XNAS:LION Fidelity Southern Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarter ended June 30, 2012

Commission file number 001-34981

 

 

 

LOGO

Fidelity Southern Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   58-1416811

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3490 Piedmont Road, Suite 1550,

Atlanta GA

  30305
(Address of principal executive offices)   (Zip Code)

(404) 639-6500

(Registrant's telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer    ¨    Accelerated filer    ¨
Non-accelerated filer    ¨  (Do not check if a smaller reporting company)    Smaller reporting company    x

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

As of August 6, 2012 (the most recent practicable date), the Registrant had outstanding approximately 14,047,161 shares of Common Stock.

 

 

 


Table of Contents

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

Report on Form 10-Q

June 30, 2012

TABLE OF CONTENT

 

               Page  

Part I.

      Financial Information   
   Item l.   

Consolidated Financial Statements (unaudited)

  
     

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

     3   
     

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011

     4   
     

Consolidated Statements of Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2012 and 2011

     5   
     

Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2012 and 2011

     6   
     

Notes to Consolidated Financial Statements (unaudited)

     7   
   Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   
   Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

     42   
   Item 4.   

Controls and Procedures

     42   

Part II.

      Other Information   
   Item 1.   

Legal Proceedings

     43   
   Item 1A.   

Risk Factors

     43   
   Item 2.   

Unregistered Sales of Equity Securities and Repurchases

     43   
   Item 3.   

Default Upon Senior Securities

     43   
   Item 4.   

Mine Safety Disclosures

     43   
   Item 5.   

Other Information

     43   
   Item 6.   

Exhibits

     43   
  

Signatures

     44   

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     (Unaudited)
June 30, 2012
    December 31,
2011
 
     (Dollars in thousands)  

Assets

    

Cash and due from banks

   $ 35,959      $ 53,380   

Interest-bearing deposits with banks

     833        1,493   

Federal funds sold

     1,541        2,411   
  

 

 

   

 

 

 

Cash and cash equivalents

     38,333        57,284   

Investment securities available-for-sale (amortized cost of $186,990 and $255,435 at June 30, 2012 and December 31, 2011, respectively)

     193,251        261,419   

Investment securities held-to-maturity (fair value of $8,136 and $9,662 at June 30, 2012 and December 31, 2011, respectively)

     7,471        8,876   

Investment in FHLB stock

     8,185        7,582   

Loans held-for-sale (loans at fair value: $164,144 at June 30, 2012; $90,907 at December 31, 2011)

     214,335        133,849   

Loans

     1,746,204        1,623,871   

Allowance for loan losses

     (27,205     (27,956
  

 

 

   

 

 

 

Loans, net of allowance for loan losses

     1,718,999        1,595,915   

FDIC indemnification asset

     44,667        12,279   

Premises and equipment, net

     35,949        28,909   

Other real estate, net

     42,727        30,526   

Accrued interest receivable

     8,432        9,015   

Bank owned life insurance

     32,091        31,490   

Deferred tax asset, net

     18,299        16,224   

Other assets

     53,016        41,427   
  

 

 

   

 

 

 

Total Assets

   $ 2,415,755      $ 2,234,795   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Noninterest-bearing demand deposits

   $ 345,063      $ 269,590   

Interest-bearing deposits:

    

Demand and money market

     618,269        526,962   

Savings

     338,983        389,246   

Time deposits, $100,000 and over

     343,570        329,164   

Other time deposits

     332,185        337,350   

Brokered deposits

     9,204        19,204   
  

 

 

   

 

 

 

Total deposits

     1,987,274        1,871,516   

Short-term borrowings

     131,218        53,081   

Subordinated debt

     67,527        67,527   

Other long-term debt

     25,000        52,500   

Accrued interest payable

     2,231        2,535   

Other liabilities

     23,596        20,356   
  

 

 

   

 

 

 

Total Liabilities

     2,236,846        2,067,515   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Preferred stock, no par value. Authorized 10,000,000; 48,200 shares issued and outstanding.

     46,902        46,461   

Common stock, no par value. Authorized 50,000,000; issued and outstanding 14,269,694 and 13,778,071 at June 30, 2012 and December 31, 2011.

     77,055        74,219   

Accumulated other comprehensive gain, net of tax

     3,882        3,710   

Retained earnings

     51,070        42,890   
  

 

 

   

 

 

 

Total shareholders’ equity

     178,909        167,280   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 2,415,755      $ 2,234,795   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

3


Table of Contents

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     Six Months Ended
June 30,
    Three Months Ended
June 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands, except per share data)  

Interest income

        

Loans, including fees

   $ 45,640      $ 43,044      $ 22,902      $ 21,153   

Investment securities

     2,695        3,402        1,189        1,889   

Federal funds sold and bank deposits

     22        90        4        49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     48,357        46,536        24,095        23,091   

Interest expense

        

Deposits

     5,665        8,980        2,658        4,448   

Short-term borrowings

     427        344        253        169   

Subordinated debt

     2,271        2,243        1,132        1,122   

Other long-term debt

     439        752        152        307   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     8,802        12,319        4,195        6,046   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     39,555        34,217        19,900        17,045   

Provision for loan losses

     4,700        10,625        950        4,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     34,855        23,592        18,950        12,195   

Noninterest income

        

Service charges on deposit accounts

     2,313        1,972        1,180        1,015   

Other fees and charges

     1,636        1,253        852        672   

Mortgage banking activities

     22,924        11,443        10,840        5,484   

Indirect lending activities

     2,773        2,710        1,610        1,524   

SBA lending activities

     2,122        5,836        1,269        3,604   

Bank owned life insurance

     654        653        332        333   

Securities gains

     303        1,078               1,078   

Other

     1,964        835        951        384   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     34,689        25,780        17,034        14,094   

Noninterest expense

        

Salaries and employee benefits

     30,174        22,463        15,325        11,641   

Furniture and equipment

     1,971        1,543        994        791   

Net occupancy

     2,490        2,295        1,280        1,160   

Communication

     1,260        1,095        641        532   

Professional and other services

     4,222        2,645        2,081        1,453   

Cost of operation of other real estate

     3,439        4,251        1,702        1,793   

FDIC insurance premiums

     945        1,708        474        806   

Other

     6,918        5,358        3,572        2,707   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     51,419        41,358        26,069        20,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     18,125        8,014        9,915        5,406   

Income tax expense

     6,405        2,558        3,511        1,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     11,720        5,456        6,404        3,614   

Preferred stock dividends and discount accretion

     (1,646     (1,646     (823     (823
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common equity

   $ 10,074      $ 3,810      $ 5,581      $ 2,791   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic earnings per share

   $ 0.71      $ 0.32      $ 0.39      $ 0.23   

Diluted earnings per share

   $ 0.64      $ 0.28      $ 0.35      $ 0.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 11,720      $ 5,456      $ 6,404      $ 3,614   

Other comprehensive income, net of tax

     172        822        581        1,085   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 11,892      $ 6,338      $ 6,985      $ 4,699   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding-basic

     14,183,895        11,840,754        14,244,109        12,295,807   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding-diluted

     15,809,352        13,448,640        15,987,940        13,861,380   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

4


Table of Contents

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

     Preferred Stock      Common Stock      Accumulated
Other
Comprehensive
Income

Net of Tax
     Retained
Earnings
    Total  
               
               
               
     Shares      Amount      Shares      Amount          
     (In thousands)  

Balance at December 31, 2010

     48       $ 45,578         11,508       $ 57,542       $ 458       $ 36,933      $ 140,511   

Comprehensive income:

                   

Net income

     —           —           —           —           —           5,456        5,456   

Other comprehensive income, net

     —           —           —           —           822         —          822   
                   

 

 

 

Comprehensive income

     —           —           —           —           —           —          6,278   

Common stock issued and share-based
compensation under:

                   

Employee benefit plans

     —           —           8         174         —           —          174   

Dividend reinvestment plan

     —           —           10         72         —           —          72   

Stock issuance

     —           —           2,167         14,011         —           —          14,011   

Accretion of discount on preferred stock

     —           442         —           —           —           (442     —     

Preferred stock dividend

     —           —           —           —           —           (1,204     (1,204

Common stock dividend

     —           —           —           418         —           (418     —     

Cash paid for fractional shares

     —           —           —           —           —           (4     (4
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

     48       $ 46,020         13,693       $ 72,217       $ 1,280       $ 40,321      $ 159,838   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at December 31, 2011

     48       $ 46,461         13,778       $ 74,219       $ 3,710       $ 42,890      $ 167,280   

Comprehensive income:

                   

Net income

     —           —           —           —           —           11,720        11,720   

Other comprehensive income, net

     —           —           —           —           172         —          172   
                   

 

 

 

Comprehensive income

     —           —           —           —           —           —          11,892   

Common stock issued and share-based
compensation under:

                   

Employee benefit plans

     —           —           71         532         —           —          532   

Dividend reinvestment plan

     —           —           13         102         —           —          102   

Stock issuance – restricted stock

     —           —           400         315         —           —          315   

Accretion of discount on preferred stock

     —           441         —           —           —           (441     —     

Preferred stock dividend

     —           —           —           —           —           (1,205     (1,205

Common stock dividend

     —           —           8         1,887         —           (1,887     —     

Cash paid for fractional shares

     —           —           —           —           —           (7     (7
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance at June 30, 2012

     48       $ 46,902         14,270       $ 77,055       $ 3,882       $ 51,070      $ 178,909   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

5


Table of Contents

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Six Months Ended
June 30,
 
     2012     2011  
     (In thousands)  

Operating Activities

    

Net income

   $ 11,720      $ 5,456   

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

    

Provision for loan losses

     4,700        10,625   

Depreciation and amortization of premises and equipment

     1,216        1,003   

Other amortization

     57        1,338   

Reserve for impairment of other real estate

     2,085        2,688   

Share-based compensation

     338        119   

Gain on loan sales

     (7,407     (16,408

Gain on sales of other real estate

     (1,439     (1,078

Increase in cash value of bank owned life insurance

     (601     (329

Gain on investment security sales

     (303     (603

Net increase in deferred income taxes

     (2,429     (1,060

Net increase in FDIC indemnification asset

     2,298        —     

Changes in assets and liabilities which provided (used) cash:

    

Net (decrease) increase from sales of loans

     (61,657     136,198   

Accrued interest receivable

     583        286   

Other assets

     (6,900     (1,006

Accrued interest payable

     (304     (287

Other liabilities

     3,017        4,366   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (55,026     141,308   

Investing Activities

    

Purchases of investment securities available-for-sale

     (14,090     (83,769

Proceeds from sales of investment securities available-for-sale

     25,688        32,781   

Maturities and calls of investment securities held-to-maturity

     1,793        3,545   

Maturities and calls of investment securities available-for-sale

     75,729        42,654   

Purchase of investment in FHLB stock

     (992     86   

Net increase in loans

     (95,537     (75,278

Purchases of premises and equipment

     (5,570     (2,647

Proceeds from acquisition

     14,900        —     

Net increase in cash from acquisition

     14,817        —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     16,738        (82,628

Financing Activities

    

Net increase in transactional accounts

     67,542        45,304   

Net (decrease) increase in time deposits

     (98,241     49,852   

Net increase (decrease) in borrowings

     50,637        (19,526

Common stock dividends paid, in lieu of fractional shares

     (7     (4

Proceeds from the issuance of common stock

     611        14,139   

Preferred stock dividends paid

     (1,205     (1,205
  

 

 

   

 

 

 

Net cash provided by financing activities

     19,337        88,560   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (18,951     147,240   

Cash and cash equivalents, beginning of period

     57,284        47,759   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 38,333      $ 194,999   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the period for:

    

Interest

   $ 9,106      $ 12,606   
  

 

 

   

 

 

 

Income taxes

   $ 5,152      $ 6,455   
  

 

 

   

 

 

 

Acquisition of Security Exchange Bank

    

Assets acquired

   $ 116,862        —     
  

 

 

   

 

 

 

Liabilities assumed

   $ 146,579        —     
  

 

 

   

 

 

 

Non-cash transfers to other real estate

   $ 12,180      $ 11,085   
  

 

 

   

 

 

 

Accretion on U.S. Treasury preferred stock

   $ 441      $ 442   
  

 

 

   

 

 

 

Loans transferred from held-for-sale

   $ —        $ 1,586   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

FIDELITY SOUTHERN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 2012

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Fidelity Southern Corporation and its wholly owned subsidiaries (“Fidelity”). Fidelity Southern Corporation (“FSC”) owns 100% of Fidelity Bank (the “Bank”), and LionMark Insurance Company, an insurance agency offering consumer credit related insurance products. FSC also owns five subsidiaries established to issue trust preferred securities, which entities are not consolidated for financial reporting purposes in accordance with current accounting guidance, as FSC is not the primary beneficiary. The “Company”, as used herein, includes FSC and its subsidiaries, unless the context otherwise requires.

These unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles followed within the financial services industry for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods covered by the statements of income. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of mortgage loans held-for-sale, the calculations of and the amortization of capitalized servicing rights, the valuation of net deferred income taxes, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and the valuation of real estate or other assets acquired in connection with foreclosures or in satisfaction of loans. In addition, the actual lives of certain amortizable assets and income items are estimates subject to change. The Company principally operates in one business segment, which is community banking.

In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and results of operations for the interim periods have been included. All such adjustments are normal recurring accruals. These reclassifications had no impact on previously reported net income, or shareholders’ equity or cash flows. The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There were no new accounting policies or changes to existing policies adopted in the first six months of 2012, which had a significant effect on the results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Operating results for the three and six month periods ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K and Annual Report to Shareholders for the year ended December 31, 2011.

2. BUSINESS COMBINATIONS

On October 21, 2011, the Bank entered into a purchase and assumption agreement with a loss share arrangement with the Federal Deposit Insurance Corporation (“FDIC”), as receiver of Decatur First Bank (“Decatur First”), to acquire certain assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition. The Bank received a cash payment from the FDIC of approximately $9 million to assume the net liabilities.

On June 15, 2012, the Bank entered into a purchase and assumption agreement with a loss share arrangement with the FDIC, as receiver of Security Exchange Bank (“Security Exchange”), to acquire certain assets and assume substantially all of the deposits and certain liabilities in a whole-bank acquisition. The Bank received a cash payment from the FDIC of approximately $15 million to assume the net liabilities.

The purchased assets and liabilities assumed were recorded at their estimated fair values on the date of acquisition. The estimated fair value of assets acquired, intangible assets and the cash payment received from the FDIC exceeded the estimated fair value of the liabilities assumed, resulting in a pretax gain of $1.7 million for Decatur First. The fair value adjustments for the acquisition of Security Exchange are estimates based on management’s preliminary assessment of fair value. The acquisition will be accounted for as a business combination under the acquisition method of accounting. The determination of the value of the purchase price is dependent upon certain valuation studies that are not yet final. The final allocation will be determined subsequent to the acquisition and is subject to further adjustments as additional information becomes available and as final analyses are performed. The valuation analysis is being done by an independent third party and will be used by management to determine the required purchase accounting adjustments. The independent third party valuation analysis is expected to be completed in the third quarter of 2012.

Certain loans and other real estate acquired in the FDIC-assisted transactions of Decatur First Bank and Security Exchange Bank (collectively referred to as covered assets) acquired are covered by Loss Share Agreements (“Loss Share Agreements”) between the Bank and the FDIC which affords the Bank significant protection against future losses. Under the Loss Share Agreements, the FDIC has agreed to reimburse us for 80% of all losses incurred in connection with those covered assets for a period of five years for commercial loans and with the Loss Share Agreements for Decatur First, the FDIC has agreed to reimburse us for 80% of all losses incurred in connection with those covered assets for a period of 10 years for residential mortgage loans. There were no residential mortgage loans included in the Loss Share Agreement for Security Exchange. New loans made after the date of the transaction are not

 

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covered by the provisions of the Loss Share Agreements. The Bank acquired other assets that are not covered by the Loss Share Agreements, including investment securities purchased at fair market value and other assets. The acquired assets and liabilities, as well as adjustments to record the assets and liabilities at fair value, are presented in the following tables.

 

     As Recorded by
FDIC/Decatur
First
     Fair Value
Adjustments
    As Recorded by
Fidelity
 
     (In thousands)  

Assets

       

Cash and due from banks

   $ 33,676       $ —        $ 33,676   

Investment securities

     42,724         —          42,724   

Covered loans

     94,730         (15,306     79,424   

Loss share receivable

     —           12,279        12,279   

Core deposit intangible

     —           1,002        1,002   

Covered other real estate

     14,426         (4,961     9,465   

Other assets

     3,545         (594     2,951   
  

 

 

    

 

 

   

 

 

 

Total assets acquired

   $ 189,101       $ (7,580   $ 181,521   
  

 

 

    

 

 

   

 

 

 

Liabilities

       

Deposits

   $ 169,927       $ —        $ 169,927   

FHLB advances

     10,000         302        10,302   

Other liabilities

     182         177        359   
  

 

 

    

 

 

   

 

 

 

Total liabilities assumed

   $ 180,109       $ 479      $ 180,588   
  

 

 

    

 

 

   

 

 

 

 

     As Recorded by
FDIC/Security
Exchange
     Preliminary
Fair Value
Adjustments (1)
    As Recorded by
Fidelity
 
     (In thousands)  

Assets

       

Cash and due from banks

   $ 29,717       $ —        $ 29,717   

Investment securities

     18,579         —          18,579   

Covered loans

     65,029         (20,603     44,426   

Loss share receivable

     —           34,686        34,686   

Core deposit intangible

     —           237        237   

Covered other real estate

     44,852         (32,762     12,090   

Other assets

     7,698         (854     6,844   
  

 

 

    

 

 

   

 

 

 

Total assets acquired

   $ 165,875       $ (19,296   $ 146,579   
  

 

 

    

 

 

   

 

 

 

Liabilities

       

Deposits

   $ 146,457       $ —        $ 146,457   

Other liabilities

     122         —          122   
  

 

 

    

 

 

   

 

 

 

Total liabilities assumed

   $ 146,579       $ —        $ 146,579   
  

 

 

    

 

 

   

 

 

 

 

(1) 

The fair value adjustments above for the acquisition of Security Exchange are estimates based on management’s preliminary assessment of fair value. The acquisition will be accounted for as a business combination under the acquisition method of accounting. The determination of the value of the purchase price is dependent upon certain valuation studies that are not yet final. The final allocation will be determined subsequent to the acquisition and is subject to further adjustments as additional information becomes available and as final analyses are performed. The valuation analysis is being done by an independent third party and will be used by management to determine the required purchase accounting adjustments. The independent third party valuation analysis is expected to be completed in the third quarter of 2012.

The Loss Share Agreements applicable to single family residential mortgage loans provides for FDIC loss sharing and Bank reimbursement to the FDIC for ten years. The Loss Share Agreements applicable to commercial loans provides for FDIC loss sharing for five years and Bank reimbursement to the FDIC for eight years.

The reimbursable losses from the FDIC are based on the preacquisition book value of the covered assets, as determined by the FDIC at the date of the transaction, the contractual balance of acquired unfunded commitments, and certain future net direct costs incurred in the collection and settlement process. The amount that the Bank realizes on these assets could differ materially from the carrying value that will be reflected in any financial statements, based upon the timing and amount of collections and recoveries on the covered assets in future periods. Because the FDIC will reimburse the Bank for 80% of losses incurred on the covered assets, an indemnification asset (FDIC indemnification asset) was recorded at fair value at the acquisition date. The loss share agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties. This asset is adjusted quarterly based on expected losses, the carrying value of the indemnification asset at June 30, 2012 was $44.7 million compared to $12.3 million at December 31, 2011.

 

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The loss share agreements continue to be measured on the same basis as the related indemnified loans. Deterioration in credit quality of the loans (recorded as an adjustment to the Allowance for Loan Losses) or declines in the fair value of other real estate owned would immediately increase the basis of the indemnification asset, with the offset recorded through the Consolidated Statements of Comprehensive Income in noninterest income. Improvements in the credit quality or expected loan cash flows (reflected as an adjustment to yield) result in a decrease in the fair value of the FDIC indemnification asset, with the decrease being amortized into income over the same period or the life of the loss share agreements, whichever is shorter. Initial fair value accounting incorporates into the fair value of the indemnification asset an element of the time value of money, which is accreted back into income over the life of the loss share agreements. A summary of activity for the FDIC indemnification asset for the six-months ended June 30, 2012 is presented below:

 

     June 30, 2012  
     (In thousands)  

Indemnification Asset

  

Balance at January 1, 2012

   $ 12,279   

Adjustments:

  

Accretion income, FDIC indemnification asset

     267   

Additional estimated covered losses

     864   

Loss share remittances

     (3,429

Additional indemnification receivable

     34,686   
  

 

 

 

Balance at June 30, 2012

   $ 44,667   
  

 

 

 

3. EARNINGS PER SHARE

Basic earnings per share (“EPS”), is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if our potential common stock, which consists of dilutive stock options and a common stock warrant, were issued. As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the Consolidated Statements of Comprehensive Income, and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is provided in this note. Earnings per share were calculated as follows:

 

     For the Quarter Ended June 30,  
     2012     2011  
     (Dollars in thousands, except per share data)  

Net income

   $ 6,404      $ 3,614   

Less dividends on preferred stock and accretion of discount

     (823     (823
  

 

 

   

 

 

 

Net income available to common equity

   $ 5,581      $ 2,791   
  

 

 

   

 

 

 

Average common shares outstanding

     13,781        11,643   

Effect of stock dividends

     463        653   
  

 

 

   

 

 

 

Average common shares outstanding – basic

     14,244        12,296   

Dilutive stock options and warrants

     1,687        1,482   

Effect of stock dividends

     57        83   
  

 

 

   

 

 

 

Average common shares outstanding – dilutive

     15,988        13,861   
  

 

 

   

 

 

 

Earnings per share – basic

   $ 0.39      $ 0.23   

Earnings per share – dilutive

   $ 0.35      $ 0.20   

 

     For the Six Months Ended June 30,  
     2012     2011  
     (Dollars in thousands, except per share data)  

Net income

   $ 11,720      $ 5,456   

Less dividends on preferred stock and accretion of discount

     (1,646     (1,646
  

 

 

   

 

 

 

Net income available to common equity

   $ 10,074      $ 3,810   
  

 

 

   

 

 

 

Average common shares outstanding

     13,723        11,212   

Effect of stock dividends

     461        629   
  

 

 

   

 

 

 

Average common shares outstanding – basic

     14,184        11,841   

Dilutive stock options and warrants

     1,573        1,522   

Effect of stock dividends

     53        85   
  

 

 

   

 

 

 

Average common shares outstanding – dilutive

     15,810        13,448   
  

 

 

   

 

 

 

Earnings per share – basic

   $ 0.71      $ 0.32   

Earnings per share – dilutive

   $ 0.64      $ 0.28   

 

 

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Average number of shares for the three and six month periods ended June 30, 2012 and 2011 includes participating securities related to unvested restricted stock awards. For the three and six month periods ended, there were 116,905 in common stock options with an average exercise price of $8.08 at June 30, 2012, and 150,907 in options with an average price of $18.37 at June 30, 2011, which would have been included in the calculation of dilutive earnings per share except that to do so would have an anti-dilutive impact on earnings per share.

4. CONTINGENCIES

Due to the nature of their activities, the Company and its subsidiaries are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of June 30, 2012. While it is difficult to predict or determine the outcome of these proceedings, it is the opinion of management, after consultation with its legal counsel, that the ultimate liabilities, if any, will not have a material adverse impact on the Company’s consolidated results of operations, financial position, or cash flows.

5. SHARE-BASED COMPENSATION

The Company’s 1997 Stock Option Plan authorized the grant of options to management personnel for up to 500,000 shares of the Company’s common stock. All options granted have three year to eight year terms and vest and become fully exercisable at the end of three years to five years of continued employment. No options may be or were granted after June 30, 2007, under this plan.

The Fidelity Southern Corporation Equity Incentive Plan (the “2006 Incentive Plan”), as amended, permits the grant of stock options, stock appreciation rights, restricted stock and other incentive awards (“Incentive Awards”). Pursuant to an amendment to the Plan adopted by the shareholders on April 26, 2012, the maximum number of shares of the Company’s common stock that may be issued under the 2006 Incentive Plan is 5,000,000 shares, all of which may be stock options. Generally, no award shall be exercisable or become vested or payable more than 10 years after the date of grant. Options granted under the 2006 Incentive Plan have four year terms and become fully exercisable at the end of three years of continued employment. Incentive awards available under the 2006 Incentive Plan totaled 3,960,459 shares at June 30, 2012. On January 19, 2012, a total of 95,000 options were granted under the 2006 Incentive Plan at a grant date exercise price of $6.15 per share.

A summary of option activity as of June 30, 2012, and changes during the six month period then ended is presented below:

 

     Number of
share
options
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Terms
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2012

     370,905       $ 5.30         

Granted

     95,000         6.15         

Exercised

     1,000         4.60         

Forfeited

     —           —           
  

 

 

          

Outstanding at June 30, 2012

     464,905         5.47         1.7 years         1,615,746   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2012

     369,905         5.30         1.0 years         1,349,746   
  

 

 

    

 

 

    

 

 

    

 

 

 

In the six months ended June 30, 2012, FSC granted 400,000 restricted shares of common stock under the 2006 Equity Incentive Plan to certain employees. The restricted stock was granted at $6.15 per share, which was the market price of the stock at the grant date. 350,000 shares of the restricted stock granted will vest 20% each year over the next five years, while 50,000 shares will vest 40% after two years and then 20% per year through five years. All current year restricted stock grants will be fully vested after January 19, 2017. At June 30, 2012, there was $2.2 million in remaining unrecognized compensation cost related to the restricted stock. A summary of restricted stock activity as of June 30, 2012, and changes during the six month period then ended is presented below:

 

     Number of
shares of
Restricted
Stock
     Weighted
Average
Grant Price
 

Nonvested at December 31, 2011

     144,078       $ 4.50   

Granted

     400,000         6.15   

Vested

     57,631         4.50   

Forfeited

     —           —     
  

 

 

    

Nonvested at June 30, 2012

     486,447         5.86   
  

 

 

    

Share-based compensation expense was $202,000 and $59,000 for the three month periods ended June 30, 2012 and 2011, respectively, and $338,000 and $119,000 for the six month periods ended June 30, 2012 and 2011, respectively.

 

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6. FAIR VALUE ELECTION AND MEASUREMENT

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Current accounting guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly, for substantially the full term of the asset or liability;

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A financial instrument’s level within the hierarchy is based on the lowest level of input that is significant to the fair value measurement.

In certain circumstances, fair value enables a company to more accurately align its financial performance with the economic value of hedged assets. Fair value enables a company to mitigate the non-economic earnings volatility caused from financial assets and financial liabilities being carried at different bases of accounting, as well as to more accurately portray the active and dynamic management of a company’s balance sheet.

The Company has elected to record mortgage loans held-for-sale at fair value. The following is a description of mortgage loans held-for-sale as of June 30, 2012, including the specific reasons for electing fair value and the strategies for managing these assets on a fair value basis.

Mortgage Loans Held-for-Sale

The Company records mortgage loans held-for-sale at fair value in order to eliminate the complexities and inherent difficulties of achieving hedge accounting and to better align reported results with the underlying economic changes in value of the loans and related hedge instruments. This election impacts the timing and recognition of origination fees and costs, as well as servicing value, which are now recognized in earnings at the time of origination. Interest income on mortgage loans held-for-sale is recorded on an accrual basis in the consolidated statement of income under the heading “Interest income – loans, including fees”. The servicing value is included in the fair value of the Interest Rate Lock Commitments (“IRLCs”) with borrowers. The mark to market adjustments related to loans held-for-sale and the associated economic hedges are captured in mortgage banking activities.

Valuation Methodologies and Fair Value Hierarchy

The primary financial instruments that the Company carries at fair value include investment securities, IRLCs, derivative instruments, and loans held-for-sale. The Company used the following methods and significant assumptions to estimate fair value:

Debt securities issued by U.S. Government sponsored entities and agencies, states and political subdivisions, and agency residential mortgage backed securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

The fair value of mortgage loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics predominantly consisting of those conforming to government sponsored entity or agency standards. The fair value measurements consider observable data that may include market trade pricing from brokers and the mortgage-backed security markets. As such, the Company classifies these loans as Level 2.

The Company classifies IRLCs on residential mortgage loans held-for-sale on a gross basis within other liabilities or other assets. The fair value of these commitments, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. Projected “pull-through” rates are determined quarterly by the Mortgage Banking Division of the Bank, using the Company’s historical data and the current interest rate environment to reflect the Company’s best estimate of the likelihood that a commitment will ultimately result in a closed loan. The loan servicing value is also included in the fair value of IRLCs. Because these inputs are not transparent in market trades, IRLCs are considered to be Level 3 assets.

Derivative instruments are primarily transacted in the secondary mortgage and institutional dealer markets and priced with observable market assumptions at a mid-market valuation point, with appropriate valuation adjustments for liquidity and credit risk. For purposes of valuation adjustments to its derivative positions, the Company has evaluated liquidity premiums that may be demanded by market participants, as well as the credit risk of its counterparties and its own credit if applicable. To date, no material losses due to a counterparty’s inability to pay any net uncollateralized position has been incurred.

 

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Table of Contents

The credit risk associated with the underlying cash flows of an instrument carried at fair value was a consideration in estimating the fair value of certain financial instruments. Credit risk was considered in the valuation through a variety of inputs, as applicable, including, the actual default and loss severity of the collateral, and level of subordination. The assumptions used to estimate credit risk applied relevant information that a market participant would likely use in valuing an instrument. Because mortgage loans held-for-sale are sold within a few weeks of origination, it is unlikely to demonstrate any of the credit weaknesses discussed above and as a result, there were no credit related adjustments to fair value during the six month periods ended June 30, 2012 and 2011.

The following tables present financial assets measured at fair value at June 30, 2012 and December 31, 2011, on a recurring basis and the change in fair value for those specific financial instruments in which fair value has been elected at June 30, 2012 and 2011. The changes in the fair value of economic hedges were also recorded in mortgage banking activities and are designed to partially offset the change in fair value of the mortgage loans held-for-sale and interest rate lock commitments referenced in the tables below.

 

          Fair Value Measurements at
June 30, 2012
 
    Assets and
Liabilities
Measured at
Fair Value
June 30, 2012
    Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities

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

(Level 3)
 
    (In thousands)  

Debt securities issued by U.S. Government corporations and agencies

  $ 11,060      $ —        $ 11,060      $ —     

Debt securities issued by states and political subdivisions

    19,610        —          19,610        —     

Residential mortgage-backed securities – Agency

    162,581        —          162,581        —     

Mortgage loans held-for-sale

    164,144        —          164,144        —     

Other Assets(1)

    7,186        —          —          7,186   

Other Liabilities(1)

    (2,926     —          —          (2,926

 

(1)

This amount includes mortgage related interest rate lock commitments and derivative financial instruments to hedge interest rate risk. Interest rate lock commitments were recorded on a gross basis.

 

          Fair Value Measurements at
December 31, 2011
 
    Assets and
Liabilities
Measured at
Fair Value
December 31,
2011
    Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities

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

(Level 3)
 
    (In thousands)  

Debt securities issued by U.S. Government corporations and agencies

  $ 62,699      $ —        $ 62,699      $ —     

Debt securities issued by states and political subdivisions

    19,715        —          19,715        —     

Residential mortgage-backed securities – Agency

    174,705        —          174,705        —     

Commercial mortgage-backed securities – Agency

    4,300        —          4,300        —     

Mortgage loans held-for-sale

    90,907        —          90,907        —     

Other Assets(1)

    3,612        —          —          3,612   

Other Liabilities(1)

    (1,528     —          —          (1,528

 

(1) 

This amount includes mortgage related interest rate lock commitments and derivative financial instruments to hedge interest rate risk. Interest rate lock commitments were recorded on a gross basis.

 

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Table of Contents

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) during the three and six months ended June 30, 2012 and 2011. There were no transfers into or out of Level 3. There were no transfers between Level 1, and Level 2 during the three and six months ended June 30, 2012.

 

     Other
Assets(1)
    Other
Liabilities(1)
 
     (In thousands)  

Beginning Balance April 1, 2012

   $ 4,577      $ (369

Total gains (losses) included in earnings:(2)

    

Issuances

     9,794        (2,926

Settlements and closed loans

     (3,211     —     

Expirations

     (3,974     369   

Total gains (losses) included in other comprehensive income

     —          —     
  

 

 

   

 

 

 

Ending Balance June 30, 2012 (3)

   $ 7,186      $ (2,926
  

 

 

   

 

 

 

 

(1)

Includes mortgage related interest rate lock commitments and derivative financial instruments entered into to hedge interest rate risk.

(2) 

Amounts included in earnings are recorded in mortgage banking activities.

(3) 

Represents the amount included in earnings attributable to the changes in unrealized gains/losses relating to IRLCs and derivatives still held at period end.

 

     Other
Assets(1)
    Other
Liabilities(1)
 
     (In thousands)  

Beginning Balance January 1, 2012

   $ 3,612      $ (1,528

Total gains (losses) included in earnings:(2)

    

Issuances

     15,336        (3,295

Settlements and closed loans

     (6,396     —     

Expirations

     (5,366     1,897   

Total gains (losses) included in other comprehensive income

     —          —     
  

 

 

   

 

 

 

Ending Balance June 30, 2012 (3)

   $ 7,186      $ (2,926
  

 

 

   

 

 

 

 

(1) 

Includes mortgage related interest rate lock commitments and derivative financial instruments entered into to hedge interest rate risk.

(2) 

Amounts included in earnings are recorded in mortgage banking activities.

(3) 

Represents the amount included in earnings attributable to the changes in unrealized gains/losses relating to IRLCs and derivatives still held at period end.

 

     Other
Assets(1)
    Other
Liabilities(1)
 
     (In thousands)  

Beginning Balance April 1, 2011

   $ 1,756      $ (224

Total gains (losses) included in earnings:(2)

    

Issuances

     1,809        (8

Settlements and closed loans

     (1,050     1   

Expirations

     (706     223   

Total gains (losses) included in other comprehensive income

     —          —     
  

 

 

   

 

 

 

Ending Balance June 30, 2011 (3)

   $ 1,809      $ (8
  

 

 

   

 

 

 

 

(1) 

Includes mortgage related interest rate lock commitments and derivative financial instruments entered into to hedge interest rate risk.

(2) 

Amounts included in earnings are recorded in mortgage banking activities.

(3) 

Represents the amount included in earnings attributable to the changes in unrealized gains/losses relating to IRLCs and derivatives still held at period end.

 

     Other
Assets(1)
    Other
Liabilities(1)
 
     (In thousands)  

Beginning Balance January 1, 2011

   $ 6,627      $ (446

Total gains (losses) included in earnings:(2)

    

Issuances

     3,565        (232

Settlements and closed loans

     (1,510     178   

Expirations

     (6,873     492   

Total gains (losses) included in other comprehensive income

     —          —     
  

 

 

   

 

 

 

Ending Balance June 30, 2011 (3)

   $ 1,809      $ (8
  

 

 

   

 

 

 

 

(1) 

Includes mortgage related interest rate lock commitments and derivative financial instruments entered into to hedge interest rate risk.

(2) 

Amounts included in earnings are recorded in mortgage banking activities.

(3) 

Represents the amount included in earnings attributable to the changes in unrealized gains/losses relating to IRLCs and derivatives still held at period end.

 

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The unobservable input utilized in the determination of fair value of other assets and liabilities was a pull through rate, which was 71.9% as of June 30, 2012. A pull through rate is management’s assumption as to the percentage of loans in the pipeline that will close and eventually fund. It is based on the Company’s historical fall-out activity. Significant increases in this input in isolation would result in a significantly higher fair value measurement and significant decreases would result in a significantly lower fair value measurement. In addition, IRLCs fair value include mortgage servicing rights that do not trade in an active market with readily observable prices. Accordingly, the fair value is estimated based on a valuation model which calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.

 

     For Items Measured at Fair Value Pursuant to
Election of  the Fair Value Option: Fair Value Gain
related to Mortgage Banking Activities for the
Three Months Ended
 
     June 30, 2012      June 30, 2011  
     (In thousands)  

Mortgage loans held-for-sale

   $ 2,511       $ 186   
     For Items Measured at Fair Value Pursuant to
Election of the Fair Value Option: Fair Value Gain
related to Mortgage Banking Activities for the Six
Months Ended
 
     June 30, 2012      June 30, 2011  
     (In thousands)  

Mortgage loans held-for-sale

   $ 2,329       $ 2,603   

The following tables present the assets that are measured at fair value on a non-recurring basis by level within the fair value hierarchy as reported on the consolidated statements of financial position at June 30, 2012 and December 31, 2011.

 

     Fair Value Measurements at June 30, 2012  
     Total      Quoted Prices in
Active Markets for

Identical Assets
Level 1
     Significant
Other
Observable
Inputs Level 2
     Significant
Unobservable
Inputs

Level 3
     Valuation
Allowance
 
     (In thousands)  

Impaired loans

              

Commercial

   $ 17,143       $ —         $ —         $ 17,143       $ (1,354

Construction

     16,833         —           —           16,833         (691

SBA

     18,905         —           —           18,905         (189

Mortgage

     4,117         —           —           4,117         (1,178

Consumer

     3,453         —           —           3,453         (51

ORE

              

Commercial

     15,547         —           —           15,547         (16,269

Improved lots

     13,871         —           —           13,871         (12,825

Residential

     8,070         —           —           8,070         (5,844

Other ORE

     5,312         —           —           5,312         (9,162

Mortgage servicing rights

     15,945         —           —           15,945         (3,631

SBA servicing rights

     5,744         —           —           5,744         (302

 

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

Level 3
     Valuation
Allowance
 
     (In thousands)  

Impaired loans

   $ 59,318       $ —         $ —         $ 59,318       $ (4,315

ORE

     30,526         —           —           30,526         (7,469

Mortgage servicing rights

     11,456         —           —           11,456         (2,785

SBA servicing rights

     5,736         —           —           5,736         (213

 

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Table of Contents

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may include real estate or business assets, including equipment, inventory and accounts receivable. The value of real estate collateral is determined based on an appraisal by qualified licensed appraisers hired by the Company. If significant, the value of business equipment is based on an appraisal by qualified licensed appraisers hired by the Company otherwise, the equipment’s net book value on the business’ financial statements is the basis for the value of business equipment. Inventory and accounts receivable collateral are valued based on independent field examiner review or aging reports. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. The workout department, which reports to the Chief Credit Officer, has the primary responsibility for determining the fair value of impaired loans. Discounts applied to appraised values are validated on an annual basis by an analysis that compares the proceeds from collateral liquidated in the past twelve months to the appraisal value of the related collateral. This analysis is segregated into appraisal values that are aged less than twelve months and those that are aged greater than twelve months. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

Mortgage and SBA servicing rights are initially recorded at fair value when mortgage or SBA loans are sold servicing retained. These assets are then amortized in proportion to and over the period of estimated net servicing income. On a monthly basis these servicing assets are assessed for impairment based on fair value. Management determines fair value by stratifying the servicing portfolio into homogeneous subsets with unique behavior characteristics, converting those characteristics into income and expense streams, adjusting those streams for prepayment assumptions, present valuing the adjusted streams, and combining the present values into a total. If the cost basis of any loan stratification tranche is higher than the present value of the tranche, an impairment is recorded for the difference.

Foreclosed assets in Other Real Estate, both non-covered and covered, are adjusted to fair value upon transfer of the loans to foreclosed assets establishing a new cost basis. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less estimated selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value or when an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. Appraisals are generally disconnected further to take into account the age of the appraisal, length of expected marketing time, and estimated selling costs. Such discounts would result in a Level 3 classification. The workout department, which reports to the Chief Credit Officer, has the primary responsibility for determining the fair value of other real estate and the discount to apply to the appraisals to arrive at fair value. The same analysis utilized to validate discount rates applied against real estate collateral securing impaired loans is also used to validate discount rates applied to other real estate.

The following tables present the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held-for-sale for which the fair value option has been elected as of June 30, 2012 and December 31, 2011. The tables also include the difference between aggregate fair value and the aggregate unpaid principal balance of loans that are 90 days or more past due, as well as loans in nonaccrual status:

 

     Aggregate Fair Value
June 30, 2012
     Aggregate Unpaid
Principal Balance Under
FVO June 30, 2012
     Fair Value Over
Unpaid  Principal
 
     (In thousands)  

Loans held-for-sale

   $ 164,144       $ 159,163       $ 4,981   

Past due loans of 90+ days

     —           —           —     

Nonaccrual loans

     —           —           —     

 

     Aggregate Fair Value
December 31, 2011
     Aggregate Unpaid
Principal Balance Under
FVO December 31, 2011
     Fair Value Under
Unpaid Principal
 
     (In thousands)  

Loans held-for-sale

   $ 90,907       $ 88,255       $ 2,652   

Past due loans of 90+ days

     —           —           —     

Nonaccrual loans

     —           —           —     

Current accounting guidance requires interim disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on settlements 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets, and, in many cases, could not be realized in immediate settlement of the instrument. Current accounting guidance excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

 

15


Table of Contents

 

     Fair Value Measurements at June 30, 2012 Using:  
     Carrying
Value
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets:

              

Cash and cash equivalents

   $ 36,792       $ 36,792       $ —         $ —         $ 36,792   

Investment securities available-for-sale

     193,251         —           193,251         —           193,251   

Investment securities held-to-maturity

     7,471         —           8,136         —           8,136   

Total loans(1)

     1,960,538         —           164,144         1,832,933         1,997,077   

Financial Liabilities:

              

Noninterest-bearing demand deposits

   $ 345,063       $ —         $ —         $ 345,063       $ 345,063   

Interest-bearing deposits

     1,642,211         —           —           1,649,447         1,649,447   

Short-term borrowings

     91,226         —           91,948         —           91,948   

Long-term debt

     92,527         —           103,423         —           103,423   

 

     Fair Value Measurements at December 31, 2011 Using:  
     Carrying
Value
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial Instruments (Assets):

              

Cash and cash equivalents

   $ 54,873       $ 54,873       $ —         $ —         $ 54,873   

Investment securities available-for-sale

     261,419         —           261,419         —           261,419   

Investment securities held-to-maturity

     8,876         —           9,662         —           9,662   

Total loans(1)

     1,729,764         —           90,907         1,509,881         1,600,788   

Financial Instruments (Liabilities):

              

Noninterest-bearing demand deposits

   $ 269,590       $ —         $ —         $ 269,590       $ 269,590   

Interest-bearing deposits

     1,601,926         —           —           1,609,865         1,609,865   

Short-term borrowings

     53,081         —           53,259         —           53,259   

Long-term debt

     120,027         —           110,911         —           110,911   

 

(1) 

Includes $164,144 and $90,907 in mortgage loans held-for-sale at fair value at June 30, 2012 and December 31, 2011, respectively.

The methods and assumptions, not previously presented, used to estimate fair value are described as follows: The carrying amount reported in the consolidated balance sheets for cash, and cash equivalents approximates fair values. It is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the remaining maturities using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans along with a market risk premium and liquidity discount.

The fair value of deposits with no stated maturities, such as noninterest-bearing demand deposits, savings, interest-bearing demand, and money market accounts, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows based on the discounted rates currently offered for deposits of similar remaining maturities.

The carrying amounts reported in the consolidated balance sheets for short-term debt generally approximate those liabilities’ fair values with the exception of FHLB advances which are estimated based on the current rates offered to us for debt of the same remaining maturity.

The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities.

 

16


Table of Contents

Quantitative Information about Level 3 Fair Value Measurements

The following table shows significant unobservable inputs used in the fair value measurement of level 3 assets and liabilities:

 

Nonrecurring

Measurements

   Fair Value at
June 30, 2012

($ in thousands)
     Valuation
Technique
     Unobservable
Inputs
     Range  

Impaired loans

   $ 60,451         Discounted appraisals         Collateral discounts         6.00% -40.00%   

Other Real Estate

   $ 42,800         Discounted appraisals         Collateral discounts         6.00% -40.00%   

Mortgage Servicing Rights

   $ 16,031         Discounted cash flows        

 

Discount Rate

Prepayment Speeds

  

  

    

 

8.00% -10.00%

8.00% -20.00%

  

  

SBA Servicing Rights

   $ 7,548         Discounted cash flows        

 

Discount Rate

Prepayment Speeds

  

  

    

 

2.00% - 7.00%

3.00% -13.00%

  

  

7. DERIVATIVE FINANCIAL INSTRUMENTS

The Company maintains a risk management program to manage interest rate risk and pricing risk associated with its mortgage lending activities. The risk management program includes the use of forward contracts and other derivatives that are recorded in the financial statements at fair value and are used to offset changes in value of the mortgage inventory due to changes in market interest rates. As a normal part of its operations, the Company enters into derivative contracts to economically hedge risks associated with overall price risk related to Interest Rate Lock Commitments (“IRLCs”) and mortgage loans held-for-sale for which the fair value option has been elected. Fair value changes occur as a result of interest rate movements as well as changes in the value of the associated servicing. Derivative instruments used include forward commitments, mandatory commitments and best effort commitments. All derivatives are carried at fair value in the Consolidated Balance Sheets in other assets or other liabilities. A net loss of $2.5 million was recorded for all related commitments as of June 30, 2012, net loss of $1.4 million as of December 31, 2011 and a net gain of $452,000 as of June 30, 2011.

The Company’s risk management derivatives are based on underlying risks primarily related to interest rates and forward sales commitments. Forwards are contracts for the delayed delivery or net settlement of an underlying instrument, such as a mortgage loan, in which the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. These hedges are used to preserve the Company’s position relative to future sales of loans to third parties in an effort to minimize the volatility of the expected gain on sale from changes in interest rate and the associated pricing changes.

Credit and Market Risk Associated with Derivatives

Derivatives expose the Company to credit risk. If the counterparty fails to perform, the credit risk at that time would be equal to the net derivative asset position, if any, for that counterparty. The Company minimizes the credit or repayment risk in derivative instruments by entering into transactions with high quality counterparties that are reviewed periodically by the Company’s Risk Management area. The Company’s derivative positions as of June 30, 2012, were as follows:

 

     Contract Amount  
     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Fannie Mae mortgage-backed securities forward commitments

   $ 296,000       $ 167,500   

Mandatory loan sale commitments

     141,168         17,992   

Best efforts loan sale commitments

     39,546         15,239   
  

 

 

    

 

 

 

Total commitments

   $ 476,714       $ 200,731   
  

 

 

    

 

 

 

8. INVESTMENTS

The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

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Table of Contents

 

     June 30, 2012      December 31, 2011  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In thousands)  

Available-for-Sale:

           

U.S. Treasury securities and obligations of U.S. Government corporations and agencies:

           

Due in less than one year

   $ —         $ —         $ 15,000       $ 15,028   

Due five years through ten years

     7,140         7,337         27,137         27,465   

Due after ten years

     3,549         3,724         20,060         20,206   

Municipal securities(2)

           

Due after one year through five years

     848         864         853         855   

Due five years through ten years

     1,321         1,417         1,572         1,655   

Due after ten years

     16,663         17,341         16,698         17,203   

Mortgage backed securities-agency

     157,469         162,569         174,114         179,006   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 186,990       $ 193,251       $ 255,435       $ 261,419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity:

           

Mortgage backed securities-agency

   $ 7,471       $ 8,136       $ 8,876       $ 9,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank sold 31 securities available-for-sale totaling $25.4 million during the six month period ended June 30, 2012. Proceeds received totaled $25.7 million for a gross gain of $303,000. The Bank sold five securities available-for-sale totaling $32.8 million during the six month period ended June 30, 2011. Proceeds received totaled $33.9 million for a gross gain of $1.1 million. The Bank had three securities for a total of $33.3 million called during the six month period ended June 30, 2011. There were no investments held in trading accounts during 2012 and 2011.

 

     June 30, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Other than
Temporary
Impairment
     Fair Value  
     (In thousands)  

Available-for-Sale:

             

Obligations of U.S. Government corporations and agencies

   $ 10,689       $ 371       $ —        $ —         $ 11,060   

Municipal securities

     18,832         778         —          —           19,610   

Residential mortgage-backed securities – agency

     157,469         5,227         (115     —           162,581   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 186,990       $ 6,376       $ (115   $ —         $ 193,251   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity:

             

Residential mortgage-backed securities – agency

   $ 7,471       $ 665       $ —        $ —         $ 8,136   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Other than
Temporary
Impairment
     Fair Value  
     (In thousands)  

Available-for-Sale:

             

Obligations of U.S. Government corporations and agencies

   $ 62,197       $ 502       $ —        $ —         $ 62,699   

Municipal securities

     19,124         591         —          —           19,715   

Residential mortgage-backed securities – agency

     174,114         4,906         (15     —           179,005   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 255,435       $ 5,999       $ (15   $ —         $ 261,419   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity:

             

Residential mortgage-backed securities – agency

   $ 8,876       $ 786       $ —        $ —         $ 9,662   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

18


Table of Contents

At June 30, 2012 and December 31, 2011, all securities in an unrealized loss position had been in a loss position for less than 12 months, and result from changes in interest rates and not credit related issues.

If the fair value of a debt security is less than its amortized cost basis at the balance sheet date, management must determine if the security has an other than temporary impairment (“OTTI”). If management does not expect to recover the entire amortized cost basis of a security, an OTTI has occurred. If management’s intention is to sell the security, an OTTI has occurred. If it is more likely than not that management will be required to sell a security before the recovery of the amortized cost basis, an OTTI has occurred. The Company will recognize the full OTTI in earnings if it intends to sell a security or will more likely than not be required to sell the security. Otherwise, an OTTI will be separated into the amount representing a credit loss and the amount related to all other factors. The amount of an OTTI related to credit losses will be recognized in earnings. The amount related to other factors will be recognized in other comprehensive income, net of taxes.

The Company carries its investment securities at fair value and employs valuation techniques which utilize observable inputs when those inputs are available. These observable inputs reflect assumptions market participants would use in pricing the security and are developed based on market data obtained from sources independent of the Company. Investment securities are valued using Level 2 inputs.

Also, as of June 30, 2012, management does not intend to sell the temporarily impaired securities and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost basis. Accordingly, as of June 30, 2012, management believes the impairments detailed in the table above are temporary and no credit impairment loss has been recognized in the Company’s net income within the Consolidated Statements of Comprehensive Income.

9. LOANS

Legacy loans represent existing portfolio loans prior to the Decatur First and Security Exchange FDIC-assisted acquisitions and additional loans made subsequent to the transaction. Loans outstanding, by class, are summarized as follows:

 

     Legacy      Decatur First/Security Exchange
Acquisition
 
     June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Commercial loans

   $ 415,597       $ 403,750       $ 65,916       $ 39,209   

SBA loans

     100,411         105,604         756         777   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     516,008         509,354         66,672         39,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

Construction

     83,369         89,893         13,428         7,817   

Indirect loans

     940,396         836,845         —           —     

Installment loans

     12,871         18,215         3,795         2,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     953,267         855,060         3,795         2,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

First mortgage loans

     28,885         33,094         10,635         17,218   

Second mortgage loans

     60,561         58,988         9,584         10,346   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

     89,446         92,082         20,219         27,564   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,642,090       $ 1,546,389       $ 104,114       $ 77,482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-for-sale at June 30, 2012 and December 31, 2011 are shown in the table below:

 

     June 30,
2012
     December 31,
2011
 
     (In thousands)  

SBA loans

   $ 20,191       $ 12,942   

Real estate – mortgage – residential(1)

     164,144         90,907   

Indirect loans

     30,000         30,000   

Total

   $ 214,335       $ 133,849   
  

 

 

    

 

 

 

 

(1)

Mortgage loans held-for-sale has increased by $73.2 million since December 31, 2011. During this period, the Bank expanded its footprint in Georgia and Virginia by opening 7 new mortgage loan production offices and adding 15 new mortgage loan officers and 41 mortgage loan support employees.

 

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Table of Contents

Nonaccrual loans, segregated by class of loans, were as follows:

 

     Legacy      Decatur First/Security Exchange
Acquisition
 
     June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Commercial loans

   $ 18,583       $ 5,562       $ 4,598       $ 3,565   

SBA loans

     19,094         16,857         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     37,677         22,419         4,598         3,565   
  

 

 

    

 

 

    

 

 

    

 

 

 

Construction

     17,526         32,335         10,476         2,123   

Indirect loans

     778         1,094         —           —     

Installment loans

     500         508         218         63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loans

     1,278         1,602         218         63   
  

 

 

    

 

 

    

 

 

    

 

 

 

First mortgage loans

     3,205         3,158         1,789         521   

Second mortgage loans

     2,456         899         161         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage loans

     5,661         4,057         1,950         521   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans*

   $ 62,142       $ 60,413       $ 17,242       $ 6,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Approximately $37 million and $55 million in Legacy loan balances were past due 90 days or more at June 30, 2012 and December 31, 2011, respectively.

Loans delinquent 30-89 days and troubled debt restructured loans accruing interest, segregated by class of loans at June 30, 2012 and December 31, 2011, were as follows:

 

     June 30, 2012      December 31, 2011  
     Accruing
Delinquent
30-89 Days
     Troubled
Debt
Restructured
Loans
Accruing
     Accruing
Delinquent
30-89 Days
     Troubled
Debt
Restructured
Loans
Accruing
 
     (In thousands)  

Commercial loans

   $ 5,188       $ 6,441       $ 9,048       $ 6,450   

SBA loans

     1,694         —           849         —     

Construction loans

     242         930         2,498         932   

Indirect loans

     1,385         2,880         2,697         3,008   

Installment loans

     301         15         445         20   

First mortgage loans

     801         597         2,835         203   

Second mortgage loans

     1,095         —           507         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,706       $ 10,863       $ 18,879       $ 10,613   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings (“TDRs”) are loans in which the borrower is experiencing financial difficulty and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service under the potential modified loan terms. The types of concessions granted are generally interest rate reductions or term extensions. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower. Generally, once a loan becomes a TDR, it is probable that the loan will likely continue to be reported as a TDR for the life of the loan. Interest income recognition on impaired loans is dependent upon nonaccrual status.

During the periods ended June 30, 2012 and 2011, certain loans were modified resulting in TDRs. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

 

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The following table presents loans, by class, which were modified as TDRs that occurred during the three and six months ended June 30, 2012 and 2011 along with the type of modification.

 

     Troubled Debt Restructured
During the Quarter Ended
June 30, 2012
     Troubled Debt Restructured
During the Quarter
Ended June 30, 2011
 
     Interest Rate      Term      Interest
Rate
     Term  
            (In thousands)         

Commercial loans

   $ 507       $ —         $ 10,913       $ —     

SBA loans

     —           716         —           —     

Construction

     —           —           —           —     

Indirect loans

     —           3,013         —           —     

First mortgage loans

     —           476         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 507       $ 4,205       $ 10,913       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Troubled Debt Restructured
During the Six Months
Ended June 30, 2012
     Troubled Debt Restructured
During the Six Months
Ended June 30, 2011
 
     Interest Rate      Term      Interest Rate      Term  
            (In thousands)         

Commercial loans

   $ 707       $ —         $ —         $ —     

SBA loans

     —           6,375         —           —     

Construction

     953         195         73         —     

Indirect loans

     —           6,028         —           —     

First mortgage loans

     —           767         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,660       $ 13,365       $ 73       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the amount of loans which were restructured in the previous twelve months and which defaulted within each period:

 

     Troubled Debt Restructured
During the Twelve Months
Ended June 30, 2012 and
Defaulting During

Three Months Ended
June 30, 2012
 
     (In thousands)  

Commercial loans

   $ 929   

SBA loans

     7,014   

Construction

     216   

Indirect loans

     —     

Installment loans

     —     

First mortgage loans

     470   

Second mortgage loans

     —     
  

 

 

 

Total

   $ 8,629   
  

 

 

 

Note:    A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The Company had TDRs with a balance of $32.0 million and $23.6 million at June 30, 2012 and December 31, 2011, respectively. There were charge-offs of TDR loans of $468,000 and $196,000 for the quarter ended June 30, 2012 and June 30, 2011, respectively. The Company is not committed to lend additional amounts as of June 30, 2012 and December 31, 2011 to customers with outstanding loans that are classified as TDRs. Charge-offs on such loans are factored into the rolling historical loss rate, which is one of the considerations used in establishing the allowance for loan losses.

 

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Loans and allowance for loan loss individually and collectively evaluated by portfolio segment follow below:

 

     Three Months Ended June 30, 2012  
     Commercial     Construction     Consumer     Mortgage     Unallocated     Total  
           (In thousands)        

Beginning balance

   $ 10,973      $ 8,516      $ 5,828      $ 2,698      $ 1,267      $ 29,282   

Charge-offs

     (712     (1,661     (772     (228     —          (3,373

Recoveries

     3        54        282        7        —          346   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Charge-offs

     (709     (1,607     (490     (221     —          (3,027

Provision for loan losses

     673        13        256        245        (237     950   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 10,937      $ 6,922      $ 5,594      $ 2,722      $ 1,030      $ 27,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended June 30, 2011  
     Commercial     Construction     Consumer     Mortgage     Unallocated     Total  
           (In thousands)        

Beginning balance

   $ 7,569      $ 11,314      $ 7,241      $ 2,592      $ 978      $ 29,694   

Charge-offs

     (318     (3,661     (840     (194     —          (5,013

Recoveries

     4        53        211        2        —          270   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Charge-offs

     (314     (3,608     (629     (192     —          (4,743

Provision for loan losses

     500        2,609        988        242        511        4,850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 7,755      $ 10,315      $ 7,600      $ 2,642      $ 1,489      $ 29,801   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2012  
     Commercial     Construction     Consumer     Mortgage     Unallocated     Total  
           (In thousands)        

Beginning balance

   $ 9,183      $ 8,262      $ 6,040      $ 2,535      $ 1,936      $ 27,956   

Charge-offs

     (730     (3,168     (2,045     (323     —          (6,266

Recoveries

     6        194        597        18        —          815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Charge-offs

     (724     (2,974     (1,448     (305     —          (5,451

Provision for loan losses

     2,478        1,634        1,002        492        (906     4,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 10,937      $ 6,922      $ 5,594      $ 2,722      $ 1,030      $ 27,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2011  
     Commercial     Construction     Consumer     Mortgage     Unallocated     Total  
           (In thousands)        

Beginning balance

   $ 7,532      $ 9,286      $ 7,598      $ 2,570      $ 1,096      $ 28,082   

Charge-offs

     (589     (6,162     (2,390     (299     —          (9,440

Recoveries

     25        104        403        2        —          534   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Charge-offs

     (564     (6,058     (1,987     (297     —          (8,906

Provision for loan losses

     787        7,087        1,989        369        393        10,625   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 7,755      $ 10,315      $ 7,600      $ 2,642      $ 1,489      $ 29,801   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     June 30, 2012  
     Commercial     Construction     Consumer     Mortgage     Unallocated     Total  
           (In thousands)        

Individually evaluated for impairment

   $ 2,169      $ 1,834      $ 52      $ 1,325      $ —        $ 5,380   

Collectively evaluated for impairment

     8,768        5,088        5,542        1,397        1,030        21,825   

Acquired with deteriorated credit quality

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

   $ 10,937      $ 6,922      $ 5,594      $ 2,722      $ 1,030      $ 27,205   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ 52,555      $ 25,139      $ 3,504      $ 5,987        $ 87,185   

Collectively evaluated for impairment

     463,453        58,230        949,763        83,459          1,554,905   

Acquired with deteriorated credit quality

     66,672        13,428        3,795        20,219          104,114   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total loans

   $ 582,680      $ 96,797      $ 957,062      $ 109,665        $ 1,746,204   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 
     December 31, 2011  
     Commercial     Construction     Consumer     Mortgage     Unallocated     Total  
           (In thousands)        

Individually evaluated for impairment

   $ 1,049      $ 3,481      $ 220      $ 1,054      $ —        $ 5,804   

Collectively evaluated for impairment

     8,134        4,781        5,820        1,481        1,936        22,152   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

   $ 9,183      $ 8,262      $ 6,040      $ 2,535      $ 1,936      $ 27,956   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ 40,615      $ 39,911      $ 4,066      $ 4,057        $ 88,649   

Collectively evaluated for impairment

     468,739        49,982        850,994        88,025          1,457,740   

Acquired with deteriorated credit quality

     39,986        7,817        2,115        27,564          77,482   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total loans

   $ 549,340      $ 97,710      $ 857,175      $ 119,646        $ 1,623,871   
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

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Table of Contents

Impaired loans are evaluated based on the present value of expected future cash flows discounted at the loan’s original effective interest rate, or at the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. Impaired loans are specifically reviewed loans for which it is probable that the Bank will be unable to collect all amounts due according to the terms of the loan agreement. A specific valuation allowance is required to the extent that the estimated value of an impaired loan is less than the recorded investment. Large groups of smaller balance, homogeneous loans, such as consumer installment loans, and smaller balance commercial loans are collectively evaluated for impairment. Interest on impaired loans is reported on the cash basis as received when the full recovery of principal and interest is anticipated, or after full principal and interest has been recovered when collection of interest is in question.

Impaired loans, by class, are shown below.

 

     June 30, 2012      December 31, 2011  
     Unpaid
Principal
     Amortized
Cost(1)
     Related
Allowance
     Unpaid
Principal
     Amortized
Cost(1)
     Related
Allowance
 
     (In thousands)  

Impaired Loans with Allowance

                 

Commercial loans

   $ 9,119       $ 9,078       $ 1,980       $ 8,726       $ 8,721       $ 860   

SBA loans

     2,205         2,080         189         5,916         2,798         189   

Construction loans

     38,177         22,937         1,834         54,967         37,399         3,481   

Indirect loans

     3,013         3,013         17         3,526         3,526         147   

Installment loans

     1,445         245         35         209         210         73   

First mortgage loans

     2,686         2,686         652         3,050         2,870         540   

Second mortgage loans

     895         844         673         927         837         514   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans

   $ 57,540       $ 40,883       $ 5,380       $ 77,321       $ 56,361       $ 5,804   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2012      December 31, 2011  
     Unpaid
Principal
     Amortized
Cost(1)
     Related
Allowance
     Unpaid
Principal
     Amortized
Cost(1)
     Related
Allowance
 
     (In thousands)  

Impaired Loans with No Allowance

                 

Commercial loans

   $ 21,670       $ 21,083       $ —         $ 11,064       $ 11,024       $ —     

SBA loans

     23,558         20,314         —           19,155         18,072         —     

Construction loans

     7,699         2,202         —           6,951         2,512         —     

Indirect loans

     —           —           —           —           —           —     

Installment loans

     261         246         —           1,534         330         —     

First mortgage loans

     1,097         1,096         —           343         288         —     

Second mortgage loans

     1,363         1,361         —           63         62         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans

   $ 55,648       $ 46,302       $ —         $ 39,110       $ 32,288       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amortized cost reflects charge-offs that have been recognized plus other amounts that have been applied to reduce net book balance.

Average impaired loans and interest income recognized, by class, are summarized below.

 

     Three Months Ended
June 30, 2012
     Three Months Ended
June 30, 2011
 
     Average
Impaired
Loans
     Interest Income
Recognized on
Impaired Loans
     Cash basis
Interest Income
Recognized on
Impaired Loans
     Average
Impaired
Loans
     Interest Income
Recognized on
Impaired Loans
     Cash basis
Interest Income
Recognized on
Impaired Loans
 
                   (In thousands)                

Commercial loans

   $ 27,305       $ 164       $ —         $ 19,335       $ 13       $ —     

SBA loans

     21,517         568         5         19,433         321         —     

Construction loans

     30,627         102         —           54,396         114         —     

Indirect loans

     3,057         62         —           487         25         —     

Installment loans

     494         44         —           1,237         13         —     

First mortgage loans

     3,893         3