XNAS:TBBK The Bancorp Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:TBBK (The Bancorp Inc): Fair Value Estimate
Premium
XNAS:TBBK (The Bancorp Inc): Consider Buying
Premium
XNAS:TBBK (The Bancorp Inc): Consider Selling
Premium
XNAS:TBBK (The Bancorp Inc): Fair Value Uncertainty
Premium
XNAS:TBBK (The Bancorp Inc): Economic Moat
Premium
XNAS:TBBK (The Bancorp Inc): Stewardship
Premium
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

     [X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  March 31, 2012

OR

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

For the transition period from:                    to

Commission file number: 51018

THE BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
23-3016517
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification No.)
     
409 Silverside Road
   
Wilmington, DE
 
19809
(Address of principal
 
(Zip code)
executive offices)
   


Registrant's telephone number, including area code:  (302) 385-5000

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 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):
 
Large accelerated filer [ ]
Accelerated filer [X]
   
Non-accelerated filer [ ]
Smaller reporting company [ ]
(Do not check if a smaller
 
reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ]  No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


As of May 2, 2012 there were 33,101,281 outstanding shares of common stock, $1.00 par value.
 
 
 
 
 
2

 



THE BANCORP, INC

Form 10-Q Index
   
Page
     
Part I Financial Information
     
Item 1.
Financial Statements:
 
     
 
Consolidated Balance Sheets – March 31, 2012 (unaudited) and December 31, 2011
4
     
 
Unaudited Consolidated Statements of Operations – Three months ended March 31, 2012 and 2011
5
     
 
Unaudited Consolidated Statements of Comprehensive Income– Three months ended March 31, 2012 and 2011
6
     
 
Unaudited Consolidated Statements of Changes in Shareholders’ Equity – Three months ended March 31, 2012
7
     
 
Unaudited Consolidated Statements of Cash Flows – Three months ended March 31, 2012 and 2011
8
     
 
Unaudited Notes to Consolidated Financial Statements
9
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
     
Item 4.
Controls and Procedures
42
     
Part II Other Information
     
Item 6.
Exhibits
43
     
Signatures
43
 
 
 
 
 
3

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

THE BANCORP, INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
 
             
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
   
(in thousands)
 
ASSETS
           
Cash and cash equivalents
           
Cash and due from banks
  $ 142,123     $ 96,228  
Interest earning deposits at Federal Reserve Bank
    1,663,664       652,946  
Total cash and cash equivalents
    1,805,787       749,174  
                 
Investment securities, available-for-sale, at fair value
    481,553       448,204  
Investment securities, held-to-maturity (fair value $13,700 and $13,826, respectively)
    17,971       18,044  
Federal Home Loan and Atlantic Central Bankers Bank stock
    4,836       5,088  
Loans, net of deferred loan costs
    1,748,867       1,744,828  
Allowance for loan and lease losses
    (31,500 )     (29,568 )
Loans, net
    1,717,367       1,715,260  
Premises and equipment, net
    8,514       8,358  
Accrued interest receivable
    9,032       8,476  
Intangible assets, net
    7,754       8,004  
Other real estate owned
    7,726       7,405  
Deferred tax asset, net
    20,804       21,941  
Other assets
    22,703       20,727  
Total assets
  $ 4,104,047     $ 3,010,681  
                 
LIABILITIES
               
Deposits
               
Demand (non-interest bearing)
  $ 2,441,256     $ 1,424,913  
Savings, money market and interest checking
    1,302,538       1,222,368  
Time deposits
    20,637       25,528  
Time deposits, $100,000 and over
    9,447       9,742  
Total deposits
    3,773,878       2,682,551  
                 
Securities sold under agreements to repurchase
    25,906       33,177  
Accrued interest payable
    129       123  
Subordinated debenture
    13,401       13,401  
Other liabilities
    12,500       9,950  
Total liabilities
    3,825,814       2,739,202  
                 
SHAREHOLDERS' EQUITY
               
Common stock - authorized, 50,000,000 shares of $1.00 par value; 33,101,281 and 33,096,281
               
shares issued at March 31, 2012 and December 31, 2011, respectively
    33,201       33,196  
Treasury stock, at cost (100,000 shares)
    (866 )     (866 )
Additional paid-in capital
    242,661       241,997  
Accumulated deficit
    (5,305 )     (9,277 )
Accumulated other comprehensive income
    8,542       6,429  
Total shareholders' equity
    278,233       271,479  
                 
Total liabilities and shareholders' equity
  $ 4,104,047     $ 3,010,681  
                 
 The accompanying notes are an integral part of these statements.
               

 
 
 
4

 
 

 

THE BANCORP, INC. AND SUBSIDIARY
 
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 
             
   
For the three months ended
March 31,
 
   
2012
   
2011
 
   
(in thousands, except per share data)
 
Interest income
           
Loans, including fees
  $ 18,946     $ 18,293  
Interest on investment securities:
               
Taxable interest
    3,190       1,557  
Tax-exempt interest
    693       672  
Interest bearing deposits
    1,053       515  
      23,882       21,037  
Interest expense
               
Deposits
    2,722       2,605  
Securities sold under agreements to repurchase
    27       16  
Short-term borrowings
    -       3  
Subordinated debenture
    217       215  
      2,966       2,839  
Net interest income
    20,916       18,198  
Provision for loan and lease losses
    5,220       4,672  
Net interest income after provision for loan and lease losses
    15,696       13,526  
                 
Non-interest income
               
Service fees on deposit accounts
    905       635  
Merchant credit card processing and ACH fees
    673       569  
Prepaid fees
    9,046       4,755  
Other than temporary impairment on securities held-to-maturity (1)
    -       (75 )
Leasing income
    950       704  
Debit card income
    159       372  
Affinity fees
    432       21  
Other
    125       702  
Total non-interest income
    12,290       7,683  
                 
Non-interest expense
               
Salaries and employee benefits
    9,616       6,980  
Depreciation and amortization
    806       729  
Rent and related occupancy cost
    797       699  
Data processing expense
    2,643       2,393  
Printing and supplies
    456       282  
Audit expense
    302       260  
Legal expense
    536       500  
Amortization of intangible assets
    250       250  
Losses and write downs on other real estate owned
    1,451       52  
FDIC Insurance
    934       1,212  
Software, maintenance and equipment
    431       366  
Other real estate owned expense
    159       167  
Other
    3,406       3,200  
Total non-interest expense
    21,787       17,090  
Net income before income tax
    6,199       4,119  
Income tax provision
    2,227       1,431  
Net income available to common shareholders
  $ 3,972     $ 2,688  
Net income per share - basic
  $ 0.12     $ 0.10  
Net income per share - diluted
  $ 0.12     $ 0.10  
                 
(1) Other than temporary impairment was due to credit loss and therefore did not include amounts due to market conditions.
 
   
The accompanying notes are an integral part of these statements.
 

 
 
 
 
 
5

 

 

THE BANCORP INC. AND SUBSIDIARY
 
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
             
             
   
For the three months
 
   
ended March 31,
 
   
2012
   
2011
 
   
(in thousands)
 
       
Net income
  $ 3,972     $ 2,688  
Other comprehensive income, net of tax
               
Unrealized gains on securities
               
Unrealized holding gain arising during the period
    3,248       1,598  
Amortization of losses previously held as available for sale
    3       12  
      3,251       1,610  
Deferred tax expense
               
Unrealized holding gain arising during the period
    1,137       543  
Amortization of losses previously held as available for sale
    1       4  
      1,138       547  
                 
Other comprehensive income
    2,113       1,063  
Comprehensive income
  $ 6,085     $ 3,751  




The accompanying notes are an integral part of these statements.




 
6

 



THE BANCORP INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the three months ended March 31, 2012
(in thousands, except share data)
 
                                 
Accumulated
       
   
Common
               
Additional
         
other
       
   
stock
   
Common
   
Treasury
   
paid-in
   
Accumulated
   
comprehensive
       
   
shares
   
stock
   
stock
   
capital
   
deficit
   
income
   
Total
 
                                           
Balance at January 1, 2012
    33,196,281     $ 33,196     $ (866 )   $ 241,997     $ (9,277 )   $ 6,429     $ 271,479  
Net income
                                    3,972               3,972  
Common stock issued from option exercises, net of tax benefits
    5,000       5       -       34       -       -       39  
Stock-based compensation
    -       -       -       630       -       -       630  
Other comprehensive income, net of reclassification adjustments and tax
    -       -       -       -       -       2,113       2,113  
                                                         
Balance at March 31, 2012
    33,201,281     $ 33,201     $ (866 )   $ 242,661     $ (5,305 )   $ 8,542     $ 278,233  
                                                         
The accompanying notes are an integral part of this statement.
   
 
 
 
 
 
 
 
 
7

 
 

 
THE BANCORP, INC. AND SUBSIDIARY
 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(dollars in thousands)
 
       
   
For the three months ended
 
   
March 31,
 
   
2012
   
2011
 
Operating activities
           
Net income
  $ 3,972     $ 2,688  
Adjustments to reconcile net income to net cash
               
  provided by operating activities
               
Depreciation and amortization
    1,056       979  
Provision for loan and lease losses
    5,220       4,672  
Net amortization of investment securities discounts/premiums
    124       105  
Stock-based compensation expense
    630       416  
Mortgage loans originated for sale
    -       (458 )
Sale of mortgage loans originated for resale
    -       454  
Gain on sale of mortgage loans originated for resale
    -       (4 )
Deferred income tax benefit
    2       -  
Gain on sales of fixed assets
    -       (2 )
Other than temporary impairment on securities held-to-maturity
    -       75  
Losses on sale and write downs of other real estate owned
    1,451       52  
(Increase) decrease in accrued interest receivable
    (556 )     71  
Decrease in interest payable
    6       25  
Increase in other assets
    (2,139 )     (1,571 )
Increase in other liabilities
    2,550       5,842  
  Net cash provided by operating activities
    12,316       13,344  
                 
Investing activities
               
Purchase of  investment securities available-for-sale
    (50,401 )     (79,256 )
Proceeds from redemptions and repayment of securities available-for-sale
    20,504       38,275  
Proceeds from sale of other real estate owned
    118       173  
Net increase in loans
    (9,217 )     (21,472 )
Proceeds from sale of fixed assets
    69       39  
Purchases of premises and equipment
    (869 )     (418 )
  Net cash used in investing activities
    (39,796 )     (62,659 )
                 
Financing activities
               
Net increase in deposits
    1,091,327       507,012  
Net (decrease) increase in securities sold under agreements to repurchase
    (7,271 )     5,400  
Repayment of short-term borrowings and federal funds purchased
    -       (136,000 )
Proceeds from issuance of common stock
    -       54,528  
Proceeds from the exercise of options
    39       -  
Excess tax benefit from share-based payment arrangements
    (2 )     -  
  Net cash provided by financing activities
    1,084,093       430,940  
                 
  Net increase in cash and cash equivalents
    1,056,613       381,625  
                 
Cash and cash equivalents, beginning of period
    749,174       472,319  
                 
Cash and cash equivalents, end of period
  $ 1,805,787     $ 853,944  
                 
Supplemental disclosure:
               
Interest paid
  $ 2,960     $ 2,814  
Taxes paid
  $ 422     $ 575  
Transfers of loans to other real estate owned
  $ 1,890     $ 1,489  


The accompanying notes are an integral part of these statements.
 
 
 
 
8

 
 

 

THE BANCORP, INC. AND SUBSIDIARY
NOTES TO THE CONSOLDIATED FINANCIAL STATEMENTS

Note 1. Formation and Structure of Company

The Bancorp, Inc. (the Company) is a Delaware corporation and a registered financial holding company with a wholly owned subsidiary bank, The Bancorp Bank (the Bank). The Bank is a Delaware chartered commercial bank located in Wilmington, Delaware and is a Federal Deposit Insurance Corporation (FDIC) insured institution. Through the Bank, the Company provides retail and commercial banking services in the Philadelphia, Pennsylvania and Wilmington, Delaware areas and other banking services nationally, which include prepaid debit cards, health savings accounts, wealth management and private label banking. The principal medium for the delivery of the Company’s banking services is the Internet.

Note 2. Significant Accounting Policies

Basis of Presentation
 
The financial statements of the Company, as of March 31, 2012 and for the three month period ended March 31, 2012 and 2011, are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (Form 10-K report). The results of operations for the three month period ended March 31, 2012 may not necessarily be indicative of the results of operations for the full year ending December 31, 2012.
 
Note 3. Share-based Compensation

The Company recognizes compensation expense for stock options in accordance with FASB ASC topic 718, Stock Based Compensation. The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is usually the vesting period. For grants subject to a service condition, the Company utilizes the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Company’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested. In accordance with ASC topic 718, the Company estimates the number of options for which the requisite service is expected to be rendered. At March 31, 2012, the Company had three stock-based compensation plans, which are more fully described in its Form 10-K report and the portions of the Company’s Proxy Statement dated March 21, 2012, incorporated therein by reference.

The Company granted 500,000 common stock options in the first quarter of 2012, 40,000 with a vesting period of one year and 460,000 with a vesting period of four years.  The weighted-average fair value of the stock options issued was $5.06. During the first quarter of 2011, the Company granted no stock options.  There were 5,000 stock options exercised for the three month period ending March 31, 2012 and no stock options exercised for the three month period ending March 31, 2011.

The Company estimated the fair value of each grant on the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions:

   
March 31,
 
   
2012
   
2011
 
Risk-free interest rate
    1.97 %     -  
Expected dividend yield
    -       -  
Expected volatility
    72.90 %     -  
Expected lives (years)
    4.83       -  

 
 
 
 
9

 
 

 
Expected volatility is based on the historical volatility of the Company’s stock and peer group comparisons over the expected life of the grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant. The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee terminations. In accordance with the ASC topic 718, Stock Based Compensation, stock based compensation expense for the three month period ended March 31, 2012 is based on awards that are ultimately expected to vest and has been reduced for estimated forfeitures. The Company estimates forfeitures using historical data based upon the groups identified by management.

As of March 31, 2012, there was a total of $7.0 million of unrecognized compensation cost related to unvested awards under share-based plans.  This cost is expected to be recognized over a weighted average period of 2.9 years.  Related compensation expense for the three months ended March 31, 2012 and 2011 was $630,000 and $416,000 respectively.

A summary of the status of the Company’s equity compensations plans is presented below.

   
Shares
   
Weighted
average
exercise
price
   
Weighted-
average
remaining
contractual
term
(years)
   
Aggregate
intrinsic
value
 
   
(in thousands, except per share data)
 
                         
Outstanding at January 1, 2012
    2,745,115     $ 10.10              
Granted
    500,000       8.50       -       -  
Exercised
    -       -       -       -  
Expired
    -       -       -       -  
Forfeited
    (2,000 )     7.81       -       -  
Outstanding at March 31, 2012
    3,243,115     $ 9.85       6.72     $ -  
Exercisable at March 31, 2012
    1,446,365               3.80     $ -  

A summary of the status of the Company’s stock appreciation rights is presented below.

   
Shares
   
Weighted-
average
price
   
Average
remaining
contractual
term
(years)
 
                   
Outstanding at January 1, 2012
    60,000     $ 11.41        
Granted
    -       -       -  
Exercised
    -       -       -  
Expired/forfeited
    (60,000 )     11.41       -  
Outstanding at March 31, 2012
    -     $ -       -  

Note 4. Earnings Per Share

The Company calculates earnings per share under FASB ASC topic 260, Earnings Per Share. Basic earnings per share exclude dilution and are computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
 
 
 
 
10

 
 

 
The following tables show the Company’s earnings per share for the periods presented:

   
For the three months ended
 
   
March 31, 2012
 
   
Income
   
Shares
   
Per share
 
   
(numerator)
   
(denominator)
   
amount
 
   
(dollars in thousands except per share data)
 
Basic earnings per share
                 
Net income available to common shareholders
  $ 3,972       33,097,325     $ 0.12  
Effect of dilutive securities
                       
Common stock options
    -       9,712       -  
Diluted earnings per share
                       
Net income available to common shareholders
  $ 3,972       33,107,037     $ 0.12  

Stock options for 1,604,115 shares, exercisable at prices between $10.00 and $25.43 per share, were outstanding at March 31, 2012 but were not included in the dilutive shares because the exercise price per share was greater than the average market price.

   
For the three months ended
 
   
March 31, 2011
 
   
Income
   
Shares
   
Per share
 
   
(numerator)
   
(denominator)
   
amount
 
   
(dollars in thousands except per share data)
 
Basic earnings per share
                 
Net income available to common shareholders
  $ 2,688       28,051,948     $ 0.10  
Effect of dilutive securities
                       
Stock options
    -       6,385       -  
Diluted earnings per share
                       
Net income available to common shareholders
  $ 2,688       28,058,333     $ 0.10  

Stock options for 2,201,115 shares and stock appreciation rights for 60,000 shares, exercisable at prices between $7.81 and $25.43 share, were outstanding at March 31, 2011 but were not included in the dilutive shares because the exercise share price was greater than the average market price.

Note 5. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities classified as available-for-sale and held-to-maturity at March 31, 2012 and December 31, 2011 are summarized as follows (in thousands):


Available-for-sale
 
March 31, 2012
 
         
Gross
   
Gross
       
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
U.S. Government agency securities
  $ 8,946     $ 175     $ -     $ 9,121  
Tax-exempt obligations of states and political subdivisions
    101,329       3,912       (10 )     105,231  
Taxable obligations of states and political subdivisions
    52,438       2,475       (57 )     54,856  
Residential mortgage-backed securities
    177,646       3,718       (120 )     181,244  
Commercial mortgage-backed securities
    86,587       3,223       (118 )     89,692  
Other debt securities
    37,575       1,156       (421 )     38,310  
Other equity securities
    3,000       99       -       3,099  
    $ 467,521     $ 14,758     $ (726 )   $ 481,553  
                                 
Held-to-maturity
 
March 31, 2012
 
           
Gross
   
Gross
         
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Other debt securities - single issuers
  $ 16,336     $ 140     $ (4,124 )   $ 12,352  
Other debt securities - pooled
    1,635       -       (287 )     1,348  
    $ 17,971     $ 140     $ (4,411 )   $ 13,700  

 
 
 
 
11

 
 

 

Available-for-sale
 
December 31, 2011
 
         
Gross
   
Gross
       
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
U.S. Government agency securities
  $ 9,087     $ 198     $ -     $ 9,285  
Tax-exempt obligations of states and political subdivisions
    94,227       3,580       (8 )     97,799  
Taxable obligations of states and political subdivisions
    50,778       2,149       (60 )     52,867  
Residential mortgage-backed securities
    190,214       3,582       (111 )     193,685  
Commercial mortgage-backed securities
    51,242       875       (56 )     52,061  
Other debt securities
    38,873       1,058       (399 )     39,532  
Other equity securities
    3,000       -       (25 )     2,975  
    $ 437,421     $ 11,442     $ (659 )   $ 448,204  
                                 
Held-to-maturity
 
December 31, 2011
 
           
Gross
   
Gross
         
   
Amortized
   
unrealized
   
unrealized
   
Fair
 
   
cost
   
gains
   
losses
   
value
 
Other debt securities - single issuers
  $ 16,337     $ 138     $ (4,051 )   $ 12,424  
Other debt securities - pooled
    1,707       -       (305 )     1,402  
    $ 18,044     $ 138     $ (4,356 )   $ 13,826  
 
Investments in Federal Home Loan and Atlantic Central Bankers Bank stock are recorded at cost and amounted to $4.8 million at March 31, 2012 and $5.1 million at December 31, 2011.

The amortized cost and fair value of the Company’s investment securities at March 31, 2012, by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available-for-sale
   
Held-to-maturity
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
cost
   
value
   
cost
   
value
 
Due before one year
  $ 73,902     $ 74,212     $ -     $ -  
Due after one year through five years
    38,947       39,795       -       -  
Due after five years through ten years
    18,818       19,764       3,256       2,849  
Due after ten years
    332,854       344,683       14,715       10,851  
Other equity securities
    3,000       3,099       -       -  
    $ 467,521     $ 481,553     $ 17,971     $ 13,700  
 
At March 31, 2012 and December 31, 2011, investment securities with a book value of approximately $41.7 million and $44.6 million, respectively, were pledged to secure securities sold under repurchase agreements as required or permitted by law.

Available-for-sale securities fair values are based on the fair market value supplied by the third-party market data provider while held-to-maturity securities are based on the present value of cash flows, which discounts expected cash flows from principal and interest using yield to maturity at the measurement date. The Company periodically reviews its investment portfolio to determine whether unrealized losses are temporary, based on an evaluations of the creditworthiness of the issuers/guarantors as well as the underlying collateral if applicable, in addition to the continuing performance of the securities. The Company did not recognize any other-than-temporary impairment charges in the first three months of 2012 as compared to $75,000 on one trust preferred pooled security in the first three months of 2011.  The amount of the credit impairment was calculated by estimating the discounted cash flows for those securities.
 
 
 
 
12

 
 
 

 
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at March 31, 2012 (dollars in thousands):

Available-for-sale
       
Less than 12 months
   
12 months or longer
   
Total
 
   
Number of securities
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
 
Description of Securities
                                         
Tax-exempt obligations of states and political subdivisions
  6     $ 4,520     $ (10 )   $ -     $ -     $ 4,520     $ (10 )
Taxable obligations of states and political subdivisions
  10       16,606       (57 )     -       -       16,606       (57 )
Residential mortgage-backed securities
  8       12,747       (119 )     35       (1 )     12,782       (120 )
Commercial mortgage-backed securities
  4       29,661       (118 )     -       -       29,661       (118 )
Other debt securities
  3       9,715       (24 )     2,443       ( 397 )     12,158       (421 )
Total temporarily impaired investment securities
  31     $ 73,249     $ (328 )   $ 2,478     $ (398 )   $ 75,727     $ (726 )
                                                       
Held-to-maturity
       
Less than 12 months
   
12 months or longer
   
Total
 
   
Number of securities
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
 
Description of Securities
                                                     
Other debt securities - single issuers
  2     $ -     $ -     $ 7,952     $ (4,124 )   $ 7,952     $ (4,124 )
Other debt securities - pooled
  2       -       -       1,348       (287 )     1,348       (287 )
Total temporarily impaired investment securities
  4     $ -     $ -     $ 9,300     $ (4,411 )   $ 9,300     $ (4,411 )
 
The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2011 (dollars in thousands):

Available-for-sale
       
Less than 12 months
   
12 months or longer
   
Total
 
   
Number of securities
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
 
Description of Securities
                                         
Tax-exempt obligations of states and political subdivisions
  7     $ 11,104     $ (8 )   $ -     $ -     $ 11,104     $ (8 )
Taxable obligations of states and political subdivisions
  10       16,905       (60 )     -       -       16,905       (60 )
Residential mortgage-backed securities
  5       10,054       (111 )     -       -       10,054       (111 )
Commercial mortgage-backed securities
  4       24,421       (56 )     -       -       24,421       (56 )
Other debt securities
  3       10,929       (93 )     2,549       (306 )     13,478       (399 )
Other equity securities
  1       2,975       (25 )     -       -       2,975       (25 )
Total temporarily impaired investment securities
  30     $ 76,388     $ (353 )   $ 2,549     $ (306 )   $ 78,937     $ (659 )
                                                       
Held-to-maturity
       
Less than 12 months
   
12 months or longer
   
Total
 
   
Number of securities
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
   
Fair Value
   
Unrealized losses
 
Description of Securities
                                                     
Other debt securities - single issuers
  2     $ -     $ -     $ 8,021     $ (4,051 )   $ 8,021     $ (4,051 )
Other debt securities - pooled
  2       -       -       1,402       (305 )     1,402       (305 )
Total temporarily impaired investment securities
  4     $ -     $ -     $ 9,423     $ (4,356 )   $ 9,423     $ (4,356 )

 
 
 
 
13

 
 

 
The other debt securities included in the held-to-maturity classification on the Company’s balance sheet at March 31, 2012 consist of four single issuer trust preferred securities issued by either banks or insurance companies and two pooled issuer trust preferred securities, whose collateral is made up of trust preferred securities issued by banks. The amortized cost of the single issuer trust preferred securities was $16.3 million, of which two securities totaling $4.3 million were issued by two different banks and two securities totaling $12.0 million were issued by two different insurance companies. The two pooled trust preferred securities had an aggregate amortized cost of $1.6 million.

The Company has evaluated the securities in the above tables and has concluded that none of these securities has impairment that is other-than-temporary. The Company evaluates whether a credit impairment exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security. The Company’s best estimate of expected future cash flows which is used to determine the credit loss amount is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments regarding the future performance of the security. The Company concluded that most of the securities that are in an unrealized loss position are in a loss position because of changes in interest rates after the securities were purchased. The securities that have been in an unrealized loss position for 12 months or longer include other securities whose market values are sensitive to interest rates and changes in credit quality. The Company’s unrealized loss for the debt securities, which includes four single issuer trust preferred securities and two pooled trust preferred securities, is primarily related to general market conditions and the resultant lack of liquidity in the market. The severity of the impairments in relation to the carrying amounts of the individual investments is consistent with market developments. The Company’s analysis for each investment, is performed at the security level. As a result of its review, the Company concluded that other-than-temporary impairment did not exist due to the Company’s ability and intention to hold these securities to recover their amortized cost basis.

Note 6. Loans

The Company analyzes credit risk prior to making loans, on an individual loan basis. The Company considers relevant aspects of the borrowers’ financial position and cash flow, past borrower performance, management’s knowledge of market conditions, side collateral and the ratio of the loan amount to estimated collateral value in making its credit determinations.

Major classifications of loans are as follows (in thousands):

   
March 31,
   
December 31,
 
   
2012
   
2011
 
             
Commercial
  $ 445,912     $ 450,411  
Commercial mortgage *
    617,871       609,487  
Construction
    248,232       246,611  
Total commercial loans
    1,312,015       1,306,509  
Direct lease financing
    130,321       129,682  
Residential mortgage
    94,438       96,110  
Consumer loans and others
    208,584       209,041  
      1,745,358       1,741,342  
Unamortized loan costs
    3,509       3,486  
Total loans, net of deferred loan costs
  $ 1,748,867     $ 1,744,828  
                 
Supplemental loan data:
               
Construction 1-4 family
  $ 85,461     $ 85,189  
Commercial construction, acquisition and development
    162,771       161,422  
 
  $ 248,232     $ 246,611  
                 
* At March 31, 2012, our owner occupied loans amounted to $144.0 million, or 23.3% of commercial mortgages as compared to $137.9 million, or 22.6% at December 31, 2011.
 
 
 
 
 
14

 
 

 
The Company has identified twenty-eight loans as impaired, where it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The balance of these impaired loans was $21.4 million at March 31, 2012, of which $17.2 million had a specific reserve of $8.8 million. The remaining $4.2 million of impaired loans did not have a reserve. Included within the impaired loans at March 31, 2012 are seven troubled debt restructured loans with a balance of $7.8 million with a total specific reserve of $3.3 million.  The Company recognizes income on impaired loans when they are placed into non-accrual status on a cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, the Company will not recognize income on such loans. Interest income would have increased by $357,000 in first quarter 2012 if interest on impaired loans had been accrued. The balance of impaired loans was $17.6 million at December 31, 2011, of which $14.5 million had specific reserves of $5.9 million.  The Company did not recognize interest income on impaired loans in first quarter ended March 31, 2012 and 2011, respectively.

The following table provides information about impaired loans at March 31, 2012 and December 31, 2011 (in thousands):

   
Recorded
investment
   
Unpaid
principal
balance
   
Related
allowance
   
Average
recorded
investment
   
Interest
income
recognized
 
March 31, 2012
                             
Without an allowance recorded
                             
Construction
  $ 827     $ 827     $ -     $ 414     $ -  
Commercial mortgage
    1,169       1,500       -       584       -  
Commercial
    1,262       2,995       -       1,081       -  
Consumer - home equity
    927       927       -       927       -  
Residential
    -       -       -       632       -  
With an allowance recorded
                                       
Construction
    9,824       9,905       5,259       7,387       -  
Commercial mortgage
    2,654       2,654       1,133       3,163       -  
Commercial
    4,756       4,952       2,376       5,153       -  
Consumer - home equity
    -       -       -       162       -  
Residential
    -       -       -       -       -  
Total
                                       
Construction
  $ 10,651     $ 10,732     $ 5,259     $ 7,801     $ -  
Commercial mortgage
  $ 3,823     $ 4,154     $ 1,133     $ 3,747     $ -  
Commercial
  $ 6,018     $ 7,947     $ 2,376     $ 6,234     $ -  
Consumer - home equity
  $ 927     $ 927     $ -     $ 1,089     $ -  
Residential
  $ -     $ -     $ -     $ 632     $ -  
                                         
December 31, 2011
                                       
Without an allowance recorded
                                       
Construction
  $ -     $ -     $ -     $ 100     $ -  
Commercial mortgage
    -       -       -       310       -  
Commercial
    900       2,042       6,831       626       -  
Consumer - home equity
    927       927       3,765       371       -  
Residential
    1,264       1,414       149       662       -  
With an allowance recorded
                                       
Construction
    4,949       4,949       2,296       2,123       -  
Commercial mortgage
    3,672       3,672       712       2,793       -  
Commercial
    5,550       5,550       2,724       3,075       -  
Consumer - home equity
    325       325       204       510       -  
Residential
    -       -       -       5,048       -  
Total
                                       
Construction
  $ 4,949     $ 4,949     $ 2,296     $ 2,223     $ -  
Commercial mortgage
  $ 3,672     $ 3,672     $ 712     $ 3,103     $ -  
Commercial
  $ 6,450     $ 7,592     $ 9,555     $ 3,701     $ -  
Consumer - home equity
  $ 1,252     $ 1,252     $ 3,969     $ 881     $ -  
Residential
  $ 1,264     $ 1,414     $ 149     $ 5,710     $ -  

 
 
 
15

 

 
The following tables summarize the Company’s non-accrual loans, loans past due 90 days and other real estate owned for the periods indicated (the Company had no non-accrual leases at March 31, 2012 or December 31, 2011):

   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(in thousands)
 
             
Non-accrual loans
           
          Construction *
  $ 10,375     $ 4,949  
          Commercial mortgage *
    3,609       3,672  
          Commercial *
    6,018       6,450  
          Consumer
    927       1,252  
          Residential
    -       1,264  
Total non-accrual loans
    20,929       17,587  
                 
Loans past due 90 days or more
    3,914       4,101  
Total non-performing loans
    24,843       21,688  
Other real estate owned
    7,726       7,405  
Total non-performing assets
  $ 32,569     $ 29,093  
                 
* Included in the non-accrual loans as of March 31, 2012 are five troubled debt restructured loans.  $748,000 in commercial mortgage, $3.2 million in commercial, and $3.4 million in construction.
 
The Company’s loans that were modified and considered troubled debt restructurings in the three month period ended March 31, 2012 and year ended December 31, 2011 were already included in non-accrual and non-performing loan totals and are further detailed as follows (dollars in thousands):
 
   
March 31, 2012
   
December 31, 2011
 
   
Number
   
Pre-modification recorded investment
   
Post-modification recorded investment
   
Number
   
Pre-modification recorded investment
   
Post-modification recorded investment
 
Commercial
  1     $ 3,155     $ 3,155       -     $ -     $ -  
Commercial mortgage
  2       962       962       1       759       759  
Construction
  4       3,701       3,701       -       -       -  
Residential mortgage
  -       -       -       1       364       364  
Total
  7     $ 7,818     $ 7,818       2     $ 1,123     $ 1,123  


 
16

 
 
The balances below provide information as to how the loans were modified as troubled debt restructurings loans during the three months ended March 31, 2012 and year ended December 31, 2011.  All of the loans were already included in non-accrual and non-performing loans.
 
   
March 31, 2012
   
December 31, 2011
 
   
Adjusted interest rate
   
Extended maturity
   
Combined rate and maturity
   
Adjusted interest rate
   
Extended maturity
   
Combined rate and maturity
 
   
(in thousands)
 
Commercial
  $ -     $ 3,155     $ -     $ -     $ -     $ -  
Commercial mortgage
    748       214       -       759       -       -  
Construction
    -       3,701       -       -       -       -  
Residential mortgage
    -       -       -       364       -       -  
Total
  $ 748     $ 7,070     $ -     $ 1,123     $ -     $ -  
 
As of March 31, 2012 and December 31, 2011, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

A detail of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands):

         
Commercial
         
Residential
         
Direct lease
             
Three months ended
 
Commercial
   
mortgage
   
Construction
   
mortgage
   
Consumer
   
financing
   
Unallocated
   
Total
 
March 31, 2012
                                               
Beginning balance
  $ 10,214     $ 9,274     $ 5,352     $ 2,090     $ 1,346     $ 254     $ 1,038     $ 29,568  
Charge-offs
    (1,457 )     (991 )     (702 )     -       (172 )     (86 )     -       (3,408 )
Recoveries