Attached files
file | filename |
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EX-32 - EXHIBIT 32 - PATRIOT NATIONAL BANCORP INC | c21291exv32.htm |
EX-31.1 - EXHIBIT 31(1) - PATRIOT NATIONAL BANCORP INC | c21291exv31w1.htm |
EX-31.2 - EXHIBIT 31(2) - PATRIOT NATIONAL BANCORP INC | c21291exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2011 | Commission file number 000-29599 |
PATRIOT NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Connecticut | 06-1559137 | |
(State of incorporation) | (I.R.S. Employer Identification Number) |
900 Bedford Street, Stamford, Connecticut 06901
(Address of principal executive offices)
(Address of principal executive offices)
(203) 324-7500
(Registrants telephone number)
Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days:
Yes þ No o
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).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a 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 þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act):
Yes o No þ
State the number of shares outstanding of each of the registrants classes of common equity, as of
the latest practicable date.
Common stock, $0.01 par value per share, 38,362,727 shares outstanding as of the close of business
July 29, 2011.
Table of Contents
PART I FINANCIAL INFORMATION
Item 1: | Consolidated Financial Statements |
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
June 30, 2011 | December 31, 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and due from banks: |
||||||||
Noninterest bearing deposits and cash |
$ | 6,242,000 | $ | 4,613,211 | ||||
Interest bearing deposits |
52,759,731 | 131,711,047 | ||||||
Federal funds sold |
5,000,000 | 10,000,000 | ||||||
Short-term investments |
547,146 | 453,400 | ||||||
Total cash and cash equivalents |
64,548,877 | 146,777,658 | ||||||
Securities: |
||||||||
Available for sale securities, at fair value (Note 2) |
88,926,471 | 40,564,700 | ||||||
Other Investments |
3,500,000 | 3,500,000 | ||||||
Federal Reserve Bank stock, at cost |
1,910,600 | 1,192,000 | ||||||
Federal Home Loan Bank stock, at cost |
4,508,300 | 4,508,300 | ||||||
Total securities |
98,845,371 | 49,765,000 | ||||||
Loans receivable (net of allowance for loan losses: 2011: $11,399,727
2010: $15,374,101) (Note 3) |
451,981,025 | 534,531,213 | ||||||
Accrued interest and dividends receivable |
2,329,463 | 2,512,186 | ||||||
Premises and equipment, net |
4,234,211 | 5,270,312 | ||||||
Cash surrender value of life insurance |
20,669,577 | 20,348,332 | ||||||
Other real estate owned |
3,611,330 | 16,408,787 | ||||||
Deferred tax asset (Note 9) |
| | ||||||
Other assets |
1,986,100 | 8,711,366 | ||||||
Total assets |
$ | 648,205,954 | $ | 784,324,854 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Liabilities |
||||||||
Deposits (Note 4): |
||||||||
Noninterest bearing deposits |
$ | 61,585,518 | $ | 51,058,373 | ||||
Interest bearing deposits |
462,919,319 | 595,750,456 | ||||||
Total deposits |
524,504,837 | 646,808,829 | ||||||
Borrowings: |
||||||||
Repurchase agreements |
7,000,000 | 7,000,000 | ||||||
Federal Home Loan Bank borrowings |
50,000,000 | 50,000,000 | ||||||
Total borrowings |
57,000,000 | 57,000,000 | ||||||
Junior subordinated debt owed to unconsolidated trust |
8,248,000 | 8,248,000 | ||||||
Accrued expenses and other liabilities |
7,188,149 | 5,095,837 | ||||||
Total liabilities |
596,940,986 | 717,152,666 | ||||||
Commitments (Note 7) |
||||||||
Shareholders equity |
||||||||
Preferred stock, no par value; 1,000,000 shares authorized, no shares issued and outstanding |
| | ||||||
Common stock, $.01 par value, 100,000,000 shares authorized; 38,374,432 shares issued;
38,362,727 shares outstanding |
383,744 | 383,744 | ||||||
Additional paid-in capital |
105,050,433 | 105,050,433 | ||||||
Accumulated deficit |
(55,557,311 | ) | (39,399,345 | ) | ||||
Less: Treasury stock, at cost: 2011 and 2010, 11,705 shares |
(160,025 | ) | (160,025 | ) | ||||
Accumulated other comprehensive income |
1,548,127 | 1,297,381 | ||||||
Total shareholders equity |
51,264,968 | 67,172,188 | ||||||
Total liabilities and shareholders equity |
$ | 648,205,954 | $ | 784,324,854 | ||||
See Accompanying Notes to Consolidated Financial Statements.
3
Table of Contents
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest and Dividend Income |
||||||||||||||||
Interest and fees on loans |
$ | 6,538,593 | $ | 8,937,870 | $ | 13,495,154 | $ | 18,034,359 | ||||||||
Interest on investment securities |
486,738 | 377,286 | 760,921 | 866,848 | ||||||||||||
Dividends on investment securities |
80,728 | 66,421 | 150,629 | 135,706 | ||||||||||||
Interest on federal funds sold |
2,385 | 4,486 | 6,411 | 7,847 | ||||||||||||
Other interest income |
58,363 | 21,456 | 120,253 | 53,270 | ||||||||||||
Total interest and dividend income |
7,166,807 | 9,407,519 | 14,533,368 | 19,098,030 | ||||||||||||
Interest Expense |
||||||||||||||||
Interest on deposits |
1,553,745 | 2,948,548 | 3,419,094 | 6,065,864 | ||||||||||||
Interest on Federal Home Loan Bank borrowings |
423,529 | 423,529 | 842,404 | 842,404 | ||||||||||||
Interest on subordinated debt |
71,219 | 71,031 | 141,617 | 140,364 | ||||||||||||
Interest on other borrowings |
76,927 | 76,927 | 153,009 | 153,008 | ||||||||||||
Total interest expense |
2,125,420 | 3,520,035 | 4,556,124 | 7,201,640 | ||||||||||||
Net interest income |
5,041,387 | 5,887,484 | 9,977,244 | 11,896,390 | ||||||||||||
Provision for Loan Losses |
1,482,798 | 512,000 | 8,464,427 | 1,239,000 | ||||||||||||
Net interest income after
provision for loan losses |
3,558,589 | 5,375,484 | 1,512,817 | 10,657,390 | ||||||||||||
Non-interest Income |
||||||||||||||||
Mortgage brokerage referral fees |
1,610 | 26,790 | 14,610 | 53,674 | ||||||||||||
Loan application, inspection & processing fees |
23,966 | 39,554 | 40,765 | 75,383 | ||||||||||||
Deposit fees and service charges |
248,039 | 274,197 | 528,940 | 527,718 | ||||||||||||
Gains on sale of loans |
79,729 | | 79,729 | | ||||||||||||
Earnings on cash surrender value of life insurance |
152,985 | 138,722 | 321,245 | 268,833 | ||||||||||||
Other income |
203,984 | 81,363 | 307,874 | 173,486 | ||||||||||||
Total non-interest income |
710,313 | 560,626 | 1,293,163 | 1,099,094 | ||||||||||||
Non-interest Expenses |
||||||||||||||||
Salaries and benefits |
3,189,311 | 3,191,355 | 6,403,826 | 6,552,640 | ||||||||||||
Occupancy and equipment expense |
1,291,826 | 1,297,900 | 2,646,393 | 2,836,297 | ||||||||||||
Data processing |
336,005 | 291,664 | 663,809 | 581,827 | ||||||||||||
Advertising and promotional expenses |
271,781 | 71,045 | 429,755 | 154,678 | ||||||||||||
Professional and other outside services |
1,234,958 | 702,994 | 2,116,665 | 1,875,171 | ||||||||||||
Loan administration and processing expenses |
48,159 | 71,188 | 85,218 | 176,216 | ||||||||||||
Regulatory assessments |
628,476 | 689,798 | 1,239,744 | 1,384,641 | ||||||||||||
Insurance expense |
228,637 | 128,269 | 459,411 | 404,399 | ||||||||||||
Other real estate operations |
774,450 | 511,453 | 1,044,957 | 1,305,627 | ||||||||||||
Material and communications |
164,115 | 200,581 | 364,253 | 401,863 | ||||||||||||
Restructuring charges and asset disposals (Note
11) |
2,986,441 | | 2,986,441 | | ||||||||||||
Other operating expenses |
290,111 | 180,040 | 523,474 | 389,869 | ||||||||||||
Total non-interest expenses |
11,444,270 | 7,336,287 | 18,963,946 | 16,063,228 | ||||||||||||
Loss before income taxes |
(7,175,368 | ) | (1,400,177 | ) | (16,157,966 | ) | (4,306,744 | ) | ||||||||
Provision for Income Taxes |
| | | (225,000 | ) | |||||||||||
Net loss |
$ | (7,175,368 | ) | $ | (1,400,177 | ) | $ | (16,157,966 | ) | $ | (4,531,744 | ) | ||||
Basic and diluted loss per share (Note 5) |
$ | (0.19 | ) | $ | (0.29 | ) | $ | (0.42 | ) | $ | (0.95 | ) | ||||
See Accompanying Notes to Consolidated Financial Statements.
4
Table of Contents
PATRIOT NATIONAL BANCORP, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Number of | Common | Paid-In | Accumulated | Treasury | Comprehensive | |||||||||||||||||||||||
Shares | Stock | Capital | Deficit | Stock | Income | Total | ||||||||||||||||||||||
Six months ended June 30, 2010 |
||||||||||||||||||||||||||||
Balance at December 31, 2009 |
4,762,727 | $ | 9,548,864 | $ | 49,651,534 | $ | (24,000,400 | ) | $ | (160,025 | ) | $ | 821,337 | $ | 35,861,310 | |||||||||||||
Comprehensive loss |
||||||||||||||||||||||||||||
Net loss |
| | | (4,531,744 | ) | | | (4,531,744 | ) | |||||||||||||||||||
Unrealized holding gain on
available for
sale securities, net of taxes |
| | | | | 258,733 | 258,733 | |||||||||||||||||||||
Total comprehensive loss |
(4,273,011 | ) | ||||||||||||||||||||||||||
Balance, June 30, 2010 |
4,762,727 | $ | 9,548,864 | $ | 49,651,534 | $ | (28,532,144 | ) | $ | (160,025 | ) | $ | 1,080,070 | $ | 31,588,299 | |||||||||||||
Six months ended June 30, 2011 |
||||||||||||||||||||||||||||
Balance at December 31, 2010 |
38,362,727 | $ | 383,744 | $ | 105,050,433 | $ | (39,399,345 | ) | $ | (160,025 | ) | $ | 1,297,381 | $ | 67,172,188 | |||||||||||||
Comprehensive loss |
||||||||||||||||||||||||||||
Net loss |
| | | (16,157,966 | ) | | | (16,157,966 | ) | |||||||||||||||||||
Unrealized holding gain on
available for
sale securities, net of taxes |
| | | | | 250,746 | 250,746 | |||||||||||||||||||||
Total comprehensive loss |
(15,907,220 | ) | ||||||||||||||||||||||||||
Balance, June 30, 2011 |
38,362,727 | $ | 383,744 | $ | 105,050,433 | $ | (55,557,311 | ) | $ | (160,025 | ) | $ | 1,548,127 | $ | 51,264,968 | |||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
5
Table of Contents
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (16,157,966 | ) | $ | (4,531,744 | ) | ||
Adjustments to reconcile net loss to net cash
used in operating activities: |
||||||||
Restructuring charges and asset disposals |
1,996,441 | | ||||||
Amortization and accretion of investment premiums and discounts, net |
116,431 | 220,040 | ||||||
Amortization and accretion of purchase loan premiums and discounts, net |
5,028 | 7,096 | ||||||
Provision for loan losses |
8,464,427 | 1,239,000 | ||||||
Gain on sale of loans |
(79,729 | ) | | |||||
Amortization of core deposit intangible |
7,506 | 7,950 | ||||||
Earnings on cash surrender value of life insurance |
(321,245 | ) | (268,833 | ) | ||||
Depreciation and amortization |
684,904 | 759,658 | ||||||
Loss on sale of other real estate owned |
58,215 | 173,289 | ||||||
Impairment writedown on other real estate owned |
165,764 | 855,697 | ||||||
Changes in assets and liabilities: |
||||||||
Decrease (increase) in deferred loan costs |
100,958 | (251,312 | ) | |||||
Decrease in accrued interest and dividends receivable |
182,723 | 267,946 | ||||||
Decrease in other assets |
6,717,760 | 585,244 | ||||||
Increase in accrued expenses and other liabilities |
457,203 | 259,294 | ||||||
Net cash provided by (used in) operating activities |
2,398,420 | (676,675 | ) | |||||
Cash Flows from Investing Activities: |
||||||||
Purchases of available for sale securities |
(51,995,480 | ) | (15,162,500 | ) | ||||
Principal repayments on available for sale securities |
3,976,411 | 3,099,854 | ||||||
Purchases of Federal Reserve Bank Stock |
(1,174,100 | ) | | |||||
Redemptions of Federal Reserve Bank Stock |
455,500 | 605,450 | ||||||
Proceeds from sale of loans |
55,089,794 | | ||||||
Net decrease in loans |
16,308,380 | 40,246,529 | ||||||
Purchase of other real estate owned |
(481,165 | ) | | |||||
Proceeds from sale of other real estate owned |
15,715,973 | 11,423,342 | ||||||
Capital improvements of other real estate owned |
| (114,871 | ) | |||||
Purchase of bank premises and equipment |
(218,522 | ) | (87,739 | ) | ||||
Net cash provided by investing activities |
37,676,791 | 40,010,065 | ||||||
Cash Flows from Financing Activities: |
||||||||
Net decrease in demand, savings and money market deposits |
(9,443,954 | ) | (10,002,369 | ) | ||||
Net decrease in time certificates of deposits |
(112,860,038 | ) | (36,088,974 | ) | ||||
Net cash used in financing activities |
(122,303,992 | ) | (46,091,343 | ) | ||||
Net decrease in cash and cash equivalents |
(82,228,781 | ) | (6,757,953 | ) | ||||
Cash and Cash Equivalents: |
||||||||
Beginning |
146,777,658 | 107,799,432 | ||||||
Ending |
$ | 64,548,877 | $ | 101,041,479 | ||||
6
Table of Contents
PATRIOT NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
(Unaudited)
2011 | 2010 | |||||||
Supplemental Disclosures of Cash Flow Information |
||||||||
Interest paid |
$ | 4,432,799 | $ | 7,111,982 | ||||
Income taxes paid |
$ | 10,534 | $ | 2,080 | ||||
Supplemental disclosures of noncash investing and financing activities: |
||||||||
Unrealized holding gain on available for sale
securities arising during the period |
$ | 459,133 | $ | 417,308 | ||||
Transfer of loans to other real estate owned |
$ | 2,661,330 | $ | | ||||
See Accompanying Notes to Consolidated Financial Statements.
7
Table of Contents
PATRIOT NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Financial Statement Presentation
The Consolidated Balance Sheet at December 31, 2010 has been derived from the audited financial
statements of Patriot National Bancorp, Inc. (Bancorp or the Company) at that date, but does
not include all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
The accompanying unaudited financial statements and related notes have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
omitted. The accompanying consolidated financial statements and related notes should be read in
conjunction with the audited financial statements of Bancorp and notes thereto for the year ended
December 31, 2010.
The information furnished reflects, in the opinion of management, all normal recurring adjustments
necessary for a fair presentation of the results for the interim periods presented. The results of
operations for the six months June 30, 2011 are not necessarily indicative of the results of
operations that may be expected for the remainder of 2011.
Note 2: Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair values of
available-for-sale securities at June 30, 2011 and December 31, 2010 are as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
June 30, 2011: |
||||||||||||||||
U. S. Government agency mortgage-backed
securities |
$ | 75,475,069 | $ | 1,294,977 | $ | (37,159 | ) | $ | 76,732,887 | |||||||
Auction rate preferred equity securities |
1,899,720 | 1,355,175 | | 3,254,895 | ||||||||||||
Corporate bonds |
9,000,000 | | (61,311 | ) | 8,938,689 | |||||||||||
$ | 86,374,789 | $ | 2,650,152 | $ | (98,470 | ) | $ | 88,926,471 | ||||||||
December 31, 2010: |
||||||||||||||||
U. S. Government agency mortgage-backed
securities |
$ | 36,572,430 | $ | 900,286 | $ | (838 | ) | $ | 37,471,878 | |||||||
Auction rate preferred equity securities |
1,899,720 | 1,193,102 | | 3,092,822 | ||||||||||||
$ | 38,472,150 | $ | 2,093,388 | $ | (838 | ) | $ | 40,564,700 | ||||||||
8
Table of Contents
The following table presents the gross unrealized loss and fair value of Bancorps
available-for-sale securities, aggregated by the length of time the individual securities have been
in a continuous loss position, at June 30, 2011 and December 31, 2010:
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
June 30, 2011: |
||||||||||||||||||||||||
Corporate bonds |
$ | 8,938,689 | $ | (61,311 | ) | $ | | $ | | $ | 8,938,689 | $ | (61,311 | ) | ||||||||||
U. S. Government mortgage -
backed securities |
$ | 14,964,561 | $ | (37,159 | ) | $ | | $ | | $ | 14,964,561 | $ | (37,159 | ) | ||||||||||
Totals |
$ | 23,903,250 | $ | (98,470 | ) | $ | | $ | | $ | 23,903,250 | $ | (98,470 | ) | ||||||||||
December 31, 2010: |
||||||||||||||||||||||||
U. S. Government mortgage -
backed securities |
$ | 86,375 | $ | (838 | ) | $ | | $ | | $ | 86,375 | $ | (838 | ) | ||||||||||
Totals |
$ | 86,375 | $ | (838 | ) | $ | | $ | | $ | 86,375 | $ | (838 | ) | ||||||||||
At June 30, 2011, 11 securities had unrealized holding losses with aggregate depreciation of 0.41%
from the amortized cost. There were no securities with unrealized losses greater than 5% of
amortized cost. At December 31, 2010, two securities had unrealized losses with aggregate
depreciation of 1.0% from the amortized cost. There were no securities with unrealized losses
greater than 5% of amortized cost.
Bancorp performs a quarterly analysis of those securities that are in an unrealized loss position
to determine if those losses qualify as other-than-temporary impairments. This analysis considers
the following criteria in its determination: the ability of the issuer to meet its obligations, an
impairment due to a deterioration in credit, managements plans and ability to maintain its
investment in the security, the length of time and the amount by which the security has been in a
loss position, the interest rate environment, the general economic environment and prospects or
projections for improvement or deterioration.
Management believes that none of the unrealized losses on available-for-sale securities noted above
are other than temporary due to the fact that they relate to interest rate changes on corporate
debt and on mortgage-backed securities issued by U.S. Government agencies. Management considers
the issuers of the mortgage-backed securities, as well as the corporate bonds, to be financially
sound, and the Company expects to receive all contractual principal and interest related to these
investments. Because the Company does not intend to sell the investments, and it is not
more-likely-than-not that the Company will be required to sell the investments before recovery of
their amortized cost basis, which may be maturity, the Company does not consider those investments
to be other-than-temporarily impaired at June 30, 2011.
9
Table of Contents
The amortized cost and fair value of available-for-sale debt securities at June 30, 2011, by
contractual maturity, are presented below. Actual maturities of mortgage-backed securities may
differ from contractual maturities because the mortgages underlying the securities may be repaid
without any penalties. Because mortgage-backed securities are not due at a single maturity date,
they are not included in the maturity categories in the following maturity summary:
Amortized Cost | Fair Value | |||||||
Maturity: |
||||||||
Corporate bonds 5 to 10 years |
$ | 9,000,000 | $ | 8,938,689 | ||||
Mortgage-backed securities |
75,475,069 | 76,732,887 | ||||||
Total |
$ | 84,475,069 | $ | 85,671,576 | ||||
Note 3: Loans Receivable and Allowance for Loan Losses
A summary of the Companys loan portfolio at June 30, 2011 and December 31, 2010 is as follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Real Estate |
||||||||
Commercial |
$ | 203,889,507 | $ | 228,842,489 | ||||
Residential |
154,301,727 | 187,058,318 | ||||||
Construction |
26,479,881 | 63,889,083 | ||||||
Construction to permanent |
10,300,425 | 10,331,043 | ||||||
Commercial |
23,512,120 | 14,573,790 | ||||||
Consumer home equity |
42,600,664 | 42,884,962 | ||||||
Consumer installment |
2,009,548 | 1,932,763 | ||||||
Total Loans |
463,093,872 | 549,512,448 | ||||||
Premiums on purchased loans |
237,398 | 242,426 | ||||||
Net deferred costs |
49,482 | 150,440 | ||||||
Allowance for loan losses |
(11,399,727 | ) | (15,374,101 | ) | ||||
Loans receivable, net |
$ | 451,981,025 | $ | 534,531,213 | ||||
The changes in the allowance for loan losses for the periods shown are as follows:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance, beginning of period |
$ | 12,208,476 | $ | 15,061,796 | $ | 15,374,101 | $ | 15,794,118 | ||||||||
Provision for loan losses |
1,482,798 | 512,000 | 8,464,427 | 1,239,000 | ||||||||||||
Loans charged-off |
(3,034,591 | ) | (1,594,136 | ) | (7,188,138 | ) | (3,177,383 | ) | ||||||||
Recoveries of loans previously charged-off |
743,044 | 9,409 | 763,650 | 133,334 | ||||||||||||
Transferred to loans held-for-sale |
| | (6,014,313 | ) | | |||||||||||
Balance, end of period |
$ | 11,399,727 | $ | 13,989,069 | $ | 11,399,727 | $ | 13,989,069 | ||||||||
10
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At June 30, 2011 and December 31, 2010, the unpaid balances of loans delinquent 90 days or
more and still accruing interest were $906,962 and $3,374,242, respectively. At June 30, 2011,
this was comprised of one loan which has matured, is well secured and the borrower continues to
make payments monthly. The Company has agreed to forbear from pursuing its remedies while the
borrower arranges refinancing from another financial institution.
The unpaid principal balances of loans on nonaccrual status and considered impaired were $26.7
million at June 30, 2011 and $89.1 million at December 31, 2010. On March 24, 2011, the Company
completed the sale of certain non-performing assets that included 21 non-accruing loans with an
aggregate net book value of $52.4 million (net of related specific reserves) and 4 other real
estate owned (OREO) properties with an aggregate carrying value of $14.4 million. The sale of
$66.8 million of non-performing assets was consummated for a cash purchase price of $60,602,036
which represented 90.7% of the Banks net book value for these assets.
If non-accrual loans had been performing in accordance with their original terms, the Company would
have recorded approximately $0.5 million of additional income during the quarter ended June 30,
2011 and $1.6 million during the quarter ended June 30, 2010. If non-accrual loans had been
performing in accordance with their original terms, the Company would have recorded approximately
$1.5 million of additional income for the six months ended June 30, 2011 and $3.4 million during
the six months ended June 30, 2010.
For the three months ended June 30, 2011 and 2010, the interest collected and recognized as income
on impaired loans was approximately $30,000 and $546,000, respectively. For the six months ended
June 30, 2011 and 2010, the interest income collected and recognized on impaired loans was
approximately $461,000 and $1,279,000 respectively. The average recorded investment in impaired
loans for the three and six months ended June 30, 2011 was $42.0 million and $60.8 million
respectively.
At June 30, 2011, there were 16 loans totaling $31.5 million that were considered troubled debt
restructurings, all of which are included in impaired loans, as compared to December 31, 2010 when
there were 19 loans totaling $38.0 million, all of which were included in impaired loans. At June
30, 2011, 6 of the 16 loans aggregating $16.1 million were accruing loans and 10 loans aggregating
$15.4 million were non-accruing loans.
The Companys lending activities are conducted principally in Fairfield and New Haven Counties in
Connecticut and Westchester County, New York City and Long Island, New York. The Company grants
commercial real estate loans, commercial business loans and a variety of consumer loans. In
addition, the Company had granted loans for the construction of residential homes, residential
developments and for land development projects. A moratorium on all new construction loans was
instituted by management in July 2008. All residential and commercial mortgage loans are
collateralized primarily by first or second mortgages on real estate. The ability and willingness
of borrowers to satisfy their loan obligations is dependent in large part upon the status of the
regional economy and regional real estate market. Accordingly, the ultimate collectability of a
substantial portion of the loan portfolio and the recovery of a substantial portion of any
resulting real estate acquired is susceptible to changes in market conditions.
The Company has established credit policies applicable to each type of lending activity in which it
engages, evaluates the creditworthiness of each customer and, in most cases, extends credit of up
to 75% of the market value of the collateral at the date of the credit extension depending on the
Companys evaluation of the borrowers creditworthiness and type of collateral. In the case of
construction loans, the maximum loan-to-value was 65% of the as completed market value. The
market value of collateral is monitored on an ongoing basis and additional collateral is obtained
when warranted. Real estate is the primary form of collateral. Other important forms of
collateral are accounts receivable, inventory, other business assets, marketable securities and
time deposits. While collateral provides assurance as a secondary source of repayment, the Company
ordinarily requires the primary source of repayment to be based on the borrowers ability to
generate continuing cash flows on all loans not related to construction.
11
Table of Contents
Risk characteristics of the Companys portfolio classes include the following:
Commercial Real Estate Loans In underwriting commercial real estate loans, the Company
evaluates both the prospective borrowers ability to make timely payments on the loan and the value
of the property securing the loans. Repayment of such loans may be negatively impacted should the
borrower default or should there be a substantial decline in the value of the property securing the
loan or a decline in the general economic conditions. Where the owner occupies the property, the
Company also evaluates the businesss ability to repay the loan on a timely basis. In addition,
the Company may require personal guarantees, lease assignments and/or the guarantee of the
operating company when the property is owner occupied. These types of loans may involve greater
risks than other types of lending, because payments on such loans are often dependent upon the
successful operation of the business involved, therefore, repayment of such loans may be negatively
impacted by adverse changes in economic conditions affecting the borrowers business.
Construction Loans Construction loans are short-term loans (generally up to 18 months)
secured by land for both residential and commercial development. The loans are generally made for
acquisition and improvements. Funds are disbursed as phases of construction are completed.
In the past, the Company funded construction of single family homes, when no contract of sale
exists, based upon the experience of the builder, the financial strength of the owner, the type and
location of the property and other factors. Construction loans are generally personally guaranteed
by the principal(s). Repayment of such loans may be negatively impacted by the builders inability
to complete construction, by a downturn in the new construction market, by a significant increase
in interest rates or by a decline in general economic conditions. The Company has had a moratorium
in place since mid-2008 on new speculative construction loans.
Residential Real Estate Loans Various loans secured by residential real estate properties
are offered by the Company, including 1-4 family residential mortgages, multi-family residential
loans and a variety of home equity line of credit products. Repayment of such loans may be
negatively impacted should the borrower default, should there be a significant decline in the value
of the property securing the loan or should there be a decline in general economic conditions.
Commercial and Industrial Loans The Companys commercial and industrial loan portfolio
consists primarily of commercial business loans and lines of credit to businesses and
professionals. These loans are usually made to finance the purchase of inventory, new or used
equipment or other short or long-term working capital purposes. These loans are generally secured
by corporate assets, often with real estate as secondary collateral, but are also offered on an
unsecured basis. In granting this type of loan, the Company primarily looks to the borrowers cash
flow as the source of repayment with collateral and personal guarantees, where obtained, as a
secondary source. Commercial loans are often larger and may involve greater risks than other type
of loans offered by the Company. Payments on such loans are often dependent upon the successful
operation of the underlying business involved and, therefore, repayment of such loans may be
negatively impacted by adverse changes in economic conditions, managements inability to
effectively manage the business, claims of others against the borrowers assets which may take
priority over the Companys claims against assets, death or disability of the borrower or loss of
market for the borrowers products or services.
Other Loans The Company also offers installment loans and reserve lines of credit to
individuals. Repayments of such loans are often dependent on the personal income of the borrower
which may be negatively impacted by adverse changes in economic conditions. The Company does not
place an emphasis on originating these types of loans.
The Company does not have any lending programs commonly referred to as subprime lending. Subprime
lending generally targets borrowers with weakened credit histories typically characterized by
payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with
questionable repayment capacity as evidenced by low credit scores or high debt-burdened ratios.
12
Table of Contents
The following table sets forth activity in our allowance for loan losses, by loan type, for the
period ended June 30, 2011. The following table also details the amount of loans receivable, net,
that are evaluated individually, and collectively, for impairment, and the related portion of
allowance for loan losses that is allocated to each loan portfolio segment.
Commercial Real | Construction | |||||||||||||||||||||||||||||||
Three months ended June 30, 2011 | Commercial | Estate | Construction | to Permanent | Residential | Consumer | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||
Beginning Balance |
$ | 590,872 | $ | 6,576,501 | $ | 2,938,102 | $ | 529,745 | $ | 1,097,762 | $ | 452,708 | $ | 22,786 | $ | 12,208,476 | ||||||||||||||||
Charge-offs |
| (1,801,551 | ) | (1,071,281 | ) | | | (161,759 | ) | | (3,034,591 | ) | ||||||||||||||||||||
Recoveries |
| 3,789 | 443,588 | | | 295,667 | | 743,044 | ||||||||||||||||||||||||
Transferred to loans held-for-sale |
| | | | | | | | ||||||||||||||||||||||||
Provision |
294,438 | 1,658,960 | (969,470 | ) | 355,307 | 147,727 | 17,442 | (21,606 | ) | 1,482,798 | ||||||||||||||||||||||
Ending Balance |
$ | 885,310 | $ | 6,437,699 | $ | 1,340,939 | $ | 885,052 | $ | 1,245,489 | $ | 604,058 | $ | 1,180 | $ | 11,399,727 | ||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 226,674 | $ | 1,356,134 | $ | 228,599 | $ | 818,217 | $ | 220,476 | $ | 151,500 | $ | | $ | 3,001,600 | ||||||||||||||||
Ending balance: collectively
evaluated for impairment |
$ | 658,636 | $ | 5,081,565 | $ | 1,112,340 | $ | 66,835 | $ | 1,025,013 | $ | 452,558 | $ | 1,180 | $ | 8,398,127 | ||||||||||||||||
Total Allowance for Loan Losses |
$ | 885,310 | $ | 6,437,699 | $ | 1,340,939 | $ | 885,052 | $ | 1,245,489 | $ | 604,058 | $ | 1,180 | $ | 11,399,727 | ||||||||||||||||
Total Loans ending balance |
$ | 23,512,120 | $ | 203,889,507 | $ | 26,479,881 | $ | 10,300,425 | $ | 154,301,727 | $ | 44,610,212 | $ | | $ | 463,093,872 | ||||||||||||||||
Ending balance: individually
evaluated for
impairment |
$ | 1,212,521 | $ | 11,812,331 | $ | 6,364,172 | $ | 8,591,092 | $ | 13,413,155 | $ | 1,417,742 | $ | | $ | 42,811,013 | ||||||||||||||||
Ending balance: collectively
evaluated for
impairment |
$ | 22,299,599 | $ | 192,077,176 | $ | 20,115,709 | $ | 1,709,333 | $ | 140,888,572 | $ | 43,192,470 | $ | | $ | 420,282,859 | ||||||||||||||||
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Table of Contents
Commercial Real | Construction | |||||||||||||||||||||||||||||||
Six months ended June 30, 2011 | Commercial | Estate | Construction | to Permanent | Residential | Consumer | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||
Beginning Balance |
$ | 441,319 | $ | 7,632,355 | $ | 3,478,058 | $ | 491,446 | $ | 2,363,838 | $ | 578,612 | $ | 388,473 | $ | 15,374,101 | ||||||||||||||||
Charge-offs |
| (2,736,139 | ) | (2,832,041 | ) | | (1,458,199 | ) | (161,759 | ) | | (7,188,138 | ) | |||||||||||||||||||
Recoveries |
240 | 3,789 | 461,282 | | | 298,339 | | 763,650 | ||||||||||||||||||||||||
Transferred to loans held-for-sale |
| (963,461 | ) | (1,369,354 | ) | | (3,681,498 | ) | | | (6,014,313 | ) | ||||||||||||||||||||
Provision |
443,751 | 2,501,155 | 1,602,994 | 393,606 | 4,021,348 | (111,134 | ) | (387,293 | ) | 8,464,427 | ||||||||||||||||||||||
Ending Balance |
$ | 885,310 | $ | 6,437,699 | $ | 1,340,939 | $ | 885,052 | $ | 1,245,489 | $ | 604,058 | $ | 1,180 | $ | 11,399,727 | ||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 226,674 | $ | 1,356,134 | $ | 228,599 | $ | 818,217 | $ | 220,476 | $ | 151,500 | $ | | $ | 3,001,600 | ||||||||||||||||
Ending balance: collectively
evaluated for impairment |
$ | 658,636 | $ | 5,081,565 | $ | 1,112,340 | $ | 66,835 | $ | 1,025,013 | $ | 452,558 | $ | 1,180 | $ | 8,398,127 | ||||||||||||||||
Total Allowance for Loan Losses |
$ | 885,310 | $ | 6,437,699 | $ | 1,340,939 | $ | 885,052 | $ | 1,245,489 | $ | 604,058 | $ | 1,180 | $ | 11,399,727 | ||||||||||||||||
Total Loans ending balance |
$ | 23,512,120 | $ | 203,889,507 | $ | 26,479,881 | $ | 10,300,425 | $ | 154,301,727 | $ | 44,610,212 | $ | | $ | 463,093,872 | ||||||||||||||||
Ending balance: individually
evaluated for
impairment |
$ | 1,212,521 | $ | 11,812,331 | $ | 6,364,172 | $ | 8,591,092 | $ | 13,413,155 | $ | 1,417,742 | $ | | $ | 42,811,013 | ||||||||||||||||
Ending balance: collectively
evaluated for
impairment |
$ | 22,299,599 | $ | 192,077,176 | $ | 20,115,709 | $ | 1,709,333 | $ | 140,888,572 | $ | 43,192,470 | $ | | $ | 420,282,859 | ||||||||||||||||
14
Table of Contents
The Company monitors the credit quality of its loans receivable in an ongoing manner.
Credit quality is monitored by reviewing certain credit quality indicators. Management has
determined that loan-to-value ratios (LTVs), (at period end) and internally assigned risk ratings
are the key credit quality indicators that best help management monitor the credit quality of the
Companys loans receivable. Loan-to-value ratios used by management in monitoring credit quality
are based on current period loan balances and original values at time of origination (unless a
current appraisal has been obtained as a result of the loan being deemed impaired or the loan is a
maturing construction loan).
Appraisals on properties securing impaired loans and Other Real Estate Owned are updated annually.
Additionally, appraisals on construction loans are updated four months in advance of scheduled
maturity dates. We update our impairment analysis monthly based on the most recent appraisal as
well as other factors (such as senior lien positions, e.g. property taxes), and we are using
published information regarding actual median home sales prices in the towns/counties where our
collateral is located in CT and NY.
The majority of the Companys impaired loans have been resolved through courses of action other
than via bank liquidations of real estate collateral through the OREO. These include normal loan
payoffs, the traditional workout process, triggering personal guarantee obligations, and troubled
debt restructurings. However, as loan workout efforts progress to a point where the banks
liquidation of real estate collateral is the likely outcome, the impairment analysis is updated to
reflect actual recent experience with bank sales of OREO properties.
A disposition discount is built into our impairment analysis and reflected in our allowance once a
property is determined to be a likely OREO (e.g. foreclosure is probable). To determine the
discount we compare the actual sales prices of our OREO properties to the appraised value that was
obtained as of the date when we took title to the property. The difference is the bank-owned
disposition discount.
The Company has a risk rating system as part of the risk assessment of its loan portfolio. The
Companys lending officers are required to assign a risk rating to each loan in their portfolio at
origination. When the lender learns of important financial developments, the risk rating is
reviewed accordingly, and adjusted if necessary. Similarly, the Loan Committee can adjust a risk
rating. The Loan Workout Committee meets on a regular basis and reviews loans rated special
mention or worse. In addition, the Company engages a third party independent loan reviewer that
performs semi-annual reviews of a sample of loans, validating the Banks risk ratings assigned to
such loans. The risk ratings play an important role in the establishment of the loan loss
provision and to confirm the adequacy of the allowance for loan losses.
When assigning a risk rating to a loan, management utilizes the Banks internal nine-point risk
rating system. Loans deemed to be acceptable quality are rated 1 through 5, with a rating of 1
established for loans with minimal risk and borrowers exhibiting the strongest financial condition.
Loans rated 1 5 are considered Pass. Loans that are deemed to be of questionable quality
are rated 6 (special mention). An asset is considered special mention when it has a potential
weakness based on objective evidence, but does not currently expose the Company to sufficient risk
to warrant classification in one of the following categories. Loans with adverse classifications
(substandard, doubtful or loss) are rated 7, 8 or 9, respectively. An asset is considered
substandard if it is not adequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard assets have well defined weaknesses
based on objective evidence, and are characterized by the distinct possibility that the Company
will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful
have all of the weaknesses inherent in those classified substandard with the added characteristic
that the weaknesses present make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Charge-off generally commences in the month that the loan is classified doubtful and is fully
charged off within six months of such classification. If the account is classified loss the full
balance is charged off immediately. The full balance is charged off regardless of the potential
recovery from the sale of the collateral. This amount is recognized as a recovery once the
collateral is sold.
In accordance with FFIEC (Federal Financial Institutions Examination Council) published policies
establishing uniform criteria for the classification of retail credit based on delinquency status,
Open-end credits are charged-off when 180 days delinquent and Closed-end credits are
charged-off when 120 days delinquent. Typically, consumer installment loans are charged off no
later than 90 days past due.
15
Table of Contents
The following table details the credit risk exposure of loans receivable, by loan type and credit
quality indicator at June 30, 2011:
CREDIT RISK PROFILE BY CREDITWORTHINESS CATEGORY
Construction to | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial Real Estate | Construction | Permanent | Residential Real Estate | Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||
LTVs: | < 75% | >= 75% | < 75% | >= 75% | < 75% | >= 75% | < 75% | >= 75% | < 75% | >= 75% | < 75% | >= 75% | Other | Total | ||||||||||||||||||||||||||||||||||||||||||
Internal Risk Rating |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass |
$ | 17,059,866 | $ | 1,010,558 | $ | 129,445,812 | $ | 7,930,298 | $ | | $ | | $ | | $ | | $ | 100,042,773 | $ | 36,102,022 | $ | 38,681,443 | $ | 504,874 | $ | 689,849 | $ | 331,467,495 | ||||||||||||||||||||||||||||
Special Mention |
244,506 | 174,250 | 26,506,967 | 4,644,478 | 11,364,872 | | 1,709,333 | | 1,040,930 | | 274,390 | 3,029,362 | | 48,989,088 | ||||||||||||||||||||||||||||||||||||||||||
Substandard & Doubtful |
4,850,852 | 172,088 | 13,939,247 | 21,422,705 | 5,402,712 | 9,712,297 | | 8,591,092 | 3,999,523 | 13,116,479 | 12,552 | 1,417,742 | | 82,637,289 | ||||||||||||||||||||||||||||||||||||||||||
$ | 22,155,224 | $ | 1,356,896 | $ | 169,892,026 | $ | 33,997,481 | $ | 16,767,584 | $ | 9,712,297 | $ | 1,709,333 | $ | 8,591,092 | $ | 105,083,226 | $ | 49,218,501 | $ | 38,968,385 | $ | 4,951,978 | $ | 689,849 | $ | 463,093,872 | |||||||||||||||||||||||||||||
CREDIT RISK PROFILE
Commercial Real | Construction to | Residential | ||||||||||||||||||||||||||
Commercial | Estate | Construction | Permanent | Real Estate | Consumer | Totals | ||||||||||||||||||||||
Performing |
$ | 22,299,599 | $ | 192,319,547 | $ | 20,115,709 | $ | 6,614,333 | $ | 151,395,323 | $ | 43,616,470 | $ | 436,360,981 | ||||||||||||||
Non Performing |
1,212,521 | 11,569,960 | 6,364,172 | 3,686,092 | 2,906,404 | 993,742 | 26,732,891 | |||||||||||||||||||||
Total |
$ | 23,512,120 | $ | 203,889,507 | $ | 26,479,881 | $ | 10,300,425 | $ | 154,301,727 | $ | 44,610,212 | $ | 463,093,872 | ||||||||||||||
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Table of Contents
The following table details the credit risk exposure of loans receivable, by loan type and
credit quality indicator at December 31, 2010:
CREDIT RISK PROFILE BY CREDITWORTHINESS CATEGORY
Construction to | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | Commercial Real Estate | Construction | Permanent | Residential Real Estate | Consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||
LTVs: | < 75% | >= 75% | < 75% | >= 75% | < 75% | >= 75% | < 75% | >= 75% | < 75% | >= 75% | < 75% | >= 75% | Other | Total | ||||||||||||||||||||||||||||||||||||||||||
Internal Risk Rating |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass |
$ | 11,225,261 | $ | 256,296 | $ | 124,645,152 | $ | 9,449,059 | $ | 1,272,028 | $ | 350,000 | $ | | $ | | $ | 91,534,348 | $ | 51,996,851 | $ | 35,192,214 | $ | | 1,917,783 | $ | 327,838,992 | |||||||||||||||||||||||||||||
Special Mention |
704,053 | 181,600 | 35,253,018 | 4,645,738 | 15,059,704 | 4,485,209 | 1,709,333 | | 2,088,700 | 2,907,285 | 3,146,244 | 2,879,621 | | 73,060,505 | ||||||||||||||||||||||||||||||||||||||||||
Substandard & Doubtful |
1,424,161 | 782,419 | 13,792,482 | 41,057,040 | 10,712,146 | 32,009,996 | | 8,621,710 | 18,052,003 | 20,479,131 | 99,235 | 1,567,648 | 14,980 | 148,612,951 | ||||||||||||||||||||||||||||||||||||||||||
$ | 13,353,475 | $ | 1,220,315 | $ | 173,690,652 | $ | 55,151,837 | $ | 27,043,878 | $ | 36,845,205 | $ | 1,709,333 | $ | 8,621,710 | $ | 111,675,051 | $ | 75,383,267 | $ | 38,437,693 | $ | 4,447,269 | $ | 1,932,763 | $ | 549,512,448 | |||||||||||||||||||||||||||||
CREDIT RISK PROFILE
Commercial Real | Construction to | Residential | ||||||||||||||||||||||||||
Commercial | Estate | Construction | Permanent | Real Estate | Consumer | Totals | ||||||||||||||||||||||
Performing |
$ | 13,358,840 | $ | 202,054,317 | $ | 33,003,060 | $ | 8,951,208 | $ | 159,270,574 | $ | 43,724,749 | $ | 460,362,748 | ||||||||||||||
Non Performing |
1,214,950 | 26,788,172 | 30,886,023 | 1,379,835 | 27,787,744 | 1,092,976 | 89,149,700 | |||||||||||||||||||||
Total |
$ | 14,573,790 | $ | 228,842,489 | $ | 63,889,083 | $ | 10,331,043 | $ | 187,058,318 | $ | 44,817,725 | $ | 549,512,448 | ||||||||||||||
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Table of Contents
Included in loans receivable are loans for which the accrual of interest income has been
discontinued due to deterioration in the financial condition of the borrowers. The recorded
balance of these nonaccrual loans was $26.7 million and $89.1 million at June 30, 2011, and
December 31, 2010 respectively. Generally, loans are placed on non-accruing status when they
become 90 days or more delinquent, or earlier if deemed appropriate, and remain on non-accrual
status until they are brought current, have six months of performance under the loan terms, and
factors indicating reasonable doubt about the timely collection of payments no longer exist.
Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days
delinquent and still be on a non-accruing status. Additionally, certain loans that cannot
demonstrate sufficient global cash flow to continue loan payments in the future and certain trouble
debt restructures (TDRs) are placed on non-accrual status.
The following table sets forth the detail, and delinquency status, of non-accrual loans and
past due loans at June 30, 2011:
Non-Accrual and Past Due Loans | ||||||||||||||||||||||||||||
Total Non- | ||||||||||||||||||||||||||||
>90 Days Past | Accrual and | |||||||||||||||||||||||||||
31-60 Days | 61-90 Days | Greater Than | Total Past | Due and | Past Due | |||||||||||||||||||||||
2011 | Past Due | Past Due | 90 Days | Due | Current | Accruing | Loans | |||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Special Mention |
| | | | | | | |||||||||||||||||||||
Substandard |
| | 348,208 | 348,208 | 864,313 | | 1,212,521 | |||||||||||||||||||||
Total Commercial |
$ | | $ | | $ | 348,208 | $ | 348,208 | $ | 864,313 | $ | | $ | 1,212,521 | ||||||||||||||
Commercial Real Estate |
||||||||||||||||||||||||||||
Substandard |
$ | 1,762,100 | $ | | $ | 6,471,749 | $ | 8,233,849 | $ | 3,336,111 | $ | 906,962 | $ | 12,476,922 | ||||||||||||||
Total Commercial Real Estate |
$ | 1,762,100 | $ | | $ | 6,471,749 | $ | 8,233,849 | $ | 3,336,111 | $ | 906,962 | $ | 12,476,922 | ||||||||||||||
Construction |
||||||||||||||||||||||||||||
Substandard |
$ | | $ | | $ | 3,350,744 | $ | 3,350,744 | $ | 3,013,428 | $ | | $ | 6,364,172 | ||||||||||||||
Total Construction |
$ | | $ | | $ | 3,350,744 | $ | 3,350,744 | $ | 3,013,428 | $ | | $ | 6,364,172 | ||||||||||||||
Construction to Permanent |
||||||||||||||||||||||||||||
Substandard |
$ | 2,336,875 | $ | | $ | | $ | 2,336,875 | $ | 1,349,217 | $ | | $ | 3,686,092 | ||||||||||||||
Total Construction to Permanent |
$ | 2,336,875 | $ | | $ | | $ | 2,336,875 | $ | 1,349,217 | $ | | $ | 3,686,092 | ||||||||||||||
Residential Real Estate |
||||||||||||||||||||||||||||
Substandard |
$ | | $ | 406,404 | $ | 2,500,000 | $ | 2,906,404 | $ | | $ | | $ | 2,906,404 | ||||||||||||||
Total Residential Real Estate |
$ | | $ | 406,404 | $ | 2,500,000 | $ | 2,906,404 | $ | | $ | | $ | 2,906,404 | ||||||||||||||
Consumer |
||||||||||||||||||||||||||||
Substandard |
$ | | $ | | $ | 993,742 | $ | 993,742 | $ | | $ | | $ | 993,742 | ||||||||||||||
Total Consumer |
$ | | $ | | $ | 993,742 | $ | 993,742 | $ | | $ | | $ | 993,742 | ||||||||||||||
Total |
$ | 4,098,975 | $ | 406,404 | $ | 13,664,443 | $ | 18,169,822 | $ | 8,563,069 | $ | 906,962 | $ | 27,639,853 | ||||||||||||||
18
Table of Contents
The following table sets forth the detail, and delinquency status, of non-accrual loans and
past due loans at December 31, 2010:
Non-Accrual and Past Due Loans | ||||||||||||||||||||||||||||
Total Non- | ||||||||||||||||||||||||||||
>90 Days Past | Accrual and | |||||||||||||||||||||||||||
31-60 Days | 61-90 Days | Greater Than | Total Past | Due and | Past Due | |||||||||||||||||||||||
2010 | Past Due | Past Due | 90 Days | Due | Current | Accruing | Loans | |||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||
Special Mention |
$ | | $ | | $ | | $ | | $ | | $ | 63,289 | $ | 63,289 | ||||||||||||||
Substandard |
350,000 | 100,000 | 698,767 | 1,148,767 | 66,183 | 175,000 | 1,389,950 | |||||||||||||||||||||
Total Commercial |
$ | 350,000 | $ | 100,000 | $ | 698,767 | $ | 1,148,767 | $ | 66,183 | $ | 238,289 | $ | 1,453,239 | ||||||||||||||
Commercial Real Estate |
||||||||||||||||||||||||||||
Substandard |
$ | 269,672 | $ | 6,449,096 | $ | 13,521,123 | $ | 20,239,891 | $ | 6,548,281 | $ | | $ | 26,788,172 | ||||||||||||||
Total Commercial Real Estate |
$ | 269,672 | $ | 6,449,096 | $ | 13,521,123 | $ | 20,239,891 | $ | 6,548,281 | $ | | $ | 26,788,172 | ||||||||||||||
Construction |
||||||||||||||||||||||||||||
Substandard |
$ | 1,517,943 | $ | 4,059,516 | $ | 13,736,985 | $ | 19,314,444 | $ | 11,571,579 | $ | 3,135,953 | $ | 34,021,976 | ||||||||||||||
Total Construction |
$ | 1,517,943 | $ | 4,059,516 | $ | 13,736,985 | $ | 19,314,444 | $ | 11,571,579 | $ | 3,135,953 | $ | 34,021,976 | ||||||||||||||
Construction to Permanent |
||||||||||||||||||||||||||||
Substandard |
$ | | $ | | $ | | $ | | $ | 1,379,835 | $ | | $ | 1,379,835 | ||||||||||||||
Total Construction to Permanent |
$ | | $ | | $ | | $ | | $ | 1,379,835 | $ | | $ | 1,379,835 | ||||||||||||||
Residential Real Estate |
||||||||||||||||||||||||||||
Substandard |
$ | | $ | | $ | 15,897,248 | $ | 15,897,248 | $ | 11,890,496 | $ | | $ | 27,787,744 | ||||||||||||||
Total Residential Real Estate |
$ | | $ | | $ | 15,897,248 | $ | 15,897,248 | $ | 11,890,496 | $ | | $ | 27,787,744 | ||||||||||||||
Consumer |
||||||||||||||||||||||||||||
Substandard |
$ | | $ | | $ | 1,092,976 | $ | 1,092,976 | $ | | $ | | $ | 1,092,976 | ||||||||||||||
Total Consumer |
$ | | $ | | $ | 1,092,976 | $ | 1,092,976 | $ | | $ | | $ | 1,092,976 | ||||||||||||||
Total |
$ | 2,137,615 | $ | 10,608,612 | $ | 44,947,099 | $ | 57,693,326 | $ | 31,456,374 | $ | 3,374,242 | $ | 92,523,942 | ||||||||||||||
These non-accrual and past due amounts included loans deemed to be impaired of $42.8 million
and $89.1 million at June 30, 2011, and December 31, 2010, respectively. Loans past due ninety
days or more and still accruing interest were approximately $907,000 and $3.4 million at June 30,
2011, and December 31, 2010 respectively, and consisted of one loan at June 30, 2011 that is
current as to payment but past maturity where payoff is pending.
19
Table of Contents
The following table sets forth the detail and delinquency status of loans receivable, by
performing and non-performing loans at June 30, 2011.
Performing (Accruing) Loans | Total Non- | |||||||||||||||||||||||||||||||
Greater | Total | Accrual and | ||||||||||||||||||||||||||||||
31-60 Days | 61-90 Days | Than 90 | Total Past | Performing | Past Due | |||||||||||||||||||||||||||
2011 | Past Due | Past Due | Days | Due | Current | Loans | Loans | Total Loans | ||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | | $ | 18,070,424 | $ | 18,070,424 | $ | | $ | 18,070,424 | ||||||||||||||||
Special Mention |
| | | | 418,756 | 418,756 | | 418,756 | ||||||||||||||||||||||||
Substandard |
248,318 | | | 248,318 | 3,562,101 | 3,810,419 | 1,212,521 | 5,022,940 | ||||||||||||||||||||||||
Total Commercial |
$ | 248,318 | $ | | $ | | $ | 248,318 | $ | 22,051,281 | $ | 22,299,599 | $ | 1,212,521 | $ | 23,512,120 | ||||||||||||||||
Commercial Real Estate |
||||||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | | $ | 137,376,110 | $ | 137,376,110 | $ | | $ | 137,376,110 | ||||||||||||||||
Special Mention |
| | | | 31,151,444 | 31,151,444 | | 31,151,444 | ||||||||||||||||||||||||
Substandard |
622,027 | 949,141 | | 1,571,168 | 21,313,863 | 22,885,031 | 12,476,922 | 35,361,953 | ||||||||||||||||||||||||
Total Commercial Real Estate |
$ | 622,027 | $ | 949,141 | $ | | $ | 1,571,168 | $ | 189,841,417 | $ | 191,412,585 | $ | 12,476,922 | $ | 203,889,507 | ||||||||||||||||
Construction |
||||||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||
Special Mention |
| | | | 11,364,872 | 11,364,872 | | 11,364,872 | ||||||||||||||||||||||||
Substandard |
| | | | 8,750,837 | 8,750,837 | 6,364,172 | 15,115,009 | ||||||||||||||||||||||||
Total Construction |
$ | | $ | | $ | | $ | | $ | 20,115,709 | $ | 20,115,709 | $ | 6,364,172 | $ | 26,479,881 | ||||||||||||||||
Construction to Permanent |
||||||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||
Special Mention |
| | | | 1,709,333 | 1,709,333 | | 1,709,333 | ||||||||||||||||||||||||
Substandard |
| | | | 4,905,000 | 4,905,000 | 3,686,092 | 8,591,092 | ||||||||||||||||||||||||
Total Construction to Permanent |
$ | | $ | | $ | | $ | | $ | 6,614,333 | $ | 6,614,333 | $ | 3,686,092 | $ | 10,300,425 | ||||||||||||||||
Residential Real Estate |
||||||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | | $ | 136,144,795 | $ | 136,144,795 | $ | | $ | 136,144,795 | ||||||||||||||||
Special Mention |
521,406 | | | 521,406 | 519,524 | 1,040,930 | | 1,040,930 | ||||||||||||||||||||||||
Substandard |
| | | | 14,209,598 | 14,209,598 | 2,906,404 | 17,116,002 | ||||||||||||||||||||||||
Total Residential Real Estate |
$ | 521,406 | $ | | $ | | $ | 521,406 | $ | 150,873,917 | $ | 151,395,323 | $ | 2,906,404 | $ | 154,301,727 | ||||||||||||||||
Consumer |
||||||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | | $ | 39,876,166 | $ | 39,876,166 | $ | | $ | 39,876,166 | ||||||||||||||||
Special Mention |
| | | | 3,303,753 | 3,303,753 | | 3,303,753 | ||||||||||||||||||||||||
Substandard |
| | | | 436,551 | 436,551 | 993,742 | 1,430,293 | ||||||||||||||||||||||||
Total Consumer |
$ | | $ | | $ | | $ | | $ | 43,616,470 | $ | 43,616,470 | $ | 993,742 | $ | 44,610,212 | ||||||||||||||||
Total |
$ | 1,391,751 | $ | 949,141 | $ | | $ | 2,340,892 | $ | 433,113,127 | $ | 435,454,019 | $ | 27,639,853 | $ | 463,093,872 | ||||||||||||||||
20
Table of Contents
The following table sets forth the detail and delinquency status of loans receivable, net, by
performing and non-performing loans at December 31, 2010.
Performing (Accruing) Loans | Total Non- | |||||||||||||||||||||||||||
Greater | Total | Accrual and | ||||||||||||||||||||||||||
31-60 Days | Than 60 | Total Past | Perfoming | Past Due | ||||||||||||||||||||||||
2010 | Past Due | Days | Due | Current | Loans | Loans | Total Loans | |||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | 11,481,557 | $ | 11,481,557 | $ | | $ | 11,481,557 | ||||||||||||||
Special Mention |
| | | 822,364 | 822,364 | 63,289 | 885,653 | |||||||||||||||||||||
Substandard |
| | | 816,630 | 816,630 | 1,389,950 | 2,206,580 | |||||||||||||||||||||
Total Commercial |
$ | | $ | | $ | | $ | 13,120,551 | $ | 13,120,551 | $ | 1,453,239 | $ | 14,573,790 | ||||||||||||||
Commercial Real Estate |
||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | 134,094,210 | $ | 134,094,210 | $ | | $ | 134,094,210 | ||||||||||||||
Special Mention |
| | | 39,898,756 | 39,898,756 | | 39,898,756 | |||||||||||||||||||||
Substandard |
| | | 28,061,351 | 28,061,351 | 26,788,172 | 54,849,523 | |||||||||||||||||||||
Total Commercial Real Estate |
$ | | $ | | $ | | $ | 202,054,317 | $ | 202,054,317 | $ | 26,788,172 | $ | 228,842,489 | ||||||||||||||
Construction |
||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | 1,622,029 | $ | 1,622,029 | $ | | $ | 1,622,029 | ||||||||||||||
Special Mention |
| | | 19,544,913 | 19,544,913 | | 19,544,913 | |||||||||||||||||||||
Substandard |
| | | 8,700,165 | 8,700,165 | 34,021,976 | 42,722,141 | |||||||||||||||||||||
Total Construction |
$ | | $ | | $ | | $ | 29,867,107 | $ | 29,867,107 | $ | 34,021,976 | $ | 63,889,083 | ||||||||||||||
Construction to Permanent |
||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Special Mention |
| | | 1,709,333 | 1,709,333 | | 1,709,333 | |||||||||||||||||||||
Substandard |
1,127,875 | | 1,127,875 | 6,114,000 | 7,241,875 | 1,379,835 | 8,621,710 | |||||||||||||||||||||
Total Construction to Permanent |
$ | 1,127,875 | $ | | $ | 1,127,875 | $ | 7,823,333 | $ | 8,951,208 | $ | 1,379,835 | $ | 10,331,043 | ||||||||||||||
Residential Real Estate |
||||||||||||||||||||||||||||
Pass |
$ | 198,357 | $ | | $ | 198,357 | $ | 143,332,842 | $ | 143,531,199 | $ | | $ | 143,531,199 | ||||||||||||||
Special Mention |
2,907,285 | | 2,907,285 | 2,088,700 | 4,995,985 | | 4,995,985 | |||||||||||||||||||||
Substandard |
| | | 10,743,390 | 10,743,390 | 27,787,744 | 38,531,134 | |||||||||||||||||||||
Total Residential Real Estate |
$ | 3,105,642 | $ | | $ | 3,105,642 | $ | 156,164,932 | $ | 159,270,574 | $ | 27,787,744 | $ | 187,058,318 | ||||||||||||||
Consumer |
||||||||||||||||||||||||||||
Pass |
$ | | $ | | $ | | $ | 37,109,997 | $ | 37,109,997 | $ | | $ | 37,109,997 | ||||||||||||||
Special Mention |
168,589 | | 168,589 | 5,857,276 | 6,025,865 | | 6,025,865 | |||||||||||||||||||||
Substandard |
| | | 588,887 | 588,887 | 1,092,976 | 1,681,863 | |||||||||||||||||||||
Total Consumer |
$ | 168,589 | $ | | $ | 168,589 | $ | 43,556,160 | $ | 43,724,749 | $ | 1,092,976 | $ | 44,817,725 | ||||||||||||||
Total |
$ | 4,402,106 | $ | | $ | 4,402,106 | $ | 452,586,400 | $ | 456,988,506 | $ | 92,523,942 | $ | 549,512,448 | ||||||||||||||
21
Table of Contents
The following table summarizes impaired loans as of June 30, 2011:
Recorded | Unpaid Principal | |||||||||||
Investment | Balance | Related Allowance | ||||||||||
2011 |
||||||||||||
With no related allowance recorded: |
||||||||||||
Commercial |
$ | 848,208 | $ | 1,167,972 | $ | | ||||||
Commercial Real Estate |
4,695,242 | 5,418,345 | | |||||||||
Construction |
5,106,134 | 6,246,697 | | |||||||||
Construction to Permanent |
4,905,000 | 4,905,000 | ||||||||||
Residential |
8,331,641 | 8,331,641 | | |||||||||
Consumer |
993,742 | 1,038,640 | | |||||||||
Total: |
$ | 24,879,967 | $ | 27,108,295 | $ | | ||||||
With an allowance recorded: |
||||||||||||
Commercial |
$ | 364,313 | $ | 387,714 | $ | 226,674 | ||||||
Commercial Real Estate |
7,117,089 | 8,092,062 | 1,356,134 | |||||||||
Construction |
1,258,038 | 2,386,713 | 228,599 | |||||||||
Construction to Permanent |
3,686,092 | 3,761,875 | 818,217 | |||||||||
Residential |
5,081,514 | 5,081,514 | 220,476 | |||||||||
Consumer |
424,000 | 424,000 | 151,500 | |||||||||
Total: |
$ | 17,931,046 | $ | 20,133,878 | $ | 3,001,600 | ||||||
Commercial |
$ | 1,212,521 | $ | 1,555,686 | $ | 226,674 | ||||||
Commercial Real Estate |
11,812,331 | 13,510,407 | 1,356,134 | |||||||||
Construction |
6,364,172 | 8,633,410 | 228,599 | |||||||||
Construction to Permanent |
8,591,092 | 8,666,875 | 818,217 | |||||||||
Residential |
13,413,155 | 13,413,155 | 220,476 | |||||||||
Consumer |
1,417,742 | 1,462,640 | 151,500 | |||||||||
Total: |
$ | 42,811,013 | $ | 47,242,173 | $ | 3,001,600 | ||||||
The recorded investment of impaired loans at June 30, 2011 and December 31, 2010 was $42.8
million and $100.7 million respectively, with related allowances of $3.0 million and $6.0 million,
respectively.
Included in the table above at June 30, 2011, are 19 loans with carrying balances of $24.9 million
that required no specific reserves in our allowance for loan losses comprised of 15 non-accruing
loans aggregating $13.9 million and 4 accruing TDR loans aggregating $11.0 million. Loans that did
not require specific reserves at June 30, 2011 have sufficient collateral values, less costs to
sell, supporting the carrying balances of the loans. In some cases, there may be no specific
reserves because the Company already charged-off the specific impairment. Once a borrower is in
default, the Company is under no obligation to advance additional funds on unused commitments.
22
Table of Contents
The following table summarizes impaired loans as of December 31, 2010:
Recorded | Unpaid Principal | |||||||||||
Investment | Balance | Related Allowance | ||||||||||
2010 |
||||||||||||
With no related allowance recorded: |
||||||||||||
Commercial |
$ | 1,077,512 | $ | 1,828,917 | $ | | ||||||
Commercial Real Estate |
12,770,033 | 13,052,924 | | |||||||||
Construction |
14,060,251 | 15,133,253 | | |||||||||
Construction to Permanent |
| | ||||||||||
Residential |
24,513,106 | 24,737,293 | | |||||||||
Consumer |
1,516,977 | 1,883,585 | | |||||||||
Total: |
$ | 53,937,879 | $ | 56,635,972 | $ | | ||||||
With an allowance recorded: |
||||||||||||
Commercial |
$ | 137,438 | $ | 151,633 | $ | 76,045 | ||||||
Commercial Real Estate |
15,696,205 | 19,509,247 | 2,300,199 | |||||||||
Construction |
16,825,772 | 19,368,468 | 1,895,326 | |||||||||
Construction to Permanent |
1,379,835 | 1,425,000 | 183,835 | |||||||||
Residential |
12,706,762 | 12,826,248 | 1,556,077 | |||||||||
Consumer |
| | | |||||||||
Total: |
$ | 46,746,012 | $ | 53,280,596 | $ | 6,011,482 | ||||||
Commercial |
$ | 1,214,950 | $ | 1,980,550 | $ | 76,045 | ||||||
Commercial Real Estate |
28,466,238 | 32,562,171 | 2,300,199 | |||||||||
Construction |
30,886,023 | 34,501,721 | 1,895,326 | |||||||||
Construction to Permanent |
1,379,835 | 1,425,000 | 183,835 | |||||||||
Residential |
37,219,868 | 37,563,541 | 1,556,077 | |||||||||
Consumer |
1,516,977 | 1,883,585 | | |||||||||
Total: |
$ | 100,683,891 | $ | 109,916,568 | $ | 6,011,482 | ||||||
Included in the table above at December 31, 2010, are loans with carrying balances of $53.9
million that required no specific reserves in our allowance for loan losses. Loans that did not
require specific reserves at December 31, 2010 have sufficient collateral values, less costs to
sell, supporting the carrying balances of the loans.
23
Table of Contents
Note 4: Deposits
The following table is a summary of the Companys deposits at:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Non-interest bearing |
$ | 61,585,518 | $ | 51,058,373 | ||||
Interest bearing |
||||||||
NOW |
25,006,997 | 19,297,225 | ||||||
Savings |
56,593,803 | 57,041,943 | ||||||
Money market |
67,450,747 | 92,683,478 | ||||||
Time certificates, less than $100,000 |
189,787,813 | 251,296,558 | ||||||
Time certificates, $100,000 or more |
124,079,959 | 175,431,252 | ||||||
Total interest bearing |
462,919,319 | 595,750,456 | ||||||
Total Deposits |
$ | 524,504,837 | $ | 646,808,829 | ||||
Included in time certificates are certificates of deposit through the Certificate of Deposit
Account Registry Service (CDARS) network of $1,452,257 and $2,879,838 at June 30, 2011 and December
31, 2010, respectively. These are considered brokered deposits. Pursuant to the Agreement
discussed in Note 8, the Banks participation in the CDARS program, as an issuer of deposits to
customers of other banks in the CDARS program, may not exceed 10% of total deposits.
24
Table of Contents
Note 5: Loss per share
The Company is required to present basic income (loss) per share and diluted income (loss) per
share in its consolidated statements of operations. Basic income (loss) per share amounts are
computed by dividing net income (loss) by the weighted average number of common shares outstanding.
Diluted income (loss) per share reflects additional common shares that would have been outstanding
if potentially dilutive common shares had been issued, as well as any adjustment to income that
would result from the assumed issuance. Potential common shares that may be issued by the Company
relate to outstanding stock options and are determined using the treasury stock method. The
Company is also required to provide a reconciliation of the numerator and denominator used in the
computation of both basic and diluted loss per share.
The following is information about the computation of loss per share for the three and six months
ended June 30, 2011 and 2010:
Three months ended June 30, 2011
Weighted Average | ||||||||||||
Net Loss | Common Shares O/S | Amount | ||||||||||
Basic and Diluted Loss Per Share |
||||||||||||
Loss attributable to common shareholders |
$ | (7,175,368 | ) | 38,362,727 | $ | (0.19 | ) | |||||
Three months ended June 30, 2010
Weighted Average | ||||||||||||
Net Loss | Common Shares O/S | Amount | ||||||||||
Basic and Diluted Loss Per Share |
||||||||||||
Loss attributable to common shareholders |
$ | (1,400,177 | ) | 4,762,727 | $ | (0.29 | ) | |||||
Six months ended June 30, 2011
Weighted Average | ||||||||||||
Net Loss | Common Shares O/S | Amount | ||||||||||
Basic and Diluted Loss Per Share |
||||||||||||
Loss attributable to common shareholders |
$ | (16,157,966 | ) | 38,362,727 | $ | (0.42 | ) | |||||
Six months ended June 30, 2010
Weighted Average | ||||||||||||
Net Loss | Common Shares O/S | Amount | ||||||||||
Basic and Diluted Loss Per Share |
||||||||||||
Loss attributable to common shareholders |
$ | (4,531,744 | ) | 4,762,727 | $ | (0.95 | ) | |||||
25
Table of Contents
Note 6: Other Comprehensive Income
Other comprehensive income, which is comprised solely of the change in unrealized gains and losses
on available-for-sale securities, is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, 2011 | June 30, 2011 | |||||||||||||||||||||||
Before Tax | Net of Tax | Before Tax | Net of Tax | |||||||||||||||||||||
Amount | Tax Effect | Amount | Amount | Tax Effect | Amount | |||||||||||||||||||
Unrealized holding gains
arising during the period |
$ | 453,931 | $ | (206,410 | ) | $ | 247,521 | $ | 459,133 | $ | (208,387 | ) | $ | 250,746 | ||||||||||
Reclassification adjustment
for gains recognized in income |
| | | | | | ||||||||||||||||||
Unrealized holding gains
on available for sale securities,
net of taxes |
$ | 453,931 | $ | (206,410 | ) | $ | 247,521 | $ | 459,133 | $ | (208,387 | ) | $ | 250,746 | ||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
June 30, 2010 | June 30, 2010 | |||||||||||||||||||||||
Before Tax | Net of Tax | Before Tax | Net of Tax | |||||||||||||||||||||
Amount | Tax Effect | Amount | Amount | Tax Effect | Amount | |||||||||||||||||||
Unrealized holding (losses) gains
arising during the period |
$ | (138,135 | ) | $ | 52,492 | $ | (85,643 | ) | $ | 417,308 | $ | (158,575 | ) | $ | 258,733 | |||||||||
Reclassification adjustment
for gains recognized in income |
| | | | | | ||||||||||||||||||
Unrealized holding (losses) gains
on available for sale securities,
net of taxes |
$ | (138,135 | ) | $ | 52,492 | $ | (85,643 | ) | $ | 417,308 | $ | (158,575 | ) | $ | 258,733 | |||||||||
Note 7: Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company is a party to financial instruments with
off-balance-sheet risk to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit and involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in the balance
sheets. The contractual amounts of these instruments reflect the extent of involvement the Company
has in particular classes of financial instruments.
The contractual amounts of commitments to extend credit and standby letters of credit represent the
amounts of potential accounting loss should the contracts be fully drawn upon; the customers
default; and the values of any existing collateral become worthless. The Company uses the same
credit policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments and evaluates each customers creditworthiness on a case-by-case basis. Management
believes that the Company controls the credit risk of these financial instruments through credit
approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary.
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Financial instruments whose contractual amounts represent credit risk at June 30, 2011 are as
follows:
Commitments to extend credit: |
||||
Future loan commitments |
$ | 25,718,390 | ||
Home equity lines of credit |
25,275,739 | |||
Unused lines of credit |
17,122,105 | |||
Undisbursed construction loans |
1,017,045 | |||
Financial standby letters of credit |
52,000 | |||
$ | 69,185,279 | |||
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments to extend credit generally
have fixed expiration dates or other termination clauses, and may require payment of a fee by the
borrower. Since these commitments could expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on managements credit
evaluation of the counterparty. Collateral held varies but may include residential and commercial
property, deposits and securities.
Standby letters of credit are written commitments issued by the Company to guarantee the
performance of a customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to customers. Newly issued
or modified guarantees that are not derivative contracts are recorded on the Companys consolidated
balance sheet at the fair value at inception. No liability related to guarantees was required to
be recorded at June 30, 2011.
Note 8: Regulatory and Operational Matters
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 financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company 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 table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). In addition, due to the Banks asset profile and
current economic conditions in its markets, the Banks capital plan pursuant to the Agreement
described below targets a minimum 9% Tier 1 leverage capital ratio.
In February 2009 the Bank entered into a formal written agreement (the Agreement) with the Office
of the Comptroller of the Currency (the OCC). Under the terms of the Agreement, the Bank has
appointed a Compliance Committee of outside directors and the Chief Executive Officer. The
Committee must report quarterly to the Board of Directors and to the OCC on the Banks progress in
complying with the Agreement. The Agreement requires the Bank to review, adopt and implement a
number of policies and programs related to credit and operational issues. The Agreement further
provides for certain asset growth restrictions for a limited period of time together with
limitations on the acceptance of certain brokered deposits and the extension of credit to borrowers
whose loans are criticized. The Bank may pay dividends during the term of the Agreement only with
prior written permission from
the OCC. The Agreement also requires that the Bank develop and implement a three-year capital
plan. The Bank has taken or put into process many of the steps required by the Agreement, and does
not anticipate that the restrictions included within the Agreement will impair its current business
plan.
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In June 2010 the Company entered into a formal written agreement (the Reserve Bank Agreement)
with the Federal Reserve Bank of New York (the Reserve Bank). Under the terms of the Reserve
Bank Agreement, the Board of Directors of the Company is still required to take appropriate steps
to fully utilize the Companys financial and managerial resources to serve as a source of strength
to the Bank including taking steps to insure that the Bank complies with the Agreement with the
OCC. The Reserve Bank Agreement requires the Company to submit, adopt and implement a capital plan
that is acceptable to the Reserve Bank. The Company must also report to the Reserve Bank quarterly
on the Companys progress in complying with the Reserve Bank Agreement. The Agreement further
provides for certain restrictions on the payment or receipt of dividends, distributions of interest
or principal on subordinate debentures or trust preferred securities and the Companys ability to
incur debt or to purchase or redeem its stock without the prior written approval of the Reserve
Bank. The Company has taken or put into process many of the steps required by the Reserve Bank
Agreement, and does not anticipate that the restrictions included within the Reserve Bank Agreement
will impair its current business plan.
The Bank and the Company continue to execute their business plan with the goal of achieving full
compliance with the Agreement and the Reserve Bank Agreement noted above. The financial condition
of the Company has improved with the continued reduction in non-performing assets. The operating
performance has also been strengthened with the reduction in operating expenses, resulting from the
closure of four branches and the elimination of selective staff positions. Net interest income is
also improving due to the continued deposit cost reduction and the investment of excess liquidity.
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The Companys and the Banks actual capital amounts and ratios at June 30, 2011 and December 31,
2010 were:
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
(dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
June 30, 2011 |
||||||||||||||||||||||||
The Company: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
$ | 63,217 | 16.27 | % | $ | 31,084 | 8.00 | % | N/A | N/A | ||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
57,671 | 14.85 | % | 15,534 | 4.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 Capital (to Average Assets) |
57,671 | 8.53 | % | 27,044 | 4.00 | % | N/A | N/A | ||||||||||||||||
The Bank: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
$ | 60,847 | 15.68 | % | $ | 31,044 | 8.00 | % | $ | 38,805 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
55,305 | 14.25 | % | 15,524 | 4.00 | % | 23,286 | 6.00 | % | |||||||||||||||
Tier 1 Capital (to Average Assets) |
55,305 | 8.18 | % | 27,044 | 4.00 | % | 33,805 | 5.00 | % | |||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
The Company: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
$ | 80,358 | 17.08 | % | $ | 37,643 | 8.00 | % | N/A | N/A | ||||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
73,822 | 15.69 | % | 18,822 | 4.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 Capital (to Average Assets) |
73,822 | 9.16 | % | 32,219 | 4.00 | % | N/A | N/A | ||||||||||||||||
The Bank: |
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets) |
$ | 77,705 | 16.54 | % | $ | 37,582 | 8.00 | % | $ | 46,978 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk Weighted Assets) |
71,178 | 15.15 | % | 18,791 | 4.00 | % | 28,187 | 6.00 | % | |||||||||||||||
Tier 1 Capital (to Average Assets) |
71,178 | 8.84 | % | 32,203 | 4.00 | % | 40,253 | 5.00 | % |
Restrictions on dividends, loans and advances
The Companys ability to pay dividends is dependent on the Banks ability to pay dividends to the
Company. Pursuant to the February 9, 2009 Agreement between the Bank and the OCC, the Bank can pay
dividends to the Company only pursuant to a dividend policy requiring compliance with the Banks
OCC-approved capital program, in compliance with applicable law and with the prior written
determination of no supervisory objection by the Assistant Deputy Comptroller. In addition to the
Agreement, certain other restrictions exist regarding the ability of the Bank to transfer funds to
the Company in the form of cash dividends, loans or advances. The approval of the OCC is required
to pay dividends in excess of the Banks earnings retained in the current year plus retained net
earnings for the preceding two years. As of June 30, 2011, the Bank had an accumulated deficit;
therefore, dividends may not be paid to the Company. The Bank is also prohibited from paying
dividends that would reduce its capital ratios below minimum regulatory requirements.
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The Companys ability to pay dividends and incur debt is also restricted by the Reserve Bank
Agreement. Under the terms of the Reserve Bank Agreement, the Company has agreed that it shall not
declare or pay any dividends or incur, increase or guarantee any debt without the prior written
approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation
(the Director) of the Board of Governors.
Loans or advances to the Company from the Bank are limited to 10% of the Banks capital stock and
surplus on a secured basis.
Recent Legislative Developments
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Act) was signed into
law on July 21, 2010. The Act is a significant piece of legislation that will have a major impact
on the financial services industry, including the organization, financial condition and operations
of banks and bank holding companies. Management is currently evaluating the impact of the Act;
however, uncertainty remains as to its operational impact, which could have a material adverse
impact on the Companys business, results of operations and financial condition. Many of the
provisions of the Act are aimed at financial institutions that are significantly larger than the
Company and the Bank. Notwithstanding this, there are many other provisions that the Company and
the Bank are subject to and will have to comply with, including any new rules applicable to the
Company and the Bank promulgated by the Bureau of Consumer Financial Protection, a new regulatory
body dedicated to consumer protection. As rules and regulations are promulgated by the agencies
responsible for implementing and enforcing the Act, the Company and the Bank will have to address
each to ensure compliance with applicable provisions of the Act and compliance costs are expected
to increase.
The Dodd-Frank Act broadens the base for Federal Deposit Insurance Corporation insurance
assessments. Under rules issued by the FDIC in February 2011, the base for insurance assessments
changed from domestic deposits to consolidated assets less tangible equity. Assessment rates are
calculated using formulas that take into account the risks of the institution being assessed. The
rule was effective beginning April 1, 2011. This did not have a material impact on the Company.
On June 28, 2011, the Federal Reserve Board approved a final debit-card interchange rule. This
primarily impacts larger banks and should not have a material impact on the Company.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be
written implementing rules and regulations will have on the Company. The financial reform
legislation and any implementing rules that are ultimately issued could have adverse implications
on the financial industry, the competitive environment, and our ability to conduct business.
Management will have to apply resources to ensure compliance with all applicable provisions of the
Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely
impact our earnings.
Note 9: Income Taxes
The determination of the amount of deferred tax assets which are more likely than not to be
realized is primarily dependent on projections of future earnings, which are subject to uncertainty
and estimates that may change given economic conditions and other factors. A valuation allowance
related to deferred tax assets is required when it is considered more likely than not that all or
part of the benefit related to such assets will not be realized. Management has reviewed the
deferred tax position of the Company at June 30, 2011. The deferred tax position has been affected
by several significant transactions in the past three years. These transactions include increased
provision for loan losses, the heightened levels of non-accrual loans and other-than-temporary
impairment write-offs of certain investments. As a result, the Company is in a cumulative net loss
position at June 30, 2011, and under the applicable accounting guidance, has concluded that it is
not more-likely-than-not that the Company will be able to realize its deferred tax assets and,
accordingly, has established a full valuation allowance totaling $16.4 million against its deferred
tax asset at June 30, 2011. The valuation allowance is analyzed quarterly for changes affecting
the deferred tax asset. If, in the future, the Company generates taxable income on a sustained
basis, managements conclusion regarding the need for a deferred tax asset valuation allowance
could change, resulting in the reversal of all or a portion of the deferred tax asset valuation
allowance.
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As measured under the rules of the Tax Reform Act of 1986, the Company has undergone a greater than
50% change of ownership in 2010. Consequently, use of the Companys net operating loss carryforward
and certain built in deductions available against future taxable income in any one year is limited.
The maximum amount of carryforwards available in a given year is limited to the product of the
Companys fair market value on the date of ownership change and the federal long-term tax-exempt
rate, plus any limited carryforward not utilized in prior years. The Company is currently
analyzing the impact of its recent ownership change. There is a full valuation allowance against
the deferred tax assets as the Company does not believe that it is more-likely-than-not that the
Company will generate sufficient taxable income to realize the deferred tax assets. Accordingly,
the Company does not believe the analysis will result in a material impact to the consolidated
financial statements.
Note 10: Fair Value and Interest Rate Risk
The Company uses fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value is best determined based upon quoted market
prices. However, in certain instances, there are no quoted market prices for certain assets or
liabilities. In cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset
or liability.
Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement date under current
market conditions. If there has been a significant decrease in the volume and level of activity
for the asset or liability, a change in valuation technique or the use of multiple valuation
techniques may be appropriate. In such instances, determining the price at which willing market
participants would transact at the measurement date under current market conditions depends on the
facts and circumstances and requires the use of significant judgment.
The Companys fair value measurements are classified into a fair value hierarchy based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used
to determine fair value. The three categories within the hierarchy are as follows:
| Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. |
| Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability (such as interest rates,
volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally
from or corroborated by market data by correlation or other means. |
| Level 3 Inputs - Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities. |
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The fair value measurement level of an asset or liability within the fair value hierarchy is based
on the lower level of any input that is significant to the fair value measurement. Valuation
techniques used need to maximize the use of observable inputs and minimize the use of unobservable
inputs.
A description of the valuation methodologies used for assets and liabilities recorded at fair
value, and for estimating fair value for financial and non-financial instruments not recorded at
fair value, is set forth below.
Cash and due from banks, federal funds sold, short-term investments and accrued interest receivable
and payable: The carrying amount is a reasonable estimate of fair value. These financial
instruments are not recorded at fair value on a recurring basis.
Available-for-Sale Securities: These financial instruments are recorded at fair value in the
financial statements. Where quoted prices are available in an active market, securities are
classified within Level 1 of the fair value hierarchy. If quoted prices are not available, then
fair values are estimated by using pricing models (i.e., matrix pricing) or quoted prices of
securities with similar characteristics and are classified within Level 2 of the fair value
hierarchy. Examples of such instruments include government agency bonds and mortgage-backed
securities, and money market preferred equity securities. Level 3 securities are instruments for
which significant unobservable inputs are utilized. Available-for-sale Securities are recorded at
fair value on a recurring basis.
Other Investments: This investment includes the Solomon Hess SBA Loan Fund, utilized for the
purpose of the Bank satisfying its CRA lending requirements. As this fund operates as a private
fund, shares in the Fund are not publicly traded and therefore have no readily determinable market
value. Therefore, this investment is classified within Level 2 of the fair value hierarchy. An
investor can have their interest in the Fund redeemed for the balance of their capital account at
any quarter end assuming they give the Fund 60 days notice. The investment in this Fund is
recorded at cost. The Company does not record other investments at fair value on a recurring
basis.
Loans: For variable rate loans, which reprice frequently and have no significant change in credit
risk, carrying values are a reasonable estimate of fair values, adjusted for credit losses inherent
in the portfolios. The fair value of fixed rate loans is estimated by discounting the future cash
flows using the period end rates, estimated by using local market data, at which similar loans
would be made to borrowers with similar credit ratings and for the same remaining maturities,
adjusted for credit losses inherent in the portfolios. The Company does not record loans at fair
value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to
collateral-dependent impaired loans are recorded to reflect partial write-downs based on the
observable market price or current appraised value of collateral. Fair values estimated in this
manner do not fully incorporate an exit-price approach to fair value, but instead are based on a
comparison to current market rates for comparable loans.
Other Real Estate Owned: The fair values of the Companys other real estate owned (OREO)
properties are based on the estimated current property valuations less estimated selling costs.
When the fair value is based on current observable appraised values, OREO is classified within
Level 2. The Company classifies OREO within Level 3 when unobservable adjustments are made to
appraised values. The Company does not record other real estate owned at fair value on a recurring
basis.
Deposits: The fair value of demand deposits, regular savings and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of certificates of deposit and
other time deposits is estimated using a discounted cash flow calculation that applies interest
rates currently being offered for deposits of similar remaining maturities, estimated using local
market data, to a schedule of aggregated expected maturities on such deposits. The Company does
not record deposits at fair value on a recurring basis.
Short-term borrowings: The carrying amounts of borrowings under short-term repurchase agreements
and other short-term borrowings maturing within 90 days approximate their fair values. The Company
does not record short-term borrowings at fair value on a recurring basis.
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Junior Subordinated Debt: Junior subordinated debt reprices quarterly and as a result the carrying
amount is considered a reasonable estimate of fair value. The Company does not record junior
subordinated debt at fair value on a recurring basis.
Federal Home Loan Bank Borrowings: The fair value of the advances is estimated using a discounted
cash flow calculation that applies current Federal Home Loan Bank interest rates for advances of
similar maturity to a schedule of maturities of such advances. The Company does not record these
borrowings at fair value on a recurring basis.
Other Borrowings: The fair values of longer term borrowings and fixed rate repurchase agreements
are estimated using a discounted cash flow calculation that applies current interest rates for
transactions of similar maturity to a schedule of maturities of such transactions. The Company
does not record these borrowings at fair value on a recurring basis.
Off-balance sheet instruments: Fair values for the Companys off-balance-sheet instruments
(lending commitments) are based on interest rate changes and fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements and the
counterparties credit standing. The Company does not record its off-balance-sheet instruments at
fair value on a recurring basis.
The following table details the financial assets measured at fair value on a recurring basis as of
June 30, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation
techniques utilized by the Company to determine fair value:
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets | Observable | Unobservable | Balance | |||||||||||||
for Identical Assets | Inputs | Inputs | as of | |||||||||||||
June 30, 2011 | (Level 1) | (Level 2) | (Level 3) | June 30, 2011 | ||||||||||||
Securities available for sale |
$ | | $ | 88,926,471 | $ | | $ | 88,926,471 | ||||||||
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets | Observable | Unobservable | Balance | |||||||||||||
for Identical Assets | Inputs | Inputs | as of | |||||||||||||
December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | December 31, 2010 | ||||||||||||
Securities available for sale |
$ | | $ | 40,564,700 | $ | | $ | 40,564,700 | ||||||||
Certain financial assets and financial liabilities are measured at fair value on a
nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but
are subject to fair value adjustments in certain circumstances (for example, when there is evidence
of impairment).
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Table of Contents
The following tables reflect financial assets measured at fair value on a non-recurring basis as of
June 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the
fair value hierarchy utilized to measure fair value:
Quoted Prices in | Significant | Significant | ||||||||||||||
Active Markets | Observable | Unobservable | ||||||||||||||
for Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Balance | |||||||||||||
June 30, 2011 |
||||||||||||||||
Impaired Loans (1) |
$ | | $ | | $ | 19,051,605 | $ | 19,051,605 | ||||||||
Other real estate owned (2) |
$ | | $ | | $ | 3,611,330 | $ | 3,611,330 | ||||||||
December 31, 2010 |
||||||||||||||||
Impaired Loans (1) |
$ | | $ | | $ | 30,999,865 | $ | 30,999,865 | ||||||||
Other real estate owned (2) |
$ | | $ | | $ | 10,103,199 | $ | 10,103,199 | ||||||||
(1) | Represents carrying value for which adjustments are based on the appraised
value of the collateral. |
|
(2) | Represents carrying value for which adjustments are based on the appraised value of
the property. |
The Company discloses fair value information about financial instruments, whether or not
recognized in the consolidated balance sheet, for which it is practicable to estimate that value.
Certain financial instruments are excluded from disclosure requirements and, accordingly, the
aggregate fair value amounts presented do not represent the underlying value of the Company.
The estimated fair value amounts have been measured as of June 30, 2011 and December 31, 2010 and
have not been reevaluated or updated for purposes of these financial statements subsequent to those
respective dates. As such, the estimated fair value of these financial instruments subsequent to
the respective reporting dates may be different than amounts reported on those dates.
The information presented should not be interpreted as an estimate of the fair value of the Company
since a fair value calculation is only required for a limited portion of the Companys assets and
liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in
making the estimates, comparisons between the Companys disclosures and those of other bank holding
companies may not be meaningful.
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Table of Contents
The following is a summary of the carrying amounts and estimated fair values of the Companys
financial instruments at June 30, 2011 and December 31, 2010 (in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial Assets: |
||||||||||||||||
Cash and noninterest bearing balances due from banks |
$ | 6,242 | $ | 6,242 | $ | 4,613 | $ | 4,613 | ||||||||
Interest-bearing deposits due from banks |
52,760 | 52,760 | 131,711 | 131,711 | ||||||||||||
Federal funds sold |
5,000 | 5,000 | 10,000 | 10,000 | ||||||||||||
Short-term investments |
547 | 547 | 453 | 453 | ||||||||||||
Other investments |
3,500 | 3,500 | 3,500 | 3,500 | ||||||||||||
Available-for-sale securities |
88,926 | 88,926 | 40,565 | 40,565 | ||||||||||||
Federal Reserve Bank stock |
1,911 | 1,911 | 1,192 | 1,192 | ||||||||||||
Federal Home Loan Bank stock |
4,508 | 4,508 | 4,508 | 4,508 | ||||||||||||
Loans receivable, net |
451,981 | 462,781 | 534,531 | 542,360 | ||||||||||||
Accrued interest receivable |
2,329 | 2,329 | 2,512 | 2,512 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Demand deposits |
$ | 61,586 | $ | 61,586 | $ | 51,058 | $ | 51,058 | ||||||||
Savings deposits |
56,594 | 56,594 | 57,042 | 57,042 | ||||||||||||
Money market deposits |
67,451 | 67,451 | 92,683 | 92,683 | ||||||||||||
NOW accounts |
25,007 | 25,007 | 19,297 | 19,297 | ||||||||||||
Time deposits |
313,867 | 317,927 | 426,728 | 432,466 | ||||||||||||
FHLB Borrowings |
50,000 | 51,323 | 50,000 | 51,195 | ||||||||||||
Securities sold under repurchase agreements |
7,000 | 7,796 | 7,000 | 7,796 | ||||||||||||
Subordinated debentures |
8,248 | 8,248 | 8,248 | 8,248 | ||||||||||||
Accrued interest payable |
852 | 852 | 729 | 729 |
The Company assumes interest rate risk (the risk that general interest rate levels will
change) as a result of its normal operations. As a result, the fair values of the Companys
financial instruments will change when interest rate levels change and that change may be either
favorable or unfavorable to the Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate environment and more likely
to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are
more likely to withdraw funds before maturity in a rising rate environment and less likely to do so
in a falling rate environment. Management monitors rates and maturities of assets and liabilities
and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by
investing in securities with terms that mitigate the Companys overall interest rate risk.
Off-balance sheet instruments
Loan commitments on which the committed interest rate is less than the current market rate were
insignificant at June 30, 2011 and December 31, 2010. The estimated fair value of fee income on
letters of credit at June 30, 2011 and December 31, 2010 was insignificant.
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Note 11: Restructuring Charges and Asset Disposals
Bancorp recorded restructuring charges and asset disposals of $3.0 million for the quarter ended
June 30, 2011. These costs are included in restructuring charges and asset disposals expense in
the Consolidated Statements of Operations.
During 2011, Bancorp announced that it would be undertaking a series of initiatives that are
designed to transform and enhance its operations. In order to strengthen Bancorps competitive
position and return it to its goal of restored health and profitability, it executed one initiative
to consolidate four branch locations and vacate other office space, and a second plan to reduce
workforce by approximately 10% of employees.
On March 3, 2011, Bancorp announced that it would consolidate four branches, effective June 2011,
to reduce operating expenses. All customer accounts in the affected branches were transferred to
nearby Patriot branches to minimize any inconvenience to customers. The consolidation of these
branches resulted in an earnings charge of $1.8 million, which is comprised of lease termination
expenses of $1.2 million, lease liabilities charges of $0.4 million, and severance payments of $0.2
million to affected employees. In addition, there was a $0.6 million write-off of leasehold
improvements and other fixed assets for these branches that were closed.
In order to further reduce operating expenses, Bancorp announced on May 16, 2011 that it would be
executing a workforce reduction plan with employees in the back office operational areas. There
were a total of eighteen employees affected by this reduction. This initiative resulted in an
earnings charge of $0.6 million, which is comprised exclusively of severance payments to affected
employees.
Restructuring reserves at June 30, 2011 for the restructuring activities taken in connection with
these initiatives are comprised of the following:
Cash | Non-cash | Balance at | ||||||||||||||
Expenses | payments | charges | June 30, 2011 | |||||||||||||
Severance and benefit costs |
$ | 756,727 | $ | | $ | | $ | 756,727 | ||||||||
Lease termination costs |
1,659,995 | (990,000 | ) | | 669,995 | |||||||||||
Asset disposals |
569,719 | | (569,719 | ) | | |||||||||||
Total |
$ | 2,986,441 | $ | (990,000 | ) | $ | (569,719 | ) | $ | 1,426,722 | ||||||
The restructuring reserves at June 30, 2011 are included in accrued expenses and other liabilities
in the Consolidated Balance Sheet.
Note 12: Recent Accounting Pronouncements
In February 2010, the FASB issued ASU No. 2010-06 Topic 820 Improving Disclosures about Fair Value
Measurements which amended the existing guidance related to Fair Value Measurements and
Disclosures. The amendments require the following new fair value disclosures:
| Separate disclosure of the significant transfers into and out of Level 1 and Level 2
fair value measurements, and a description of the reasons for the transfers. |
| In the rollforward of activity for Level 3 fair value measurements (significant
unobservable inputs), purchases, sales, issuances, and settlements should be presented
separately (on a gross basis rather than as one net number). |
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In addition, the amendments clarify existing disclosure requirements, as follows:
| Fair value measurements and disclosures should be presented for each class of assets
and liabilities within a line item in the statement of financial position. |
| Reporting entities should provide disclosures about the valuation techniques and
inputs used to measure fair value for both recurring and nonrecurring fair value
measurements that fall in either Level 2 or Level 3. |
The new disclosures and clarifications of existing disclosures were effective for the Company
beginning in the quarter ended March 31, 2010, except for the disclosures included in the roll
forward of activity for Level 3 fair value measurements, for which the effective date is for fiscal
years beginning after December 15, 2010, and for interim periods within those fiscal years. The
Company adopted this guidance during the quarters ended March 31, 2010 and March 31, 2011
respectively, and has included these disclosures in these financial statements.
The FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses in July 2010. The amendments in this ASU apply to all entities,
both public and nonpublic, with financing receivables, excluding short-term trade accounts
receivable or receivables measured at fair value or lower of cost or fair value. The amendments in
this ASU enhance disclosures about the credit quality of financing receivables and the allowance
for credit losses. This ASU amends existing disclosure guidance to require entities to provide a
greater level of disaggregated information about the credit quality of its financing receivables
and its allowance for credit losses. In addition, this ASU requires entities to disclose credit
quality indicators, past due information, and modifications of its financing receivables. For
public entities, the disclosures as of the end of a reporting period are effective for interim and
annual reporting periods ending on or after December 15, 2010. The disclosures about activity that
occurs during a reporting period are effective for interim and annual reporting periods beginning
on or after December 15, 2010. The adoption of this guidance did not have an impact on the
Companys results of operations or financial position.
In April 2011, the FASB issued ASU No. 2011-02, A Creditors Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. The amendments in this update apply to all
creditors, both public and nonpublic, that restructure receivables that fall within the scope of
Subtopic 310-40, Receivables Troubled Debt Restructurings by Creditors. The amendments in this
ASU clarify the guidance on a creditors evaluation of whether it has granted a concession and
whether a debtor is experiencing financial difficulties. In addition, the amendments clarify that
a creditor is precluded from using the effective interest rate test in the debtors guidance on
restructuring of payables when evaluating whether a restructuring constitutes a troubled debt
restructuring. These amendments are effective for the first interim or annual period beginning on
or after June 15, 2011. The Company adopted this guidance in the first quarter ended March 31,
2011 and the guidance did not have a material impact on the Companys results of operations or
financial position.
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Item 2: | Managements Discussion and Analysis of Financial Condition and Results of
Operations |
SAFE HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in Bancorps public reports, including this report, and in particular
in Managements Discussion and Analysis of Financial Condition and Results of Operations, may be
forward looking and subject to a variety of risks and uncertainties. These factors include, but
are not limited to; (1) changes in prevailing interest rates which would affect the interest earned
on Bancorps interest earning assets and the interest paid on its interest bearing liabilities; (2)
the timing of repricing of Bancorps interest earning assets and interest bearing liabilities; (3)
the effect of changes in governmental monetary policy; (4) the effect of changes in regulations
applicable to Bancorp and the Bank and the conduct of its business; (5) changes in competition
among financial service companies, including possible further encroachment of non-banks on services
traditionally provided by banks; (6) the ability of competitors that are larger than Bancorp to
provide products and services which it is impracticable for Bancorp to provide; (7) the state of
the economy and real estate values in Bancorps market areas, and the consequent effect on the
quality of Bancorps loans, customers, vendors and communities; (8) recent governmental initiatives
that are expected to have a profound effect on the financial services industry and could
dramatically change the competitive environment of Bancorp; (9) other legislative or regulatory
changes, including those related to residential mortgages, changes in accounting standards, and
Federal Deposit Insurance Corporation (FDIC) premiums that may adversely affect Bancorp.
Although Bancorp believes that it offers the loan and deposit products and has the resources needed
for continued success, future revenues and interest spreads and yields cannot be reliably
predicted. These trends may cause Bancorp to adjust its operations in the future. Because of the
foregoing and other factors, recent trends should not be considered reliable indicators of future
financial results or stock prices.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities.
Actual results could differ from those estimates. Management has identified the accounting for the
allowance for loan losses, the valuation of its investment securities and the valuation of deferred
income tax assets, as Bancorps most critical accounting policies and estimates in that they are
important to the portrayal of Bancorps financial condition and results. They require managements
most subjective and complex judgment as a result of the need to make an estimate about the effect
of matters that are inherently uncertain. These accounting policies, including the nature of the
estimates and types of assumptions used, are described throughout this Managements Discussion and
Analysis.
Summary
Bancorp incurred a net loss of $7.2 million ($0.19 basic and diluted loss per share) for the
quarter ended June 30, 2011, compared to a net loss of $1.4 million ($0.29 basic and diluted loss
per share) for the quarter ended June 30, 2010. For the six-month period ended June 30, 2011,
Bancorp incurred a net loss of $16.2 million ($0.42 basic and diluted loss per share) compared to
net loss of $4.5 million ($0.95 basic and diluted loss per share) for the six months ended June 30,
2010. The primary reason for the increased loss in the six-month comparison is the $6.2 million
loss on the bulk sale of non-performing assets, as discussed in Note 3, and the restructuring
charges of $3.0 million associated with the branch closings and reduction-in-force, discussed in
Note 11. Bancorps net interest income for the quarter ended June 30, 2011 was $5.0 million
compared to $5.9 million for the quarter ended June 30, 2010. Interest income and interest expense
decreased by 24% and 40%, respectively, for the quarter ended June 30, 2011 compared to the quarter
ended June 30, 2010. For the six months ended June 30, 2011, interest income and expense declined
by 24% and 37% respectively, compared to the six months ended June 30, 2010. The decline in
interest income is due primarily to lower average outstanding loan balances, the lower interest
rate environment and high levels of liquidity. The significant decline in interest expense is
primarily due to the reduction of total deposits as management lowered interest rates paid on high
rate non-core deposits.
Total assets decreased $136.1 million from $784.3 million at December 31, 2010 to $648.2 million at
June 30, 2011. Cash and cash equivalents decreased $82.2 million from $146.8 million at December
31, 2010 to $64.5 million at June 30, 2011. Available-for-sale securities increased $48.4 million
from $40.6 million at December 31, 2010 to $88.9 million at June 30, 2011. The net loan portfolio
decreased $82.6 million from $534.5 million at December 31, 2010 to $452.0 million at June 30,
2011. This decrease is primarily a result of a $66.8 million bulk sale of non-performing assets,
comprised of $52.4 million of non-performing loans and $14.4 million of other real estate owned.
This was the result of managements strategic plan to dramatically lower the level of
non-performing assets and improve the overall credit quality, and significantly increase the level
of earning assets. As a result of weak loan demand and currently high levels of balance sheet
liquidity, the Bank continued to lower rates on deposit products. The overall cost of deposits
decreased from 1.81% at June 30, 2010 to 1.30% at June 30, 2011. Deposits decreased $122.3 million
from $646.8 million at December 31, 2010 to $524.5 million at June 30, 2011. Borrowings remained
unchanged compared to December 31, 2010.
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Financial Condition
Cash and Cash Equivalents
Cash and cash equivalents decreased $82.3 million, or 56%, to $64.5 million at June 30, 2011
compared to $146.8 million at December 31, 2010. This decrease is primarily the result of using
$52.0 million in excess liquidity to purchase available for sale securities. In addition, deposit
balances decreased as Bancorp strategically reduced deposit rates in order to lower its funding
costs.
Investments
The following table is a summary of Bancorps available-for-sale securities portfolio, at fair
value, at the dates shown:
June 30, | December 31 | |||||||
2011 | 2010 | |||||||
U. S. Government agency mortgage-backed
securities |
$ | 76,732,887 | $ | 37,471,878 | ||||
Corporate bonds |
8,938,689 | | ||||||
Auction rate preferred equity securities |
3,254,895 | 3,092,822 | ||||||
Total Available-for-Sale Securities |
$ | 88,926,471 | $ | 40,564,700 | ||||
Available-for-sale securities increased $48.3 million, or 119.2%, from $40.6 million at
December 31, 2010 to $88.9 million at June 30, 2011. This increase is primarily due to purchases
of mortgage-backed securities and corporate bonds of $43.0 million and $9.0 million respectively,
and net unrealized gains of $342,000. These were partially offset with principal pay downs of $4.0
million on mortgage backed securities.
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Loans
The following table is a summary of Bancorps loan portfolio at the dates shown:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Real Estate |
||||||||
Commercial |
$ | 203,889,507 | $ | 228,842,489 | ||||
Residential |
154,301,727 | 187,058,318 | ||||||
Construction |
26,479,881 | 63,889,083 | ||||||
Construction to permanent |
10,300,425 | 10,331,043 | ||||||
Commercial |
23,512,120 | 14,573,790 | ||||||
Consumer home equity |
42,600,664 | 42,884,962 | ||||||
Consumer installment |
2,009,548 | 1,932,763 | ||||||
Total Loans |
463,093,872 | 549,512,448 | ||||||
Premiums on purchased loans |
237,398 | 242,426 | ||||||
Net deferred costs |
49,482 | 150,440 | ||||||
Allowance for loan losses |
(11,399,727 | ) | (15,374,101 | ) | ||||
Loans receivable, net |
$ | 451,981,025 | $ | 534,531,213 | ||||
Bancorps net loan portfolio decreased $82.5 million, or 15.4%, from $534.5 million at
December 31, 2010 to $452.0 million at June 30, 2011. The decrease is primarily a result of a bulk
sale of non-performing assets and loan payoffs, including some that were impaired and on
non-accrual status. Construction loans decreased by $37.4 million, commercial real estate loans
decreased by $25.0 million, residential mortgages decreased by $32.8 million and consumer home
equity decreased by $284 thousand, partially offset by increases to commercial loans of $8.9
million. The net decrease in the portfolio also reflects net charge-offs for the six months ended
June 30, 2011 of $6.4 million, of which specific reserves of $3.4 million were related to loans in
the bulk sale. In an effort to reduce its concentration in construction loans, Bancorp has
continued its moratorium on originating new speculative construction loans.
On March 24, 2011, the Bank completed the sale of certain non-performing assets that included 21
non-accruing loans with an aggregate net book value of $52.4 million (net of related specific
reserves) and 4 OREO properties with an aggregate carrying value of $14.4 million. The sale of
$66.8 million of non-performing assets was consummated for a cash purchase price of $60.6 million
which represented 90.7% of the Banks net book value for these assets.
At June 30, 2011, the net loan to deposit ratio was 86% and the net loan to total assets ratio was
70%. At December 31, 2010, these ratios were 83% and 68%, respectively.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectability of the loans in light of historical experience,
the nature and volume of the loan portfolio, adverse situations that may affect a borrowers
ability to repay, estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. The allowance for loan losses
decreased by $4.0 million from December 31, 2010 to June 30, 2011 primarily due to net charge-offs
of $6.4 million, of which $3.4 million were specific reserves related to the bulk sale. In
addition, a provision of $8.5 million was recorded, of which $6.0 million related to loans
transferred to held-for-sale in connection with the bulk loan sale.
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The allowance consists of allocated and general components. The allocated component relates to
loans that are considered impaired. For such impaired loans, an allowance is established when the
discounted cash flows (or observable market price or collateral value if the loan is collateral
dependent) of the impaired loan is lower than the carrying value of that loan. When a loan is
placed on non-accrual status the loan is considered impaired. For collateral dependent loans, the
appraised value is reduced by estimated selling costs and any senior liens and the result is
compared to the principal loan balance to determine the impairment amount, if any. For loans that
are not collateral dependent and for which a restructure is in place, the impairment is determined
by using the discounted cash flow method which takes into account the difference between the
original interest rate and the restructured rate.
The general component covers all other loans, segregated generally by loan type, and is based on
historical loss experience with adjustments for qualitative factors which are made after an
assessment of internal or external influences on credit quality that are not fully reflected in the
historical loss data. In addition, a risk rating system is utilized to evaluate the general
component of the allowance for loan losses. Management assigns risk ratings to all loans assigning
ratings between one and nine, with a rating of one being the least risk, and a rating of nine
reflecting the most risk or a complete loss. Risk ratings are assigned based upon the
recommendations of the credit analyst and the originating loan officer and confirmed by the Loan
Committee at the initiation of the transactions and are reviewed and changed, when necessary,
during the life of the loan. Loans assigned a risk rating of six or above are monitored more
closely by the credit administration officers and Loan Workout Committee.
The allowance for loan losses reflects managements estimate of probable but unconfirmed losses
inherent in the portfolio; such estimates are influenced by uncertainties in economic conditions,
unfavorable information about a borrowers financial condition, delays in obtaining information,
difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and
risk factors that have not yet manifested themselves in loss allocation factors. Loan quality
control is continually monitored by management, subject to oversight by the Board of Directors
through its members who serve on the Loan Committee. Loan quality control is also reviewed by the
full Board of Directors on a monthly basis and semi-annual loan reviews are performed by an
independent external firm. The independent external loan review reports directly to the Audit
Committee.
The methodology for determining the adequacy of the allowance for loan losses has been consistently
applied. Of the $11.4 million allowance for loan losses as of June 30, 2011, $3.0 million was
attributed to collateral dependent impaired loans and $8.4 million was the general reserve
attributed to performing loans. The appraised values on impaired loans that are anticipated to
become OREO in the coming quarter are adjusted based upon Bancorps recent sales experience. As of
June 30, 2011, the Banks OREO sales experience has indicated that the ultimate sales prices of the
underlying collateral have been 13% less than the appraisal amounts. The appraisal adjustment
percentage is reviewed quarterly for those loans anticipated to become OREO in the subsequent
quarter, based on an analysis of actual variances between appraised values as of the date the loan
is transferred into OREO and the actual sales prices of the OREO properties. Generally, the sales
prices have usually been below the appraised values due to the fact that buyers become aware that
the Bank owns those properties and, therefore, attempt to offer less than fair market value. In
the future, additional revisions may be made to the methodology and assumptions based on historical
information related to charge-off and recovery experience and managements evaluation of the
current loan portfolio, and prevailing internal and external factors including but not limited to
current economic conditions and local real estate markets. The $8.5 million provision for the six
months ended June 30, 2011 included $6.0 million related to loans transferred to held-for-sale in
connection with the bulk loan sale and $2.5 million was deemed necessary by management to maintain
appropriate coverage after taking the net charge-offs of $6.4 million. The ratio of allowance for
loan losses to total loans as of June 30, 2011 was 2.46% as compared to 2.80% as of December 31,
2010. Management believes that the decrease is warranted based upon the significant reduction on
non-performing loans and charge-offs of specific reserves related to loans in the bulk sale.
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The accrual of interest on loans is discontinued at the time a loan is 90 days past due unless the
loan is well-secured and in process of collection. Past due status is based on contractual terms
of the loan. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date
if collection of principal or interest is considered doubtful. Management considers all
non-accrual loans and troubled debt restructured loans to be impaired. All interest accrued but not
collected for loans that are placed on nonaccrual status is reversed against interest income. The
interest on these loans is accounted for on the cash-basis method until qualifying for return to
accrual status. Loans may be returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured after a
six month seasoning period.
In most cases, loan payments that are past due less than 90 days, based on contractual terms, are
considered collection delays and the related loans are not considered to be impaired. The Bank
considers consumer installment loans to be pools of smaller balance homogeneous loans, which are
collectively evaluated for impairment.
The changes in the allowance for loan losses for the periods shown are as follows:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
(Thousands of dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Balance at beginning of period |
$ | 12,208 | $ | 15,062 | $ | 15,374 | $ | 15,794 | ||||||||
Charge-offs |
(3,034 | ) | (1,594 | ) | (7,188 | ) | (3,177 | ) | ||||||||
Recoveries |
743 | 9 | 764 | 133 | ||||||||||||
Net Charge-offs |
(2,291 | ) | (1,585 | ) | (6,424 | ) | (3,044 | ) | ||||||||
Transferred to loans held-for-sale |
| | (6,014 | ) | | |||||||||||
Provision charged to operations |
1,483 | 512 | 8,464 | 1,239 | ||||||||||||
Balance at end of period |
$ | 11,400 | $ | 13,989 | $ | 11,400 | $ | 13,989 | ||||||||
Ratio of net charge-offs during
the period to average loans
outstanding during the period |
0.48 | % | 0.25 | % | 1.28 | % | 0.47 | % | ||||||||
Ratio of ALLL / Gross Loans |
2.46 | % | 2.26 | % | 2.46 | % | 2.26 | % | ||||||||
Based upon the overall assessment and evaluation of the loan portfolio, management believes
the allowance for loan losses of $11.4 million, at June 30, 2011, which represents 2.46% of gross
loans outstanding, is adequate under prevailing economic conditions, to absorb existing losses in
the loan portfolio. Bancorp has had seven consecutive quarters of decreases in non-accrual loans.
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Non-Accrual, Past Due and Restructured Loans
The following table presents non-accruing loans and loans past due 90 days or more and still
accruing:
June 30, | December 31, | |||||||
(Thousands of dollars) | 2011 | 2010 | ||||||
Loans past due over 90 days
still accruing |
$ | 907 | $ | 3,374 | ||||
Non accruing loans |
26,733 | 89,150 | ||||||
Total |
$ | 27,640 | $ | 92,524 | ||||
% of Total Loans |
5.96 | % | 16.83 | % | ||||
% of Total Assets |
4.26 | % | 11.80 | % |
Loans delinquent over 90 days and still accruing aggregating $907,000 are comprised of one loan
which has matured, is well secured and the borrower continues to make payments monthly. The bank
has agreed to forbear from pursuing its remedies while the borrower arranges refinancing from
another financial institution. Impaired loans, which are comprised of non-accruing loans and
troubled debt restructured loans, decreased by $7.7 million to $42.8 million for the quarter ended
June 30, 2011 and decreased $57.9 million for the six months ended June 30, 2011. Impaired loans
are attributable to the lingering effects of the downturn in the economy, which has severely
impacted the real estate market and placed unprecedented stress on credit markets. Residents of
Fairfield County, Connecticut, many of whom are associated with the financial services industry,
have been affected by the impact of the poor economy on employment and real estate values.
The $26.7 million of non-accrual loans at June 30, 2011 is comprised of exposure to 32 loans, for
which a specific reserve of $2.7 million has been established. All of the non-accruing loans are
collateral dependent and are secured by residential or commercial real estate located within the
Banks market area. In all cases, the Bank has obtained appraisal reports from independent
licensed appraisal firms and discounted those values for estimated selling costs to determine
estimated impairment. Of the $26.7 million of non-accrual loans at June 30, 2011, borrowers of 11
loans with aggregate balances of $8.2 million continue to make loan payments and these loans are
current within one month as to payments.
Potential Problem Loans
In addition to the above, there are $55.9 million of substandard accruing loans comprised of 38
loans and $49.0 million of special mention loans comprised of 53 loans for which management has a
concern as to the ability of the borrowers to comply with the present repayment terms. All but
$2.2 million of the substandard accruing loans and the special mention loans comprised of 4
borrowers continue to make timely payments and are within 30 days at June 30, 2011.
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Other Real Estate Owned
The following table is a summary of Bancorps other real estate owned at the dates shown:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Residential construction |
$ | 2,661,330 | $ | 15,774,187 | ||||
Land |
950,000 | 634,600 | ||||||
Other real estate owned |
$ | 3,611,330 | $ | 16,408,787 | ||||
The balance of other real estate owned at June 30, 2011 is comprised of two properties with
a carrying value of $3.6 million that was obtained through loan foreclosure proceedings. Included
in the March 2011 bulk sale of non-performing assets were four OREO properties with an aggregate
carrying value of $14.4 million. Additionally, during the six months ended June 30, 2011 one
property was added and two properties were sold.
Deferred Taxes
The determination of the amount of deferred tax assets which are more likely than not to be
realized is primarily dependent on projections of future earnings, which are subject to uncertainty
and estimates that may change given economic conditions and other factors. A valuation allowance
related to deferred tax assets is required when it is considered more likely than not that all or
part of the benefit related to such assets will not be realized. Management has reviewed the
deferred tax position of Bancorp at June 30, 2011. The deferred tax position has been affected by
several significant matters in the past three years. These matters include increased levels of
provision for loan losses, the high levels of non-accrual loans and other-than-temporary impairment
write-offs of certain investments. As a result, Bancorp is in a cumulative net loss position at
June 30, 2011, and under the applicable accounting guidance, has concluded that it is not
more-likely-than-not that the Company will be able to realize the deferred tax assets and
accordingly has established a full valuation allowance totaling $16.4 million against its net
deferred tax asset at June 30, 2011. The valuation allowance is analyzed quarterly for changes
affecting the deferred tax asset. If, in the future, Bancorp generates taxable income on a
sustained basis, managements conclusion regarding the need for a deferred tax asset valuation
allowance could change, resulting in the reversal of all or a portion of the deferred tax asset
valuation allowance.
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Deposits
The following table is a summary of the Companys deposits at the dates shown:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Non-interest bearing |
$ | 61,585,518 | $ | 51,058,373 | ||||
Interest bearing |
||||||||
NOW |
25,006,997 | 19,297,225 | ||||||
Savings |
56,593,803 | 57,041,943 | ||||||
Money market |
67,450,747 | 92,683,478 | ||||||
Time certificates, less than $100,000 |
189,787,813 | 251,296,558 | ||||||
Time certificates, $100,000 or more |
124,079,959 | 175,431,252 | ||||||
Total interest bearing |
462,919,319 | 595,750,456 | ||||||
Total Deposits |
$ | 524,504,837 | $ | 646,808,829 | ||||
Total deposits decreased $122.3 million, or 19%, from $646.8 million at December 31, 2010 to
$524.5 million at June 30, 2011. Demand deposits increased $10.5 million primarily as a result of
increases in commercial and personal checking accounts of $4.2 million and $2.1 million
respectively, and an increase in official checks of $4.2 million. Interest bearing accounts
decreased $132.8 million. This is primarily due to decreases in certificates of deposit (CDs)
of $112.9 million, which is a result of Bancorp intentionally allowing the higher rate CDs to
runoff to help reduce the cost of funds and improve the interest spread; and, decreases in money
market accounts of $25.2 million due to improved economic conditions in the overall financial
markets as customers reinvested in financial instruments outside of the banking industry A large
number of our CD account holders had temporarily placed funds in money market accounts during the
economic recession. These decreases were partially offset by increases in NOW accounts of $5.7
million, of which $4.6 million were due to IOLTA accounts.
Borrowings
At June 30, 2011, total borrowings were $65.2 million and are unchanged compared to December 31,
2010. In addition to the outstanding borrowings disclosed in the consolidated balance sheet, the
Bank has the ability to borrow approximately $100.3 million in additional advances from the Federal
Home Loan Bank of Boston, including a $2.0 million overnight line of credit. The Bank has also
established a line of credit at the Federal Reserve Bank.
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The subordinated debentures of $8,248,000 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
subordinated debentures and the declaration of trust governing the Trust, provides a full and
unconditional guarantee of amounts on the capital securities. The subordinated debentures, which
bear interest at three-month LIBOR plus 3.15% (3.3965% at June 30, 2011), matures on March 26,
2033. Beginning in the second quarter of 2009, the Company began deferring interest payments on
the subordinated debentures as permitted under the terms of the debentures. The deferral in the
second quarter of 2011 represented the ninth consecutive quarter of deferral. The Company
continues to accrue and charge interest to operations. The Company may defer the payment of
interest until March 2014, and all accrued interest must be paid prior to or at completion of the
deferral period.
Capital
Capital decreased $15.9 million compared to December 31, 2010 primarily as a result of the net loss
of $6.2 million on the bulk sale of non-performing assets, $3.0 million on branch closings and
reduction-in-force, and loss on continuing operations for the six months ended June 30, 2011.
Off-Balance Sheet Arrangements
Bancorps off-balance sheet arrangements, which primarily consist of commitments to lend, increased
by $34.2 million from $35.0 million at December 31, 2010 to $69.2 million at June 30, 2011,
primarily due to increases of $21.0 million in future loan commitments, $9.4 million in unused
lines of credit and $4.1 million in home equity lines of credit as the Company continues to
increase loan origination activity.
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Results of Operations
Interest and dividend income and expense
The following tables present average balance sheets (daily averages), interest income, interest
expense and the corresponding yields earned and rates paid for major balance sheet components:
Three months ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Income/ | Average | Average | Income/ | Average | |||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Loans |
$ | 472,761 | $ | 6,539 | 5.53 | % | $ | 634,250 | $ | 8,938 | 5.64 | % | ||||||||||||
Investments |
77,569 | 568 | 2.93 | % | 69,458 | 444 | 2.56 | % | ||||||||||||||||
Interest bearing deposits in banks |
77,734 | 58 | 0.30 | % | 41,761 | 21 | 0.20 | % | ||||||||||||||||
Federal funds sold |
9,890 | 2 | 0.08 | % | 10,000 | 4 | 0.16 | % | ||||||||||||||||
Total interest
earning assets |
637,954 | 7,167 | 4.49 | % | 755,469 | 9,407 | 4.98 | % | ||||||||||||||||
Cash and due from banks |
19,977 | 20,826 | ||||||||||||||||||||||
Premises and equipment, net |
4,681 | 5,929 | ||||||||||||||||||||||
Allowance for loan losses |
(11,746 | ) | (14,997 | ) | ||||||||||||||||||||
Other assets |
27,842 | 46,492 | ||||||||||||||||||||||
Total Assets |
$ | 678,708 | $ | 813,719 | ||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 492,060 | $ | 1,554 | 1.26 | % | $ | 662,308 | $ | 2,949 | 1.78 | % | ||||||||||||
FHLB advances |
50,000 | 424 | 3.39 | % | 50,000 | 424 | 3.39 | % | ||||||||||||||||
Subordinated debt |
8,248 | 71 | 3.44 | % | 8,248 | 70 | 3.39 | % | ||||||||||||||||
Other borrowings |
7,000 | 77 | 4.42 | % | 7,000 | 77 | 4.40 | % | ||||||||||||||||
Total interest
bearing liabilities |
557,308 | 2,126 | 1.53 | % | 727,556 | 3,520 | 1.94 | % | ||||||||||||||||
Demand deposits |
59,022 | 48,640 | ||||||||||||||||||||||
Accrued expenses and
other liabilities |
5,629 | 4,858 | ||||||||||||||||||||||
Shareholders equity |
56,749 | 32,665 | ||||||||||||||||||||||
Total liabilities and equity |
$ | 678,708 | $ | 813,719 | ||||||||||||||||||||
Net interest income |
$ | 5,041 | $ | 5,887 | ||||||||||||||||||||
Interest margin |
3.16 | % | 3.12 | % | ||||||||||||||||||||
Interest spread |
2.96 | % | 3.04 | % | ||||||||||||||||||||
47
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Six months ended June 30, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||||
Average | Income/ | Average | Average | Income/ | Average | |||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Loans |
$ | 502,707 | $ | 13,495 | 5.37 | % | $ | 644,093 | $ | 18,034 | 5.60 | % | ||||||||||||
Investments |
63,366 | 912 | 2.88 | % | 68,077 | 1,003 | 2.95 | % | ||||||||||||||||
Interest bearing deposits in banks |
88,443 | 120 | 0.27 | % | 42,171 | 53 | 0.25 | % | ||||||||||||||||
Federal funds sold |
9,945 | 6 | 0.12 | % | 10,000 | 8 | 0.16 | % | ||||||||||||||||
Total interest
earning assets |
664,461 | 14,533 | 4.37 | % | 764,341 | 19,098 | 5.00 | % | ||||||||||||||||
Cash and due from banks |
20,038 | 21,088 | ||||||||||||||||||||||
Premises and equipment, net |
4,824 | 6,086 | ||||||||||||||||||||||
Allowance for loan losses |
(13,615 | ) | (15,456 | ) | ||||||||||||||||||||
Other assets |
36,815 | 48,039 | ||||||||||||||||||||||
Total Assets |
$ | 712,523 | $ | 824,098 | ||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | 524,418 | $ | 3,419 | 1.30 | % | $ | 670,832 | $ | 6,066 | 1.81 | % | ||||||||||||
FHLB advances |
50,000 | 842 | 3.37 | % | 50,000 | 843 | 3.37 | % | ||||||||||||||||
Subordinated debt |
8,248 | 142 | 3.44 | % | 8,248 | 140 | 3.39 | % | ||||||||||||||||
Other borrowings |
7,000 | 153 | 4.39 | % | 7,000 | 153 | 4.37 | % | ||||||||||||||||
Total interest
bearing liabilities |
589,666 | 4,556 | 1.55 | % | 736,080 | 7,202 | 1.96 | % | ||||||||||||||||
Demand deposits |
55,977 | 49,280 | ||||||||||||||||||||||
Accrued expenses and
other liabilities |
5,811 | 4,770 | ||||||||||||||||||||||
Shareholders equity |
61,069 | 33,968 | ||||||||||||||||||||||
Total liabilities and equity |
$ | 712,523 | $ | 824,098 | ||||||||||||||||||||
Net interest income |
$ | 9,977 | $ | 11,896 | ||||||||||||||||||||
Interest margin |
3.00 | % | 3.11 | % | ||||||||||||||||||||
Interest spread |
2.82 | % | 3.04 | % | ||||||||||||||||||||
48
Table of Contents
The following rate volume analysis reflects the impact that changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing liabilities had on net
interest income during the periods indicated. Information is provided in each category with
respect to changes attributable to changes in volume (changes in volume multiplied by prior rate),
changes attributable to changes in rates (changes in rates multiplied by prior volume) and the
total net change. The change resulting from the combined impact of volume and rate is allocated
proportionately to the change due to volume and the change due to rate.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2011 vs 2010 | 2011 vs 2010 | |||||||||||||||||||||||
Increase (decrease) in Interest | Increase (decrease) in Interest | |||||||||||||||||||||||
Income/Expense | Income/Expense | |||||||||||||||||||||||
Due to change in: | Due to change in: | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Loans |
$ | (2,228 | ) | $ | (171 | ) | $ | (2,399 | ) | $ | (3,793 | ) | $ | (746 | ) | $ | (4,539 | ) | ||||||
Investments |
49 | 75 | 124 | (68 | ) | (23 | ) | (91 | ) | |||||||||||||||
Interest bearing deposits in banks |
13 | 24 | 37 | 57 | 10 | 67 | ||||||||||||||||||
Federal funds sold |
| (2 | ) | (2 | ) | (6 | ) | 4 | (2 | ) | ||||||||||||||
Total interest
earning assets |
(2,166 | ) | (74 | ) | (2,240 | ) | (3,810 | ) | (755 | ) | (4,565 | ) | ||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Deposits |
$ | (653 | ) | $ | (742 | ) | $ | (1,395 | ) | $ | (870 | ) | $ | (1,777 | ) | $ | (2,647 | ) | ||||||
FHLB advances |
| | | | (1 | ) | (1 | ) | ||||||||||||||||
Subordinated debt |
| 1 | 1 | | 2 | 2 | ||||||||||||||||||
Other borrowings |
| | | | | | ||||||||||||||||||
Total interest
bearing liabilities |
(653 | ) | (741 | ) | (1,394 | ) | (870 | ) | (1,776 | ) | (2,646 | ) | ||||||||||||
Net interest income |
$ | (1,513 | ) | $ | 667 | $ | (846 | ) | $ | (2,940 | ) | $ | 1,021 | $ | (1,919 | ) | ||||||||
For the quarter ended June 30, 2011, average interest earning assets decreased $117.5
million, or 16%, to $638.0 million from $755.5 million for the quarter ended June 30, 2010,
resulting in interest income for Bancorp of $7.2 million compared to $9.4 million for the same
period in 2010. Interest and fees on loans decreased $2.4 million, or 27%, from $8.9 million for
the quarter ended June 30, 2010 to $6.5 million for the quarter ended June 30, 2011. This decrease
is primarily the result of a $161.5 million decrease in the average balance of the loan portfolio.
When compared to the same period last year, interest income on investments increased by 28% due to
an increase of $8.1 million in the average balance of investments outstanding, and an increase in
the yield on the investment portfolio. Income on interest-bearing deposits in banks increased 176%
for the quarter ended June 30, 2011 compared to the quarter ended June 30, 2010, which is
reflective of an increase in the average balances due to excess funds being invested overnight in
our Federal Reserve Bank account.
Total interest expense for the quarter ended June 30, 2011 of $2.1 million represents a decrease of
$1.4 million, or 40%, compared to interest expense of $3.5 million for the same period last year.
This decrease in interest expense is the result of a decrease in both interest rates paid and in
the average balances of interest-bearing liabilities. Average balances of deposit accounts
decreased $170.2 million, or 26%, which is comprised primarily of decreases in certificates of
deposit and money market accounts of $130.6 million and $42.7 million, respectively. In addition,
significantly lower interest rates contributed to a reduction of $742,000 to the overall decrease
of $1.4 million in interest expense on deposits. Average FHLB advances remained constant at $50
million and resulted in $424,000 in interest expense, which is consistent with the same period last
year. Interest expense on the junior subordinated debt and borrowed funds remained relatively
flat.
49
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As a result of the above, Bancorps net interest income decreased $846,000, or 14%, to $5.0 million
for the three months ended June 30, 2011 compared to $5.9 million for the same period last year.
The net interest margin for the three months ended June 30, 2011 was 3.16% as compared to 3.12% for
the three months ended June 30, 2010 as a result of the various reasons mentioned above.
Interest and dividend income was $14.5 million for the six months ended June 30, 2011, which
represents a decrease of $4.6 million, or 24%, as compared to interest and dividend income of $19.1
million for the same period last year. This decrease was due primarily to a $141.4 million
decrease in the average loan portfolio and lower interest rates, resulting in a decrease of $4.5
million in interest and fees on loans. This was combined with a decrease in interest rates on
investment securities, partially offset with an increase in average balances.
For the six months ended June 30, 2011, total interest expense decreased $2.6 million, or 37%, to
$4.6 million from $7.2 million for the six months ended June 30, 2010. This decrease in interest
expense was due to the above-mentioned reasons.
As a result of the above, net interest income decreased $1.9 million, or 16%, for the six months
ended June 30, 2011 to $10.0 million as compared to $11.9 million at June 30, 2010. The net
interest margin for the six months ended June 30, 2011 was 3.00% as compared to 3.11% for the six
months ended June 30, 2010.
Provision for Loan Losses
Based on managements most recent evaluation of the adequacy of the allowance for loan losses, the
provision for loan losses charged to operations for the three months ended June 30, 2011 was $1.5
million compared to $512,000 for the three months ended June 30, 2010. For the six months ended
June 30, 2011, the provision for loan losses charged to operations was $8.5 million compared to
$1.2 million for the six months ended June 30, 2010 primarily due to $6.0 million related to loans
transferred to held-for-sale in connection with the bulk loan sale and additional specific reserves
for certain impaired loans.
An analysis of the changes in the allowance for loan losses is presented under Allowance for Loan
Losses.
Non-interest income
Non-interest income increased $149,000 from $561,000 for the quarter ended June 30, 2010 to
$710,000 for the quarter ended June 30, 2011. This is primarily due to interest received of
$111,000 from federal tax refunds and an $80,000 gain on sale of loans, partially offset by lower
service charges on deposit accounts and loan origination and processing fees of $26,000 and $16,000
respectively.
For the six months ended June 30, 2011, non-interest income increased $194,000, or 18%, to $1.3
million as compared to $1.1 million for the six months ended June 30, 2010. This is primarily due
to $111,000 in interest received on federal tax refunds, an $80,000 gain on sale of loans, and an
increase of $52,000 in earnings on the cash surrender value of life insurance.
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Non-interest expenses
Non-interest expenses increased $4.1 million or 56% from $7.3 million to $11.4 million for the
quarter ended June 30, 2011 as compared to the quarter ended June 31, 2010. This increase was
primarily due to restructuring charges related to the branch closings and reduction in force of
$3.0 million, of which $0.8 million were related to severance and benefit costs, $1.7 million
related to lease termination costs and $0.6 million related to asset disposals associated with the
restructuring activities. Professional and other outside services increased $532,000 primarily due
to consultants for restructuring activities and outsourcing of IT services. Other real estate
owned expenses increased approximately $263,000 for the quarter due to costs associated with
acquiring one property.
For the six months ended June 30, 2011, non-interest expenses increased $2.9 million, or 18%, to
$19.0 million from $16.1 million for the same period in 2010. This increase was primarily due to
$3.0 million in restructuring charges and asset disposals related to the branch closings and
reduction in force as discussed above.
Liquidity
Bancorps liquidity ratio was 24% at June 30, 2011 compared to 20% at June 30, 2010. The liquidity
ratio is defined as the percentage of liquid assets to total assets. The following categories of
assets, as described in the accompanying consolidated balance sheets, are considered liquid assets:
cash and due from banks, federal funds sold, short-term investments and available-for-sale
securities. Liquidity is a measure of Bancorps ability to generate adequate cash to meet
financial obligations. The principal cash requirements of a financial institution are to cover
downward fluctuations in deposit accounts and increases in its loan portfolio. Management believes
Bancorps short-term assets provide sufficient liquidity to cover loan demand, potential
fluctuations in deposit accounts and to meet other anticipated cash operating requirements.
Capital
The following table illustrates Bancorps regulatory capital ratios at June 30, 2011 and December
31, 2010 respectively:
June 30, 2011 | December 31, 2010 | |||||||
Tier 1 Leverage Capital |
8.53 | % | 9.16 | % | ||||
Tier 1 Risk-based Capital |
14.85 | % | 15.69 | % | ||||
Total Risk-based Capital |
16.27 | % | 17.08 | % |
The following table illustrates the Banks regulatory capital ratios at June 30, 2011 and December
31, 2010 respectively:
June 30, 2011 | December 31, 2010 | |||||||
Tier 1 Leverage Capital |
8.18 | % | 8.84 | % | ||||
Tier 1 Risk-based Capital |
14.25 | % | 15.15 | % | ||||
Total Risk-based Capital |
15.68 | % | 16.54 | % |
Pursuant to the Securities Purchase Agreement among Patriot National Bancorp, Inc., Patriot
National Bank and PNBK Holdings LLC dated December 16, 2009 (the Securities Purchase Agreement),
the Company may pay one or more special stock dividends (a Special Dividend) to stockholders in
the form of Company common stock. The amount of that Special Dividend would be based upon the net
recoveries received by the Bank during the period beginning after June 30, 2009 and ending on June
30, 2011 from the charged off portion of loans on the Banks books on or prior to June 30, 2009,
and would be determined by cash collections of those loans during that period, net of all fees and
expenses.
As of June 30, 2011, the majority of loans related to the Special Dividend have been resolved with
no net recoveries. Accordingly, there will be no dividend payments related to the Special
Dividend.
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Table of Contents
IMPACT OF INFLATION AND CHANGING PRICES
Bancorps consolidated financial statements have been prepared in terms of historical dollars,
without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more significant impact on
a financial institutions performance than the general levels of inflation. Interest rates do not
necessarily move in the same direction or with the same magnitude as the prices of goods and
services. Notwithstanding this, inflation can directly affect the value of loan collateral, in
particular, real estate. Inflation, or disinflation, could significantly affect Bancorps earnings
in future periods.
Item 3: | Quantitative and Qualitative Disclosures about Market Risk |
Market risk is defined as the sensitivity of income to fluctuations in interest rates, foreign
exchange rates, equity prices, commodity prices and other market-driven rates or prices. Based
upon the nature of Bancorps business, the primary source of market risk is interest rate risk,
which is the impact that changing interest rates have on current and future earnings. In addition,
Bancorps loan portfolio is primarily secured by real estate in the companys market area. As a
result, the changes in valuation of real estate could also impact Bancorps earnings.
Qualitative Aspects of Market Risk
Bancorps goal is to maximize long term profitability while minimizing its exposure to interest
rate fluctuations. The first priority is to structure and price Bancorps assets and liabilities
to maintain an acceptable interest rate spread while reducing the net effect of changes in interest
rates. In order to accomplish this, the focus is on maintaining a proper balance between the
timing and volume of assets and liabilities re-pricing within the balance sheet. One method of
achieving this balance is to originate variable rate loans for the portfolio and purchase
short-term investments to offset the increasing short term re-pricing of the liability side of the
balance sheet. In fact, a number of the interest-bearing deposit products have no contractual
maturity. Therefore, deposit balances may run off unexpectedly due to changing market conditions.
Additionally, loans and investments with longer term rate adjustment frequencies are matched
against longer term deposits and borrowings to lock in a desirable spread.
The exposure to interest rate risk is monitored by the Management Asset and Liability Committee
consisting of senior management personnel. The Committee meets on a monthly basis, but may convene
more frequently as conditions dictate. The Committee reviews the interrelationships within the
balance sheet to maximize net interest income within acceptable levels of risk. This Committee
reports to the Board of Directors on a monthly basis regarding its activities. In addition to the
Management Asset and Liability Committee, there is a Board Asset and Liability Committee (ALCO),
which meets quarterly. ALCO monitors the interest rate risk analyses, reviews investment
transactions during the period and determines compliance with Bank policies.
Quantitative Aspects of Market Risk
In order to manage the risk associated with interest rate movements, management analyzes Bancorps
interest rate sensitivity position through the use of interest income simulation and GAP analysis.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets
and liabilities are interest sensitive. An asset or liability is said to be interest sensitive
within a specific time period if it will mature or reprice within that time period.
Managements goal is to manage asset and liability positions to moderate the effects of interest
rate fluctuations on net interest income. Interest income simulations are completed quarterly and
presented to ALCO. The simulations provide an estimate of the impact of changes in interest rates
on net interest income under a range of assumptions. Changes to these assumptions can
significantly affect the results of the simulations. The simulation incorporates assumptions
regarding the
potential timing in the repricing of certain assets and liabilities when market rates change and
the changes in spreads between different market rates.
52
Table of Contents
Simulation analysis is only an estimate of Bancorps interest rate risk exposure at a particular
point in time. Management regularly reviews the potential effect changes in interest rates could
have on the repayment of rate sensitive assets and funding requirements of rate sensitive
liabilities.
The table below sets forth examples of changes in estimated net interest income and the estimated
net portfolio value based on projected scenarios of interest rate increases and decreases. The
analyses indicate the rate risk embedded in Bancorps portfolio at the dates indicated should all
interest rates instantaneously rise or fall. The results of these changes are added to or
subtracted from the base case; however, there are certain limitations to these types of analyses.
Rate changes are rarely instantaneous and these analyses may also overstate the impact of
short-term repricings. As a result of the historically low interest rate environment, the
calculated effects of the 100 and 200 basis point downward shocks cannot absolutely reflect the
risk to earnings and equity since the interest rates on certain balance sheet items have approached
their minimums, and, therefore, it is not possible for the analyses to fully measure the entire
impact of these downward shocks.
Net Interest Income and Economic Value
Summary Performance
Summary Performance
June 30, 2011 | ||||||||||||||||||||||||
Net Interest Income | Net Portfolio Value | |||||||||||||||||||||||
Projected Interest | Estimated | $ Change | % Change | Estimated | $ Change | % Change | ||||||||||||||||||
Rate Scenario | Value | from Base | from Base | Value | from Base | from Base | ||||||||||||||||||
+ 200 |
22,420 | (36 | ) | -0.16 | % | 49,706 | (8,550 | ) | -14.68 | % | ||||||||||||||
+ 100 |
22,495 | 39 | 0.17 | % | 54,023 | (4,233 | ) | -7.27 | % | |||||||||||||||
BASE |
22,456 | 58,256 | ||||||||||||||||||||||
- 100 |
21,833 | (623 | ) | -2.78 | % | 62,396 | 4,140 | 7.11 | % | |||||||||||||||
- 200 |
20,913 | (1,543 | ) | -6.87 | % | 67,379 | 9,123 | 15.66 | % |
December 31, 2010 | ||||||||||||||||||||||||
Net Interest Income | Net Portfolio Value | |||||||||||||||||||||||
Projected Interest | Estimated | $ Change | % Change | Estimated | $ Change | % Change | ||||||||||||||||||
Rate Scenario | Value | from Base | from Base | Value | from Base | from Base | ||||||||||||||||||
+ 200 |
26,290 | 110 | 0.42 | % | 63,164 | (4,420 | ) | -6.54 | % | |||||||||||||||
+ 100 |
26,209 | 29 | 0.11 | % | 65,502 | (2,082 | ) | -3.08 | % | |||||||||||||||
BASE |
26,180 | 67,584 | ||||||||||||||||||||||
- 100 |
25,869 | (311 | ) | -1.19 | % | 70,228 | 2,644 | 3.91 | % | |||||||||||||||
- 200 |
25,068 | (1,112 | ) | -4.25 | % | 75,096 | 7,512 | 11.12 | % |
53
Table of Contents
Item 4: | Controls and Procedures |
Based on an evaluation of the effectiveness of Bancorps disclosure controls and procedures
performed by Bancorps management, with the participation of Bancorps Chief Executive Officer and
its Chief Financial Officer as of the end of the period covered by this report, Bancorps Chief
Executive Officer and Chief Financial Officer concluded that Bancorps disclosure controls and
procedures have been effective.
As used herein, disclosure controls and procedures means controls and other procedures of Bancorp
that are designed to ensure that information required to be disclosed by Bancorp in the reports
that it files or submits under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commissions rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by Bancorp in the reports that it files or submits under
the Securities Exchange Act is accumulated and communicated to Bancorps management, including its
principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure.
There were no changes in Bancorps internal controls over financial reporting identified in
connection with the evaluation described in the preceding paragraph that occurred during Bancorps
fiscal quarter ended June 30, 2011 that has materially affected, or is reasonably likely to
materially affect, Bancorps internal controls over financial reporting.
54
Table of Contents
PART II OTHER INFORMATION.
Item 1: | Legal Proceedings |
Neither Bancorp nor the Bank has any pending legal proceedings, other than ordinary routine
litigation incidental to its business, to which Bancorp or the Bank is a party or any of its
property is subject.
Item 1A: | Risk Factors |
During the three months ended June 30, 2011, there were no material changes to the risk factors
relevant to Bancorps operations, which are described in the Annual Report on Form 10-K for the
year ended December 31, 2010.
Item 6: | Exhibits |
No. | Description | |||
2 | Agreement and Plan of Reorganization dated as of June 28,
1999 between Bancorp and the Bank (incorporated by reference to Exhibit 2 to
Bancorps Current Report on Form 8-K dated December 1, 1999 (Commission File
No. 000-29599)). |
|||
3 | (i) | Certificate of Incorporation of Bancorp, (incorporated by
reference to Exhibit 3(i) to Bancorps Current Report on Form 8-K dated
December 1, 1999 (Commission File No. 000-29599)). |
||
3 | (i)(A) | Certificate of Amendment of Certificate of Incorporation of Patriot
National Bancorp, Inc. dated July 16, 2004 (incorporated by reference to
Exhibit 3(i)(A) to Bancorps Annual Report on Form 10-KSB for the year ended
December 31, 2004 (Commission File No. 000-29599)). |
||
3 | (i)(B) | Certificate of Amendment of Certificate of Incorporation of Patriot
National Bancorp, Inc. dated June 15, 2006 (incorporated by reference to
Exhibit 3(i)(B) to Bancorps Quarterly Report of Form 10-Q for the quarter
ended September 30, 2006 (commission File No. 000-29599)). |
55
Table of Contents
No. | Description | |||
3 | (i)(C) | Certificate of Amendment to the Certificate of Incorporation of
Patriot National Bancorp, Inc., filed with the Secretary of State
of the State of Connecticut on October 6, 2010 (incorporated
by reference to Exhibit 3.1 to Bancorps Current Report on
Form 8-K dated October 20, 2010 (Commission File No. 000-
29599)). |
||
3 | (i)(D) | Registration Rights Agreement, dated as of October 15, 2010, by and between
Patriot National Bancorp, Inc. and PNBK Holdings LLC (incorporated by
reference to Exhibit 10.1 to Bancorps Current Report on Form 8-K dated
October 20, 2010 (Commission File No. 000-29599)). |
||
3 | (ii) | Amended and Restated By-laws of Bancorp (incorporated by
reference to Exhibit 3(ii) to Bancorps Current Report on Form 8-K dated
November 1, 2010 (Commission File No. 000-29599)). |
||
10 | (a)(1) | 2001 Stock Appreciation Rights Plan of Bancorp (incorporated by reference
to Exhibit 10(a)(1) to Bancorps Annual Report on Form 10-KSB for the year
ended December 31, 2001 (Commission File No. 000-29599)). |
||
10 | (a)(3) | Employment Agreement, dated as of October 23, 2000, as amended by a First
Amendment, dated as of March 21, 2001, among the Bank, Bancorp and Charles F.
Howell (incorporated by reference to Exhibit 10(a)(4) to Bancorps Annual
Report on Form 10-KSB for the year ended December 31, 2000 (Commission File
No. 000-29599)). |
||
10 | (a)(4) | Change of Control Agreement, dated as of January 1, 2007 among Angelo De
Caro, and Patriot National Bank and Bancorp (incorporated by reference to
Exhibit 10(a)(4) to Bancorps Annual Report on Form 10-K for the year ended
December 31, 2006 (Commission File No. 000-29599)). |
||
10 | (a)(5) | Employment Agreement dated as of January 1, 2008 among
Patriot National Bank, Bancorp and Robert F. OConnell (incorporated
by reference to Exhibit 10(a)(5) to Bancorps Annual Report on Form
10-K for the year ended December 31, 2007 (Commission File No.
000-29599)). |
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No. | Description | |||
10 | (a)(6) | Change of Control Agreement, dated as of January 1, 2007 among Robert F.
OConnell, Patriot National Bank and Bancorp (incorporated by reference to
Exhibit 10(a)(6) to Bancorps Annual Report on Form 10-K for the year ended
December 31, 2006 (Commission File No. 000-29599)). |
||
10 | (a)(9) | License agreement dated July 1, 2003 between Patriot National Bank and L.
Morris Glucksman (incorporated by reference to Exhibit 10(a)(9) to Bancorps
Annual Report on Form 10-KSB for the year ended December 31, 2003 (Commission
File No. 000-29599)) |
||
10 | (a)(10) | Employment Agreement dated as of January 1, 2007 among Patriot National
Bank, Bancorp and Charles F. Howell (incorporated by reference to Exhibit
10(a)(10) to Bancorps Annual Report on Form 10-K for the year ended December
31, 2006 (Commission File No. 000-29599)). |
||
10 | (a)(11) | Change of Control Agreement, dated as of January 1, 2007 among Charles F.
Howell, Patriot National Bank and Bancorp (incorporated by reference to
Exhibit 10(a)(11) to Bancorps Annual Report on Form 10-K for the year ended
December 31, 2006 (Commission File No. 000-29599)). |
||
10 | (a)(12) | 2005 Director Stock Award Plan (incorporated by reference to Exhibit
10(a)(12) to Bancorps Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006 (Commission File No. 000 - 295999)). |
||
10 | (a)(13) | Change of Control Agreement, dated as of January 1, 2007 between Martin
G. Noble and Patriot National Bank (incorporated by reference to Exhibit
10(a)(13) to Bancorps Annual Report on Form 10-K for the year ended December
31, 2006 (Commission File No. 000-29599)). |
||
10 | (a)(14) | Change of Control Agreement, dated as of January 1, 2007 among Philip W.
Wolford, Patriot National Bank and Bancorp (incorporated by reference to
Exhibit 10(a)(14) to Bancorps Annual Report on Form 10-K for the year ended
December 31, 2006 (Commission File No. 000-29599)). |
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Table of Contents
No. | Description | |||
10 | (a)(15) | Formal Written Agreement between Patriot National Bank and the Office of
the Comptroller of the Currency (incorporated by reference to Exhibit
10(a)(15) to Bancorps Current Report on Form 8-K dated February 9, 2009
(Commission File No. 000-29599)). |
||
10 | (a)(16) | Securities Purchase Agreement by and among Patriot National Bancorp,
Inc., Patriot National Bank and PNBK Holdings LLC dated as of December 16,
2009 (incorporated by reference to Exhibit 10.1 to Bancorps Current Report on
Form 8-K dated December 17, 2009). |
||
10 | (a)(17) | First Amendment to Securities Purchase Agreement by and among Patriot
National Bancorp, Inc., Patriot National Bank and PNBK Holdings LLC dated as
of May 3, 2010. (incorporated by reference to Exhibit 10(a) to Bancorps
Current Report on Form 8-K dated May 4, 2010). |
||
10 | (a)(18) | Purchase and Sale Agreement, dated February 25, 2011, by and among
Patriot National Bank, Pinpat Acquisition Corporation and ES Ventures One LLC
(incorporated by reference to Exhibit 2.1 to Bancorps Current Report on Form
8-K dated March 29, 2011). |
||
10 | (a)(19) | Formal Written Agreement between Patriot National Bank and the Federal
Reserve Bank of New York (as incorporated by reference to Exhibit 10(a)(16) to
Bancorps Annual Report on Form 10-K for the year ended December 31, 2010). |
||
10 | (c) | 1999 Stock Option Plan of the Bank (incorporated by
reference to Exhibit 10(c) to Bancorps Current Report on Form 8-K dated
December 1, 1999 (Commission File No. 000-29599)). |
||
14 | Code of Conduct for Senior Financial Officers (incorporated
by reference to Exhibit 14 to Bancorps Annual Report on Form 10 - KSB for the
year ended December 31, 2004 (Commission File No. 000-29599). |
|||
21 | Subsidiaries of Bancorp (incorporated by reference to Exhibit
21 to Bancorps Annual Report on Form 10-KSB for the year ended December 31,
1999 (Commission File No. 000-29599)). |
|||
31 | (1) | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer |
||
31 | (2) | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer |
||
32 | Section 1350 Certifications |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Patriot National Bancorp, inc. (Registrant) |
||||
By: | /s/ Robert F. OConnell | |||
Robert F. OConnell, | ||||
Senior Executive Vice President Chief Financial Officer (On behalf of the registrant and as chief financial officer) |
August 12, 2011
59