||
Total noninterest income |
|
130 |
|
137 |
| ||
Noninterest expense: |
|
|
|
|
| ||
Salaries and employee benefits |
|
1,222 |
|
1,060 |
| ||
Occupancy and equipment expenses |
|
341 |
|
324 |
| ||
Other operating expenses |
|
542 |
|
451 |
| ||
Total noninterest expense |
|
2,105 |
|
1,835 |
| ||
Income before provision for income taxes |
|
511 |
|
440 |
| ||
Provision for income taxes |
|
175 |
|
132 |
| ||
Net income |
|
$ |
336 |
|
$ |
308 |
|
Basic earnings per share |
|
$ |
0.23 |
|
$ |
0.21 |
|
Diluted earnings per share |
|
$ |
0.22 |
|
$ |
0.21 |
|
Basic weighted average number of shares outstanding |
|
1,473,508 |
|
1,461,802 |
| ||
Diluted weighted average number of shares outstanding |
|
1,499,219 |
|
1,468,896 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Frederick County Bancorp, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders Equity (Unaudited)
Three Months Ended March 31, |
|
Shares |
|
Common |
|
Additional |
|
Retained |
|
Accumulated |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, January 1, 2010 |
|
1461,802 |
|
$ |
15 |
|
$ |
14,702 |
|
$ |
6,987 |
|
$ |
46 |
|
$ |
21,750 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
|
|
|
308 |
|
|
|
308 |
| |||||
Changes in net unrealized gains (losses) on securities available for sale, net of income taxes of $10 |
|
|
|
|
|
|
|
|
|
16 |
|
16 |
| |||||
Total Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
324 |
| |||||
Compensation expense from stock option transactions |
|
|
|
|
|
2 |
|
|
|
|
|
2 |
| |||||
Balance, March 31, 2010 |
|
1,461,802 |
|
$ |
15 |
|
$ |
14,704 |
|
$ |
7,295 |
|
$ |
62 |
|
$ |
22,076 |
|
Balance, January 1, 2011 |
|
1,469,364 |
|
$ |
15 |
|
$ |
15,069 |
|
$ |
8,142 |
|
$ |
(31 |
) |
$ |
23,195 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
|
|
|
|
|
|
336 |
|
|
|
336 |
| |||||
Changes in net unrealized gains (losses) on securities available for sale, net of income taxes of $23 |
|
|
|
|
|
|
|
|
|
35 |
|
35 |
| |||||
Reclassification adjustment for (gains) losses realized, net of income tax benefits of $1 |
|
|
|
|
|
|
|
|
|
(2 |
) |
(2 |
) | |||||
Total Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
369 |
| |||||
Shares repurchased |
|
(7,850 |
) |
|
|
(105 |
) |
|
|
|
|
(105 |
) | |||||
Shares issued under stock option transactions |
|
15,240 |
|
|
|
153 |
|
|
|
|
|
153 |
| |||||
Compensation expense from stock option transactions |
|
|
|
|
|
47 |
|
|
|
|
|
47 |
| |||||
Excess tax benefit from equity-based awards |
|
|
|
|
|
24 |
|
|
|
|
|
24 |
| |||||
Balance, March 31, 2011 |
|
1,476,754 |
|
$ |
15 |
|
$ |
15,188 |
|
$ |
8,478 |
|
$ |
2 |
|
$ |
23,683 |
|
Frederick County Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
|
|
Three Months Ended March 31, |
| ||||
(dollars in thousands) |
|
2011 |
|
2010 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
336 |
|
$ |
308 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
73 |
|
77 |
| ||
Deferred income taxes (benefits) |
|
(76 |
) |
82 |
| ||
Provision for loan losses |
|
115 |
|
400 |
| ||
Securities gains |
|
(3 |
) |
|
| ||
Net premium amortization on investment securities |
|
81 |
|
60 |
| ||
Stock option compensation expense |
|
47 |
|
|
| ||
Excess tax benefit from equity-based awards |
|
(24 |
) |
|
| ||
Decrease in accrued interest and other assets |
|
186 |
|
19 |
| ||
Increase (decrease) in accrued interest and other liabilities |
|
30 |
|
(150 |
) | ||
Net cash provided by operating activities |
|
765 |
|
796 |
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchases of investment securities available for sale |
|
(9,037 |
) |
(6,139 |
) | ||
Proceeds from sales of investment securities available for sale |
|
1,274 |
|
|
| ||
Proceeds from maturities, prepayments and calls investment securities available for sale |
|
1,042 |
|
2,130 |
| ||
Net decrease (increase) in loans |
|
1,629 |
|
(143 |
) | ||
Purchases of bank premises and equipment |
|
(921 |
) |
(74 |
) | ||
Net cash used in investing activities |
|
(6,013 |
) |
(4,226 |
) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net increase in NOW, money market accounts, savings accounts and noninterest-bearing deposits |
|
3,857 |
|
6,968 |
| ||
Net (decrease) increase in time deposits |
|
(1,709 |
) |
15,851 |
| ||
Proceeds from issuance of common stock |
|
153 |
|
|
| ||
Repurchase of common stock |
|
(105 |
) |
|
| ||
Excess tax benefit from equity-based awards |
|
24 |
|
|
| ||
Net cash provided by financing activities |
|
2,220 |
|
22,819 |
| ||
Net (decrease) increase in cash and cash equivalents |
|
(3,028 |
) |
19,389 |
| ||
Cash and cash equivalents beginning of period |
|
42,065 |
|
12,114 |
| ||
Cash and cash equivalents end of period |
|
$ |
39,037 |
|
$ |
31,503 |
|
Supplemental cash flow disclosures: |
|
|
|
|
| ||
Interest paid |
|
$ |
809 |
|
$ |
971 |
|
Income taxes paid |
|
$ |
92 |
|
$ |
121 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
FREDERICK COUNTY BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1. General:
Frederick County Bancorp, Inc. (the Bancorp), the parent company for its wholly-owned subsidiary Frederick County Bank (the Bank and together with Bancorp, the Company), was organized in September 2003. The Bank was incorporated under the laws of the state of Maryland in August 2000 and commenced banking operations in October 2001. The Bank provides its customers with various banking services. The Bank offers various loan and deposit products to its customers. The Banks customers include individuals and commercial enterprises within its principal market area consisting of Frederick County, Maryland. Additionally, the Bank maintains correspondent banking relationships and transacts daily federal funds sales on an unsecured basis with regional correspondent banks. Note 4 discusses the types of securities the Bank purchases. Note 5 discusses the types of lending in which the Bank engages. The Bank does not have any significant concentrations to any one industry or customer. Bancorp also has a subsidiary trust, established to issue trust preferred securities, and two subsidiaries established to hold foreclosed properties. The two subsidiaries established to hold foreclosed properties are known as FCB Holdings, Inc. (a direct subsidiary of Bancorp) and FCB Hagerstown, LLC (an indirect subsidiary of Bancorp). See Note 7 for additional disclosures related to the subsidiary trust.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q, Regulation S-X, and general practices within the banking industry. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Companys 2009 Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The results shown in this interim report are not necessarily indicative of results to be expected for any other period or for the full year ending December 31, 2011.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on information available as of the date of the consolidated financial statements and could differ from actual results.
Recent Accounting Pronouncements
The FASB issued new guidance under ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820), also known as, to improve disclosures about fair value measurements. The guidance requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the same. It also requires Level 3 reconciliation to be presented on a gross basis disclosing purchases, sales, issuances and settlements separately. The guidance is effective for interim and annual financial periods beginning after December 15, 2009 except for gross basis presentation for Level 3 reconciliation, which is effective for interim and annual periods beginning after December 15, 2010. The disclosure requirements effective for interim and annual financial periods beginning after December 15, 2009 have been adopted for the interim period ended March 31, 2010, while the disclosure requirements effective for gross basis presentation for Level 3 reconciliation beginning after December 15, 2010 have been adopted for the interim period ended March 31, 2011.
The FASB issued new guidance under ASU 2010-20, Receivables - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310). The guidance requires entities to provide disclosures designed to facilitate financial statement users evaluation of (i) the nature of credit risk inherent in the entitys portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a roll forward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 became effective for the Companys financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. The Company adopted the guidance for disclosures that relate to activity during a reporting period on January 1, 2011 and it did not have a material impact on the Companys consolidated financial condition or results of operations.
The FASB issued new guidance under ASU 2010-28, Intangibles Goodwill and Other (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether
it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 became effective for the Company on January 1, 2011 and did not have a significant impact on the Companys financial statements.
The FASB issued new guidance under ASU 2011-02, Receivables (Topic 310) A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This guidance clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under this guidance, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties, ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. Adoption of ASU 2011-02 is not expected to have a significant impact of the Companys financial statement.
Note 2. Earnings Per Share:
Earnings per share (EPS) are disclosed as basic and diluted. Basic EPS is generally computed by dividing net income by the weighted-average number of common shares outstanding for the period, whereas diluted EPS essentially reflects the potential dilution in basic EPS that could occur if other contracts to issue common stock were exercised.
|
|
Three Months Ended |
| ||||
(dollars in thousands, except per share amounts) |
|
2011 |
|
2010 |
| ||
Net income |
|
$ |
336 |
|
$ |
308 |
|
Basic earnings per share |
|
$ |
0.23 |
|
$ |
0.21 |
|
Diluted earnings per share |
|
$ |
0.22 |
|
$ |
0.21 |
|
Basic weighted average number of shares outstanding |
|
1,473,508 |
|
1,461,802 |
| ||
Effect of dilutive securities stock options |
|
25,710 |
|
7,094 |
| ||
Diluted weighted average number of shares outstanding |
|
1,499,218 |
|
1,468,896 |
| ||
Anti-dilutive securities outstanding |
|
|
|
|
|
Note 3. Employee Stock Option Plan:
The Company maintains an Employee Stock Option Plan that provides for grants of incentive and non-incentive stock options. This plan has been presented to and approved by the Companys shareholders. There were 118,700 stock options granted in April 2010 and no stock options granted in the three months ended March 31, 2011. The Company recognizes the cost of employee services received in exchange for an award of equity investment based on the grant-date fair value of the award. That cost is recognized over the vesting period of the award. Stock-based compensation expense related to stock options for the three months ended March 31, 2011 and 2010 was $47 thousand and $2 thousand, respectively. As of March 31, 2011, there was $83 thousand of total unrecognized compensation cost related to non-vested stock options that will be expensed over the period April 1, 2011 through April 30, 2012.
The weighted-average fair value of options granted in the year ended December 31, 2010 was $2.97, respectively, and was estimated at the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions.
|
|
December 31, |
|
|
|
2010 |
|
Risk free interest rate of return |
|
3.80 |
% |
Expected option life (months) |
|
60 |
|
Expected volatility |
|
25 |
% |
Expected dividends |
|
|
% |
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected lives are based on the simplified method allowed by ASC Topic 718 Compensation, whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award. The expected volatility is based on the Companys estimated level of volatility. The dividend yield assumption is based on the Companys expectation of dividend payouts.
The following is a summary of stock option transactions during the three months ended March 31, 2011.
|
|
Options Issued |
|
Weighted-Average |
| |
Balance at January 1, 2011 |
|
235,430 |
|
$ |
10.69 |
|
Exercised |
|
15,240 |
|
10.05 |
| |
Balance at March 31, 2011 |
|
220,190 |
|
$ |
10.73 |
|
Exercisable at March 31, 2011 |
|
136,180 |
|
$ |
10.13 |
|
Note 4. Investment Portfolio:
The following tables set forth certain information regarding the Companys investment portfolio at March 31, 2011 and December 31, 2010:
Available-for-sale portfolio
March 31, 2011 |
|
Amortized |
|
Gross |
|
Gross |
|
Estimated |
|
Average |
| ||||
State and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
| ||||
Due after five years through ten years |
|
$ |
4,299 |
|
$ |
25 |
|
$ |
35 |
|
$ |
4,289 |
|
4.82 |
% |
Due after ten years |
|
9,672 |
|
73 |
|
71 |
|
9,674 |
|
5.63 |
% | ||||
|
|
13,971 |
|
98 |
|
106 |
|
13,963 |
|
|
| ||||
Mortgage-backed debt securities |
|
22,601 |
|
137 |
|
126 |
|
22,612 |
|
3.06 |
% | ||||
Equity securities |
|
300 |
|
|
|
|
|
300 |
|
|
% | ||||
|
|
$ |
36,872 |
|
$ |
235 |
|
$ |
232 |
|
$ |
36,875 |
|
3.92 |
% |
December 31, 2010 |
|
Amortized |
|
Gross |
|
Gross |
|
Estimated |
|
Average |
| ||||
State and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
| ||||
Due after five years through ten years |
|
$ |
2,094 |
|
$ |
12 |
|
$ |
21 |
|
$ |
2,085 |
|
5.36 |
% |
Due after ten years |
|
7,005 |
|
50 |
|
123 |
|
6,932 |
|
5.74 |
% | ||||
|
|
9,099 |
|
62 |
|
144 |
|
9,017 |
|
|
| ||||
Mortgage-backed debt securities |
|
20,830 |
|
158 |
|
127 |
|
20,861 |
|
2.71 |
% | ||||
Equity securities |
|
300 |
|
|
|
|
|
300 |
|
|
% | ||||
|
|
$ |
30,229 |
|
$ |
220 |
|
$ |
271 |
|
$ |
30,178 |
|
3.57 |
% |
|
|
Continuous unrealized |
|
Continuous unrealized |
|
Total |
| ||||||||||||
March 31, 2011 |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
| ||||||
State and political subdivisions |
|
$ |
4,435 |
|
$ |
106 |
|
$ |
|
|
$ |
|
|
$ |
4,435 |
|
$ |
106 |
|
Mortgage-backed debt securities |
|
9,778 |
|
126 |
|
|
|
|
|
9,778 |
|
126 |
| ||||||
Total temporarily impaired securities |
|
$ |
14,213 |
|
$ |
232 |
|
$ |
|
|
$ |
|
|
$ |
14,213 |
|
$ |
232 |
|
|
|
Continuous unrealized |
|
Continuous unrealized |
|
Total |
| ||||||||||||
December 31, 2010 |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
| ||||||
State and political subdivisions |
|
$ |
4,253 |
|
$ |
144 |
|
|
|
$ |
|
|
$ |
4,253 |
|
$ |
144 |
| |
Mortgage-backed debt securities |
|
9,398 |
|
127 |
|
|
|
|
|
9,398 |
|
127 |
| ||||||
Total temporarily impaired securities |
|
$ |
13,651 |
|
$ |
271 |
|
$ |
|
|
$ |
|
|
$ |
13,651 |
|
$ |
271 |
|
Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include: (1) duration and magnitude of the decline in value; (2) the financial condition of the issuer or issuers; and (3) the structure of the security. An impairment loss is recognized in earnings only when: (1) we intend to sell the debt security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) we do not expect to recover the entire amortized cost basis of the security. In situations where we intend to sell or when it is more likely than not that we will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders equity as a component of other comprehensive income, net of deferred taxes. Credit loss is determined by calculating the present value of future cash flows of the security compared to the amortized cost of the security. Realized gains or losses on the sale of investment and mortgage-backed securities are reported in earnings and determined using the amortized cost of the specific security sold.
Restricted Stock
The following table shows the amounts of restricted stock as of March 31, 2011 and December 31, 2010:
|
|
March 31, |
|
December 31, |
| ||
(dollars in thousands) |
|
2011 |
|
2010 |
| ||
Federal Home Loan Bank of Atlanta |
|
$ |
907 |
|
$ |
907 |
|
Federal Reserve Bank |
|
574 |
|
574 |
| ||
Atlantic Central Bankers Bank |
|
40 |
|
40 |
| ||
|
|
$ |
1,521 |
|
$ |
1,521 |
|
Note 5. Loans and Allowance for Loan Losses:
Loans consist of the following:
|
|
March 31, |
|
% of |
|
December 31, |
|
% of |
| ||
(dollars in thousands) |
|
2011 |
|
Loans |
|
2010 |
|
Loans |
| ||
|
|
|
|
|
|
|
|
|
| ||
Construction and land development |
|
$ |
13,892 |
|
7 |
% |
$ |
15,742 |
|
8 |
% |
Real estate: |
|
|
|
|
|
|
|
|
| ||
Commercial real estate mortgage |
|
130,988 |
|
63 |
% |
128,998 |
|
62 |
% | ||
Residential real estate mortgage |
|
35,598 |
|
17 |
% |
37,143 |
|
17 |
% | ||
Total construction and real estate mortgage |
|
166,586 |
|
80 |
% |
166,141 |
|
79 |
% | ||
Commercial and industrial |
|
25,708 |
|
12 |
% |
25,778 |
|
12 |
% | ||
Consumer |
|
1,580 |
|
1 |
% |
1,726 |
|
1 |
% | ||
|
|
207,766 |
|
100 |
% |
209,387 |
|
100 |
% | ||
Less allowance for loan losses |
|
(3,842 |
) |
|
|
(3,718 |
) |
|
| ||
Net loans |
|
$ |
203,924 |
|
|
|
$ |
205,669 |
|
|
|
Allowance for loan losses and recorded investment in loans for the three months ended March 31, 2011 is summarized as follows:
(dollars in thousands) |
|
Construction |
|
Commercial |
|
Residential |
|
Commercial |
|
Consumer |
|
Total |
| ||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance |
|
$ |
273 |
|
$ |
2,546 |
|
$ |
432 |
|
$ |
455 |
|
$ |
12 |
|
$ |
3,718 |
|
Charge-offs |
|
(1 |
) |
|
|
|
|
|
|
|
|
(1 |
) | ||||||
Recoveries |
|
|
|
|
|
|
|
10 |
|
|
|
10 |
| ||||||
Provisions |
|
(63 |
) |
243 |
|
(76 |
) |
14 |
|
(3 |
) |
115 |
| ||||||
Ending balance |
|
$ |
209 |
|
$ |
2,789 |
|
$ |
356 |
|
$ |
479 |
|
$ |
9 |
|
$ |
3,842 |
|
Ending balance: individually evaluated for impairment |
|
$ |
155 |
|
$ |
1,213 |
|
$ |
11 |
|
$ |
206 |
|
$ |
|
|
$ |
1,585 |
|
Ending balance: collectively evaluated for impairment |
|
$ |
54 |
|
$ |
1,576 |
|
$ |
345 |
|
$ |
273 |
|
$ |
9 |
|
$ |
2,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
13,892 |
|
$ |
130,988 |
|
$ |
35,598 |
|
$ |
25,708 |
|
$ |
1,580 |
|
$ |
207,766 |
|
Ending balance: individually evaluated for impairment |
|
$ |
2,198 |
|
$ |
12,454 |
|
$ |
1,566 |
|
$ |
4,171 |
|
$ |
20 |
|
$ |
20,409 |
|
Ending balance: collectively evaluated for impairment |
|
$ |
11,694 |
|
$ |
118,534 |
|
$ |
34,032 |
|
$ |
21,537 |
|
$ |
1,560 |
|
$ |
187,357 |
|
Credit quality indicators as of March 31, 2011 are as follows:
Internally assigned grade:
Pass loans in this category have strong asset quality and liquidity along with a multi-year track record of profitability.
Special mention loans in this category are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.
Substandard loans in this category show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Commercial credit exposure - Credit risk profile by internally assigned grade
(dollars in thousands) |
|
Construction |
|
Commercial |
|
Commercial |
|
Total |
| ||||
Pass |
|
$ |
8,235 |
|
$ |
103,814 |
|
$ |
15,451 |
|
$ |
127,500 |
|
Special mention |
|
3,716 |
|
14,894 |
|
7,162 |
|
25,772 |
| ||||
Substandard |
|
1,941 |
|
12,280 |
|
3,095 |
|
17,316 |
| ||||
Total |
|
$ |
13,892 |
|
$ |
130,988 |
|
$ |
25,708 |
|
$ |
170,588 |
|
Consumer credit exposure - Credit risk profile by internally assigned grade
(dollars in thousands) |
|
Residential |
|
Consumer |
|
Total |
| |||
Pass |
|
$ |
30,240 |
|
$ |
1,489 |
|
$ |
31,729 |
|
Special mention |
|
3,788 |
|
91 |
|
3,879 |
| |||
Substandard |
|
1,570 |
|
|
|
1,570 |
| |||
Total |
|
$ |
35,598 |
|
$ |
1,580 |
|
$ |
37,178 |
|
Information on impaired loans for the three months ended March 31, 2011 is as follows:
(dollars in thousands) |
|
Recorded |
|
Unpaid |
|
Related |
|
Average |
|
Interest |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
With no allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Construction and land development |
|
$ |
1,833 |
|
$ |
1,833 |
|
$ |
|
|
$ |
1,936 |
|
$ |
41 |
|
Commercial real estate mortgage |
|
7,451 |
|
7,451 |
|
|
|
7,913 |
|
86 |
| |||||
Residential real estate mortgage |
|
1,049 |
|
1,049 |
|
|
|
707 |
|
|
| |||||
Commercial and industrial |
|
3,757 |
|
3,757 |
|
|
|
3,968 |
|
40 |
| |||||
Consumer |
|
20 |
|
20 |
|
|
|
10 |
|
|
| |||||
Total with no allowance |
|
$ |
14,110 |
|
$ |
14,110 |
|
$ |
|
|
$ |
14,534 |
|
$ |
167 |
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
| |||||
Construction and land development |
|
$ |
365 |
|
$ |
365 |
|
$ |
155 |
|
$ |
365 |
|
$ |
5 |
|
Commercial real estate mortgage |
|
5,003 |
|
5,003 |
|
1,213 |
|
4,870 |
|
77 |
| |||||
Residential real estate mortgage |
|
517 |
|
517 |
|
11 |
|
517 |
|
8 |
| |||||
Commercial and industrial |
|
414 |
|
414 |
|
206 |
|
414 |
|
6 |
| |||||
Total with an allowance |
|
$ |
6,299 |
|
$ |
6,299 |
|
$ |
1,585 |
|
$ |
6,166 |
|
$ |
96 |
|
Grand total: |
|
|
|
|
|
|
|
|
|
|
| |||||
Construction and land development |
|
$ |
2,198 |
|
$ |
2,198 |
|
$ |
155 |
|
$ |
2,301 |
|
$ |
46 |
|
Commercial real estate mortgage |
|
12,454 |
|
12,454 |
|
1,213 |
|
12,783 |
|
163 |
| |||||
Residential real estate mortgage |
|
1,566 |
|
1,566 |
|
11 |
|
1,224 |
|
8 |
| |||||
Commercial and industrial |
|
4,171 |
|
4,171 |
|
206 |
|
4,382 |
|
46 |
| |||||
Consumer |
|
20 |
|
20 |
|
|
|
10 |
|
|
| |||||
Grand total |
|
$ |
20,409 |
|
$ |
20,409 |
|
$ |
1,585 |
|
$ |
20,700 |
|
$ |
263 |
|
At March 31, 2011 and December 31, 2010, nonaccrual loans are $2.45 million and $2.20 million, respectively.
An age analysis of past due loans as of March 31, 2011 is as follows:
(dollars in thousands) |
|
30-59 |
|
60-89 Days |
|
Greater |
|
Total |
|
Current |
|
Total |
|
Greater than |
| |||||||
Construction and land development |
|
$ |
232 |
|
$ |
|
|
$ |
108 |
|
$ |
340 |
|
$ |
13,552 |
|
$ |
13,892 |
|
$ |
|
|
Commercial real estate mortgage |
|
1,919 |
|
2,179 |
|
2,167 |
|
6,265 |
|
124,723 |
|
130,988 |
|
|
| |||||||
Residential real estate mortgage |
|
305 |
|
|
|
|
|
305 |
|
35,293 |
|
35,598 |
|
|
| |||||||
Commercial and industrial |
|
34 |
|
|
|
178 |
|
212 |
|
25,496 |
|
25,708 |
|
|
| |||||||
Consumer |
|
22 |
|
|
|
|
|
22 |
|
1,558 |
|
1,580 |
|
|
| |||||||
Total |
|
$ |
2,512 |
|
$ |
2,179 |
|
$ |
2,453 |
|
$ |
7,144 |
|
$ |
200,622 |
|
$ |
207,766 |
|
$ |
|
|
The Companys charge-off policy states after all collection efforts have been exhausted and the loan is deemed to be a loss, it will be charged to the Companys established allowance for loan losses. Consumer loans subject to the Uniform Retail Credit Classification are charged-off as follows: (a) closed end loans are charged-off no later than 120 days after becoming delinquent; (b) consumer loans to borrowers who subsequently declare bankruptcy, where the Company is an unsecured creditor, are charged-off within 60 days of receipt of the notification from the bankruptcy court; (c) fraudulent loans are charged-off within 90 days of discovery; and (d) death of a borrower will cause a charge-off to be incurred at such time an actual loss is determined. All other types of loans are generally evaluated for loss potential at the 90th day past due threshold; and any loss is recognized no later than the 120th day past due threshold; each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.
The Company does not normally engage in partial charge-offs and has not incurred any in the three months ended March 31, 2011.
Note 6. Deposits
The following table provides a summary of the Companys deposit base at the dates indicated.
|
|
March 31, |
|
December 31, |
| ||
(dollars in thousands) |
|
2011 |
|
2010 |
| ||
Noninterest-bearing demand deposits |
|
$ |
42,549 |
|
$ |
41,244 |
|
Interest-bearing demand deposits: |
|
|
|
|
| ||
NOW accounts |
|
15,186 |
|
15,049 |
| ||
Money market accounts |
|
73,464 |
|
71,317 |
| ||
Savings accounts |
|
5,087 |
|
4,820 |
| ||
Certificates of deposit: |
|
|
|
|
| ||
$100,000 or more |
|
47,548 |
|
47,566 |
| ||
Less than $100,000 |
|
66,938 |
|
68,628 |
| ||
Total deposits |
|
$ |
250,772 |
|
$ |
248,624 |
|
Note 7. Trust preferred securities/junior subordinated debentures and other long-term borrowings:
In December 2006, Bancorp completed the private placement of an aggregate of $6.00 million of trust preferred securities through FCBI Statutory Trust I (the Trust), a newly formed trust subsidiary organized under Connecticut law, of which Bancorp owns all of the common securities of $186 thousand. The principal asset of the Trust is a similar amount of Bancorps junior subordinated debentures. The junior subordinated debentures bear interest at a fixed rate of 6.5375% until December 15, 2011, at which time the interest rate becomes a variable rate, adjusted quarterly, equal to 163 basis points over three-month LIBOR. The junior subordinated debentures mature on December 15, 2036, and may be redeemed at par, at Bancorps option, on any interest payment date commencing December 15, 2011. The securities are redeemable prior to December 15, 2011, at a premium ranging up to 103.525% of the principal amount thereof, upon the occurrence of certain regulatory or legal events. The obligations of Bancorp with respect to the Trusts preferred securities constitute a full and unconditional guarantee by Bancorp of Trusts obligations with respect to the trust preferred securities to the extent set forth in the related guarantee. Subject to certain exceptions and limitations, Bancorp may elect from time to time to defer interest payments on the junior subordinated debentures, resulting in a deferral of distribution payments on the related trust preferred securities. If the Company defers interest payments on the junior subordinated debentures, or otherwise is in default of the obligations, the Company would be prohibited from making dividend payments to its shareholders.
The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy purposes up to 25% of Tier 1 capital, net of goodwill after its inclusion. The portion of the trust preferred securities not qualifying as Tier 1 capital may be included as part of total qualifying capital in Tier 2 capital, subject to limitation.
At March 31, 2011 and December 31, 2010, the Company had a total of $10.00 million in borrowings under its credit facility from the Federal Home Loan Bank of Atlanta (FHLB). This amount consists of two (2) $5.00 million borrowings with fixed interest rates of 3.29% and 3.05%, with a maturity of November 19, 2015. Outstanding advances are secured by collateral consisting of a blanket lien on qualifying loans in the Banks residential mortgage loan portfolio and certain commercial real estate loans.
Note 8. Noninterest Expense:
Noninterest expense consists of the following:
|
|
Three Months Ended |
| ||||
(dollars in thousands) |
|
2011 |
|
2010 |
| ||
|
|
|
|
|
| ||
Salaries |
|
$ |
1,018 |
|
$ |
881 |
|
Deferred Personnel Costs |
|
(26 |
) |
(14 |
) | ||
Payroll Taxes |
|
88 |
|
78 |
| ||
Employee Insurance |
|
79 |
|
55 |
| ||
Other Employee Benefits |
|
63 |
|
77 |
| ||
Depreciation |
|
73 |
|
104 |
| ||
Rent |
|
115 |
|
104 |
| ||
Utilities |
|
27 |
|
27 |
| ||
Repairs and Maintenance |
|
60 |
|
57 |
| ||
ATM Expense |
|
22 |
|
24 |
| ||
Other Occupancy and Equipment Expenses |
|
44 |
|
35 |
| ||
Postage and Supplies |
|
20 |
|
15 |
| ||
Data Processing |
|
99 |
|
98 |
| ||
Advertising and Promotion |
|
70 |
|
70 |
| ||
FDIC insurance |
|
94 |
|
81 |
| ||
Legal |
|
20 |
|
10 |
| ||
Insurance |
|
21 |
|
14 |
| ||
Consulting |
|
10 |
|
5 |
| ||
Courier |
|
4 |
|
4 |
| ||
Audit Fees |
|
48 |
|
48 |
| ||
Other |
|
156 |
|
106 |
| ||
|
|
$ |
2,105 |
|
$ |
1,835 |
|
Note 9. 401(k) Profit Sharing Plan:
The Company has a Section 401(k) profit sharing plan covering employees meeting certain eligibility requirements as to minimum age and years of service. Employees may make voluntary contributions to the Plan through payroll deductions on a pre-tax basis. The Company has the discretion to make matching contributions of 100% of the employees contributions up to 4% of the employees salary. A participants account under the Plan, together with investment earnings thereon, is normally distributable, following retirement, death, disability or other termination of employment, in a single lump-sum payment.
The Company made matching contributions of $48 thousand and $42 thousand for the three months ended March 31, 2011 and 2010, respectively.
Note 10. Shareholders Equity:
Capital:
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Companys consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company, once it exceeds $500 million in assets, and the Bank must meet specific capital guidelines that involve quantitative measures of the Companys and the Banks assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Companys and the Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject as of March 31, 2011.
As of March 31, 2011, the most recent notification from the regulatory agency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification which management believes have changed the Banks category.
The Companys and the Banks actual capital amounts and ratios at March 31, 2011 and December 31, 2010 are presented in the following tables.
March 31, 2011 |
|
Actual |
|
For Capital |
|
Minimum To Be Well |
| |||||||||
(dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |||
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
To Risk-Weighted Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Company |
|
$ |
29,681 |
|
12.99 |
% |
$ |
9,136 |
|
4.00 |
% |
N/A |
|
N/A |
| |
Bank |
|
$ |
28,831 |
|
12.68 |
% |
$ |
9,097 |
|
4.00 |
% |
$ |
13,646 |
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Capital |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
To Risk-Weighted Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Company |
|
$ |
32,548 |
|
14.25 |
% |
$ |
18,273 |
|
8.00 |
% |
N/A |
|
N/A |
| |
Bank |
|
$ |
31,686 |
|
13.93 |
% |
$ |
18,195 |
|
8.00 |
% |
$ |
22,743 |
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
To Average Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Company |
|
$ |
29,681 |
|
10.37 |
% |
$ |
11,445 |
|
4.00 |
% |
N/A |
|
N/A |
| |
Bank |
|
$ |
28,831 |
|
10.11 |
% |
$ |
11,406 |
|
4.00 |
% |
$ |
14,258 |
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
Minimum To Be Well |
| |||||
|
|
|
|
|
|
|
|
|
|
Capitalized Under |
| |||||
|
|
|
|
|
|
For Capital |
|
Prompt Corrective |
| |||||||
December 31, 2010 |
|
Actual |
|
Adequacy Purposes |
|
Action Provisions |
| |||||||||
(dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |||
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
To Risk-Weighted Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Company |
|
$ |
29,226 |
|
12.86 |
% |
$ |
9,094 |
|
4.00 |
% |
N/A |
|
N/A |
| |
Bank |
|
$ |
28,430 |
|
12.56 |
% |
$ |
9,055 |
|
4.00 |
% |
$ |
13,582 |
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Capital |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
To Risk-Weighted Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Company |
|
$ |
32,079 |
|
14.11 |
% |
$ |
18,188 |
|
8.00 |
% |
N/A |
|
N/A |
| |
Bank |
|
$ |
31,271 |
|
13.81 |
% |
$ |
18,110 |
|
8.00 |
% |
$ |
22,637 |
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 Capital |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
To Average Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Company |
|
$ |
29,226 |
|
10.03 |
% |
$ |
11,652 |
|
4.00 |
% |
N/A |
|
N/A |
| |
Bank |
|
$ |
28,430 |
|
9.78 |
% |
$ |
11,625 |
|
4.00 |
% |
$ |
14,531 |
|
5.00 |
% |
On June 26, 2007, the Company authorized the repurchase of up to 146,000 shares of its common stock, for an aggregate expenditure of not more than $4.5 million, through September 30, 2012, or earlier termination of the program by the Board of Directors.
Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price, and to provide a source of liquidity for the Companys shares. As of March 31, 2011, there have been 12,968 shares repurchased by the Company at an average price of $12.88.
Note 11. Fair Value Measurements
The Company follows the guidance issued by the FASB under ASC Topic 825 Financial Instruments regarding fair value measurements and disclosures topic. This guidance permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a Company commitment. Subsequent changes must be recorded in earnings. The Company has yet to apply the fair value option to any assets or liabilities. This guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under this guidance, fair value measurements are not adjusted for transaction costs. This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance are described below.
Level 1 |
|
Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
|
|
|
Level 2 |
|
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
|
|
Level 3 |
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
A financial instruments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy. As required by fair value measurement and disclosures guidance, the Company does not adjust the quoted price for such instruments.
The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, less liquid mortgage products, less liquid equities, state, municipal and provincial obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, managements best estimate is used.
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on appraisal by qualified licensed appraisers hired by the Company. The value of business equipment, inventory and accounts receivable collateral is based on the net book value on the business financial statements and, if necessary, discounted based on managements review and analysis. Appraised and reported values may be discounted based on managements historical knowledge, changes in market conditions from the time of valuation, and/or managements expertise and knowledge of the client and clients business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
The following tables set forth the Companys financial assets and liabilities that were accounted for or disclosed at fair value on a recurring basis as of March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
Significant |
|
|
| ||||
|
|
Carrying |
|
|
|
Other |
|
Significant |
| ||||
|
|
Value |
|
Quoted |
|
Observable |
|
Unobservable |
| ||||
March 31, 2011 |
|
(Fair |
|
Prices |
|
Inputs |
|
Inputs |
| ||||
(dollars in thousands) |
|
Value) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Securities available for sale: |
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed debt |
|
$ |
22,612 |
|
$ |
|
|
$ |
22,612 |
|
$ |
|
|
State and political subdivisions |
|
13,963 |
|
|
|
13,963 |
|
|
| ||||
Equity securities |
|
300 |
|
|
|
300 |
|
|
| ||||
Total |
|
$ |
36,875 |
|
$ |
|
|
$ |
36,875 |
|
$ |
|
|
|
|
|
|
|
|
Significant |
|
|
| ||||
|
|
Carrying |
|
|
|
Other |
|
Significant |
| ||||
|
|
Value |
|
Quoted |
|
Observable |
|
Unobservable |
| ||||
December 31, 2010 |
|
(Fair |
|
Prices |
|
Inputs |
|
Inputs |
| ||||
(dollars in thousands) |
|
Value) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Securities available for sale: |
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed debt |
|
$ |
20,861 |
|
$ |
|
|
$ |
20,861 |
|
$ |
|
|
State and political subdivisions |
|
9,017 |
|
|
|
9,017 |
|
|
| ||||
Equity securities |
|
300 |
|
|
|
300 |
|
|
| ||||
Total |
|
$ |
30,178 |
|
$ |
|
|
$ |
30,178 |
|
$ |
|
|
The following tables set forth the Companys financial assets and liabilities that were accounted for or disclosed at fair value on a nonrecurring basis as of March 31, 2011 and December 31, 2010.
March 31, 2011 |
|
Carrying |
|
Quoted |
|
Significant |
|
Significant |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Foreclosed properties |
|
$ |
726 |
|
$ |
|
|
$ |
|
|
$ |
726 |
|
Impaired loans |
|
$ |
18,824 |
|
$ |
|
|
$ |
|
|
$ |
18,824 |
|
|
|
|
|
|
|
Significant |
|
|
| ||||
|
|
Carrying |
|
|
|
Other |
|
Significant |
| ||||
|
|
Value |
|
Quoted |
|
Observable |
|
Unobservable |
| ||||
December 31, 2010 |
|
(Fair |
|
Prices |
|
Inputs |
|
Inputs |
| ||||
(dollars in thousands) |
|
Value) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Foreclosed properties |
|
$ |
726 |
|
$ |
|
|
$ |
|
|
$ |
726 |
|
Impaired loans |
|
$ |
19,744 |
|
$ |
|
|
$ |
|
|
$ |
19,744 |
|
The following tables provide a reconciliation of all assets measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2011 and 2010.
(dollars in thousands) |
|
Foreclosed |
|
Impaired |
| ||
Balance at December 31, 2010 |
|
$ |
726 |
|
$ |
19,744 |
|
Total net gains (losses) for the period included in: |
|
|
|
|
| ||
Gain on sale of foreclosed properties |
|
|
|
|
| ||
Other comprehensive gain (loss) |
|
|
|
|
| ||
Purchases |
|
|
|
|
| ||
Sales |
|
|
|
|
| ||
Transfers in |
|
|
|
268 |
| ||
Transfers out |
|
|
|
(1,188 |
) | ||
Balance at March 31, 2011 |
|
$ |
726 |
|
$ |
18,824 |
|
(dollars in thousands) |
|
Foreclosed |
|
Impaired |
| ||
Balance at December 31, 2009 |
|
$ |
495 |
|
$ |
12,950 |
|
Total net gains (losses) for the period included in: |
|
|
|
|
| ||
Gain on sale of foreclosed properties |
|
|
|
|
| ||
Other comprehensive gain (loss) |
|
|
|
|
| ||
Purchases |
|
|
|
|
| ||
Sales |
|
|
|
|
| ||
Transfers in |
|
|
|
242 |
| ||
Transfers out |
|
|
|
(379 |
) | ||
Balance at March 31, 2010 |
|
$ |
495 |
|
$ |
12,213 |
|
Note 12. Fair Value of Financial Instruments
The estimated fair values of the Companys financial instruments are as follows:
|
|
March 31, 2011 |
|
December 31, 2010 |
| ||||||||
(dollars in thousands) |
|
Carrying |
|
Fair Value |
|
Carrying |
|
Fair Value |
| ||||
FINANCIAL ASSETS |
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
|
$ |
39,037 |
|
$ |
39,037 |
|
$ |
42,065 |
|
$ |
42,065 |
|
Investment securities available for sale |
|
36,875 |
|
36,875 |
|
30,178 |
|
30,178 |
| ||||
Restricted stock |
|
1,521 |
|
1,521 |
|
1,521 |
|
1,521 |
| ||||
Net loans |
|
203,924 |
|
202,111 |
|
205,669 |
|
205,878 |
| ||||
Accrued interest receivable |
|
950 |
|
950 |
|
850 |
|
850 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
FINANCIAL LIABILITIES |
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
$ |
250,772 |
|
$ |
259,614 |
|
$ |
248,624 |
|
$ |
257,805 |
|
Short-term borrowings |
|
300 |
|
300 |
|
300 |
|
300 |
| ||||
Long-term borrowings |
|
10,000 |
|
10,348 |
|
10,000 |
|
10,438 |
| ||||
Junior subordinated debentures |
|
6,186 |
|
6,083 |
|
6,186 |
|
6,058 |
| ||||
Accrued interest payable |
|
138 |
|
138 |
|
140 |
|
140 |
|
The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of March 31, 2011 and December 31, 2010:
Cash and cash equivalents:
The fair value of cash and cash equivalents is estimated to approximate the carrying amounts.
Investment securities and restricted stock:
Fair values are based on quoted market prices for Level 1 and 2, except for certain restricted stocks where fair value equals par value because of certain redemption restrictions.
Loans:
Fair values are estimated for portfolios of loans with similar financial characteristics. Each portfolio is further segmented into fixed and adjustable rate interest terms by performing and non-performing categories.
The fair value of performing loans is calculated by discounting estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated cash flows do not anticipate prepayments.
Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented for loans would be indicative of the value negotiated in an actual sale.
Deposits:
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
Short-term borrowings:
The fair value of short-term borrowings is determined using rates currently available to the Company for debt with similar terms and remaining maturities.
Long-term borrowings:
The fair value of the long-term borrowings is determined using rates currently available to the Company for debt with similar terms and remaining maturities.
Junior subordinated debentures:
The junior subordinated debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the junior subordinated debentures and the declaration of trust governing the Trust provides a full and unconditional guarantee of the Trusts preferred securities. The fair value of junior subordinated debentures is determined using rates currently available to the Company for debt with similar terms and remaining maturities. See Note 7 for additional disclosures.
Accrued Interest:
The carrying amounts of accrued interest approximate fair value.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This managements discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to Frederick County Bancorp, Inc.s (Bancorp) and Frederick County Banks (the Bank and together with Bancorp, the Company) beliefs, expectations, anticipations and plans regarding, among other
things, general economic trends, interest rates, product expansions and other matters. Such forward-looking statements are identified by terminology such as may, will, believe, expect, estimate, anticipate, likely, unlikely, continue, or similar terms and are subject to numerous uncertainties, such as federal monetary policy, inflation, employment, profitability and consumer confidence levels, both nationally and in the Companys market area, the health of the real estate and construction market in the Companys market area, the Companys ability to develop and market new products and to enter new markets, competitive challenges in the Companys market, legislative and regulatory changes, changes in accounting principles or the application thereof and other factors, and as such, there can be no assurance that future events will develop in accordance with the forward-looking statements contained herein. Readers are cautioned against placing undue reliance on any such forward-looking statement. In addition, the Companys past results of operations do not necessarily indicate its future results.
General
The following paragraphs provide an overview of the financial condition and results of operations of the Company. This discussion is intended to assist the readers in their analysis of the accompanying financial statements and notes thereto.
Bancorp, the parent company for the Bank, its wholly-owned subsidiary, was organized in September 2003. The Bank was incorporated under the laws of the state of Maryland in August 2000 and commenced banking operations in October 2001. The Bank provides its customers with various banking services, from three banking offices in the City of Frederick and one in Walkersville, Maryland. The Bank is currently planning to establish a fifth banking office located in the City of Frederick, which has received federal and state banking regulatory approvals and is in the process of obtaining the construction permits, and is expected to open in the fourth quarter of 2011. The Bank offers various loan and deposit products to its customers. The Banks customers include individuals and commercial enterprises within its principal market area consisting of Frederick County, Maryland. Additionally, the Bank maintains correspondent banking relationships and transacts daily federal funds sales on an unsecured basis with regional correspondent banks. Note 4 discusses the types of securities the Bank purchases. Note 5 discusses the types of lending in which the Bank engages. The Bank does not have any significant concentrations to any one industry or customer. Bancorp also has a subsidiary trust, established to issue trust preferred securities, and two subsidiaries established to hold foreclosed properties. The two subsidiaries established to hold foreclosed properties are known as FCB Holdings, Inc. (a direct subsidiary of Bancorp) and FCB Hagerstown, LLC (an indirect subsidiary of Bancorp). See Note 7 for additional disclosures related to the subsidiary trust, which issued trust preferred securities.
Critical Accounting Policies
The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and follow general practices within the industry in which it operates. 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. The estimates used in managements assessment of the adequacy of the allowance for loan losses require that management make assumptions about matters that are uncertain at the time of estimation. Differences in these assumptions and differences between the estimated and actual losses could have a material effect. For discussions related to the critical accounting policies of the Company, refer to the sections in this Managements Discussion and Analysis entitled Income Taxes, Allowance for Loan Losses and Investment Portfolio.
Loans
Loans decreased by $1.62 million, or 0.77%, from December 31, 2010, to a balance of $207.77 million as of March 31, 2011 and by $6.82 million, or 3.18% from March 31, 2010. Management continues to be cautious about the economy and therefore has maintained the lower growth loan strategy.
Deposits
Deposits increased by $2.15 million, or 0.86%, from December 31, 2010 to a balance of $250.77 million as of March 31, 2011, and by $8.64 million, or 3.57% from March 31, 2010. The balance of certificates of deposit decreased to $114.49 million as of March 31, 2011 from $116.19 million as of December 31, 2010; while noninterest-bearing demand deposits increased by $1.31 million from $41.24 million, NOW and savings accounts increased to $20.27 million from $19.87 million, and money market accounts increased to
$73.46 million from $71.32 million, all for the same periods. As a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) banks are no longer prohibited from paying interest on demand deposit accounts, including those from businesses, effective in July 2011. It is not clear what affect the elimination of this prohibition will have on the Banks interest expense, allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability.
Three Months Ended March 31, 2011 and 2010
Net income was $336 thousand for the three months ended March 31, 2011, as compared to $308 thousand of net income for the same period in 2010. The increase in earnings for this quarter in 2011 is primarily related to an increase in net interest income of $63 thousand, a reduction in the provision for loan losses of $285 thousand and an increase in noninterest expenses of $270 thousand primarily reflecting higher salary and compensation expense. Net interest income for the quarter ended March 31, 2011 increased (on a tax-equivalent basis) to $2.68 million from $2.61 million for the same period in 2010. Basic earnings per share for the three months ended March 31, 2011 and 2010 were $0.23 and $0.21, respectively, and were based on weighted-average number of shares outstanding of 1,473,508 and 1,461,802, respectively. Diluted earnings per share for the three months ended March 31, 2011 and 2010 were $0.22 and $0.21, respectively, and were based on weighted-average number of shares outstanding of 1,499,219 and 1,468,896, respectively.
The Company experienced an annualized return on average assets of 0.47% for both of the three-month periods ended March 31, 2011 and 2010. Additionally, the Company experienced an annualized return on average shareholders equity of 5.70% and 5.55% for the three-month periods ended March 31, 2011 and 2010, respectively.
Distribution of Assets, Liabilities and Shareholders Equity; Interest Rates and Interest Differential
The following tables show average balances of asset and liability categories, interest income and interest expense, and average yields and rates for the periods indicated.
|
|
2011 |
|
2010 |
| ||||||||||||
Three Months Ended March 31, |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal funds sold |
|
$ |
1,125 |
|
$ |
|
|
|
% |
$ |
1,086 |
|
$ |
|
|
|
% |
Interest bearing deposits in other banks |
|
36,002 |
|
22 |
|
0.25 |
|
15,500 |
|
8 |
|
0.21 |
| ||||
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Taxable |
|
25,295 |
|
172 |
|
2.76 |
|
17,777 |
|
127 |
|
2.90 |
| ||||
Tax-exempt (2) |
|
8,745 |
|
130 |
|
6.03 |
|
7,845 |
|
121 |
|
6.26 |
| ||||
Loans (3) |
|
207,149 |
|
3,160 |
|
6.19 |
|
214,714 |
|
3,322 |
|
6.27 |
| ||||
Total interest-earning assets |
|
278,316 |
|
3,484 |
|
5.08 |
|
256,922 |
|
3,578 |
|
5.65 |
| ||||
Noninterest-earning assets |
|
7,802 |
|
|
|
|
|
7,267 |
|
|
|
|
| ||||
Total assets |
|
$ |
286,118 |
|
|
|
|
|
$ |
264,189 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
NOW accounts |
|
$ |
14,114 |
|
$ |
10 |
|
0.29 |
% |
$ |
12,359 |
|
$ |
5 |
|
0.16 |
% |
Savings accounts |
|
4,836 |
|
1 |
|
0.08 |
|
4,874 |
|
1 |
|
0.08 |
| ||||
Money market accounts |
|
72,436 |
|
144 |
|
0.81 |
|
58,143 |
|
166 |
|
1.16 |
| ||||
Certificates of deposit $100,000 or more |
|
46,977 |
|
196 |
|
1.69 |
|
43,195 |
|
231 |
|
2.17 |
| ||||
Certificates of deposit less than $100,000 |
|
67,835 |
|
272 |
|
1.63 |
|
67,689 |
|
343 |
|
2.06 |
| ||||
Short-term borrowings |
|
300 |
|
4 |
|
5.41 |
|
500 |
|
5 |
|
4.06 |
| ||||
Long-term borrowings |
|
10,000 |
|
79 |
|
3.20 |
|
10,000 |
|
114 |
|
4.62 |
| ||||
Junior subordinated debentures |
|
6,186 |
|
101 |
|
6.62 |
|
6,186 |
|
101 |
|
6.62 |
| ||||
Total interest-bearing liabilities |
|
222,684 |
|
807 |
|
1.47 |
|
202,946 |
|
966 |
|
1.93 |
| ||||
Noninterest-bearing deposits |
|
39,181 |
|
|
|
|
|
38,353 |
|
|
|
|
| ||||
Noninterest-bearing liabilities |
|
685 |
|
|
|
|
|
706 |
|
|
|
|
| ||||
Total liabilities |
|
262,550 |
|
|
|
|
|
242,005 |
|
|
|
|
| ||||
Total shareholders equity |
|
23,568 |
|
|
|
|
|
22,184 |
|
|
|
|
| ||||
Total liabilities and shareholders equity |
|
$ |
286,118 |
|
|
|
|
|
$ |
264,189 |
|
|
|
|
| ||
Net interest income |
|
|
|
$ |
2,677 |
|
|
|
|
|
$ |
2,612 |
|
|
| ||
Net interest spread |
|
|
|
|
|
3.61 |
% |
|
|
|
|
3.72 |
% | ||||
Net interest margin |
|
|
|
|
|
3.90 |
% |
|
|
|
|
4.12 |
% |
(1) Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which is reflected as a component of shareholders equity.
(2) Presented on a taxable-equivalent basis using the statutory federal income tax rate of 34%. Taxable-equivalent adjustments of $44 thousand in 2011 and $41 thousand in 2010 are included in the calculation of the tax-exempt investment interest income.
(3) Presented on a taxable-equivalent basis using the statutory federal income tax rate of 34%. Taxable-equivalent adjustments of $32 thousand in 2011 and $33 thousand in 2010 are included in the calculation of the loan interest income. Net loan origination income (expense) in interest income totaled $13 thousand in 2011 and 2010.
Rate/Volume Analysis
The following table indicates the changes in interest income and interest expense that are attributable to changes in average volume and average rates, in comparison with the same period in the preceding year on a fully taxable equivalent basis. The change in interest due to the combined rate-volume variance has been allocated entirely to the change in rate.
|
|
Three Months Ended March 31, |
| |||||||
|
|
Increase (decrease) |
|
Net |
| |||||
(dollars in thousands) |
|
Volume |
|
Rate |
|
(decrease) |
| |||
Interest income |
|
|
|
|
|
|
| |||
Interest-earning assets: |
|
|
|
|
|
|
| |||
Interest-bearing deposits in other banks |
|
$ |
11 |
|
$ |
3 |
|
$ |
14 |
|
Investment securities: |
|
|
|
|
|
|
| |||
Taxable |
|
54 |
|
(9 |
) |
45 |
| |||
Tax-exempt |
|
14 |
|
(5 |
) |
9 |
| |||
Loans |
|
(119 |
) |
(43 |
) |
(162 |
) | |||
Total interest income |
|
(40 |
) |
(54 |
) |
(94 |
) | |||
|
|
|
|
|
|
|
| |||
Interest expense |
|
|
|
|
|
|
| |||
Interest-bearing liabilities: |
|
|
|
|
|
|
| |||
NOW accounts |
|
|
|
5 |
|
5 |
| |||
Money market accounts |
|
41 |
|
(63 |
) |
(22 |
) | |||
Certificates of deposit $100,000 or more |
|
21 |
|
(56 |
) |
(35 |
) | |||
Certificates of deposit less than $100,000 |
|
1 |
|
(72 |
) |
(71 |
) | |||
Short-term borrowings |
|
(2 |
) |
1 |
|
(1 |
) | |||
Long-term borrowings |
|
|
|
(35 |
) |
(35 |
) | |||
Total interest expense |
|
61 |
|
(220 |
) |
(159 |
) | |||
Net interest income |
|
$ |
(101 |
) |
$ |
166 |
|
$ |
65 |
|
Net Interest Income
Net interest income is generated from the Companys lending and investment activities, and is the most significant component of the Companys earnings. Net interest income is the difference between interest and rate-related fee income on earning assets (primarily loans and investment securities) and the interest paid on the funds (primarily deposits) supporting them. The Company primarily utilizes deposits to fund loans and investments, with a small amount of additional funding from junior subordinated debentures and minimal short-term and long-term borrowings. In future periods, the Company may utilize a higher level of short-term and long-term borrowings, including borrowings from the Federal Home Loan Bank, federal funds lines with correspondent banks and repurchase agreements, to fund operations, depending on economic conditions, deposit availability and pricing, interest rates and other factors.
Three Months Ended March 31, 2011 and 2010
Net interest income (on a taxable-equivalent basis) was $2.68 million in 2011 and $2.61 million in 2010. The change in net interest income was primarily driven by lower rates paid on certificates of deposit, money market accounts and long-term borrowings, and an improvement in the volume of investment securities, which was partially offset by a lower volume of loans. Average earning assets increased by $21.39 million, or 8.33%, since March 31, 2010. The yield on earning assets in 2011 decreased by 57 basis points to 5.08% from 5.65% in 2010. The decrease of 46 basis points in the rate paid on interest-bearing liabilities primarily is the result of the lower rates paid certificates of deposit. The Companys net interest margin was 3.90% and 4.12%, and the net interest spread was 3.61% and 3.72%, for the three-month periods ended March 31, 2011 and 2010, respectively.
Interest expense decreased 16.46% from $966 thousand in 2010 to $807 thousand in 2011 due to the reduced rates paid on interest-bearing liabilities, which decreased to 1.47% in 2011 from 1.93% in 2010 primarily as a result in declines in rates on certificates of deposit. The net interest margin is not expected to improve substantially through the re-pricing of the certificates of deposit portfolio since the majority are priced at current market interest rates.
Noninterest Income
Noninterest income was $130 thousand in 2011 and $137 thousand in 2010 for the respective quarters ended March 31. Gains on sale of securities were $3 thousand in 2011 and none were realized in the same quarter in 2010.
Noninterest Expense
Noninterest expense amounted to $2.11 million and $1.84 million for the three-month periods ended March 31, 2011 and 2010, respectively. The primary increase in noninterest expense in 2011 compared to 2010 relates to increases in salaries of $137 thousand, which includes $47 thousand of stock option compensation expense in 2011, and an increase in FDIC insurance premiums of $13 thousand, reflecting an increase in deposit levels.
Income Taxes
During the three months ended March 31, 2011, the Company recognized income tax expense of $175 thousand compared to $132 thousand during the same period in 2010. The effective tax rates for the three-month periods in 2011 and 2010 were 34.25% and 30.00%, respectively. The increase in income tax expense in 2011 is due to the of the higher pre-tax income and the impact of the $47 thousand of stock option compensation expense with the associated tax benefit of $24 thousand being recorded as additional paid in capital and not used to reduce the current periods income tax expense.
Market Risk, Liquidity and Interest Rate Sensitivity
Asset/liability management involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities. It also involves providing adequate liquidity while sustaining stable growth in net interest income. Regular review and analysis of deposit and loan trends, cash flows in various categories of loans, and monitoring of interest spread relationships are vital to this process.
The conduct of our banking business requires that we maintain adequate liquidity to meet changes in the composition and volume of assets and liabilities due to seasonal, cyclical or other reasons. Liquidity describes the ability of the Company to meet financial obligations that arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the customers of the Company, as well as for meeting current and future planned expenditures. This liquidity is typically provided by the funds received through customer deposits, investment maturities, loan repayments, borrowings, and income. Management considers the current liquidity position to be adequate to meet the needs of the Company and its customers.
The Company seeks to limit the risks associated with interest rate fluctuations by managing the balance between interest sensitive assets and liabilities. Managing to mitigate interest rate risk is, however, not an exact science. Not only does the interval until repricing of interest rates on assets and liabilities change from day to day as the assets and liabilities change, but for some assets and liabilities, contractual maturity and the actual maturity experienced are not the same. Similarly, NOW and money market accounts, by contract, may be withdrawn in their entirety upon demand and savings deposits may be withdrawn on seven days notice. While these contracts are extremely short, it is the Companys belief that these accounts turn over at the rate of five percent (5%) per year. The Company therefore treats them as having maturities staggered over all periods. If all of the Companys NOW, money market, and savings accounts were treated as repricing in one year or less, the cumulative gap at one year or less would be $(50.58) million.
Interest rate sensitivity is an important factor in the management of the composition and maturity configurations of the Companys earning assets and funding sources. An Asset/Liability Committee manages the interest rate sensitivity position in order to maintain an appropriate balance between the maturity and repricing characteristics of assets and liabilities that is consistent with the Companys liquidity analysis, growth, and capital adequacy goals. It is the objective of the Asset/Liability Committee to maximize net interest margins during periods of both volatile and stable interest rates, to attain earnings growth, and to maintain sufficient liquidity to satisfy depositors requirements and meet credit needs of customers.
The table below, Interest Rate Sensitivity Gap Analysis, summarizes, as of March 31, 2011, the anticipated maturities or repricing of the Companys interest-earning assets and interest-bearing liabilities, the Companys interest rate sensitivity gap (interest-earning assets less interest-bearing liabilities), the Companys cumulative interest rate sensitivity gap, and the Companys cumulative interest sensitivity gap ratio (cumulative interest rate sensitivity gap divided by total assets). A negative gap for any time period means that more interest-bearing liabilities will reprice or mature during that time period than interest-earning assets. During periods of rising interest rates, a negative gap position would generally decrease earnings, and during periods of declining interest rates, a negative gap position would generally increase earnings. The converse would be true for a positive gap position. Therefore, a positive gap for any time period means that more interest-earning assets will reprice or mature during that time period than interest-bearing liabilities. During periods of rising interest rates, a positive gap position would generally increase earnings, and during periods of declining interest rates, a positive gap position would generally decrease earnings.
It is important to note that the following table represents the static gap position for interest sensitive assets and liabilities at March 31, 2011. The table does not give effect to prepayments or extensions of loans as a result of changes in general market interest rates. Moreover, while the table does indicate the opportunities to reprice assets and liabilities within certain time frames, it does not account for timing differences that occur during periods of repricing. For example, changes to deposit rates tend to lag in a rising rate environment and lead in a falling rate environment, although this will not always be the case. Nor does it account for the effects of competition on pricing of deposits and loans. For example, under current market conditions, market rates paid on deposits may not be able to adjust by the full amount of downward adjustments in the federal funds target rate, while rates on loans will tend to adjust by the full amount, subject to certain limitations. In response to the weak economic climate, the Company has maintained a higher level of liquidity over the past year, mostly in interest-bearing deposits in other banks with the majority being held at the Federal Reserve.
Interest Rate Sensitivity Gap Analysis
March 31, 2011
|
|
Expected Repricing or Maturity Date |
| |||||||||||||
(dollars in thousands) |
|
Within |
|
One to |
|
Three to |
|
After |
|
Total |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Federal funds sold |
|
$ |
1,304 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1,304 |
|
Interest-bearing deposits in other banks |
|
36,269 |
|
|
|
|
|
|
|
36,269 |
| |||||
Investment securities(1) |
|
96 |
|
6,511 |
|
152,596 |
|
17,372 |
|
36,575 |
| |||||
Loans |
|
90,472 |
|
78,930 |
|
28,176 |
|
10,188 |
|
207,766 |
| |||||
Total interest-earning assets |
|
120,008 |
|
95,072 |
|
38,441 |
|
35,096 |
|
288,617 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Savings and NOW accounts |
|
1,014 |
|
2,027 |
|
2,207 |
|
15,205 |
|
20,273 |
| |||||
Money Market accounts |
|
3,673 |
|
7,346 |
|
7,347 |
|
55,098 |
|
73,464 |
| |||||
Certificates of deposit |
|
78,501 |
|
17,041 |
|
18,944 |
|
|
|
114,486 |
| |||||
Short-term borrowings |
|
300 |
|
|
|
|
|
|
|
300 |
| |||||
Long-term borrowings |
|
|
|
|
|
10,000 |
|
|
|
10,000 |
| |||||
Junior subordinated debentures |
|
6,186 |
|
|
|
|
|
|
|
6,186 |
| |||||
Total interest-bearing liabilities |
|
89,674 |
|
26,414 |
|
38,318 |
|
70,303 |
|
224,709 |
| |||||
Interest rate sensitivity gap |
|
$ |
38,467 |
|
$ |
59,027 |
|
$ |
2,454 |
|
$ |
(42,743 |
) |
$ |
57,205 |
|
Cumulative interest rate sensitivity gap |
|
$ |
38,467 |
|
$ |
97,494 |
|
$ |
99,948 |
|
$ |
57,205 |
|
|
| |
Cumulative gap ratio as a percentage of total assets |
|
13.19 |
% |
33.42 |
% |
34.26 |
% |
19.61 |
% |
|
|
(1) Excludes equity securities.
In addition to the Interest Rate Sensitivity Gap Analysis, the Company also uses an earnings simulation model on a quarterly basis to closely monitor interest sensitivity and to expose its balance sheet and income statement to different scenarios. The model is based on current Company data and adjusted by assumptions as to growth patterns, noninterest income and noninterest expense and interest rate sensitivity, based on historical data, for both assets and liabilities projected for a one-year period. The model is then subjected to a shock test assuming a sudden prime interest rate increase of 200 basis points or a decrease of 200 basis points, but not below zero. The results show that with a 200 basis point rise in the prime interest rate the Companys net interest income would increase by 1.63%. However, a decrease in the prime interest rate of 200 basis points was not considered to be feasible since this would infer that the federal funds interest rate would fall below zero.
Certain shortcomings are inherent in this method of analysis. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.
Critical Accounting Policy:
Allowance for Loan Losses
The Company makes provisions for loan losses in amounts deemed necessary to maintain the allowance for loan losses at an appropriate level. The Companys provision for loan losses for the three months ended March 31, 2011 and 2010 was $115 thousand and $400 thousand, respectively. The provision for loan losses is determined based upon Managements estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the Companys loan portfolio. At March 31, 2011 and December 31, 2010, the allowance for loan losses was $3.84 million and $3.72 million, respectively. The change in the allowance from December 31, 2010 reflects the provision of $115 thousand less net recoveries of $9 thousand, consisting of $1 thousand in charge-offs and $10 thousand in recoveries, as compared to a provision of $400 thousand less net charge-offs of $500 thousand, consisting of $500 thousand in charge-offs and no recoveries in the same period of 2010. The $1 thousand of charge-offs in 2011 is a result of one (1) consumer relationship, as compared to the $500 thousand of charge-offs in 2010, which consisted of one (1) commercial real estate relationship and the difference in the provision for the comparable periods is due to a lower level of charge-offs and lower loan growth in 2011.
The Company prepares a quarterly analysis of the allowance for loan losses, with the objective of quantifying portfolio risk into a dollar amount of inherent losses. The determination of the allowance for loan losses is based on eight qualitative factors and one quantitative factor for each category and type of loan along with any specific allowance for adversely classified loans within each category. Each factor is assigned a percentage weight and that total weight is applied to each loan category. Factors are different for each category. Qualitative factors include: levels and trends in delinquencies and nonaccrual loans; 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; concentrations of credit; quality of the Companys loan review system; and regulatory requirements. The total allowance required thus changes as the percentage weight assigned to each factor increased or decreased due to the particular circumstances, as the various types and categories of loans change as a percentage of total loans and as specific allowances are required due to increases in adversely classified loans.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. The allowance is based on two basic principles of accounting: (i) Accounting Standards Codification (ASC) Contingencies Topic, which requires that losses be accrued when they are probable of occurring and estimable; and (ii) ASC Receivables Topic, which requires that losses be accrued based on the differences between the loan balance and either the value of collateral, or the present value of future cash flows, or the loans value as observable in the secondary market. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are any loans that have been classified by internal measurements as substandard or worse. Factors considered by Management in determining impairment include payment status, collateral value, and the projected potential cash flow of the borrower. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and borrower, including the length of the delay, the reason for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The provision for loan losses included in the statements of operations serves to maintain the allowance at a level Management considers adequate.
The Companys allowance for loan losses has three basic components: the specific allowance, the formula allowance and the pooled allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. As a result of the uncertainties inherent in the estimation process, Managements estimate of loan losses and the related allowance could change in the near term.
The specific allowance component is used to individually establish an allowance for loans identified as impaired. When impairment is identified, a specific reserve may be established based on the Companys calculation of the estimated loss embedded in the individual loan. Impaired loans are any loans that have been classified by internal measurements as substandard or worse. Impairment testing includes consideration of the borrowers overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment.
The formula allowance component is used for estimating the loss on internally risk rated loans meeting the Companys internal criteria for classification as special mention are segregated from performing loans within the portfolio. These internally classified loans are then grouped by loan type (commercial, commercial real estate, commercial construction, residential real estate, residential construction or installment). Each loan type is assigned an allowance factor based on Managements estimate of the associated risk, complexity and size of the individual loans within the particular loan category. Classified loans are assigned a higher allowance factor than non-classified loans due to Managements concerns regarding collectability or Managements knowledge of particular elements surrounding the borrower. Allowance factors increase with the worsening of the internal risk rating.
The pooled formula component is used to estimate the losses inherent in the pools of non-classified loans. These loans are then also segregated by loan type and allowance factors are assigned by Management based on delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of Management, national and local economic trends, concentrations of credit, quality of loan review system and the effect of external factors (i.e. competition and regulatory requirements). The allowance factors assigned differ by loan type.
Allowance factors and overall size of the allowance may change from period to period based on Managements assessment of the above-described factors and the relative weights given to each factor. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination.
Management believes that the allowance for loan losses is adequate at March 31, 2011. There can be no assurance, however, that additional provisions for loan losses will not be required in the future, including as a result of changes in the economic assumptions underlying Managements estimates and judgments, adverse developments in the economy, on a national basis or in the Companys market area, or changes in the circumstances of particular borrowers.
As of March 31, 2011 and December 31, 2010, the real estate loan portfolio constituted 87% of the total loan portfolio. While this exceeds the 10% threshold for determining a concentration of credit risk within an industry, we do not consider this to be a concentration with adverse risk characteristics given the diversity of borrowers within the real estate portfolio and other sources of repayment. An industry for this purpose is defined as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Additionally, the loan portfolio does not include concentrations of credit risk in residential loan products that permit the deferral of principal payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; or loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates. However, the Company does have interest only home equity lines of credit with outstanding balances of $8.95 million of at March 31, 2011.
|
|
Three Months Ended |
| ||||
(dollars in thousands) |
|
March 31, |
|
March 31, |
| ||
Average total loans outstanding during period |
|
$ |
207,149 |
|
$ |
214,714 |
|
Balance at beginning of period |
|
$ |
3,718 |
|
$ |
3,127 |
|
Recoveries commercial and industrial |
|
10 |
|
|
| ||
Total recoveries |
|
10 |
|
|
| ||
Charge-offs construction and land development |
|
(1 |
) |
|
| ||
Charge-offs - commercial real estate mortgage |
|
|
|
(500 |
) | ||
Total charge-offs |
|
(1 |
) |
(500 |
) | ||
Net recoveries (charge-offs) |
|
9 |
|
(500 |
) | ||
Provision charged to operating expenses |
|
115 |
|
400 |
| ||
Balance at end of period |
|
$ |
3,842 |
|
$ |
3,027 |
|
Ratios of net charge-offs to average loans |
|
0.00 |
% |
0.23 |
% |
The allocation of the allowance, presented in the following table, is based primarily on the factors discussed above in evaluating the adequacy of the allowance as a whole. Since all of those factors are subject to change, the allocation is not necessarily indicative of the category of recognized loan losses, and does not restrict the use of the allowance to absorb losses in any category.
Allocation of Allowance for Loan Losses |
|
March 31, |
|
December 31, |
| ||||||
|
2011 |
|
% of |
|
2010 |
|
% of |
| |||
Construction and land development |
|
$ |
209 |
|
7 |
% |
$ |
273 |
|
8 |
% |
Real estate - mortgage loans: |
|
|
|
|
|
|
|
|
| ||
Commercial real estate mortgage |
|
2,789 |
|
63 |
% |
2,546 |
|
61 |
% | ||
Residential real estate mortgage |
|
356 |
|
17 |
% |
432 |
|
18 |
% | ||
Total mortgage loans |
|
3,145 |
|
80 |
% |
2,978 |
|
79 |
% | ||
Commercial and industrial |
|
479 |
|
12 |
% |
455 |
|
12 |
% | ||
Consumer |
|
9 |
|
1 |
% |
12 |
|
1 |
% | ||
|
|
$ |
3,842 |
|
100 |
% |
$ |
3,718 |
|
100 |
% |
|
|
March 31, |
|
December 31, |
| ||
(dollars in thousands) |
|
2011 |
|
2010 |
| ||
Nonaccrual loans: |
|
|
|
|
| ||
Construction and land development |
|
$ |
108 |
|
$ |
111 |
|
Commercial real estate mortgage |
|
2,167 |
|
1,913 |
| ||
Commercial and industrial |
|
178 |
|
178 |
| ||
Total nonaccrual loans |
|
2,453 |
|
2,202 |
| ||
Loans 90 days past due and still accruing |
|
|
|
|
| ||
Total nonperforming loans |
|
2,453 |
|
2,202 |
| ||
Foreclosure properties |
|
726 |
|
726 |
| ||
Total nonperforming assets |
|
$ |
3,179 |
|
$ |
2,928 |
|
Nonperforming assets to total assets |
|
1.09 |
% |
1.01 |
% |
There were no other interest-bearing assets at March 31, 2011 or December 31, 2010 classified as past due 90 days or more and still accruing, problem assets, and no non-impaired loans which were currently performing in accordance with their terms, but as to which information known to Management caused it to have serious doubts about the ability of the borrower to comply with the loan as currently written.
Information concerning the Companys recorded investment in impaired loans is as follows:
|
|
March 31, |
|
December 31, |
| |||
(dollars in thousands) |
|
2011 |
|
2010 |
| |||
Impaired loans with no allowance: |
|
|
|
|
| |||
Construction and land development |
|
$ |
|
1,833 |
|
$ |
2,038 |
|
Commercial real estate mortgage |
|
7,451 |
|
8,374 |
| |||
Residential real estate mortgage |
|
1,049 |
|
364 |
| |||
Commercial and industrial |
|
3,757 |
|
4,179 |
| |||
Consumer |
|
20 |
|
|
| |||
Total impaired loans with no allowance |
|
$ |
|
14,110 |
|
$ |
14,955 |
|
|
|
|
|
|
| |||
Impaired loans with allowance: |
|
|
|
|
| |||
Construction and land development |
|
$ |
|
365 |
|
$ |
365 |
|
Commercial real estate mortgage |
|
5,003 |
|
4,737 |
| |||
Residential real estate mortgage |
|
517 |
|
517 |
| |||
Commercial and industrial |
|
414 |
|
414 |
| |||
Total impaired loans with allowance |
|
$ |
|
6,299 |
|
$ |
6,033 |
|
Specific allocation of allowance |
|
$ |
|
1,585 |
|
$ |
1,244 |
|
|
|
March 31, |
|
December 31, |
| ||
(dollars in thousands) |
|
2011 |
|
2010 |
| ||
Impaired performing loans: |
|
|
|
|
| ||
Construction and land development |
|
$ |
2,090 |
|
$ |
2,403 |
|
Commercial real estate mortgage |
|
10,287 |
|
11,296 |
| ||
Residential real estate mortgage |
|
1,566 |
|
881 |
| ||
Commercial and industrial |
|
3,993 |
|
4,206 |
| ||
Consumer |
|
20 |
|
|
| ||
Total impaired performing loans |
|
$ |
17,956 |
|
$ |
18,786 |
|
|
|
|
|
|
| ||
Impaired nonperforming loans (nonaccrual): |
|
|
|
|
| ||
Construction and land development |
|
$ |
108 |
|
$ |
|
|
Commercial real estate mortgage |
|
2,167 |
|
1,815 |
| ||
Commercial and industrial |
|
178 |
|
387 |
| ||
Total impaired nonperforming loans |
|
$ |
2,453 |
|
$ |
2,202 |
|
Total impaired loans |
|
$ |
20,409 |
|
$ |
20,988 |
|
At March 31, 2011, there were $14.11 million of impaired loans with no specific reserves that consisted of two (2) construction loans in the aggregate amount to $1.83 million, nineteen (19) commercial real estate loans in the aggregate amount of $7.45 million, two (2) residential real estate loans in the amount of $1.05 million, fourteen (14) commercial and industrial loans totaling $3.76 million and one (1) consumer loan for $20 thousand. By comparison at December 31, 2010 there were $14.96 million of impaired loans which required no specific reserves consisting of two (2) construction loans in the aggregate amount of $2.04 million, fourteen (14) commercial real estate loans in the aggregate amount of $8.36 million, one (1) residential mortgage loan for $364 thousand and ten (10) commercial and industrial loans totaling $4.18 million. In addition at March 31, 2011, there were $6.30 million of impaired loans, which required specific reserves totaling $1.59 million, that consisted of one (1) construction loan for $365 thousand, twelve (12) commercial real estate loans in the aggregate amount of $5.00 million, one (1) residential mortgage loan for $517 thousand and three (3) commercial and industrial loans totaling $414 thousand, compared to $6.03 million of impaired loans, which required specific reserves totaling $1.24 million, that consisted of one (1) construction loan for $365 thousand, eleven (11) commercial real estate loans in the aggregate amount of $4.73 million, one (1) residential mortgage loan for $517 thousand and three (3) commercial and industrial loans totaling $414 thousand at December 31, 2010. All of the impaired loan relationships discussed are in different types of businesses.
There are no loans that had a specific allowance as of December 31, 2010 that are still in the Companys loan portfolio as of March 31, 2011 where the specific allowance has been reduced or eliminated.
Loans are placed into a nonaccruing status and classified as nonperforming when the principal or interest has been in default for a period of 90 days or more unless the obligation is well secured and in the process of collection. A debt is well secured if it is secured by (i) pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt, (including accrued interest), in full, or (ii) the guarantee of a financially responsible party. A debt is in the process of collection if collection on the debt is proceeding in due course either through legal action, including judgment enforcement procedure, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status.
Loans classified as substandard or worse are considered for impairment testing. A substandard loan shows signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. The borrower on such loans typically exhibit one or more of the following characteristics: financial ratios and profitability margins are well below industry average; a negative cash flow position exists; debt service capacity is insufficient to the service debt and an improvement in the cash flow position is unlikely within the next twelve months; secondary and tertiary means of debt repayment are weak. Loans classified as substandard are characterized by the probability that the Bank will not collect amounts due according to the contractual terms or sustain some loss if the deficiencies are not corrected.
Loss potential, while existing with respect to the aggregate amount of substandard (or worse) loans, does not have to exist in any individual assets classified as substandard. Such credits are also evaluated for nonaccrual status.
Impaired loans include loans that have been classified as substandard or worse. However, certain of such loans have been paying as agreed and have remained current, with some financial issues related to cash flow that has caused some concern as to the ability of the borrower to perform in accordance with the current loan terms, but it has not been extreme enough to require the loan be put into a nonaccruing status.
The Company does not have a formal modification program such as the Making Home Affordable Program, but instead uses a system whereby loans are modified on a case-by-case basis, based upon an analysis of the individual borrowers situation and the causes of the weakness in the individual loan. To date, loan modifications have primarily involved commercial real estate mortgages and commercial and industrial loans and have included reducing the interest rate on the loan to a level that is in line with current market rates for similar type loans, converting to an interest only period, usually six to twelve months, or re-amortizing the loan. For the first three months of 2011, the Company has made concessions on only a few residential mortgage loans which included reducing the interest rate on one (1) residential mortgage loans in the amount $576 thousand and an interest only period of six to twelve months for a $473 thousand residential loan.
Troubled debt restructured loans, which are included in the total of impaired loans, amounted to $9.06 million as of March 31, 2011: loans converted to interest only periods for six to twelve months in the amount of $5.78 million, reduced interest rates on loans in the amount of $625 thousand, and loans that have been re-amortized in the amount of $2.65 million. These loans have specific reserves of $589 thousand based on the collateral value.
As noted above the Company does not have a formal modification program; however, it had four (4) loan relationships as of March 31, 2011 that had been modified and then subsequently re-defaulted in 2010. First of the loan relationships involves a $760 thousand commercial real estate loan, the second involves a $612 thousand commercial real estate loan, the third is a commercial and industrial loan in the amount of $178 thousand and the last is a loan relationship for a $70 thousand commercial real estate loan.
Loans classified as non-performing are nonaccrual loans and loans 90 days or more past due. The Company does not have any loans 90 days or more past due that are still in an accruing status. If a loan has been modified and it is current as to principal and interest for a period of at least six months then it is classified as a performing loan, otherwise it is considered to be a non-performing loan.
The Companys charge-off policy states after all collection efforts have been exhausted and the loan is deemed to be a loss, it will be charged to the Companys established allowance for loan losses. Consumer loans subject to the Uniform Retail Credit Classification are charged-off as follows (a) closed end loans are charged-off no later than 120 days after becoming delinquent, (b) consumer loans to borrowers who subsequently declare bankruptcy, where the Company is an unsecured creditor, are charged-off within 60 days of receipt of the notification from the bankruptcy court, (c) fraudulent loans are charged-off within 90 days of discovery and (d) death of a borrower will cause a charge-off to be incurred at such time an actual loss is determined. All other types of loans are generally evaluated for loss potential at the 90th day past due threshold, and any loss is recognized no later than the 120th day past due threshold; each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.
The Company does not normally engage in partial charge-offs and has not incurred any in the three months ended March 31, 2011.
Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of credit. The Company has also entered into long-term lease obligations for some of its premises and equipment, the terms of which generally include options to renew. The above instruments and obligations involve, to varying degrees, elements of off-balance sheet risk in excess of the amount recognized in the consolidated statements of financial condition. With the exception of these instruments and the Companys obligations relating to its trust preferred securities, the Company does not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Companys financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Commitments to extend credit and standby letters of credit were as follows:
|
|
March 31, |
| |
|
|
2011 |
| |
(dollars in thousands) |
|
Contractual |
| |
Financial instruments whose notional or contract amounts represent credit risk: |
|
|
| |
Commitments to extend credit |
|
$ |
28,693 |
|
Standby letters of credit |
|
2,995 |
| |
Total |
|
$ |
31,688 |
|
See Note 9 to the Notes to the Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 for additional information regarding the Companys long-term lease obligations.
Capital Resources
The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory capital requirements, discussed below. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, preferred stock (which the Company does not currently have authorized), or subordinated debt. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms. On December 15, 2006, the Company completed the issuance of $6.00 million of trust preferred securities, as discussed above, that can be recognized as capital for regulatory purposes. Under Dodd-Frank, the capital treatment of the Companys trust preferred securities is grandfathered, but we will not be able to issue additional trust preferred securities which count as capital at the holding company. The Company has an unsecured revolving line of credit borrowing arrangement with an unaffiliated financial institution in the amount of $4.00 million with outstanding balance of $300 thousand as of March 31, 2011 and December 31, 2010. This facility matures on July 22, 2011, has a floating interest rate equal to the Wall Street Journal prime rate plus 0.50%, subject to a minimum rate of 4.25%, and requires monthly interest payments only. The purpose of this facility is to provide capital to the Bank, as needed. The Bank expects to have this credit facility renewed, but there can be no assurance.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. The Company will be subject to such requirements when its assets exceed $500 million, it has publicly issued debt or it engages in certain highly leveraged activities. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Companys consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Significant further growth of the Company may be limited because the current level of capital will not support rapid short term growth while meeting regulatory capital expectations. Loan portfolio growth will need to be funded primarily by increases in deposits as the Company has limited amounts of on-balance sheets assets deployable into loans. Growth will depend upon Company earnings and/or the raising of additional capital.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes that the Bank met all capital adequacy requirements to which it is subject as of March 31, 2011 and that the Company would meet such requirements if applicable. See Note 10 to the consolidated financial statements for a table depicting compliance with regulatory capital requirements.
As of March 31, 2011, the most recent notification from the regulatory agency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table in Note 10. There are no conditions or events since that notification which management believes have changed the Banks category.
On June 26, 2007, the Company authorized the repurchase of up to 146,000 shares of its common stock, for an aggregate expenditure of not more than $4.5 million, through September 30, 2012, or earlier termination of the program by the Board of Directors. Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price, and to provide a source of liquidity for the Companys shares. As of March 31, 2011, there have been 12,968 shares repurchased by the Company at an average price of $12.88.
Inflation
The effect of changing prices on financial institutions is typically different than on non-banking companies since virtually all of a Companys assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor magnitude of the changes are directly related to price level indices; therefore, the Company can best counter inflation over the long term by managing net interest income and controlling net increases in noninterest income and expenses.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Market Risk, Liquidity and Interest Rate Sensitivity at Page 24.
Item 4. Controls and Procedures
The Companys management, under the supervision and with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Companys disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective. There were no changes in the Companys internal control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
Item 1. Legal Proceedings. On July 30, 2010, the Bank was served with a lawsuit, Pionteck, v. Frederick County Bank, filed in the United States District Court for the District of Maryland, Greenbelt Division, alleging noncompliance the ATM notice requirements of the Electronic Funds Transfer Act. The complaint, which purports to be a class action, was filed on July 15, 2010. If the class action proceeds and the Bank is ultimately found to be liable, statutory damages from the noncompliance could be up to 1% of the Banks net worth, approximately $270 thousand at March 31, 2011. The Bank has entered into a settlement agreement with the plaintiff for an amount, inclusive of plaintiff legal fees and costs, below the maximum statutory damages. The settlement agreement is subject to approval by the court. The Companys March 31, 2011 financial statements reflect a reserve for litigation and settlement costs that the Company believes will cover substantially all remaining expense to be incurred in connection with this matter. If the settlement agreement is approved by the court, the Company believes that it would not have a material adverse affect on the Companys financial position. There can be no assurance that the settlement will be approved by the court on the proposed terms, or that final settlement will not result in greater expense than that anticipated.
Item 1A. Risk Factors. Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities. None
(b) Use of Proceeds. Not Applicable.
(c) Registrant Purchases of Securities
The following table provides information on the Companys purchases of its common stock during the quarter ended March 31, 2011.
Period |
|
Total Number of |
|
Average Price Paid |
|
Total Number of |
|
Maximum Number of |
| |
January 1-31, 2011 |
|
0 |
|
N/A |
|
0 |
|
0 |
| |
February 1-28, 2011 |
|
0 |
|
N/A |
|
0 |
|
0 |
| |
March 1-31, 2011 |
|
7,850 |
|
$ |
13.38 |
|
7,850 |
|
133,032 |
(2) |
(1) On June 26, 2007, the Companys Board of Directors approved a share repurchase program that authorizes the repurchase of up to 146,000 shares of the Companys outstanding common stock, subject to a maximum expenditure of $4.5 million. Repurchases under the program may be made on the open market and in privately negotiated transactions from time to time until September 30, 2012, or earlier termination of the program by the Board.
(2) Subject to a maximum expenditure of $4.5 million. Number of shares indicated is the remaining number of shares authorized for repurchase as of the end of the indicated period.
Item 3. Defaults upon Senior Securities. None
Item 5. Other Information None
Exhibit No. |
|
Description of Exhibits |
|
|
|
3(a) |
|
Articles of Incorporation of the Company, as amended(1) |
3(b) |
|
Bylaws of the Company(2) |
4(a) |
|
Indenture, dated as of December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as trustee(3) |
4(b) |
|
Amended and Restated Declaration of Trust, dated as December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as trustee, and Martin S. Lapera and William R. Talley, Jr. as Administrators(3) |
4(c) |
|
Guarantee Agreement dated as of December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as Guarantee Trustee(3) |
10(a) |
|
2001 Stock Option Plan(4) |
10(b) |
|
Employment Agreement between the Bank and Martin S. Lapera(5) |
10(c) |
|
Employment Agreement between the Bank and William R. Talley, Jr. (6) |
10(f) |
|
2002 Executive and Director Deferred Compensation Plan, as amended(7) |
10(g) |
|
Amendment No. 1 to the 2002 Executive and Director Deferred Compensation Plan(7) |
10(h) |
|
Promissory Note with Atlantic Central Bankers Bank (8) |
10(i) |
|
Amendment to Loan Documents (9) |
10(j) |
|
2011 Stock Incentive Plan |
11 |
|
Statement Regarding Computation of Per Share Income Please refer to Note 2 to the unaudited consolidated financial statements included herein |
21 |
|
Subsidiaries of the Registrant |
31(a) |
|
Certification of Martin S. Lapera, President and Chief Executive Officer |
31(b) |
|
Certification of William R. Talley, Jr., Executive Vice President and Chief Financial Officer |
32(a) |
|
Certification of Martin S. Lapera, President and Chief Executive Officer |
32(b) |
|
Certification of William R. Talley, Jr., Executive Vice President and Chief Financial Officer |
(1) Incorporated by reference to Exhibit of the same number to the Companys Quarterly Report on Form 10-QSB for the quarter ended September 30, 2004, as filed with the Securities and Exchange Commission.
(2) Incorporated by reference to Exhibit of the same number to the Companys Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission.
(3) Not filed in accordance with the provision of Item 601(b)(4)(v) of Regulation SK. The Company agrees to provide a copy of these documents to the Commission upon request.
(4) Incorporated by reference to Exhibit 4 to the Companys Registration Statement on Form S-8 (No. 333-111761).
(5) Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 29, 2009.
(6) Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on September 29, 2009.
(7) Incorporated by reference to Exhibit of the same number to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.
(8) Incorporated by reference to Exhibit of the same number to the Companys Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission.
(9) Incorporated by reference to Exhibit of the same number to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, as filed with the Securities and Exchange Commission.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
FREDERICK COUNTY BANCORP, INC. | |
|
|
|
|
|
|
|
|
|
|
Date: |
May 11, 2011 |
|
By: |
/s/ Martin S. Lapera |
|
|
|
|
Martin S. Lapera |
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
Date: |
May 11, 2011 |
|
By: |
/s/ William R. Talley, Jr. |
|
|
|
|
William R. Talley, Jr. |
|
|
|
|
Executive Vice President, Chief Financial Officer |
|
|
|
|
and Chief Operating Officer |