XNAS:BANC 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

 

 

(Mark One)

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

For the quarterly period ended June 30, 2012

or

 

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

For the transition period from            to             

Commission file number 001-35522

 

 

FIRST PACTRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

(State or other jurisdiction of

incorporation or organization)

04-3639825

(IRS Employer Identification No.)

18500 Von Karman Ave, Suite 1100, Irvine, California

(Address of principal executive offices)

92612

(Zip Code)

(949) 236-5211

(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 (Section 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 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   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 August 8, 2012 the registrant had outstanding 10,612,592 shares of voting common stock and 1,090,061 shares of Class B non-voting common stock.

 

 

 


Table of Contents

FIRST PACTRUST BANCORP, INC.

Form 10-Q Quarterly Report

Index

 

             Page  
PART I - Financial Information   
  Item 1   Financial Statements      4   
  Item 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   
  Item 3   Quantitative and Qualitative Disclosures About Market Risk      51   
  Item 4   Controls and Procedures      52   
PART II - Other Information   
  Item 1   Legal Proceedings      54   
  Item 1A   Risk Factors      54   
  Item 2   Unregistered Sales of Equity Securities and Use of Proceeds      55   
  Item 3   Defaults Upon Senior Securities      55   
  Item 4   Mine Safety Disclosures      55   
  Item 5   Other Information      55   
  Item 6   Exhibits      56   
SIGNATURES      59   

 

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Table of Contents

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

When used in this report and in public shareholder communications, in other documents of First PacTrust Bancorp, Inc. (the “Company,” “we,” “us” and “our”) filed with or furnished to the Securities and Exchange Commission (the “SEC”), or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” “guidance” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenue, expense or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (i) the occurrence of any event, change or other circumstances that could give rise to the termination of the stock purchase agreement for the Company’s pending acquisition of Gateway Bancorp; (ii) the inability to complete the Gateway Bancorp transaction due to the failure to satisfy such transaction’s conditions to completion (iii) risks that the Gateway Bancorp transaction or the recently completed Beach Business Bank transaction disrupt current plans and operations, the potential difficulties in customer and employee retention as a result of the transactions and the amount of the costs, fees, expenses and charges related to the transactions; (iv) continuation or worsening of current recessionary conditions, as well as continued turmoil in the financial markets; (v) the credit risks of lending activities, which may be affected by further deterioration in the real estate markets, may lead to increased loan delinquencies, losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses and require us to materially increase our loan loss reserves; (vi) the quality and composition of our securities portfolio; (vii) changes in general economic conditions, either nationally or in our market areas; (viii) changes in the levels of general interest rates, and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin and funding sources; (ix) fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in commercial and residential real estate values in our market area; (x) results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses, write-down asset values, increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (xi) legislative or regulatory changes that adversely affect our business, including changes in the interpretation of regulatory capital or other rules; (xii) our ability to control operating costs and expenses; (xiii) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; (xiv) errors in our estimates in determining fair value of certain of our assets, which may result in significant declines in valuation; (xv) the network and computer systems on which we depend could fail or experience a security breach; (xvi) our ability to attract and retain key members of our senior management team; (xvii) costs and effects of litigation, including settlements and judgments; (xviii) increased competitive pressures among financial services companies; (xix) changes in consumer spending, borrowing and saving habits; (xx) adverse changes in the securities markets; (xxi) earthquake, fire or other natural disasters affecting the condition of real estate collateral; (xxii) the availability of resources to address changes in laws, rules or regulations or to respond to regulatory actions; (xxiii) inability of key third-party providers to perform their obligations to us; (xxiv) changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board or their application to our business or final audit adjustments, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; (xxv) war or terrorist activities; and (xxvi) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in this report and from time to time in other documents that we file with or furnish to the SEC. You should not place undue reliance on forward-looking statements, and we undertake no obligation to update any such statements to reflect circumstances or events that occur after the date on which the forward-looking statement is made.

 

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Table of Contents

ITEM 1 – FINANCIAL STATEMENTS

First PacTrust Bancorp, Inc.

Consolidated Statements of Financial Condition

(In thousands of dollars except share and per share data)

(Unaudited)

 

     June 30,
2012
    December 31,
2011
 
ASSETS     

Cash and due from banks

   $ 7,211      $ 6,755   

Interest-bearing deposits

     81,616        37,720   
  

 

 

   

 

 

 

Total cash and cash equivalents

     88,827        44,475   

Securities available for sale

     117,008        101,616   

Federal Home Loan Bank stock, at cost

     6,311        6,972   

Loans, net of allowance of $11,448 at June 30, 2012 and $12,780 at December 31, 2011

     829,137        775,609   

Accrued interest receivable

     3,715        3,569   

Other real estate owned (OREO), net

     9,239        14,692   

Premises and equipment, net

     13,152        10,585   

Capital lease assets, net

     169        —     

Bank owned life insurance investment

     18,581        18,451   

Prepaid FDIC assessment

     1,752        2,405   

Other assets

     27,229        20,667   
  

 

 

   

 

 

 

Total assets

   $ 1,115,120      $ 999,041   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Deposits

    

Noninterest-bearing demand

   $ 26,594      $ 20,039   

Interest-bearing demand

     53,007        68,578   

Money market accounts

     225,808        188,658   

Savings accounts

     41,827        39,176   

Certificates of deposit

     505,095        469,883   
  

 

 

   

 

 

 

Total deposits

     852,331        786,334   

Advances from Federal Home Loan Bank

     35,000        20,000   

Capital lease obligation

     169        —     

Notes payable, net

     31,714        —     

Accrued expenses and other liabilities

     13,611        8,212   
  

 

 

   

 

 

 

Total liabilities

     932,825        814,546   

Commitments and contingent liabilities

     —          —     
SHAREHOLDERS’ EQUITY     

Preferred stock, $.01 par value per share, $1,000 per share liquidation preference for a total of $32,000; 50,000,000 shares authorized, 32,000 shares issued and outstanding at June 30, 2012 and December 31, 2011

     31,925        31,934   

Common stock, $.01 par value per share, 196,863,844 shares authorized; 11,774,837 shares issued and 10,604,477 shares outstanding at June 30, 2012; 11,756,636 shares issued and 10,581,704 shares outstanding at December 31, 2011

     118        117   

Class B non-voting non-convertible Common stock, $.01 par value per share, 3,136,156 shares authorized; 1,078,807 shares issued and outstanding at June 30, 2012 and 1,054,991 shares issued and outstanding at December 31, 2011

     11        11   

Additional paid-in capital

     151,612        150,786   

Retained earnings

     23,746        27,623   

Treasury stock, at cost (June 30, 2012-1,170,360 shares, December 31, 2011-1,174,932 shares)

     (25,007     (25,037

Accumulated other comprehensive loss, net

     (110     (939
  

 

 

   

 

 

 

Total shareholders’ equity

     182,295        184,495   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,115,120      $ 999,041   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

First PacTrust Bancorp, Inc.

Consolidated Statements of Income/(Loss) and Comprehensive Income/(Loss)

(In thousands of dollars except share and per share data)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Interest and dividend income

        

Loans, including fees

   $ 9,604      $ 7,513      $ 19,132      $ 15,179   

Securities

     694        1,002        1,431        2,246   

Dividends and other interest-earning assets

     80        67        140        106   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     10,378        8,582        20,703        17,531   

Interest expense

        

Savings

     11        97        22        187   

NOW

     40        16        60        32   

Money market

     162        61        391        127   

Certificates of deposit

     1,145        1,049        2,234        2,154   

Federal Home Loan Bank advances

     92        351        192        868   

Capital leases

     2        —          2        —     

Notes payable

     495        —          495        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,947        1,574        3,396        3,368   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     8,431        7,008        17,307        14,163   

Provision for loan losses

     279        451        970        451   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     8,152        6,557        16,337        13,712   

Noninterest income

        

Customer service fees

     378        373        739        711   

Mortgage loan prepayment penalties

     —          26        16        26   

Income from bank owned life insurance

     60        80        129        144   

Net gain/(loss) on sales of securities available for sale

     (32     1,118        (71     1,437   

Net gain/(loss) on sales of loans

     145        —          145        —     

Other

     88        38        184        84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     639        1,635        1,142        2,402   

Noninterest expense

        

Salaries and employee benefits

     5,177        2,856        10,044        6,237   

Occupancy and equipment

     1,321        532        2,320        1,196   

Advertising

     214        51        453        111   

Professional fees

     987        414        1,530        749   

Stationery paper, supplies, and postage

     183        116        296        231   

Data processing

     502        323        909        616   

ATM costs

     91        78        184        142   

FDIC expense

     362        392        680        775   

Loan servicing and foreclosure expense

     367        532        705        456   

Operating loss on equity investment

     77        78        153        156   

OREO valuation allowance

     155        137        169        558   

Net (gain)/loss on sales of other real estate owned

     (192     51        (508     819   

Other general and administrative

     699        439        1,226        769   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     9,943        5,999        18,161        12,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income/(loss) before income taxes

     (1,152     2,193        (682     3,299   

Income tax expense/(benefit)

     (413     644        (320     1,057   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss)

   $ (739   $ 1,549      $ (362   $ 2,242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends

   $ 314      $ —        $ 714      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income/(loss) available to common shareholders

   $ (1,053   $ 1,549      $ (1,076   $ 2,242   

Basic earnings/(loss) per common share

   $ (0.09   $ 0.16      $ (0.09   $ 0.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings/(loss) per common share

   $ (0.09   $ 0.16      $ (0.09   $ 0.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss), before tax:

        

Change in net unrealized gains on securities:

        

Net unrealized holding gains arising during the period

     509        (2,369     1,338        (1,476

Less: reclassification adjustment for (gains)/losses included in net income

     32        (1,118     71        (1,437
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains, net of reclassification adjustments

     541        (3,487     1,409        (2,913

Income tax expense/(benefit) related to items of other comprehensive income

     223        (1,430     580        (1,201
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income/(loss), net of tax

     318        (2,057     829        (1,712
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income/(loss)

   $ (421   $ (508   $ 467      $ 530   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

First PacTrust Bancorp, Inc.

Consolidated Statements of Shareholder’s Equity

(In thousands of dollars, except share and per share data)

(Unaudited)

 

     Preferred
Stock
    Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Unearned
ESOP
    Accumulated
Other
Comprehensive
Income (Loss), net
    Total  

Balance at January 1, 2011

   $ —        $ 109       $ 123,170      $ 35,773      $ (25,135   $ (507   $ 2,599      $ 136,009   

Net Loss

     —          —           —          (2,728     —          —          —          (2,728

Other comprehensive (loss), net

     —          —           —          —          —          —          (3,538     (3,538

Forfeiture and retirement of shares and common stock

     —          —           13        —          (13     —          —          —     

Stock option compensation expense

     —          —           816        —          —          —          —          816   

ESOP forfeitures used to reduce ESOP contribution

     —          —           7        —          —          —          —          7   

Stock awards earned

     —          —           412        —          —          —          —          412   

Issuance of stock awards

     —          —           (611     —          107        —          —          (504

Purchase of 5,224 shares of treasury stock

     —          —           —          —          (55     —          —          (55

Employee stock ownership plan shares earned

     —          —           98        —          —          507        —          605   

Tax benefit/(loss) of restricted share awards vesting

     —          —           (4     —          —          —          —          (4

Dividends declared ($.45 per common share)

     —          —           516        (4,888     —          —          —          (4,372

Repurchase of warrants – TARP

     —          —           (1,003     —          —          —          —          (1,003

Tax effect of ESOP

     —          —           256        —          —          —          —          256   

Tax effect of options redeemed

     —          —           147        —          —          —          —          147   

Reissuance of ESOP shares

     —          —           (59     —          59        —          —          —     

Preferred stock dividends

     —          —           —          (534     —          —          —          (534

Issuance of 32,000 shares of preferred stock, net of issuance costs of $66

     31,934        —           —          —          —          —          —          31,934   

Net proceeds from stock issuance

     —          19         27,028        —          —          —          —          27,047   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     31,934        128         150,786        27,623        (25,037     —          (939     184,495   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

     —          —           —          (362     —          —          —          (362

Other comprehensive income, net

     —          —           —          —          —          —          829        829   

Forfeiture and retirement of 200 shares and common stock

     —          —           3        —          (3     —          —          —    

Stock option compensation expense

     —          —           427        —          —          —          —          427   

RRP option compensation expense

     —          —           104        —          —          —          —          104   

Issuance of 5,000 stock awards

     —          —           (106     —          106        —          —          —     

Purchase of 228 shares of treasury stock

     —          —           —          —          (73 )     —          —          (73

Dividends declared ($0.24 per common share)

     —          1         421        (2,801     —          —          —          (2,379

Preferred stock issuance costs

     (9     —           —          —          —          —          —          (9

Preferred stock dividends

     —          —           —          (714     —          —          —          (714

Tax benefit/(loss) of RRP shares vesting

     —          —           (17     —          —          —          —          (17

Capital raising expenses

     —          —           (6     —          —          —          —          (6
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 31,925      $ 129       $ 151,612      $ 23,746      $ (25,007   $ —        $ (110   $ 182,295   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

First PacTrust Bancorp, Inc.

Consolidated Statements of Cash Flows

(In thousands of dollars)

(Unaudited)

 

     Six months ended
June 30,
 
     2012     2011  

Cash flows from operating activities

    

Net income/(loss)

   $ (362   $ 2,242   

Adjustments to reconcile net income to net cash from operating activities

    

Provision for loan losses

     970        451   

Net amortization/(accretion) of securities

     433        (400

Net amortization/(accretion) of debt

     34        —     

Depreciation and amortization

     535        283   

Employee stock ownership plan compensation expense

     —          346   

Stock option compensation expense

     427        347   

Stock award compensation expense

     104        66   

Bank owned life insurance income

     (129     (144

Operating loss on equity investment

     153        156   

Net (gain)/loss on sales of securities available-for-sale

     71        (1,437

Net (gain)/loss on sales of other real estate owned

     (508     819   

Deferred income tax (benefit)/expense

     517        (1,293

Increase in valuation allowances on other real estate owned

     169        3,243   

Net change in:

    

Deferred loan costs

     355        266   

Premiums and discounts on purchased loans

     (425     —     

Accrued interest receivable

     (146     65   

Other assets

     8,074        (3,425

Accrued interest payable and other liabilities

     (1,023     1,997   
  

 

 

   

 

 

 

Net cash from operating activities

     9,249        3,582   

Cash flows from investing activities

    

Proceeds from sales of securities available-for-sale

     5,682        18,192   

Proceeds from maturities, calls and principal repayments of securities available-for-sale

     21,932        13,966   

Purchases of securities available-for-sale

     (42,229     (43,220

Funding of equity investment

     (375     —     

Loan originations and principal collections, net

     (65,714     (10,452

Purchase of loans

     (22,385     —     

Redemption of Federal Home Loan Bank stock

     661        673   

Proceeds from sales of other real estate owned

     7,015        3,286   

Proceeds from sale of loans

     22,947        —     

Additions to premises and equipment

     (3,092     (2,655

Payments on capital lease obligations

     (10     —     
  

 

 

   

 

 

 

Net cash from investing activities

     (75,568     (20,210

Cash flows from financing activities

    

Repurchase of warrants, TARP

     —          (1,003

Net increase in deposits

     65,997        39,626   

Repayments of Federal Home Loan Bank advances

     (20,000     (45,000

Proceeds from Federal Home Loan Bank advances

     35,000        —     

SBLF expense

     (7     —     

Net proceeds from issuance of common stock

     —          25,977   

Net proceeds from issuance of debt

     31,680        —     

Purchase of stock

     (82     (4

Tax benefit/(loss) from RRP shares vesting

     (17     (1

Tax effect of ESOP

     —          148   

Tax effect of options redeemed

     —          147   

Dividends paid on DRIP shares

     5        —     

Dividends paid on preferred stock

     (714     —     

Dividends paid on common stock

     (1,191     (1,323
  

 

 

   

 

 

 

Net cash from financing activities

     110,671        18,567   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     44,352        1,939   

Cash and cash equivalents at beginning of period

     44,475        59,100   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 88,827      $ 61,039   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Interest paid on deposits and borrowed funds

   $ 3,380      $ 3,412   

Income taxes paid

     —          950   

Supplemental disclosure of noncash activities

    

Transfer from loans to loans provided for sales of other real estate owned

     —          —     

Transfer from loans to other real estate owned, net

     3,614        12,719   

Equipment acquired under capital leases

     179        —     

See accompanying notes to consolidated financial statements.

 

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FIRST PACTRUST BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

(Amounts in thousands of dollars, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of First PacTrust Bancorp, Inc. (the Company) and its wholly owned subsidiaries, Pacific Trust Bank (the Bank) and PTB Property Holdings, LLC, as of June 30, 2012 and December 31, 2011 and for the three and six month periods ended June 30, 2012 and June 30, 2011. Significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2011 filed by the Company with the Securities and Exchange Commission. The December 31, 2011 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission, but does not include all of the disclosures required by U.S. generally accepted accounting principles.

Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending December 31, 2012. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.

The results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the Bank and PTB Property Holdings, LLC. All significant intercompany transactions and balances are eliminated in consolidation.

Nature of Operations: The principal business of the Company is the ownership of the Bank. The Bank is a federally chartered stock savings bank and a member of the Federal Home Loan Bank (FHLB) system, which maintains insurance on deposit accounts with the Federal Deposit Insurance Corporation (FDIC).

The Bank is engaged in the business of retail banking, with operations conducted through its main office, eleven full-service branch offices, three limited-service deposit gathering branches and one loan production office, primarily serving San Diego, Los Angeles, Orange and Riverside Counties, California. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is significantly dependent on the real estate market and general economic conditions in the area.

On April 5, 2012, the Company announced that the Office of the Comptroller of the Currency (the OCC) terminated the August 2009 Memorandum of Understanding between the Office of Thrift Supervision (the OTS) which was succeeded as the bank’s primary regulator effective July 21, 2011 by the Office of the Comptroller of the Currency and the Bank, effective April 4, 2012. The Memorandum of Understanding subjected the Bank to additional oversight by its regulator and placed certain restrictions on its business.

The accounting and reporting polices of the Company are based upon U.S. generally accepted accounting principles and conform to predominant practices within the banking industry. Significant accounting policies followed by the Company are presented below.

Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan losses, other real estate owned, realization of deferred tax assets, and the fair value of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial statements.

Affordable Housing Fund: The Company has two equity investments in affordable housing funds originally totaling $9.2 million for purposes of obtaining tax credits and for Community Reinvestment Act purposes. These investments are accounted for using the equity method of accounting. Under the equity method of accounting, the Company recognizes its ownership share of the profits and losses of the fund. The Company obtains tax credits from these investments which reduce income tax expense for a period of 10 years. These investments are regularly evaluated for impairment by comparing the carrying value to the remaining tax credits expected to be received. For the six month periods ending June 30, 2012 and 2011, our share of the funds’ operating losses was $153 thousand and $156 thousand, respectively. The balance of the investments at June 30, 2012 and December 31, 2011 was $6.4 million and $1.6 million, respectively, and is included in other assets.

 

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Concentration of Credit Risk: Most of the Company’s business activity is with customers located within San Diego, Los Angeles, Orange and Riverside Counties, California. Therefore, the Company’s exposure to credit risk is significantly affected by economic conditions in those areas.

Allowance for Loan Losses: The allowance for loan losses is maintained at a level considered adequate by management to provide for probable incurred credit losses. The allowance is increased by provisions charged against income, while loan losses are charged against the allowance when management deems a loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance. The Company performs an analysis of the adequacy of the allowance on a monthly basis. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company evaluates all impaired loans individually under the guidance of ASC 310, primarily through the evaluation of collateral values and cash flows. Loans for which the terms have been modified and where the borrower is experiencing financial difficulties are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Troubled debt restructurings are also measured at the present value of estimated future cash flows using the loan’s effective rate at inception or at the fair value of collateral if repayment is expected solely from the collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance for loan losses covers loans that are not impaired and is determined by portfolio segment and is based on actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; effects of changes in credit concentrations and other factors. The historical loss analysis is also combined with a comprehensive loan to value analysis to analyze the associated risks in the current loan portfolio. For 2011 and 2012, the Company used a three year loss look back for determining the level of its allowance for loan losses. Prior to this, the Company used a one year look back. This change was made to better reflect the improving state of the loan portfolio as delinquencies have declined and loan losses have leveled. An updated loan to value analysis is obtained from an independent firm semi-annually, most recently in May 2012. Management uses available information to recognize loan losses, however, future loan loss provisions may be necessary based on changes in the above mentioned factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Bank to recognize additional provisions based on their judgment of information available to them at the time of their examination.

The following portfolio segments have been identified: commercial and industrial, commercial real estate mortgage, multi-family, land, residential real estate one-to four- family first mortgage, residential real estate one-to four- family junior lien mortgage, and other revolving credit and installment. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all loans delinquent over 60 days and non-homogenous loans such as commercial and commercial real estate loans. Classification of problem one-to-four family-residential loans is performed on a monthly basis while analysis of non-homogenous loans is performed on a quarterly basis.

 

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Loans secured by multi-family and commercial real estate properties generally involve a greater degree of credit risk than one-to four- family residential mortgage loans. Because payments on loan secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. Commercial business loans are also considered to have a greater degree of credit risk than one- to four-family residential mortgage loans due to the fact commercial business loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). Consumer and other real estate loans may entail greater risk than do one- to four- family residential mortgage loans given that collection of these loans is dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Negatively amortizing and interest only loans are also considered to carry a higher degree of credit risk due to their unique cash flows. The Bank’s Green Account Mortgages tend to have lower levels of delinquencies as a result of the borrower’s ability to meet their monthly payments obligations by increasing the level of their line of credit. Credit risk on this asset class is also managed through the completion of regular re-appraisals of the underlying collateral and monitoring of the borrower’s usage of this account to determine if the borrower is making monthly payments from external sources or “draw downs” on their line. In cases where the property values have declined to levels less than the original loan-to-value, or other levels deemed prudent by the Bank, the Bank may freeze the line and/or require monthly payments or principal reductions to bring the loan in balance.

Classified Assets: Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the OCC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. The Bank includes in its classification of “Substandard Assets” loans that are performing under terms of a TDR, but where the borrower has yet to make twelve or more payments under the TDR, and where the loan remains impaired, as well as loans where the borrower is current in his or her payments on the subject Classified Loan but may be a guarantor on another loan that is classified as a result of weakness in the credit or collateral (“Relationship”). TDR loans that have continued to make payments for twelve months or more, but where the collateral remains impaired, retain a “Substandard” classification. As of June 30, 2012, the Bank had $3.9 million of TDR loans classified as “substandard” with less than twelve months of payment performance and $5.5 million of TDR loans classified as “substandard” with payment performance for more than twelve months. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general or specific allowances for loan losses in an amount deemed prudent by management and approved by the Board of Directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC, which may order the establishment of additional general or specific loss allowances.

In connection with the filing of the Bank’s periodic reports with the OCC and in accordance with our classification of assets policy, the Bank regularly reviews the problem assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations.

Purchased Credit-impaired Loans: The Company purchases loans with and without evidence of credit quality deterioration since origination. Evidence of credit quality deterioration as of the purchase date may include statistics such as prior loan modification history, updated borrower credit scores and updated loan-to-value (LTV) ratios, some of which are not immediately available as of the purchase date. Purchased loans with evidence of credit quality deterioration where the Company estimates that it will not receive all contractual payments are accounted for as purchased credit impaired loans (“PCI loans”). The excess of the cash flows expected to be collected on PCI loans, measured as of the acquisition date, over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan using a level yield methodology. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the nonaccretable difference. PCI loans that have similar risk characteristics, primarily credit risk, collateral type and interest rate risk, are pooled and accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

 

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The Company estimates cash flows expected to be collected over the life of the loan using management’s best estimate of current key assumptions such as default rates, loss severity and payment speeds. If, upon subsequent evaluation, the Company determines it is probable that the present value of the expected cash flows have decreased, the PCI loan is considered further impaired which will result in a charge to the provision for credit losses and a corresponding increase to a valuation allowance included in the allowance for loan losses. If, upon subsequent evaluation, it is probable that there is an increase in the present value of the expected cash flows, the Company will reduce any remaining valuation allowance. If there is no remaining valuation allowance, the Company will recalculate the amount of accretable yield as the excess of the revised expected cash flows over the current carrying value resulting in a reclassification from nonaccretable difference to accretable yield. The present value of the expected cash flows is determined using the PCI loans’ effective interest rate, adjusted for changes in the PCI loans’ interest rate indexes. Loan dispositions, which may include sales of loans, receipt of payments in full from the borrower or foreclosure, result in removal of the loan from the PCI loan pool. Write-downs are not recorded on the PCI loan pool until actual losses exceed the remaining nonaccretable difference. To date, no write-downs have been recorded for the PCI loan pools held by the Company, all of which were purchased by the Company during the six months ended June 30, 2012.

Capital Lease Assets and Capital Lease Obligation: A capital lease asset and capital lease obligation are recorded when the Company determines that the terms of a lease include at least one of the following: (i) transfer of ownership of the leased property at the end of the lease term; (ii) a bargain purchase option; (iii) lease term equal to 75% or more of the estimated economic life of the leased property; (iv) present value of minimum lease payments at the beginning of the lease term equal to or in excess of 90% of the fair value of the leased property. The capital lease asset and capital lease obligation are initially recorded at the present value of the minimum lease payments. The Company calculates the present value of the minimum lease payments using the lower of the interest rate implicit in the lease and the Company’s own incremental borrowing rate. If the use of the lower rate results in the present value of minimum lease payments being greater than the fair value of the leased property, the Company records the capital lease asset and capital lease obligation at the fair value of the leased property. The capital lease asset is depreciated using the straight-line method over the appropriate term which is determined through the analysis of criteria (i) through (iv) discussed above. During the lease term, each minimum lease payment is allocated between a reduction of the capital lease obligation and interest expense to produce a constant periodic rate of interest on the remaining balance of the obligation.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company had a $1.3 million valuation allowance for its net deferred tax asset at June 30, 2012 and December 31, 2011. See further discussion in Note 12, Income Taxes, of the Notes to Consolidated Financial Statements.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2008 and for all state income taxes before 2007.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties at June 30, 2012 and December 31, 2011.

Comprehensive Income/(Loss): Comprehensive income/(loss) consists of net income/(loss) and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale, net of tax, which are also recognized as a separate component of shareholders’ equity.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

Adoption of New Accounting Standards: In May, 2011, the Financial Accounting Standards Board (FASB) issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The effect of adopting this standard did not have a material effect on the Company’s consolidated operating results or financial condition, but the additional disclosures are included in Note 5.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The adoption of this amendment changed the presentation of

 

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the components of comprehensive income for the Company from being presented as part of the consolidated statement of shareholder’s equity to being included in a single statement with the consolidated statements of income and comprehensive income/(loss).

In September 2011, the FASB issued ASU 2011-08 “Intangibles-Goodwill and Other.” The amendments in ASU 2011-08 will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of ASU 2011-08 did not impact the Company’s consolidated financial statements or disclosures

Effective January 2012, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03). ASU 2011-03 is intended to improve financial reporting of repurchase agreements and refocus the assessment of effective control on a transferor’s contractual rights and obligations rather than practical ability to perform those rights and obligations. The guidance in ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements.

Newly Issued But Not Yet Effective Accounting Standards: In December 2011, the FASB issued an accounting standards update to increase the disclosure requirements surrounding derivative instruments that are offset within the balance sheet pursuant to the provisions of current generally accepted accounting principles. The objective of the update is to provide greater comparability between issuers reporting under U.S. versus International accounting principles and provide users the ability to evaluate the effect of netting arrangements on a company’s financial statements. The provisions of the update are effective for annual and interim periods beginning on or after January 1, 2013 and are not currently expected to add to the Company’s current level of disclosures.

NOTE 3 – EMPLOYEE STOCK COMPENSATION

The Company has multiple share based compensation plans as described below. Total compensation cost that has been charged against income for the Company’s stock compensation plans was $248 thousand and $532 thousand for the three and six months ended June 30, 2012, respectively. Total compensation cost that has been charged against income for the Company’s stock compensation plans was $217 thousand and $413 thousand for the three and six months ended June 30, 2011, respectively. The total income tax expense was $16 thousand and $17 thousand for the three and six months ended June 30, 2012, respectively.

The total income tax expense was zero and $1 thousand for the three and six months ended June 30, 2011, respectively.

 

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Restricted Share Awards

2003 Recognition and Retention Plan

The Company’s 2003 Recognition and Retention Plan (“RRP”) provides for the issuance of up to 211,600 shares to directors, officers, and employees. Compensation expense is recognized over the vesting period of the shares based on the market value at date of grant. At June 30, 2012, all 211,600 shares were issued. These shares vest over a five-year period. Compensation expense for the RRP awards totaled approximately $10 thousand and $20 thousand for the three and six months ended June 30, 2012, respectively, and $6 thousand and $12 thousand for the three and six months ended June 30, 2011, respectively. As of June 30, 2012, there was $82 thousand of total unrecognized compensation cost related to 8,318 nonvested awards under the RRP. The cost is expected to be recognized over a weighted-average period of less than five years.

A summary of changes in the Company’s nonvested shares awarded under the RRP for the three months ended June 30, 2012 follows:

 

Nonvested shares

   Shares      Weighted-Average
Grant-Date
Fair-Value
 

Nonvested at March 31, 2012

     8,318       $ 11.78   

Granted

     —           —     

Vested

     —           —     

Forfeited/expired

     —           —     
  

 

 

    

 

 

 

Nonvested at June 30, 2012

     8,318       $ 11.78   
  

 

 

    

 

 

 

A summary of changes in the Company’s nonvested shares awarded under the RRP for the six months ended June 30, 2012 follows:

Nonvested shares

   Shares     Weighted-Average
Grant-Date
Fair-Value
 

Nonvested at January 1, 2012

     8,958      $ 12.15   

Granted

     —          —     

Vested

     (640     17.00   

Forfeited/expired

     —          —     
  

 

 

   

 

 

 

Nonvested at June 30, 2012

     8,318      $ 11.78   
  

 

 

   

 

 

 

A summary of changes in the Company’s nonvested shares awarded under the RRP for the three months ended June 30, 2011 follows:

Nonvested shares

   Shares     Weighted-Average
Grant-Date
Fair-Value
 

Nonvested at March 31, 2011

     11,518      $ 12.49   

Granted

     —          —     

Vested

     —          —     

Forfeited/expired

     (440     22.23   
  

 

 

   

 

 

 

Nonvested at June 30, 2011

     11,078      $ 12.10   
  

 

 

   

 

 

 

A summary of changes in the Company’s nonvested shares awarded under the RRP for the six months ended June 30, 2011 follows:

Nonvested shares

   Shares     Weighted-Average
Grant-Date
Fair-Value
 

Nonvested at January 1, 2011

     12,378      $ 13.17   

Granted

     —          —     

Vested

     —          —     

Forfeited/expired

     (1,300     22.23   
  

 

 

   

 

 

 

Nonvested at June 30, 2011

     11,078      $ 12.10   
  

 

 

   

 

 

 

 

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Inducement Grants

One-time inducement restricted shares were granted during 2010 and 2011 to newly hired executive officers. No inducement restricted shares were granted during the three or six months ended June 30, 2012. These one-time inducement grants were made outside of the RRP and the Omnibus Incentive Plan (described below). These shares vest over a three year period. Compensation expense for the inducement restricted share awards totaled approximately $25 thousand and $50 thousand for the three and six months ended June 30, 2012, respectively, and $22 thousand and $43 thousand for the three and six months ended June 30, 2011, respectively. As of June 30, 2012, there was $172 thousand of total unrecognized compensation cost related to the 17,667 nonvested inducement restricted share awards. The cost is expected to be recognized over a weighted-average period of less than three years.

A summary of changes related to the Company’s nonvested inducement restricted share awards for the three months ended June 30, 2012 follows:

     Shares     Weighted
Average
Exercise
Price
 

Nonvested at March 31, 2012

     19,333      $ 12.32   

Granted

     —          —     

Vested

     (1,666     14.48   

Forfeited or expired

     —          —     
  

 

 

   

 

 

 

Nonvested at June 30, 2012

     17,667      $ 12.12   
  

 

 

   

 

 

 

A summary of changes related to the Company’s nonvested inducement restricted share awards for the six months ended June 30, 2012 follows:

     Shares     Weighted
Average
Exercise
Price
 

Nonvested at January 1, 2012

     26,500      $ 12.12   

Granted

     —          —     

Vested

     (8,833     12.12   

Forfeited or expired

     —          —     
  

 

 

   

 

 

 

Nonvested at June 30, 2012

     17,667      $ 12.12   
  

 

 

   

 

 

 

A summary of changes related to the Company’s nonvested inducement restricted share awards for the three months ended June 30, 2011 follows:

     Shares      Weighted
Average
Exercise
Price
 

Nonvested at March 31, 2011

     21,500       $ 11.57   

Granted

     5,000         14.48   

Vested

     —           —     

Forfeited or expired

     —           —     
  

 

 

    

 

 

 

Nonvested at June 30, 2011

     26,500       $ 12.12   
  

 

 

    

 

 

 

A summary of changes related to the Company’s nonvested inducement restricted share awards for the six months ended June 30, 2011 follows:

     Shares      Weighted
Average
Exercise
Price
 

Nonvested at January 1, 2011

     21,500       $ 11.57   

Granted

     5,000         14.48   

Vested

     —           —     

Forfeited or expired

     —           —     
  

 

 

    

 

 

 

Nonvested at June 30, 2011

     26,500       $ 12.12   
  

 

 

    

 

 

 

 

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Table of Contents

2011 Omnibus Incentive Plan

During June, 2011, the Company adopted its 2011 Omnibus Incentive Plan under the terms of which participating employees and directors may be awarded stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-based awards or cash awards. The total number of shares of common stock available for awards under the plan is 950,000, of which no more than 300,000 shares may be used for awards other than stock options and stock appreciation rights. There were 48,606 shares awarded as restricted shares from this plan as of June 30, 2012. These shares vest over a one year period. Compensation expense for these awards totaled approximately $25 thousand and $42 thousand for the three and six months ended June 30, 2012, respectively. Compensation expense for these awards totaled approximately $2 thousand for both the three and six months ended June 30, 2011. As of June 30, 2012, there was $201 thousand of total unrecognized compensation cost related to the 24,918 nonvested shares awarded under the Omnibus Incentive Plan. The cost is expected to be recognized over a weighted-average period of less than one year.

A summary of changes related to the Company’s nonvested restricted share awards under the Omnibus Incentive Plan for the three months ended June 30, 2012 follows:

     Shares     Weighted
Average
Exercise
Price
 

Nonvested at March 31, 2012

     23,158      $ 12.42   

Granted

     5,000        12.12   

Vested

     (3,240     12.07   

Forfeited or expired

     —          —     
  

 

 

   

 

 

 

Nonvested at June 30, 2012

     24,918      $ 12.41   
  

 

 

   

 

 

 

A summary of changes related to the Company’s nonvested restricted share awards under the Omnibus Incentive Plan for the six months ended June 30, 2012 follows:

     Shares     Weighted
Average
Exercise
Price
 

Nonvested at January 1, 2012

     23,158      $ 12.42   

Granted

     5,000        12.12   

Vested

     (3,240     12.07   

Forfeited or expired

     —          —     
  

 

 

   

 

 

 

Nonvested at June 30, 2012

     24,918      $ 12.41   
  

 

 

   

 

 

 

A summary of changes related to the Company’s nonvested restricted share awards under the Omnibus Incentive Plan for the three months ended June 30, 2011 follows:

     Shares      Weighted
Average
Exercise
Price
 

Nonvested at March 31, 2011

     —         $ —     

Granted

     5,000         15.81   

Vested

     —           —     

Forfeited or expired

     —           —     
  

 

 

    

 

 

 

Nonvested at June 30, 2011

     5,000       $ 15.81   
  

 

 

    

 

 

 

Stock Options

2003 Stock Option Plan

In addition to the Omnibus Incentive Plan discussed above, the Company has a 2003 Stock Option Plan (“SOP”) which provides for the issuance of options to directors, officers, and employees. The Company recorded stock compensation expense of $214 thousand and $427 thousand as salary and employee benefits expense during the three and six months ended June 30, 2012, respectively, and $164 thousand and $328 thousand as salary and employee benefits expense during the three and six months ended June 30, 2011, respectively.

 

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Table of Contents

The Company adopted the SOP during 2003 under the terms of which 529,000 shares of the Company’s common stock may be awarded. At June 30, 2012, the number of shares available for future awards was 16,500. The options become exercisable in equal installments over a five-year period from the date of grant. The options expire ten years from the date of grant. The fair value of options granted are computed using option pricing models, using weighted-average assumptions as of grant date. The fair value of each option is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted in 2012 or 2011 under the SOP. There were no options granted, exercised or forfeited during the three or six months ended June 30, 2012 or 2011 and no options are outstanding under this plan at June 30, 2012.

Inducement Grants

During 2010 and 2011, 850,000 inducement options were granted to newly hired executive officers. No inducement options were granted during the six months ended June 30, 2012 or 2011. These one-time inducement options were granted outside of the SOP and the Omnibus Incentive Plan. None of these options were exercised during the six months ended June 30, 2012 or 2011. These options have a three year vesting period. As of June 30, 2012, there was $1.2 million of total unrecognized compensation cost related to nonvested inducement options. The cost is expected to be recognized over a weighted-average period of less than three years.

The following table represents inducement option activity during the three months ended June 30, 2012:

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (Years)
 

Outstanding at March 31, 2012

     850,000       $ 11.71         1.66   

Granted

     —          —       

Exercised

     —          —       

Forfeited or expired

     —          —       
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2012

     850,000       $ 11.71         1.41   
  

 

 

    

 

 

    

 

 

 

Fully vested and expected to vest

     807,500       $ 11.12         1.41   
  

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2012

     283,328       $ 11.71         1.41   
  

 

 

    

 

 

    

 

 

 

The following table represents inducement option activity during the six months ended June 30, 2012:

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (Years)
 

Outstanding at January 1, 2012

     850,000       $ 11.71         1.91   

Granted

     —          —       

Exercised

     —          —       

Forfeited or expired

     —          —       
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2012

     850,000       $ 11.71         1.41   
  

 

 

    

 

 

    

 

 

 

Fully vested and expected to vest

     807,500       $ 11.12         1.41   
  

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2012

     283,328       $ 11.71         1.41   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table represents inducement option activity during the three months ended June 30, 2011:

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (Years)
 

Outstanding at March 31, 2011

     770,000       $ 11.42         2.00   

Granted

     80,000         14.48      

Exercised

     —           —        

Forfeited or expired

     —           —        
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2011

     850,000       $ 11.71         2.00   
  

 

 

    

 

 

    

 

 

 

Fully vested and expected to vest

     807,500       $ 11.12         2.00   
  

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2011

     —         $ —           —    
  

 

 

    

 

 

    

 

 

 

The following table represents inducement option activity during the six months ended June 30, 2011:

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (Years)
 

Outstanding at January 1, 2011

     770,000       $ 11.42         2.00   

Granted

     80,000         14.48      

Exercised

     —           —        

Forfeited or expired

     —           —        
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2011

     850,000       $ 11.71         2.00   
  

 

 

    

 

 

    

 

 

 

Fully vested and expected to vest

     807,500       $ 11.12         2.00   
  

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2011

     —         $ —           —    
  

 

 

    

 

 

    

 

 

 

Omnibus Incentive Plan

During 2011, 68,569 shares were awarded as stock options under the Omnibus Incentive Plan. These options were awarded to Company and Bank directors in lieu of, or in combination with cash compensation for director services. No options were issued during the six months ended June 30, 2012. The options become exercisable one year from the date of grant. The options expire ten years from the date of grant. The fair value of options granted are computed using option pricing models, using weighted-average assumptions as of grant date. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black Scholes) model. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

As of June 30, 2012, all of the compensation cost related to vested stock options awarded under the Omnibus Incentive Plan had been recognized as the options had completely vested at June 30, 2012.

The following table represents option activity under the Omnibus Incentive Plan during the three months ended June 30, 2012:

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (Years)
 

Outstanding at March 31, 2012

     68,569       $ 15.81         0.22   

Granted

     —          —       

Exercised

     —          —       

Forfeited or expired

     —          —       
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2012

     68,569       $ 15.81         —    
  

 

 

    

 

 

    

 

 

 

Fully vested and expected to vest

     68,569       $ 15.81         —    
  

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2012

     68,569         15.81         —    
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table represents option activity under the Omnibus Incentive Plan during the six months ended June 30, 2012:

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (Years)
 

Outstanding at January 1, 2012

     68,569       $ 15.81         0.47   

Granted

     —           —        

Exercised

     —           —        

Forfeited or expired

     —           —        
  

 

 

    

 

 

    

 

 

 

Outstanding at June 30, 2012

     68,569       $ 15.81         —     
  

 

 

    

 

 

    

 

 

 

Fully vested and expected to vest

     68,569       $ 15.81         —     
  

 

 

    

 

 

    

 

 

 

Options exercisable at June 30, 2012

     68,569         15.81         —     
  

 

 

    

 

 

    

 

 

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. ASC 718 and 505 require the recognition of stock based compensation for the number of awards that are ultimately expected to vest. As a result, recognized stock compensation expense was reduced for estimated forfeitures prior to vesting primarily based on historical annual forfeiture rates of approximately 5% for senior management and the board of directors and 45% for all other employees. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

NOTE 4 – EARNINGS/(LOSS) PER COMMON SHARE

Basic earnings/(loss) per common share were computed by dividing net income/(loss) available to common shareholders after subtracting preferred stock dividends by the weighted average number of common shares outstanding. Diluted earnings/(loss) per common share were computed by dividing net income/(loss) available to common shareholders by the weighted average number of shares outstanding, adjusted for the dilutive effect, if any, of the outstanding stock options, restricted stock awards and warrants to purchase common stock. Computations for basic and diluted earnings/(loss) per common share are provided below.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2012     2011      2012     2011  

Basic

         

Net income/(loss)

   $ (739   $ 1,549       $ (362   $ 2,242   

Less: Dividends on preferred stock

     (314     —           (714     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income/(loss) available to common shareholders

   $ (1,053   $ 1,549       $ (1,076   $ 2,242   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average common shares outstanding

     11,675,487        9,753,153         11,664,679        9,707,554   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings/(loss) per common share

   $ (0.09   $ 0.16       $ (0.09   $ 0.23   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

         

Net income/(loss) available to common shareholders

   $ (1,053   $ 1,549       $ (1,076   $ 2,242   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average common shares outstanding for basic earnings per common share

     11,675,487        9,753,153         11,664,679        9,707,554   

Add: Dilutive effects of stock options

     —          3,974         —          3,895   

Add: Dilutive effects of stock awards

     —          28,076         —          10,711   

Add: Dilutive effects of warrants

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Average shares and dilutive potential common shares

     11,675,487        9,785,203         11,664,679        9,722,160   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted earnings per common share

   $ (0.09   $ 0.16       $ (0.09   $ 0.23   

 

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Table of Contents

All outstanding options, stock awards, and warrants were not considered in computing diluted earnings per common share for the three and six months ended June 30, 2012 because they were anti-dilutive. 156,580 outstanding options and 236,850 stock awards were not considered in computing diluted earnings per common share for the three and six months ended June 30, 2011, respectively, because they were anti-dilutive. They were anti-dilutive since there was a net loss available to common shareholders and/or the exercise prices were greater than the average market price of the common stock.

NOTE 5 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair Value Hierarchy. ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Securities Available for Sale. The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of the Company’s Level 3 securities are determined by the Company and an independent third-party provider using a discounted cash flow methodology. The methodology uses discount rates that are based upon observed market yields for similar securities. Prepayment speeds are estimated based upon the prepayment history of each bond and a detailed analysis of the underlying collateral. Gross weighted average coupon, geographic concentrations, loan to value, FICO and seasoning are among the different loan attributes that are factored into our prepayment curve. Default rates and severity are estimated based upon geography of the collateral, delinquency, modifications, loan to value ratios, FICO scores, and past performance.

Impaired Loans. The fair value of impaired loans with specific allocations of the allowance for loan losses based on collateral values is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. For the three and six months ended June 30, 2012, the Company charged off $0.0 million and $2.3 million, respectively, of specific valuation allowance allocations related to changes in reporting requirements for OCC regulated thrifts which no longer permit the use of these specific valuation allowances.

Other Real Estate Owned Assets. Other real estate owned assets (OREO) are recorded at the fair value less estimated costs to sell at the time of foreclosure. The fair value of other real estate owned assets is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value. For the three and six months ended June 30, 2012, the Company experienced $155 thousand and $169 thousand in valuation allowance expense for those assets, respectively. For the three and six months ended June 30, 2011, the Company experienced $137 thousand and $558 thousand in valuation allowance expense for those assets, respectively.

Assets and Liabilities Measured on a Recurring and Non Recurring Basis

Available for sale securities are measured at fair value on a recurring basis, impaired loans and other real estate owned are measured at fair value on a non-recurring basis.

 

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Table of Contents

 

            Fair Value Measurements at June 30, 2012 Using  
     Carrying
Value
     Quoted Prices in
Active Markets
for Identical
Assets
(Level One)
     Significant Other
Observable
Inputs
(Level Two)
     Significant
Unobservable Inputs
(Level Three)
 

Assets

           

Available-for-sale securities:

           

Municipal securities (recurring)

   $ 6,864       $ —         $ 6,864       $ —     

Private label residential mortgage-backed securities (recurring)

     57,318         —           —           57,318   

Agency residential mortgage-backed securities (recurring)

     52,826         —           2         52,824   

Other real estate owned assets (non recurring)

           

Real estate 1-4 family first mortgage

     211         —           —           211   

Multi-family

     2,480         —           —           2,480   

Land

     2,427         —           —           2,427   

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six month periods ended June 30, 2012:

 

    Three months  ended
June 30, 2012
    Six months  ended
June 30, 2012
 
    Investment
Securities
Available-for-sale
    Investment
Securities
Available-for-sale
 

Balance of recurring Level 3 assets at beginning of period

  $ 91,688      $ 91,862   

Total gains or (losses) (realized/unrealized):

   

Included in earnings—realized

    (32     (71

Included in earnings—unrealized

    —          —     

Included in other comprehensive income

    695        1,373   

Amortization of premium/discount

    (438     (438

Purchases

    30,288        41,031   

Sales, issuances and settlements

    (12,059     (23,615

Net transfers in and/or out of Level 3

    —          —     
 

 

 

   

 

 

 

Balance of recurring Level 3 assets at June 30, 2012

  $ 110,142      $ 110,142   
 

 

 

   

 

 

 

There were no significant transfers between Level 1 and Level 2 during the three or six months ended June 30, 2012.

Other real estate owned which is measured at fair value less costs to sell having a valuation allowance, had a net carrying amount of $5.1 million, which is made up of the outstanding balance of $8.3 million, net of a valuation allowance of $3.2 million at June 30, 2012.

 

     Carrying
Value
     Fair Value Measurements at December 31, 2011 Using  
      Quoted Prices in
Active Markets
for Identical
Assets
(Level One)
     Significant Other
Observable
Inputs
(Level Two)
     Significant
Unobservable Inputs
(Level Three)
 

Assets

           

Available-for-sale securities:

           

U.S. government-sponsored entities and agency securities (recurring)

   $ 4,038       $ —         $ 4,038       $ —     

Municipal securities (recurring)

     5,713         —           5,713         —     

Private label residential mortgage-backed securities (recurring)

     76,203         —           —           76,203   

Agency residential mortgage-backed securities (recurring)

     15,662         —          3         15,659  

 

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Table of Contents
     Carrying
Value
     Fair Value Measurements at December 31, 2011 Using  
      Quoted Prices in
Active Markets
for Identical
Assets
(Level One)
     Significant Other
Observable
Inputs
(Level Two)
     Significant
Unobservable Inputs
(Level Three)
 

Impaired loans: (non recurring)

           

Real estate 1-4 family first mortgage

     6,893         —           —           6,893   

Multi-family

     1,638         —           —           1,638   

Land

     1,164         —           —           1,164   

Other real estate owned assets: (non recurring)

           

Real estate 1-4 family first mortgage

     8,224         —           —           8,224   

Multi-family

     2,480         —           —           2,480   

Land

     3,988         —           —           3,988   

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six month periods ended June 30, 2011:

 

    Three months ended
June  30, 2011
    Six months ended
June  30, 2011
 
    Investment
Securities
Available-for-sale
    Investment
Securities
Available-for-sale
 

Balance of recurring Level 3 assets at beginning of period

  $ 52,097      $ 54,246   

Total gains or losses (realized/unrealized):

   

Included in earnings—realized

    1,102        1,421   

Included in earnings—unrealized

    —          —     

Included in other comprehensive income (loss)

    (710     (2,992

Purchases

    10,861        31,203   

Sales, issuances and settlements

    (6,308     (26,836

Net transfers in and/or out of Level 3

    —          —     
 

 

 

   

 

 

 

Balance of recurring Level 3 assets at June 30, 2011

  $ 57,042      $ 57,042   
 

 

 

   

 

 

 

There were no significant transfers between Level 1 and Level 2 during the three six months ended June 30, 2011.

Impaired loans measured at fair value on a non-recurring basis with specific allowances allocations are measured for impairment using the fair value of the collateral for collateral dependent loans. These loans totaled $12.6 million and had a carrying amount of $9.7 million, net of specific allowance allocations of $2.9 million at December 31, 2011.

Other real estate owned which is measured at fair value less costs to sell having a valuation allowance, had a net carrying amount of $14.7 million, which is made up of the outstanding balance of $18.8 million, net of a valuation allowance of $4.1 million at December 31, 2011.

The following table presents quantitative information about level 3 fair value measurements at June 30, 2012:

 

     Fair value     

Valuation Technique(s)

  

Unobservable Input(s)

  

Range (Weighted
Average)

Private label residential mortgage backed securities (recurring)

   $ 57,318      

Discounted cash flow

  

Voluntary prepayment rate

Collateral default rate

Loss severity at default

  

0.9 to 35.1 (12.8)

1.0 to 9.5 (3.4)

2.4 to 66.6 (33.7)

Agency residential mortgage based securities (recurring)

     52,824      

Discounted cash flow

  

Voluntary prepayment rate

Collateral default rate

Loss severity at default

  

0.9 to 35.1 (12.8)

1.0 to 9.5 (3.4)

2.4 to 66.6 (33.7)

Other real estate owned assets – 1-4 family first mortgage (non-recurring)

     211      

Sales comparison approach

  

Adjustment for differences between the comparable sales

  

-10.845% to 11.496%

(-1.387%)

Other real estate owned assets – Multi-family (non-recurring)

     2,480      

Sales comparison approach

  

Adjustment for differences between the comparable sales

  

-51.2% to 50.6%

(-18.42%)

Other real estate owned assets – Land (non-recurring)

     2,427      

Sales comparison approach

  

Adjustment for differences between the comparable sales

  

-37.7% to -3.6%

(-15.26%)

 

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Table of Contents

The significant unobservable inputs used in the fair value measurement of the Company’s private label and agency residential mortgage backed securities are prepayment rates, collateral default rates, and loss severity in the event of default. Significant increases/(decreases) in any of those inputs in isolation would result in a significantly lower/(higher) fair value measurement. Generally, a change in the assumption used for the collateral default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

The carrying amounts and estimated fair values of financial instruments, at June 30, 2012 and December 31, 2011 were as follows:

            Fair Value Measurements at June 30, 2012 Using  
     Carrying
Value
     Level One      Level Two      Level Three      Total  

Financial assets

              

Cash and cash equivalents

   $ 88,827       $ 88,827       $ —         $ —         $ 88,827   

Securities available-for-sale

     117,008         —           6,866         110,142         117,008   

FHLB stock

     6,311         N/A         N/A         N/A         N/A   

Loans receivable, net

     829,137         —           —           834,706         834,706   

Accrued interest receivable

     3,715         9         —           3,706         3,715   

Financial liabilities

              

Deposits

     852,331         347,236         501,390         —           848,626   

Advances from FHLB

     35,000         —           35,081         —           35,081   

Notes payable

     31,714         33,001         —           —           33,001   

Accrued interest payable

     233         6         227         —           233   

 

            Fair Value Measurements at December 31, 2011 Using  
     Carrying
Value
    
Level One
    
Level Two
    
Level Three
    
Total
 

Financial assets

              

Cash and cash equivalents

   $ 44,475       $ 44,475       $ —         $ —         $ 44,475   

Securities available-for-sale

     101,616         —           9,754         91,862         101,616   

FHLB stock

     6,972         N/A         N/A         N/A         N/A   

Loans receivable, net

     775,609         —           —           777,053         777,053   

Accrued interest receivable

     3,569         3         8         3,558         3,569   

Financial liabilities

              

Deposits

     786,334         316,451         472,509         —           788,960   

Advances from FHLB

     20,000         —           20,095         —           20,095   

Accrued interest payable

     217         1         216         —           217   

 

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The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that re-price frequently and fully. The methods for determining the fair values for securities available for sale were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of long-term debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material (or is based on the current fees or costs that would be charged to enter into or terminate such arrangements) and is not presented.

NOTE 6 – SECURITIES AVAILABLE FOR SALE

The following tables summarize the amortized cost and fair value of the available-for-sale investment securities portfolio at June 30, 2012 and December 31, 2011, respectively, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

2012

          

Available-for-sale

          

Municipal securities

   $ 6,718       $ 172       $ (26   $ 6,864   

Private label residential mortgage-backed securities

     57,847         114         (643     57,318   

Agency residential mortgage-backed securities

     52,629         301         (104     52,826   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 117,194       $ 587       $ (773   $ 117,008   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

2011

          

Available-for-sale

          

U.S. government-sponsored entities and agency securities

   $ 4,000       $ 38       $ —        $ 4,038   

Municipal securities

     5,641         88         (16     5,713   

Private label residential mortgage-backed securities

     78,029         27         (1,853     76,203   

Agency residential mortgage-backed securities

     15,541         121         —          15,662   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 103,211       $ 274       $ (1,869   $ 101,616   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of the available-for-sale securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2012  
     Amortized
Cost
     Fair
Value
 

Maturity

     

Available-for-sale

     

Within one year

   $ —         $ —     

One to five years

     2,521         2,552   

Five to ten years

     —           —     

Greater than ten years

     4,197         4,312   

Private label residential mortgage backed and agency residential mortgage-backed securities

     110,476         110,144   
  

 

 

    

 

 

 

Total

   $ 117,194       $ 117,008   
  

 

 

    

 

 

 

At June 30, 2012 and December 31, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

 

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Table of Contents

The following table summarizes the investment securities with unrealized losses at June 30, 2012 by aggregated major security type and length of time in a continuous unrealized loss position:

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Available-for-sale

               

Municipal securities

   $ 1,044       $ (26   $ —         $ —        $ 1,044       $ (26

Private label residential mortgage-backed securities

     27,328         (510     16,442         (133     43,770         (643

Agency residential mortgage-backed securities

     13,470         (104     —           —          13,470         (104
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 41,842       $ (640   $ 16,442       $ (133   $ 58,284       $ (773
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the investment securities with unrealized losses at December 31, 2011 by aggregated major security type and length of time in a continuous unrealized loss position:

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Available-for-sale

               

Municipal securities

   $ 1,072       $ (16   $ —         $ —        $ 1,072       $ (16

Private label residential mortgage-backed securities

     64,911         (1,763     8,145         (90     73,056         (1,853
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 65,983       $ (1,779   $ 8,145       $ (90   $ 74,128       $ (1,869
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of June 30, 2012, the Company’s securities available for sale portfolio consisted of sixty-seven securities, thirty-two of which were in an unrealized loss position. The unrealized losses are related to the Company’s municipal securities and private label and agency residential mortgage-backed securities as discussed below.

The Company’s private label residential mortgage-backed securities that are in an unrealized loss position had a fair value of $43.8 million with unrealized losses of $643 thousand million at June 30, 2012. The Company’s agency residential mortgage-backed securities that are in an unrealized loss position had a fair value of $13.5 million with unrealized losses of $104 thousand at June 30, 2012. The Company’s residential mortgage-backed securities were rated AA or above at purchase and are not within the scope of ASC 325. The Company monitors to insure it has adequate credit support and as of June 30, 2012, the Company believes there is no other than temporary impairment (OTTI) and it does not have the intent to sell these securities and it is not likely that it will be required to sell the securities before their anticipated recovery. Of the Company’s $117.0 million securities portfolio at June 30, 2012, $107.8 million were rated AAA, AA or A, $7.1 million were rated BBB, and $2.1 million consisting of one security, was rated BB based on the most recent credit rating as of June 30, 2012. The Company considers the lowest credit rating for identification of OTTI. During the first quarter of 2012, the Company sold one downgraded security for a net loss of $39 thousand and during the second quarter of 2012, the Company sold two downgraded securities for a net loss of $32 thousand. Subsequent to June 30, 2012, the Company sold the security rated BB and recognized a loss of $(15) thousand.

During the six months ended June 30, 2012 and 2011, the Company determined that no securities were other-than-temporarily impaired.

 

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Table of Contents

NOTE 7 – LOANS

Loans receivable consist of the following:

     Loans Receivable Outstanding (1)     Purchased Credit-Impaired Loan Portfolio  
     June 30, 2012     December 31, 2011     June 30, 2012      December 31, 2011  

Commercial:

         

Commercial and industrial

   $ 8,929      $ 9,019      $ —         $ —     

Real estate mortgage

     185,407        124,013        —           —     

Multi-family

     81,673        87,290        —           —     

Land

     1,059        2,375        —           —     

Consumer:

         

Real estate 1-4 family first mortgage

     523,111        546,760        22,728         —     

Real estate 1-4 family junior lien mortgage

     8,945        9,219        —           —     

Other revolving credit and installment

     7,979        8,604        —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

     817,103        787,280        22,728         —     

Less: Net deferred loan costs

     754        1,109        —           —     

Allowance for loan losses

     (11,448     (12,780     —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Loans receivable, net

   $ 806,409      $ 775,609      $ 22,728       $ —     
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Does not include purchased credit-impaired loans.

At June 30, 2012, the Company had a total of $380.6 million in interest only mortgage loans (including Green Account loans) and $21.5 million in loans with potential for negative amortization. At December 31, 2011, the Company had a total of $382.0 million in interest only mortgage loans (including Green Account loans) and $23.4 million in loans with potential for negative amortization. These loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization, however, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on loan-to-value ratios.

Activity in the allowance for loan losses is summarized as follows for the three and six months ended June 30, 2012 and 2011:

     2012     2011  

Balance at March 31

   $ 11,173      $ 11,905   

Loans charged off

     (22     (4,000

Recoveries of loans previously charged off

     18        75   

Provision for loan losses

     279        451   
  

 

 

   

 

 

 

Balance at June 30

   $ 11,448      $ 8,431   
  

 

 

   

 

 

 

 

     2012     2011  

Balance at January 1

   $ 12,780      $ 14,637   

Loans charged off

     (2,321     (6,735

Recoveries of loans previously charged off

     19        78   

Provision for loan losses

     970        451   
  

 

 

   

 

 

 

Balance at June 30

   $ 11,448      $ 8,431   
  

 

 

   

 

 

 

 

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Table of Contents

The following tables present the activity in the allowance for loan losses and the recorded investment in loans, excluding accrued interest receivable and net deferred loan costs as they are not considered to be material, in loans by portfolio segment and is based on the impairment method for the six months ended June 30, 2012 and 2011. Total accrued interest receivable and net deferred loan costs were $3.3 million and $754 thousand, respectively at June 30, 2012. Total accrued interest receivable and net deferred loan costs totaled $3.3 million and $1.1 million, respectively at December 31, 2011. Total accrued interest receivable and net deferred loan costs totaled $3.0 million and $1.6 million, respectively at June 30, 2011.

 

     Commercial
and
Industrial
    Commercial
Real  Estate
Mortgage
     Multi-
family
    Land     Real Estate
1-4 family
first
mortgage
    Real Estate
1-4 family
junior lien
mortgage
    Other
Revolving
Credit and
Installment
    TOTAL  

Allowance for loan losses:

                 

Balance as of March 31, 2012

   $ 129      $ 2,920       $ 1,601      $ 8      $ 6,317      $ 66      $ 132      $ 11,173   

Charge-offs

     —          —           —          —          (18     —          (4     (22

Recoveries

     —          —           —          —          17        —          1        18   

Provision

     (1     382         (309     3        212        (2     (6     279   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

   $ 128      $ 3,302       $ 1,292      $ 11      $ 6,528      $ 64      $ 123      $ 11,448   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 128      $ 1,998       $ 1,541      $ 236      $ 8,635      $ 110      $ 132      $ 12,780   

Charge-offs

     —          —           —          (236     (2,078     —          (7     (2,321

Recoveries

     —          —           —          —          17        —          2        19   

Provision

     —          1,304         (249     11        (46     (46     (4     970   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

   $ 128      $ 3,302       $ 1,292      $ 11      $ 6,528      $ 64      $ 123      $ 11,448   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2011

   $ 52      $ 345       $ 2,357      $ 260      $ 8,470      $ 188      $ 233      $ 11,905   

Charge-offs

     —          —           (2,136     (169     (1,693     —          (2     (4,000

Recoveries

     —          —           —          23        49        —          3        75   

Provision

     32        294         471        164        (665     172        (17     451   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

   $ 84      $ 639       $ 692      $ 278      $ 6,161      $ 360      $ 217      $ 8,431   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2010

   $ 50      $ 332       $   2,389      $ 1,067      $ 10,191      $ 258      $ 350      $   14,637   

Charge-offs

     —          —           (2,136     (1,843     (2,746     —          (10     (6,735

Recoveries

     —          —           —          23        49        —          6        78   

Provision

     34        307         439        1,031        (1,333     102        (129     451   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

   $ 84      $ 639       $ 692      $ 278      $ 6,161      $ 360      $ 217      $ 8,431   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Commercial
and
Industrial
     Commercial
Real  Estate
Mortgage
     Multi-
family
    Land     Real Estate
1-4 family
first
mortgage
    Real Estate
1-4 family
junior lien
mortgage
    Other
Revolving
Credit
    TOTAL  

Balance as of June 30, 2012

                  

Individually evaluated for impairment

   $ —         $ 359       $ 658      $ 3      $ 537      $ —        $ —        $ 1,557   

Collectively evaluated for impairment

     128         2,943         634        8        5,991        64        123        9,891   

Acquired with deteriorated credit quality

     —           —           —          —          —          —          —          —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 128       $ 3,302       $ 1,292      $       11      $ 6,528      $ 64      $        123      $ 11,448   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                  

Loans individually evaluated for impairment

   $ —         $ 3,014       $ 5,443      $ 473      $ 14,349      $ —        $ 41      $ 23,320   

Loans collectively evaluated for impairment

     8,929         182,393         76,230        586        508,762        8,945        7,938        793,783   

Loans acquired with deteriorated credit quality

     —           —           —          —          22,728        —          —          22,728   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loans balance

   $ 8,929       $ 185,407       $ 81,673      $ 1,059      $ 545,839      $ 8,945      $ 7,979      $ 839,831   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents
     Commercial
and
Industrial
     Commercial
Real  Estate
Mortgage
     Multi-
family
     Land      Real Estate
1-4 family
first
mortgage
     Real Estate
1-4 family
junior lien
mortgage
     Other
Revolving
Credit
     TOTAL  

Balance as of December 31, 2011:

                       

Individually evaluated for impairment

   $ —         $ —         $ 663       $ 236       $ 2,815       $ —         $ —         $ 3,714   

Collectively evaluated for impairment

     128         1,998         878         —           5,820         110         132         9,066   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 128       $ 1,998       $ 1,541       $ 236       $ 8,635       $ 110       $ 132       $ 12,780   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                       

Loans individually evaluated for impairment

   $ —         $ —         $ 5,001       $ 1,887       $ 20,650       $ —         $ —         $ 27,538   

Loans collectively evaluated for impairment

     9,019         124,013         82,289         488         526,110         9,219         8,604         759,742   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 9,019       $ 124,013       $ 87,290       $ 2,375       $ 546,760       $ 9,219       $ 8,604       $ 787,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2012. The recorded investment included represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs and accrued interest receivable.

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
     Average
Recorded
Investment
YTD
     Interest
Income
Recognized
YTD
     Cash Basis
Interest
Recognized
YTD
 

With no related allowance recorded:

                 

Commercial:

                 

Commercial and industrial

   $ —         $ —         $ —         $ —         $ —         $ —     

Real estate mortgage

     1,401         1,407         —           1,425         27         27   

Multi-family

     —           —           —           —           —           —     

Land

     148         149         —           153         5         5   

Consumer:

                 

Real estate 1-4 family first mortgage

     5,264         5,256         —           5,433         133         132   

Real estate 1-4 family junior lien mortgage

     —           —           —           —           —           —     

Other revolving credit and installment

     41         41         —           42         1         —     

With an allowance recorded:

                 

Commercial:

                 

Commercial and industrial

     —           —           —           —           —           —     

Real estate mortgage

     1,613         1,618         359         1,633         16         16   

Multi-family

     5,443         5,452         658         5,487         158         140   

Land

     325         326         3         333         9         9   

Consumer:

                 

Real estate 1-4 family first mortgage

     9,085         9,096         537         9,133         194         48   

Real estate 1-4 family junior lien mortgage

     —           —           —           —           —           —     

Other revolving credit and installment

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,320       $ 23,345       $ 1,557       $ 23,639       $ 543       $ 377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six months ended
June 30,
 
     2012      2011  

Average of individually impaired loans during the period

   $ 25,198       $ 42,999   

Interest income recognized during impairment

     543         418   

Cash-basis interest income recognized

     377         212   

 

     Three months ended
June 30,
 
     2012      2011  

Average of individually impaired loans during the period

   $ 24,544       $ 38,111   

Interest income recognized during impairment

     288         306