XNAS:ANCX Access National Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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: 000-49929

 

ACCESS NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Virginia 82-0545425
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

1800 Robert Fulton Drive, Suite 300, Reston, Virginia 20191

(Address of principal executive offices) (Zip Code)

 

(703) 871-2100

(Registrant's telephone number, including area code)

 

N/A
(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

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

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

 

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

 

The number of shares outstanding of Access National Corporation’s common stock, par value $0.835, as of August 10, 2012 was 10,276,267 shares.

 

 
 

 

Table of Contents

ACCESS NATIONAL CORPORATION

FORM 10-Q

 

INDEX

 

PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements (Unaudited)  
  Consolidated Balance Sheets, June 30, 2012 and December 31, 2011 Page 2
  Consolidated Statements of Income, three and six months ended June 30, 2012 and 2011 Page 3
  Consolidated Statements of Comprehensive Income, three and six months ended June 30, 2012 and 2011 Page 4
  Consolidated Statements of Changes in Shareholders' Equity, six months ended June 30, 2012 and 2011 Page 5
  Consolidated Statements of Cash Flows, six months ended June 30, 2012 and 2011 Page 6
  Notes to Consolidated Financial Statements (Unaudited) Page 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Page 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk Page 47
Item 4. Controls and Procedures Page 48
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings Page 48
Item1A. Risk Factors Page 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Page 49
Item 3. Defaults Upon Senior Securities Page 49
Item 4. Mine Safety Disclosures Page 49
Item 5. Other Information Page 49
Item 6. Exhibits Page 50
     
  Signatures Page 51

 

1
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ACCESS NATIONAL CORPORATION

Consolidated Balance Sheets

(In Thousands, Except for Share and Per Share Data)

 

   June 30,   December 31, 
   2012   2011 
   (Unaudited)     
ASSETS          
Cash and due from banks  $11,322   $5,362 
Interest-bearing deposits in other banks and federal funds sold   22,335    38,547 
Securities:          
Securities available-for-sale, at fair value   32,477    45,837 
Securities held-to-maturity, at amortized cost (fair value of $70,363 and $39,978)   69,936    39,987 
Total investment securities   102,413    85,824 
           
Restricted stock   5,788    3,665 
Loans held for sale, at fair value   100,310    95,126 
Loans   582,600    569,400 
Allowance for loan losses   (12,031)   (11,738)
Net loans   570,569    557,662 
Premises and equipment   8,517    8,671 
Accrued interest receivable   7,191    6,071 
Other assets   13,264    8,830 
Total assets  $841,709   $809,758 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits          
Noninterest-bearing deposits  $157,305   $113,885 
Savings and interest-bearing deposits   173,423    182,005 
Time deposits   350,203    349,123 
Total deposits   680,931    645,013 
Other liabilities          
Short-term borrowings   48,161    59,904 
Long-term borrowings   2,964    4,821 
Subordinated debentures   6,186    6,186 
Other liabilities and accrued expenses   14,419    11,019 
Total liabilities  $752,661   $726,943 
           
SHAREHOLDERS' EQUITY          
Common stock, par value, $0.835; authorized, 60,000,000 shares; issued and outstanding, 10,250,802 shares at June 30, 2012 and 10,192,649 shares at December 31, 2011  $8,559   $8,511 
Additional paid in capital   16,753    16,716 
Retained earnings   63,673    57,529 
Accumulated other comprehensive income, net   63    59 
Total shareholders' equity   89,048    82,815 
Total liabilities and shareholders' equity  $841,709   $809,758 

 

See accompanying notes to consolidated financial statements.

 

2
 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Income

(In Thousands, Except for Share and Per Share Data)

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
Interest and Dividend Income                    
Interest and fees on loans  $8,369   $7,932   $17,040   $15,814 
Interest on deposits in other banks   19    17    50    72 
Interest and dividends on securities   614    580    1,263    1,213 
Total interest and dividend income   9,002    8,529    18,353    17,099 
                     
Interest Expense                    
Interest on deposits   1,150    1,179    2,423    2,690 
Interest on short-term borrowings   33    396    145    773 
Interest on long-term borrowings   31    55    72    117 
Interest on subordinated debentures   56    52    113    105 
Total interest expense   1,270    1,682    2,753    3,685 
                     
Net interest income   7,732    6,847    15,600    13,414 
Provision for loan losses   472    (2)   1,190    221 
Net interest income after provision for loan losses   7,260    6,849    14,410    13,193 
                     
Noninterest Income                    
Service fees on deposit accounts   160    168    337    341 
Gain on sale of loans   14,738    7,382    25,682    12,898 
Mortgage broker fee income   20    233    27    569 
Other (loss) income   (1,186)   317    (213)   131 
Total noninterest income   13,732    8,100    25,833    13,939 
                     
Noninterest Expense                    
Salaries and employee benefits   7,474    5,877    15,809    11,270 
Occupancy and equipment   579    678    1,230    1,343 
Other operating expenses   6,358    4,248    11,136    6,821 
Total noninterest expense   14,411    10,803    28,175    19,434 
                     
Income before income taxes   6,581    4,146    12,068    7,698 
                     
Income tax expense   2,691    1,475    4,741    2,740 
NET INCOME  $3,890   $2,671   $7,327   $4,958 
                     
Earnings per common share:                    
Basic  $0.38   $0.26   $0.72   $0.48 
Diluted  $0.38   $0.26   $0.71   $0.48 
                     
Average outstanding shares:                    
Basic   10,237,515    10,324,502    10,219,085    10,341,944 
Diluted   10,350,314    10,391,451    10,331,529    10,398,064 

 

See accompanying notes to consolidated financial statements.

 

3
 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
Net income  $3,890   $2,671   $7,327   $4,958 
                     
Other comprehensive income:                    
Unrealized gains (losses) on securities                    
Unrealized holding gains arising during period   67    1,783    6    2,500 
Tax effect   (23)   (608)   (2)   (851)
Net of tax amount   44    1,175    4    1,649 
                     
Comprehensive income  $3,934   $3,846   $7,331   $6,607 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders' Equity

(In Thousands, Except for Share Data)

(Unaudited)

 

               Accumulated     
               Other     
       Additional       Compre-     
   Common   Paid in   Retained   hensive     
   Stock   Capital   Earnings   Income (Loss)   Total 
Balance, December 31, 2011  $8,511   $16,716   $57,529   $59   $82,815 
Net income   -    -    7,327    -    7,327 
Other comprehensive income   -    -    -    4    4 
Stock option exercises (132,453 shares)   110    613    -    -    723 
Repurchased under share repurchase program (74,300 shares)   (62)   (708)   -    -    (770)
Cash dividend   -    -    (1,183)   -    (1,183)
Stock-based compensation expense recognized in earnings   -    132    -    -    132 
                          
Balance, June 30, 2012  $8,559   $16,753   $63,673   $63   $89,048 
                          
Balance, December 31, 2010  $8,664   $17,794   $47,530   $(1,795)  $72,193 
Net income   -    -    4,958    -    4,958 
Other comprehensive income   -    -    -    1,649    1,649 
Stock option exercises (4,250 shares)   4    22    -    -    26 
Repurchased under share repurchase program (81,378 shares)   (68)   (516)   -    -    (584)
Cash dividend   -    -    (542)   -    (542)
Stock-based compensation expense recognized in earnings   -    119    -    -    119 
                          
Balance, June 30, 2011  $8,600   $17,419   $51,946   $(146)  $77,819 

 

See accompanying notes to consolidated financial statements.

 

5
 

 

ACCESS NATIONAL CORPORATION

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

   Six Months Ended June 30, 
   2012   2011 
Cash Flows from Operating Activities          
Net income  $7,327   $4,958 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   1,190    221 
Provision for losses on mortgage loans sold   1,600    289 
Provision for off-balance sheet losses   52    - 
Net gains/losses on sales and write-down of other real estate owned   -    (1,015)
Deferred tax benefit   (183)   (8)
Stock-based compensation   132    119 
Valuation allowance on derivatives   (898)   (68)
Amortization of premiums and discount accretion on securities, net   6    8 
Depreciation and amortization   209    227 
Changes in assets and liabilities:          
Increase in valuation of loans held for sale carried at fair value   (994)   (779)
(Increase) decrease in loans held for sale   (4,190)   26,504 
Increase in other assets   (3,181)   (2,019)
Increase (decrease) in other liabilities   458    (791)
Net cash provided by operating activities   1,528    27,646 
Cash Flows from Investing Activities          
Proceeds from maturities and calls of securities available-for-sale   31,248    40,317 
Proceeds from maturities and calls of securities held-to-maturity   15,000    - 
Purchases of securities available-for-sale   (20,013)   (5,604)
Purchases of securities held-to-maturity   (44,947)   - 
Net increase in loans   (14,097)   (31,818)
Proceeds from sales of other real estate owned   -    5,266 
Purchases of premises and equipment   (60)   (28)
Net cash provided by (used in) investing activities   (32,869)   8,133 
Cash Flows from Financing Activities          
Net  increase in demand, interest-bearing demand and savings deposits   34,878    13,505 
Net (decrease) increase in time deposits   1,040    (133,441)
Decrease in securities sold under agreement to repurchase   (5,493)   (3,160)
Net increase (decrease) in other short-term borrowings   (7,000)   271 
Net decrease in long-term borrowings   (1,107)   (1,107)
Proceeds from issuance of common stock   724    26 
Repurchase of common stock   (770)   (584)
Dividends paid   (1,183)   (542)
Net cash (used in) provided by financing activities   21,089    (125,032)
           
Decrease in cash and cash equivalents   (10,252)   (89,253)
Cash and Cash Equivalents          
Beginning   43,909    111,906 
Ending  $33,657   $22,653 
Supplemental Disclosures of Cash Flow Information          
Cash payments for interest  $3,069   $4,101 
Cash payments for income taxes  $4,695   $2,524 
Supplemental Disclosures of Noncash Investing Activities          
Unrealized gain on securities available-for-sale  $6   $2,500 

 

See accompanying notes to consolidated financial statements.

 

6
 

 

Notes to Consolidated Financial Statements (Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

Access National Corporation (the “Corporation”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation has two wholly-owned subsidiaries, Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal laws as a national banking association, and Access National Capital Trust II, which was formed for the purpose of issuing redeemable capital securities. The Bank has three active subsidiaries, Access Real Estate LLC (“Access Real Estate”), ACME Real Estate LLC (“ACME”), and Access Capital Management Holding LLC (“ACM”).

 

Prior to the third quarter of 2011, Access National Mortgage Corporation (the “Mortgage Corporation”) operated as a wholly owned subsidiary of the Bank. As a result of changes mandated by the implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the activities of the Mortgage Corporation were transitioned into an operating division of the Bank and the Mortgage Corporation became inactive beginning July 1, 2011.

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”). The statements do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2012. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2011, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

NOTE 2 – STOCK-BASED COMPENSATION PLANS

 

During the first six months of 2012, the Corporation granted 106,350 stock options to officers, directors, and employees under the 2009 Stock Option Plan (the “Plan”). Options granted under the Plan have an exercise price equal to the fair market value as of the grant date. Options granted vest over various periods ranging from two and one-half years to four years and expire one year after the full vesting date. Stock–based compensation expense recognized in other operating expense during the first six months of 2012 and 2011 was $132 thousand and $119 thousand, respectively. The fair value of options is estimated on the date of grant using a Black Scholes option-pricing model with the assumptions noted below.

 

The total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the Plan as of June 30, 2012 was $442,026. The cost is expected to be recognized over a weighted average period of 2.95 years.

 

7
 

 

NOTE 2 – STOCK-BASED COMPENSATION PLANS (continued)

 

A summary of stock option activity under the Plan for the six months ended June 30, 2012 and 2011 is presented as follows:

 

   Six Months Ended 
   June 30, 2012 
     
Expected life of options granted, in years   4.60 
Risk-free interest rate   0.39%
Expected volatility of stock   43%
Annual expected dividend yield   2%
      
Fair Value of Granted Options  $327,368 
Non-Vested Options   324,650 

 

           Weighted Avg.     
   Number of   Weighted Avg.   Remaining Contractual   Aggregate Intrinsic 
   Options   Exercise Price   Term, in years   Value 
                     
Outstanding at beginning of year, in years   385,450   $6.04    1.63   $1,064,115 
Granted   106,350    9.30    4.60    - 
Exercised   (132,453)   5.47    0.03    674,588 
Lapsed or Canceled   (8,992)  $6.65    2.08   $- 
                     
Outstanding at June 30, 2012   350,355   $7.23    2.64   $2,055,653 
                     
Exercisable at June 30, 2012   25,705   $3.99    0.07   $234,173 

 

   Six Months Ended 
   June 30, 2011 
     
Expected life of options granted, in years   3.09 
Risk-free interest rate   0.99%
Expected volatility of stock   49%
Annual expected dividend yield   1%
      
Fair value of granted options  $238,323 
Non-vested options   285,200 

 

           Weighted Avg.     
   Number of   Weighted Avg.   Remaining Contractual   Aggregate Intrinsic 
   Options   Exercise Price   Term, in years   Value 
                     
Outstanding at beginning of year, in years   418,525   $5.98    1.34   $290,583 
Granted   100,100    6.72    3.09    - 
Exercised   (4,250)   6.11    -    - 
Lapsed or canceled   (86,100)  $7.33    -   $- 
                     
Outstanding at June 30, 2011   428,275   $5.88    1.57   $565,064 
                     
Exercisable at June 30, 2011   143,075   $6.41    0.44   $112,368 

 

NOTE 3 – SECURITIES

 

The following table provides the amortized cost and fair value for the categories of available-for-sale securities and held-to-maturity securities at June 30, 2012 and December 31, 2011. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premiums and accretion of discounts. Available-for-sale securities are carried at estimated fair value with net unrealized gains or losses reported on an after tax basis as a component of accumulated other comprehensive income in shareholders’ equity. The estimated fair value of available-for-sale securities is impacted by interest rates, credit spreads, market volatility, and liquidity.

 

8
 

 

NOTE 3 – SECURITIES (continued)

 

   June 30, 2012 
   Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 
  (In Thousands)  
Available-for-sale:                    
U.S. Government agencies  $15,000   $31   $-   $15,031 
Mortgage backed securities   9,862    79    (12)   9,929 
Corporate bonds   6,019    48    (44)   6,023 
CRA mutual fund   1,500    -    (6)   1,494 
Total  $32,381   $158   $(62)  $32,477 
                     
Held-to-maturity:                    
U.S. Government agencies  $69,936   $432   $(5)  $70,363 
Total  $69,936   $432   $(5)  $70,363 

 

   December 31, 2011 
   Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
(Losses)
   Estimated
Fair Value
 
   (In Thousands) 
Available-for-sale:                    
U.S. Government agencies  $39,402   $152   $(36)  $39,518 
Mortgage backed securities   582    38    -    620 
Municipals - taxable   240    2    -    242 
Corporate bonds   4,022    -    (61)   3,961 
CRA mutual fund   1,500    -    (4)   1,496 
Total  $45,746   $192   $(101)  $45,837 
                     
Held-to-maturity:                    
U.S. Government agencies  $39,987   $80   $(89)  $39,978 
Total  $39,987   $80   $(89)  $39,978 

 

9
 

 

NOTE 3 – SECURITIES (continued)

 

The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity as of June 30, 2012 and December 31, 2011 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.

 

   June 30, 2012   December 31, 2011 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (In Thousands) 
Available-for-sale:                    
U.S. Government agencies:                    
Due in one year or less  $5,000   $5,001   $-   $- 
Due after one through five years   5,000    5,014    5,000    5,007 
Due after five through ten years   5,000    5,016    14,994    15,037 
Due after ten through fifteen years   -    -    19,408    19,474 
Municipals - taxable:                    
Due in one year or less   -    -    240    242 
Mortgage backed securities:                    
Due after five through ten years   4,267    4,292    -    - 
Due after ten through fifteen years   5,059    5,047    -    - 
Due after fifteen years   536    590    582    620 
Corporate bonds:                    
Due in one year or less   2,006    2,013    2,032    2,012 
Due after one through five years   4,013    4,010    1,990    1,949 
CRA Mutual Fund   1,500    1,494    1,500    1,496 
Total  $32,381   $32,477   $45,746   $45,837 
                     
Held-to-maturity:                    
U.S. Government agencies:                    
Due after one through five years  $19,993   $20,032   $10,000   $9,993 
Due after five through ten years   34,973    35,227    29,987    29,985 
Due after ten through fifteen years   14,970    15,104    -    - 
Total  $69,936   $70,363   $39,987   $39,978 

 

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes amounted to $45.8 million at June 30, 2012 and $50.1 million at December 31, 2011.

 

10
 

 

NOTE 3 – SECURITIES (continued)

 

Securities available-for-sale and held-to-maturity that have an unrealized loss position at June 30, 2012 and December 31, 2011 are as follows:

 

   Securities in a loss   Securities in a loss         
   Position for less than   Position for 12 Months         
   12 Months   or Longer   Total 
June 30, 2012  Estimated       Estimated       Estimated     
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
   (In Thousands) 
Investment securities available-for-sale:                              
                               
Mortgage backed securities  $5,047   $(12)  $-   $-   $5,047   $(12)
Corporate bonds   1,948    (44)   -    -    1,948    (44)
CRA Mutual fund   1,494    (6)   -    -    1,494    (6)
Total  $8,489   $(62)  $-   $-   $8,489   $(62)
                               
Investment securities held-to-maturity:                              
                               
U.S. Government agencies  $4,990   $(5)  $-   $-   $4,990   $(5)
Total  $4,990   $(5)  $-   $-   $4,990   $(5)

 

   Securities in a loss   Securities in a loss         
   Position for less than   Position for 12 Months         
   12 Months   or Longer   Total 
December 31, 2011  Estimated       Estimated       Estimated     
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
   (In Thousands) 
Investment securities available-for-sale                              
                               
U.S. Government agencies  $4,964   $(36)  $-   $-   $4,964   $(36)
Corporate bonds   3,961    (61)   -    -    3,961    (61)
CRA Mutual fund   1,496    (4)   -    -    1,496    (4)
Total  $10,421   $(101)  $-   $-   $10,421   $(101)
                               
Investment securities held-to-maturity:                              
                               
U.S. Government agencies  $24,905   $(89)  $-   $-   $24,905   $(89)
Total  $24,905   $(89)  $-   $-   $24,905   $(89)

 

The Corporation evaluates securities for other than temporary impairment (“OTTI”) on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. Consideration is given to various factors in determining whether the Corporation anticipates a recovery in fair value such as: the length of time and extent to which the fair value has been less than cost, and the financial condition and underlying credit quality of the issuer. When analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, the sector or industry trends affecting the issuer, and whether any recent downgrades by bond rating agencies have occurred.

 

U.S. Government agencies

The Corporation’s unrealized losses on U.S. Government Agency obligations were caused by interest rate fluctuations. On June 30, 2012, one held-to-maturity security had an unrealized loss of $5,595. The severity and duration of this unrealized loss will fluctuate with interest rates in the economy. As the security is an obligation of a government agency, it is the Corporation’s intent to hold this security until a market price recovery or maturity, and it is more likely than not that the Corporation will not be required to sell the security before its anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.

 

11
 

 

NOTE 3 – SECURITIES (continued)

 

Corporate bonds

The Corporation’s unrealized losses on corporate obligations were caused by interest rate fluctuations. At June 30, 2012, one security had an unrealized loss of $43,657. Based on the credit quality of the issuers, the Corporation’s intent to hold this security until a market price recovery or maturity, and the determination that it is more likely than not that the Corporation will not be required to sell the security before its anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.

 

Mortgage-backed

The Corporation’s unrealized losses on mortgage backed securities were caused by interest rate fluctuations. At June 30, 2012, one security had an unrealized loss of $11,876. As this Ginnie Mae security is backed by the United States Government, the Corporation’s intent to hold this security until a market price recovery or maturity, and the determination that it is more likely than not that the Corporation will not be required to sell this security before its anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.

 

Mutual fund

The Corporation’s unrealized loss on its mutual fund investment was caused by interest rate fluctuations. At June 30, 2012, the sole mutual fund security had an unrealized loss of $5,721. Based on the past performance of the fund, the Corporation’s intent to hold this security until a market price recovery, and the determination that it is more likely than not that the Corporation will not be required to sell this security before its anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.

 

Restricted Stock

 

The Corporation’s restricted stock consists of Federal Home Loan Bank of Atlanta (“FHLB”) stock and Federal Reserve Bank (“FRB”) stock. The amortized costs of the restricted stock as of June 30, 2012 and December 31, 2011 are as follows:

 

   June 30, 2012   December 31, 2011 
   (In Thousands) 
Restricted Stock:          
           
Federal Reserve Bank stock  $999   $999 
           
FHLB stock   4,789    2,666 
   $5,788   $3,665 

 

12
 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

The following table presents the composition of the loans held for investment portfolio at June 30, 2012 and December 31, 2011:

Composition of Loan Portfolio
 
   June 30, 2012   December 31, 2011 
   Amount   Percentage of
Total
   Amount   Percentage of
Total
 
   (Dollars In Thousands) 
Commercial real estate  - owner occupied  $180,133    30.92%  $171,599    30.14%
Commercial real estate - non-owner occupied   105,468    18.10    104,976    18.44 
Residential real estate   126,645    21.74    128,485    22.56 
Commercial   140,272    24.08    131,816    23.15 
Real estate construction   26,880    4.61    29,705    5.22 
Consumer   3,202    0.55    2,819    0.49 
Total loans  $582,600    100.00%  $569,400    100.00%
Less allowance for loan losses   12,031         11,738      
Net loans  $570,569        $557,662      

 

Unearned income and net deferred loan fees and costs totaled $1.5 and $1.6 million at June 30, 2012 and December 31, 2011, respectively. Loans pledged to secure borrowings at the FHLB totaled $106.4 million and $83.5 million at June 30, 2012 and December 31, 2011, respectively.

 

Allowance for Loan Losses

 

The allowance for loan losses totaled $12.0 million at June 30, 2012 compared to $11.7 million at year end December 31, 2011. The allowance for loan losses was equivalent to 2.06% of total loans held for investment at June 30, 2012 and December 31, 2011. Adequacy of the allowance is assessed and the allowance is increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible.

 

The methodology by which we systematically determine the amount of our allowance is set forth by the Board of Directors in our Loan Policy and implemented by management. The results of the analysis are documented, reviewed, and approved by the Board of Directors no less than quarterly.

 

13
 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

 

The level of the allowance for loan losses is determined by management through an ongoing, detailed analysis of historical loss rates and risk characteristics. During each quarter, management evaluates the collectability of all loans in the portfolio and ensures an accurate risk rating is assigned to each loan. The risk rating scale and definitions commonly adopted by the Federal Banking Agencies is contained within the framework prescribed by the Bank’s Loan Policy. Any loan that is deemed to have potential or well defined weaknesses that may jeopardize collection in full is then analyzed to ascertain its level of weakness. If appropriate, the loan may be charged-off or a specific reserve may be assigned if the loan is deemed to be impaired.

 

During the risk rating verification process, each loan identified as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged is considered impaired and is placed on non-accrual status. On these loans, management analyzes the potential impairment of the individual loan and may set aside a specific reserve. Any amounts deemed uncollectible during that analysis are charged-off.

 

For the remaining loans in each segment, the Bank calculates the probability of loss as a group using the risk rating for each of the following loan types: Commercial Real Estate - Owner Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate, Commercial, Real Estate Construction, and Consumer. Management calculates the historical loss rate in each group by risk rating using a period of at least five years. This historical loss rate may then be adjusted based on management’s assessment of internal and external environmental factors. While management may consider other factors, the analysis generally includes factors such as unemployment, office vacancy rates, and any concentrations that exist within the portfolio. This adjustment is meant to account for changes between the historical economic environment and current conditions and for changes in the ongoing management of the portfolio which affects the loans’ potential losses.

 

Once complete, management compares the condition of the portfolio using several different characteristics, as well as its experience, to the experience of other banks in its peer group in order to determine if it is directionally consistent with others’ experience in our area and line of business. Based on that analysis, management aggregates the probabilities of loss of the remaining portfolio based on the specific and general allowances and may provide additional amounts to the allowance for loan losses as needed. Since this process involves estimates, the allowance for loan losses may also contain an amount that is non-material which is not allocated to a specific loan or to a group of loans but is deemed necessary to absorb additional losses in the portfolio.

 

Management and the Board of Directors subject the reserve adequacy and methodology to a review on a regular basis by internal auditors, external auditors and bank regulators, and such reviews have not resulted in any material adjustment to the allowance.

 

14
 

 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

 

The following tables provide detailed information about the allowance for loan losses as of and for the periods indicated.

 

   Allowance for Loan Losses 
Three Months Ended June 30, 2012  Commercial real
estate - owner
occupied
   Commercial real
estate - non-owner
occupied
   Residential real
estate
   Commercial   Real estate
construction
   Consumer   Total 
   (In Thousands) 
Allowance for credit losses:                                   
Beginning Balance  $3,544   $2,227   $2,652   $2,885   $564   $69   $11,941 
Charge-offs   -    -    (30)   (411)   -    -    (441)
Recoveries   -    23    18    17    -    1    59 
Provisions   176    (73)   (24)   406    (9)   (4)   472 
Ending Balance  $3,720   $2,177   $2,616   $2,897   $555   $66   $12,031 
                                    
Six Months Ended June 30, 2012                                   
Allowance for credit losses:                                   
Beginning Balance  $3,634   $1,747   $2,874   $3,021   $423   $39   $11,738 
Charge-offs   (202)   -    (494)   (694)   -    (35)   (1,425)
Recoveries   -    56    229    242    -    1    528 
Provisions   288    374    7    328    132    61    1,190 
Ending Balance  $3,720   $2,177   $2,616   $2,897   $555   $66   $12,031 

 

Three Months Ended June 30, 2011  Commercial real
estate - owner
occupied
   Commercial real
estate - non-owner
occupied
   Residential real
estate
   Commercial   Real estate
construction
   Consumer   Total 
   (In Thousands) 
Allowance for credit losses:                                   
Beginning Balance  $3,196   $2,005   $2,903   $1,909   $682   $27   $10,722 
Charge-offs   -    -    (361)   (8)   -    -    (369)
Recoveries   377    141    28    160    -    -    706 
Provisions   (202)   (418)   673    21    (83)   7    (2)
Ending Balance  $3,371   $1,728   $3,243   $2,082   $599   $34   $11,057 
                                    
Six Months Ended June 30, 2011                                   
Allowance for credit losses:                                   
Beginning Balance  $3,143   $2,173   $2,925   $1,506   $757   $23   $10,527 
Charge-offs   (21)   (140)   (363)   (29)   -    -    (553)
Recoveries   451    141    38    232    -    -    862 
Provisions   (202)   (446)   643    373    (158)   11    221 
Ending Balance  $3,371   $1,728   $3,243   $2,082   $599   $34   $11,057 

 

   Recorded Investment in Loans 
   Commercial real
estate - owner
occupied
   Commercial real
estate - non-owner
occupied
   Residential real
estate
   Commercial   Real estate
construction
   Consumer   Total 
As of June 30, 2012                                   
Allowance                                   
Ending balance: individually evaluated for impairment  $512   $41   $580   $341   $-   $-   $1,474 
Ending balance: collectively evaluated for impairment  $3,208   $2,136   $2,036   $2,556   $555   $66   $10,557 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    
Loans                                   
Ending balance  $180,133   $105,468   $126,645   $140,272   $26,880   $3,202   $582,600 
Ending balance: individually evaluated for impairment  $1,668   $313   $2,048   $1,180   $-   $-   $5,209 
Ending balance: collectively evaluated for impairment  $178,465   $105,155   $124,597   $139,092   $26,880   $3,202   $577,391 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    
As of December 31, 2011                                   
Allowance                                   
Ending balance: individually evaluated for impairment  $672   $70   $537   $644   $-   $-   $1,923 
Ending balance: collectively evaluated for impairment  $2,699   $1,658   $2,706   $1,438   $599   $34   $9,134 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    
Loans                                   
Ending balance  $171,599   $104,976   $128,485   $131,816   $29,705   $2,819   $569,400 
Ending balance: individually evaluated for impairment  $2,694   $321   $2,249   $1,439   $-   $-   $6,703 
Ending balance: collectively evaluated for impairment  $168,905   $104,655   $126,236   $130,377   $29,705   $2,819   $562,697 
Ending balance: loans acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 

 

15
 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

 

Identifying and Classifying Portfolio Risks by Risk Rating

 

At origination, loans are categorized into risk categories based upon original underwriting. Subsequent to origination, management evaluates the collectability of all loans in the portfolio and assigns a proprietary risk rating. Ratings range from the highest to lowest quality based on factors including measurements of ability to pay, collateral type and value, borrower stability, management experience, and credit enhancements. These ratings are consistent with the bank regulatory rating system.

 

A loan may have portions of its balance in one rating and other portions in a different rating. The Bank may use these “split ratings” when factors cause loan loss risk to exist for part but not all of the principal balance. Split ratings may also be used where cash collateral or a government agency has provided a guaranty that partially covers a loan.

 

For clarity of presentation, the Corporation’s loan portfolio is profiled below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:

 

Pass - The condition of the borrower and the performance of the loan is satisfactory or better.

 

Special mention - A special mention asset has one or more potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

 

Substandard - A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

 

Doubtful - An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loss - Assets classified loss are considered uncollectible and their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, and a partial recovery may be effected in the future.

 

The Bank did not have any loans classified as loss at June 30, 2012 or December 31, 2011. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.

 

The profile of the loan portfolio, as indicated by risk rating, as of June 30, 2012 and December 31, 2011 is shown below.

  

   Credit Quality Indicators  
Credit Risk Profile by Regulatory Risk Rating
 
   Commercial real estate -
owner occupied
   Commercial real estate -
non-owner occupied
   Residential real estate   Commercial   Real estate construction   Consumer   Totals 
   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11 
   (In Thousands) 
Pass  $163,024   $152,495   $98,130   $91,685   $120,783   $122,501   $121,671   $121,717   $26,963   $29,791   $3,202   $2,819   $533,773   $521,008 
Special mention   11,173    8,113    1,857    5,204    1,785    1,811    13,167    6,851    -    -    -    -    27,982    21,979 
Substandard   6,477    11,531    5,821    8,470    4,199    4,268    5,876    3,695    -    -    -    -    22,373    27,964 
Doubtful   -    -    -    -    -    -    -    -    -    -    -    -    -    - 
Loss   -    -    -    -    -    -    -    -    -    -    -    -    -    - 
Unearned income   (541)   (540)   (340)   (383)   (122)   (95)   (442)   (447)   (83)   (86)   -    -    (1,528)   (1,551)
Total  $180,133   $171,599   $105,468   $104,976   $126,645   $128,485   $140,272   $131,816   $26,880   $29,705   $3,202   $2,819   $582,600   $569,400 

 

16
 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

 

Loans listed as non-performing are also placed on non-accrual status. The accrual of interest is discontinued at the time a loan is 90 days delinquent or when the credit deteriorates and there is doubt that the credit will be paid as agreed, unless the credit is well-secured and in process of collection. Once the loan is on non-accrual status, all accrued but unpaid interest is also charged-off, and all payments are used to reduce the principal balance. Once the principal balance is repaid in full, additional payments are taken into income. A loan may be returned to accrual status if the borrower shows renewed willingness and ability to repay under the term of the loan agreement. The risk profile based upon payment activity is shown below.

 

   Commercial real estate -
owner occupied
   Commercial real estate -
non-owner occupied
   Residential real estate   Commercial   Real estate construction   Consumer   Totals 
   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11   6/30/12   12/31/11 
   (In Thousands) 
Performing  $178,465   $168,905   $105,155   $104,655   $124,597   $126,236   $139,092   $130,377   $26,880   $29,705   $3,202   $2,819   $577,391   $562,697 
Non-performing   1,668    2,694    313    321    2,048    2,249    1,180    1,439    -    -    -    -    5,209    6,703 
Total  $180,133   $171,599   $105,468   $104,976   $126,645   $128,485   $140,272   $131,816   $26,880   $29,705   $3,202   $2,819   $582,600   $569,400 

 

Loans are considered past due if a contractual payment is not made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the portfolio is shown below as of June 30, 2012 and December 31, 2011. Loans that were on non-accrual status are not included in any past due amounts.

 

   Age Analysis of Past Due Loans 
   June 30, 2012 
   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater than
90 Days
   Total Past
Due
   Non-accrual
Loans
   Current
Loans
   Total
Loans
 
   (In Thousands) 
Commercial real estate - owner occupied  $-   $-   $-   $-   $1,668   $178,465   $180,133 
Commercial real estate - non-owner occupied   614    -    -    614    313    104,541    105,468 
Residential real estate   -    -    -    -    2,048    124,597    126,645 
Commercial   -    -    -    -    1,180    139,092    140,272 
Real estate construction   -    -    -    -    -    26,880    26,880 
Consumer   -    -    -    -    -    3,202    3,202 
Total  $614   $-   $-   $614   $5,209   $576,777   $582,600 

 

   December 31, 2011 
   30-59 Days
Past Due
   60-89 Days
Past Due
   Greater than
90 Days
   Total Past
Due
   Non-accrual
Loans
   Current
Loans
   Total
Loans
 
   (In Thousands) 
Commercial real estate - owner occupied  $-   $-   $-   $-   $2,694   $168,905   $171,599 
Commercial real estate - non-owner occupied   -    -    -    -    321    104,655    104,976 
Residential real estate   154    63    -    217    2,249    126,019    128,485 
Commercial   -    54    -    54    1,439    130,323    131,816 
Real estate construction   -    -    -    -    -    29,705    29,705 
Consumer   -    -    -    -    -    2,819    2,819 
Total  $154   $117   $-   $271   $6,703   $562,426   $569,400 

 

17
 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

 

Troubled Debt Restructurings

 

A troubled debt restructuring ("TDR") is a formal restructure of a loan when the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to a borrower. The Bank classifies these transactions as a TDR if the transaction meets the following conditions: an existing credit agreement must be formally renewed, extended and/or modified; the borrower must be experiencing financial difficulty; and the Bank has granted a concession that it would not otherwise consider. ASU 2011-02 requires public companies to identify and account for TDRs for interim and annual periods beginning on or after June 15, 2011.

 

Once identified as a TDR, a loan is considered to be impaired, and an impairment analysis is performed for the loan individually, rather than under a general loss allowance based on the loan type and risk rating. Any resulting shortfall is charged-off. This method is used consistently for all segments of the portfolio.

 

Normally, loans identified as TDRs would be placed on non-accrual status and considered non-performing until sufficient history of timely collection or payment has occurred that allows them to return to performing status, generally 6 months.

 

No loans were modified in connection with a troubled debt restructuring during the three and six month periods ended June 30, 2012.

 

There was one commercial loan restructured within the last 12 months with a recorded balance of $95,990 that subsequently defaulted in the three month period ended June 30, 2012. No payment defaults occurred during the first quarter of 2012 for loans restructured within the last 12 months.

 

Impaired Loans

 

A loan is classified as impaired when it is deemed probable by management’s analysis that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, or the recorded investment in the impaired loan is greater than the present value of expected future cash flows, discounted at the loan's effective interest rate. In the case of an impaired loan, management conducts an analysis which identifies if a quantifiable potential loss exists, and takes the necessary steps to record that loss when it has been identified as uncollectible.

 

As the ultimate collectability of the total principal of an impaired loan is in doubt, the loan is placed on nonaccrual status with all payment applied to principal under the cost-recovery method. As such, the Bank did not recognize any interest income on its impaired loans for the three and six month periods ended June 30, 2012 and 2011.

 

18
 

 

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

 

The table below shows the results of management’s analysis of impaired loans as of June 30, 2012 and December 31, 2011.

 

   Impaired Loans 
   June 30, 2012   December 31, 2011 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
 
   (In Thousands)   (In Thousands) 
With no specific related allowance recorded:                                    
Commercial real estate - owner occupied  $-   $-   $-   $-   $-   $- 
Commercial real estate - non-owner occupied   -    -    -    -    -    - 
Residential real estate   -    -    -    183    183    - 
Commercial   165    220    -    258    425    - 
Real estate construction   -    -    -    -    -    - 
Consumer   -    -    -    -    -    - 
With a specific related allowance recorded:                              
Commercial real estate - owner occupied  $1,668   $2,152   $512   $2,694   $3,156   $672 
Commercial real estate - non-owner occupied   313    422    41    321    422    70 
Residential real estate   2,048    2,332    580    2,066    2,313    537 
Commercial   1,015    1,264    341    1,181    1,200    644 
Real estate construction   -    -    -    -    -    - 
Consumer   -    -    -    -    -    - 
Total:                              
Commercial real estate - owner occupied  $1,668   $2,152   $512   $2,694   $3,156   $672 
Commercial real estate - non-owner occupied   313    422    41    321    422    70 
Residential real estate   2,048    2,332    580    2,249    2,496    537 
Commercial   1,180    1,484    341    1,439    1,625    644 
Real estate construction   -    -    -    -    -    - 
Consumer   -    -    -    -    -    - 
Total  $5,209   $6,390   $1,474   $6,703   $7,699   $1,923 

 

The table below shows the average recorded investment in impaired loans for the periods presented.

 

   Three Months Ended   Six Months Ended 
   June 30, 2012   June 30, 2011   June 30, 2012   June 30, 2011 
   Average Recorded
Investment
   Average Recorded
Investment
   Average Recorded
Investment
   Average Recorded
Investment
 
     
Commercial real estate - owner occupied  $1,691   $4,271   $1,677   $3,628 
Commercial real estate - non-owner occupied   315    754    315    - 
Residential real estate   2,068    2,549    2,062    3,357 
Commercial   1,205    747    1,303    628 
Real estate construction   -    -    -    - 
Consumer   -    -    -    - 
Total  $5,279   $8,321   $5,357   $7,613 

 

NOTE 5 – SEGMENT REPORTING

 

The Corporation has two reportable segments: traditional commercial banking and mortgage banking. Revenues from commercial banking operations consist primarily of interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income.

 

The commercial banking segment provides the mortgage banking segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the prime rate. These transactions are eliminated in the consolidation process.

 

19
 

 

NOTE 5 – SEGMENT REPORTING (continued)

 

The “Other” column in the following table includes the operations of the Corporation, Access Real Estate, and ACM. The primary source of income for the Corporation is derived from dividends from the Bank and its primary expense relates to interest on subordinated debentures. The primary source of income for Access Real Estate is derived from rents received from the Bank. ACM’s primary source of income is derived from fees related to its wealth management services.

 

The following table presents segment information for the three months ended June 30, 2012 and 2011:

 

   Commercial   Mortgage           Consolidated 
June 30, 2012  Banking   Banking   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                         
Interest income  $8,915   $510   $3   $(426)  $9,002 
Gain on sale of loans   -    14,202    -    536    14,738 
Other revenues   699    (1,311)   604    (998)   (1,006)
Total revenues   9,614    13,401    607    (888)   22,734 
                          
Expenses:                         
Interest expense   1,231    308    158    (427)   1,270 
Salaries and employee benefits   2,810    4,342    322    -    7,474 
Other expenses   2,071    5,036    763    (461)   7,409 
Total operating expenses   6,112    9,686    1,243    (888)   16,153 
                          
Income (loss) before income taxes  $3,502   $3,715   $(636)  $-   $6,581 
                          
Total assets  $749,588   $108,078   $10,409   $(26,366)  $841,709 

 

   Commercial   Mortgage           Consolidated 
June 30, 2011  Banking   Banking   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                         
Interest income  $8,408   $342   $2   $(224)  $8,528 
Gain on sale of loans   -    7,383    -    -    7,383 
Other revenues   1,956    (1,278)   456    (416)   718 
Total revenues   10,364    6,447    458    (640)   16,629 
                          
Expenses:                         
Interest expense   1,574    174    159    (225)   1,682 
Salaries and employee benefits   2,428    3,173    276    -    5,877 
Other expenses   2,236    2,352    751    (415)   4,924 
Total operating expenses   6,238    5,699    1,186    (640)   12,483 
                          
Income (loss) before income taxes  $4,126   $748   $(728)  $-   $4,146 
                          
Total assets  $696,532   $59,838   $10,692   $(54,046)  $713,016 

 

20
 

 

NOTE 5 – SEGMENT REPORTING (continued)

 

The following table presents segment information for the six months ended June 30, 2012 and 2011:

 

   Commercial   Mortgage           Consolidated 
June 30, 2012  Banking   Banking   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                         
Interest income  $18,004   $1,360   $5   $(1,016)  $18,353 
Gain on sale of loans   -    26,561    -    (879)   25,682 
Other revenues   1,318    (2,250)   1,129    (46)   151 
Total revenues   19,322    25,671    1,134    (1,941)   44,186 
                          
Expenses:                         
Interest expense   2,659    793    318    (1,017)   2,753 
Salaries and employee benefits   5,645    9,546    618    -    15,809 
Other expenses   4,276    8,785    1,419    (924)   13,556 
Total operating expenses   12,580    19,124    2,355    (1,941)   32,118 
                          
Income (loss) before income taxes  $6,742   $6,547   $(1,221)  $-   $12,068 
                          
Total assets  $749,588   $108,078   $10,409   $(26,366)  $841,709 

 

   Commercial   Mortgage           Consolidated 
June 30, 2011  Banking   Banking   Other   Eliminations   Totals 
   (In Thousands) 
Revenues:                         
Interest income  $16,845   $691   $5   $(443)  $17,098 
Gain on sale of loans   286    12,613    -    -    12,899 
Other revenues   2,627    (1,484)   744    (846)   1,041 
Total revenues   19,758    11,820    749    (1,289)   31,038 
                          
Expenses:                         
Interest expense   3,476    337    316    (444)   3,685 
Salaries and employee benefits   4,819    6,047    404    -    11,270 
Other expenses   3,989    3,977    1,264    (845)   8,385 
Total operating expenses   12,284    10,361    1,984    (1,289)   23,340 
                          
Income (loss) before income taxes  $7,474   $1,459   $(1,235)  $-   $7,698 
                          
Total assets  $696,532   $59,838   $10,692   $(54,046)  $713,016 

 

21
 

 

 

NOTE 6 – EARNINGS PER SHARE

 

The following table shows the calculation of both basic and diluted earnings per share (“EPS”) for the three and six months ended June 30, 2012 and 2011, respectively. The numerator of both the basic and diluted EPS is equivalent to net income. The weighted average number of shares outstanding used as the denominator for diluted EPS is increased over the denominator used for basic EPS by the effect of potentially dilutive common stock options utilizing the treasury stock method.

 

   Three Months   Three Months 
   Ended   Ended 
   June 30, 2012   June 30, 2011 
   (In Thousands, Except for Share and Per Share Data)  
     
BASIC EARNINGS PER SHARE:          
Net income  $3,890   $2,671 
Weighted average shares outstanding   10,237,515    10,324,502 
           
Basic earnings per share  $0.38   $0.26 
           
DILUTED EARNINGS PER SHARE:          
Net income  $3,890   $2,671 
Weighted average shares outstanding   10,237,515    10,324,502 
Dilutive stock options   112,699    66,949 
Weighted average diluted shares outstanding   10,350,214    10,391,451 
           
Diluted earnings per share  $0.38   $0.26 

 

   Six Months   Six Months 
   Ended   Ended 
   June 30, 2012   June 30, 2011 
   (In Thousands, Except for Share and Per Share Data) 
         
BASIC EARNINGS PER SHARE:          
Net income  $7,327   $4,958 
Weighted average shares outstanding   10,219,085    10,341,944 
           
Basic earnings per share  $0.72   $0.48 
           
DILUTED EARNINGS PER SHARE:          
Net income  $7,327   $4,958 
Weighted average shares outstanding   10,219,085    10,341,944 
Dilutive stock options   112,444    56,120 
Weighted average diluted shares outstanding   10,331,529    10,398,064 
           
Diluted earnings per share  $0.71   $0.48 

 

22
 

 

NOTE 7 - DERIVATIVES

 

As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

 

Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.

 

Since the Bank’s derivative instruments are not designated as hedging instruments, the fair value of the derivatives are recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change. The Bank has not elected to apply hedge accounting to its derivative instruments as provided in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.

 

At June 30, 2012 and December 31, 2011, the Bank had derivative financial instruments with a notional value of $284.6 million and $145.0 million, respectively. The fair value of these derivative instruments at June 30, 2012 and December 31, 2011 was $837 thousand and $(61) thousand, respectively, and was included in other assets and other liabilities, respectively.

 

Included in other noninterest income for the six months ended June 30, 2012 and June 30, 2011 was a net loss of $2.3 million and a net loss of $2.0 million, respectively, relating to derivative instruments.

 

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The Corporation adopted ASU 2011-04, which generally aligns the principles of fair value measurements with International Financial Reporting Standards (IFRSs), in its consolidated financial statements in the first quarter 2012. The provisions of ASU 2011-04 clarify the application of existing fair value measurement requirements, and expand the disclosure requirements for fair value measurements. The increased provisions of ASU 2011-04 did not have a material effect on the Corporation’s financial condition and results of operations.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (ASU 2011-05). The Corporation adopted ASU 2011-05, which revises the way in which comprehensive income is presented in the financial statements, in its consolidated financial statements in the first quarter 2012. The provisions of ASU 2011-05 give companies the option to present total comprehensive income, components of net income, and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions of ASU 2011-05 did not have a material effect on the Corporation’s financial condition and results of operations.

 

23
 

 

NOTE 9 - FAIR VALUE

 

Fair value pursuant to FASB ASC 820-10, Fair Value Measurements and Disclosures, is the exchange price, in an orderly transaction that is not a forced liquidation or distressed sale, between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability.  The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or liability. FASB ASC 820-10 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity specific inputs.  In addition, FASB ASC 820-10 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The standard describes three levels of inputs that may be used to measure fair values:

 

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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Corporation used the following methods to determine the fair value of each type of financial instrument:

 

Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Level 2).

 

Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

 

Derivative financial instruments: Derivative instruments are used to hedge residential mortgage loans held for sale and the related interest-rate lock commitments and include forward commitments to sell mortgage loans and mortgage-backed securities as further described in Note 7. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for interest rate lock commitments (Level 3).

 

Impaired loans: The fair values of impaired loans are measured on a nonrecurring basis as the fair value of the loan’s collateral for collateral-dependent loans.  Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.  The use of discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral (Level 3).

 

Other real estate owned: The fair value of other real estate owned, which consists of real estate that has been foreclosed, is recorded at the lower of fair value less selling expenses or the book balance prior to foreclosure. Write downs are provided for subsequent declines in value and are recorded in other operating expenses (Level 2).

 

24
 

 

NOTE 9 - FAIR VALUE (continued)

 

Assets and liabilities measured at fair value under FASB ASC 820-10 on a recurring and non-recurring basis, including financial assets and liabilities for which the Corporation has elected the fair value option as of June 30, 2012 and December 31, 2011, are summarized below:

 

   Fair Value Measurement 
   at June 30, 2012 Using 
Description  Carrying
Value
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs   (Level 3)
 
   (In Thousands) 
Financial Assets-Recurring                    
Available-for-sale investment securities                    
US Government agency  $15,031   $-   $15,031   $- 
Mortgage backed   9,929    -    9,929    - 
Corporate bonds   6,023    -    6,023    - 
CRA Mutual fund   1,494    -    1,494    - 
Total available-for-sale investment securities   32,477    -    32,477    - 
                     
Residential loans held for sale   100,310    -    100,310    - 
Derivative assets   2,710    -    -    2,710 
Total Financial Assets-Recurring  $135,497   $-   $132,787   $2,710 
                     
Financial Liabilities-Recurring                    
Derivative liabilities  $1,873   $-   $-   $1,873 
Total Financial Liabilities-Recurring  $1,873   $-   $-   $1,873 
                     
Financial Assets-Non-Recurring                    
Impaired loans (1)  $5,209   $-   $-   $5,209 
Total Financial Assets-Non-Recurring  $5,209   $-   $-   $5,209 

 

(1) Represents the carrying value of loans for which adjustments are based on the appraised value of the collateral.

 

25
 

 

NOTE 9 - FAIR VALUE (continued)

 

   Fair Value Measurement 
   at December 31, 2011 Using 
Description  Carrying
Value
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs   (Level 3)
 
   (In Thousands) 
Financial Assets-Recurring                    
Available-for-sale investment securities                    
US Government agency  $39,518   $-   $39,518   $- 
Mortgage backed   620    -    620    - 
Corporate bonds   3,961    -    3,961    - 
Taxable municipals   242    -    242    - 
CRA Mutual fund   1,496    -    1,496    - 
Total available-for-sale investment securities   45,837    -    45,837    - 
                     
Residential loans held for sale   95,126    -    95,126    - 
Derivative assets   1,256    -    -    1,256 
Total Financial Assets-Recurring  $142,219   $-   $140,963   $1,256 
                     
Financial Liabilities-Recurring                    
Derivative liabilities  $1,317   $-   $-   $1,317 
Total Financial Liabilities-Recurring  $1,317   $-   $-   $1,317 
                     
Financial Assets-Non-Recurring                    
Impaired loans (1)  $6,703   $-   $-   $6,703 
Total Financial Assets-Non-Recurring  $6,703   $-   $-   $6,703 
                     
(1) Represents the carrying value of loans for which adjustments are based on the appraised value of the collateral. 

  

It is the Corporation’s policy to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Level 1 and Level 2 during the six month periods ended June 30, 2012 and 2011.

 

The changes in Level 3 net derivatives measured at fair value on a recurring basis are summarized as follows:

 

   Three Months Ended June 30, 
   2012   2011 
   (In Thousands) 
Balance, beginning of period  $481   $323 
Realized and unrealized gains (losses) included in earnings   356    25 
Unrealized gains (losses) included in other comprehensive income   -    - 
Purchases, settlements, paydowns, and maturities   -    - 
Transfer into Level 3   -    - 
Balance, end of period  $837   $348 

 

26
 

 

NOTE 9 – FAIR VALUE (Continued)

 

   Six Months Ended June 30, 
   2012   2011 
   (In Thousands) 
Balance, beginning of period  $(61)  $280 
Realized and unrealized gains (losses) included in earnings   898    68 
Unrealized gains (losses) included in other comprehensive income   -    - 
Purchases, settlements, paydowns, and maturities   -    - 
Transfer into Level 3   -    - 
Balance, end of period  $837   $348 

 

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value at June 30, 2012:

 

Description  Fair Value
Estimate
   Valuation
Techniques
  Unobservable
Input
  Range (Weighted
Average)
  (In Thousands)
Financial Assets - Recurring              
Derivative assets  $2,710   Market pricing (3)  Estimated
pullthrough
  75% - 90%
Derivative liabilities  $1,873   Market pricing (3)  Estimated
pullthrough
  75% - 90%
               
Financial Assets - Non-recurring              
Impaired loans - Real estate secured  $5,797   Appraisal of
collateral (1)
  Liquidation
expenses (2)
  20% - 30%
Impaired loans - Non-real estate secured  $1,180   Cash flow basis  Liquidation
expenses (2)
  10% - 20%

 

(1)Fair value is generally determined through independent appraisals of the underlying collateral on real estate secured loans, which generally include various level 3 inputs which are not identifiable.
(2)Valuations of impaired loans may be adjusted by management for qualitative factors such as liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percent of the appraisal.
(3)Market pricing on derivative assets and liabilities is adjusted by management for the anticipated percent of derivative assets and liabilities that will create a realized gain or loss. The range and weighted average of estimated pull-through is presented as a percent of the volume.

 

Financial instruments recorded using FASB ASC 825-10

 

Under FASB ASC 825-10, Financial Instruments, the Corporation may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made.

 

27
 

 

NOTE 9 - FAIR VALUE (Continued)

 

The following table reflects the differences between the fair value carrying amount of residential mortgage loans held for sale at June 30, 2012, measured at fair value under FASB ASC 825-10, and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.

 

(In Thousands)  Aggregate
Fair Value
   Difference   Contractual
Principal
 
Residential mortgage loans held for sale  $100,310   $5,138   $95,172 

 

The Corporation has elected to account for residential loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market.

 

The following methods and assumptions not previously presented were used in estimating the fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

 

Cash and Short-Term Investments

 

For those short-term instruments, the carrying amount is a reasonable estimate of fair value. As such they are classified as Level 1 for noninterest-bearing deposits and Level 2 for interest-bearing deposits due from banks or federal funds sold.

 

Restricted Stock

 

It is not practical to determine the fair value of restricted stock due to the restrictions placed on its transferability.

 

Loans, Net of Allowance

 

For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics resulting in a Level 3 classification. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities resulting in a Level 3 classification.

 

Accrued Interest

 

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification depending upon the level of the asset or liability, with which, the accrual is associated.

 

Deposits and Borrowings

 

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date resulting in a Level 1 classification. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities also resulting in a Level 1 classification. The fair value of all other deposits and borrowings is determined using the discounted cash flow method thereby resulting in a Level 2 classification. The discount rate was equal to the rate currently offered on similar products.

 

Subordinated debentures

 

Due to the pooled nature of these instruments, which are not actively traded, estimated fair value is based on broker prices from recent similar sales resulting in a Level 2 classification.

 

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NOTE 9 - FAIR VALUE (Continued)

 

Off-Balance-Sheet Financial Instruments

 

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed interest rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

 

At June 30, 2012 and December 31, 2011, the majority of off-balance-sheet items are variable rate instruments or convert to variable rate instruments if drawn upon. Therefore, the fair value of these items is largely based on fees, which are nominal and immaterial.

 

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

 

   June 30, 2012   December 31, 2011 
       Estimated       Estimated 
   Carrying   Fair   Carrying   Fair 
   Amount   Value   Amount   Value 
   (In Thousands) 
Financial assets:     
Cash and short-term investments  $33,657   $33,657   $43,909   $43,909 
Securities available-for-sale   32,477    32,477    45,837    45,837 
Securities held-to-maturity   69,936    70,363    39,987    39,978 
Restricted stock   5,788    5,788    3,665    3,665 
Loans held for sale   100,310    100,310    95,126    95,126 
Loans, net of allowance   570,569    592,709    557,662    540,682 
Accrued interest receivable   7,191    7,191    6,071    6,071 
Derivatives   2,710    2,710    1,256    1,256 
Total financial assets  $822,638   $845,205   $793,513   $776,524 
                     
Financial liabilities:                    
Deposits  $680,931   $659,775   $645,013   $641,983 
Short-term borrowings   48,161    48,359    59,904    60,190 
Long-term borrowings   2,964    2,990    4,821    4,937 
Subordinated debentures   6,186    6,243    6,186    6,242 
Derivatives   1,873    1,873    1,317    1,317 
Total financial liabilities  $740,115   $719,240   $717,241   $714,669 

 

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NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

 

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, deemed necessary by the Corporation upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral normally consists of real property, liquid assets or business assets. The Corporation had $37.0 million and $17.9 million in outstanding commitments at June 30, 2012 and December 31, 2011, respectively.

 

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Corporation had $124.6 million and $123.1 million in unfunded lines of credit whose contract amounts represent credit risk at June 30, 2012 and December 31, 2011, respectively.

 

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation had standby letters of credit outstanding in the amount of $8.2 million and $4.1 million at June 30, 2012 and December 31, 2011, respectively.

 

The Bank maintains a reserve for potential off-balance sheet credit losses that is included in other liabilities on the balance sheet. At June 30, 2012 and December 31, 2011 the balance in this account totaled $379 thousand and $327 thousand, respectively.

 

The mortgage division of the Bank makes representations and warranties that loans sold to investors meet its program’s guidelines and that the information provided by the borrowers is accurate and complete. In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies, program compliance, early payment default, and fraud or borrower misrepresentations. The mortgage division maintains a reserve in other liabilities for potential losses on mortgage loans sold. At June 30, 2012, December 31, 2011, and June 30, 2011, the balance in this reserve totaled $4.2 million, $2.6 million, and $2.3 million, respectively.

 

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NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

 

The following table shows the changes to the Allowance for Losses on Mortgage Loans Sold.

 

   Six Months ended June 30,   Year ended 
   2012   2011   December 31, 2011 
   (In Thousands)     
Allowance for losses on mortgage loans sold -beginning of period  $2,616   $1,991   $1,991 
                
Provision charged to operating expense   1,600    289    966 
Recoveries   -    17    - 
Charge-offs   -    (11)   (341)
Allowance for losses on mortgage loans sold - end of period  $4,216   $2,286   $2,616 

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with Access National Corporation’s (“Corporation”, “we”, “us”) consolidated financial statements, and notes thereto, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results for the year ending December 31, 2012 or any future period.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Quarterly Report on Form 10-Q may contain forward-looking statements. For this purpose, any statements contained herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Examples of forward-looking statements include discussions as to our expectations, beliefs, plans, goals, objectives and future financial or other performance or assumptions concerning matters discussed in this document. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “ anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: collateral values, especially in the real estate market; continued challenging economic conditions or deterioration in general business and economic conditions and in the financial markets; the impact of any laws, regulations, policies or programs implemented pursuant to the Dodd-Frank Act, the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009; branch expansion plans; interest rates; monetary and fiscal policies of the U.S. Government, including policies of the Office of the Comptroller of the Currency (“Comptroller”), the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond; the economy of Northern Virginia, including governmental spending and commercial and residential real estate markets; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; the liquidity of the Corporation; and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.

 

For additional discussion of risk factors that may cause our actual future results to differ materially from the results indicated within forward looking statements, please see “Item 1A – Risk Factors” of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

CRITICAL ACCOUNTING POLICIES

 

The Corporation’s consolidated financial statements have been prepared in accordance with GAAP. In preparing the Corporation’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes that the most significant subjective judgments that it makes include the following:

 

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Allowance for Loan Losses

 

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) FASB ASC 450-10, which requires that losses be accrued when they are probable of occurring and can be estimated, and (ii) FASB ASC 310-10, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. An allowance for loan losses is established through a provision for loan losses based upon industry standards, known risk characteristics, management’s evaluation of the risk inherent in the loan portfolio, and changes in the nature and volume of loan activity. Such evaluation considers, among other factors, the estimated market value of the underlying collateral and current economic conditions. For further information about our practices with respect to allowance for loan losses, please see Note 4 to the consolidated financial statements.

 

Other Than Temporary Impairment of Securities

 

Securities in the Corporation’s securities portfolio are classified as either available-for-sale or held-to-maturity. At June 30, 2012, there were no non-agency mortgage backed securities or trust preferred securities in the portfolio. The estimated fair value of the portfolio fluctuates due to changes in market interest rates and other factors. Changes in estimated fair value are recorded in shareholders’ equity as a component of other comprehensive income. Securities are monitored to determine whether a decline in their value is other than temporary. Management evaluates the securities portfolio on a quarterly basis to determine the collectability of amounts due per the contractual terms of each security. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to net income is recognized. At June 30, 2012, there were no securities with other than temporary impairment.

 

Income Taxes

 

The Corporation uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year. The Corporation’s evaluation of the deductibility or taxability of items included in the Corporation’s tax returns has not resulted in the identification of any material, uncertain tax positions.

 

Fair Value

 

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. For additional information about our financial assets carried at fair value, please see Note 9 to the consolidated financial statements.

 

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FINANCIAL CONDITION

 

Executive Summary

 

At June 30, 2012, the Corporation’s assets totaled $841.7 million, compared to $809.8 million at December 31, 2011, an increase of $31.9 million. The increase in assets is attributable mainly to an increase in loans held for investment of $13.2 million and an increase in loans held for sale of $5.2 million and was funded by the increase in total deposits of $35.9 million. Also contributing to the growth in assets was an increase in investment securities of $16.6 million which was partially offset by a decrease in cash balances of $10.5 million. Loans held for investment totaled $582.6 million at June 30, 2012 compared to $569.4 million at year end 2011, an increase of $13.2 million. The increase in loans is partially attributable to an $8.5 million increase in both commercial loans and commercial real estate – owner occupied. The growth in these two categories of loans was partially offset by a $2.8 million decrease in real estate construction loans as well as a $1.8 million decrease in residential real estate. At June 30, 2012, loans secured by real estate collateral comprised 75.4% of our total loan portfolio, with loans secured by commercial real estate contributing 49.0% of our total loan portfolio, loans secured by residential real estate contributing 21.7% and real estate construction loans contributing 4.6%. Loans held for sale totaled $100.3 million at June 30, 2012, compared to $95.1 million at December 31, 2011. Loans held for sale fluctuates with the volume of loans originated during any given month and the length of time the loans are held prior to selling them in the secondary market. Deposits totaled $680.9 million at June 30, 2012, compared to $645.0 million at December 31, 2011, which was an increase of $35.9 million. Noninterest-bearing deposits increased $43.4 million from $113.9 million at December 31, 2011 to $157.3 million at June 30, 2012, which was the primary contributor for the increase in deposit accounts.

 

Net income for the second quarter of 2012 totaled $3.9 million compared to $2.7 million for the same period in 2011. Earnings per diluted share were $0.38 for the second quarter of 2012, compared to $0.26 per diluted share in the same period of 2011. The increase in earnings is primarily attributable to a $91 million increase in mortgage loan originations that increased mortgage segment pre-tax earnings from the comparable quarter by $3.0 million as well as a $437 thousand increase in interest and fees on loans coupled with a $412 thousand decrease in interest expense, due to the low rate environment and favorable changes in deposit mix.

 

Net income for the six months ended June 30, 2012 totaled $7.3 million compared to $5.0 million for the same period in 2011. Earnings per diluted share were $0.71 for the first six months of 2012, compared to $0.48 per diluted share in the same period of 2011. The increase in earnings is primarily attributable to a $208.7 million increase in mortgage loan originations that increased mortgage segment pre-tax earnings from the comparable period of the prior year by $5.1 million as well as a $932 thousand decrease in interest expense, due to the low rate environment and favorable changes in deposit mix, and a $1.3 million increase in interest and fee on loans.

 

Non-performing assets (“NPA”) totaled $5.2 million, or 0.62%, of total assets at June 30, 2012, down from $6.7 million, or 0.83%, of total assets at December 31, 2011. NPA are comprised solely of non-accrual loans at June 30, 2012.

 

We believe the economic recovery is continuing to strengthen and the labor market is improving. The unemployment rate for Fairfax County, Virginia at the end of June 2012 was 3.9% compared to 5.7% for the state of Virginia and 8.2% for the nation. The median sales price of new single family homes that sold through May 2012 was $1,107,000, an increase of 26.1% compared to the 2011 median of $878,000. The volume of homes in the United States entering the foreclosure process is down more than 25% from a year ago according to Reuters while reported foreclosures in Fairfax County were down 22.5% for the same period. The Federal Open Market Committee reiterated at the June 2012 meeting that the target rate for federal funds will remain at 0 to 25 basis points, with expectation that economic conditions will warrant this range through late 2014. The historically low interest rate environment continues to negatively impact yields of variable loans and the securities portfolio while positively impacting loan origination volume. Despite the low rate environment, the Corporation’s net interest margin increased from the second quarter of 2011 to the second quarter of 2012. While there is no certainty to the magnitude of any impact, an extended period of low interest rates, as presently forecasted by the Federal Reserve, is expected to have an adverse effect on the net interest margin yet serve as a catalyst to mortgage loan origination volume and related earnings.

 

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We are continuing to focus on credit quality and we believe that we are well positioned for expanding our core commercial banking business and strategic initiatives as the economy cycles into recovery.

 

Securities

 

The Corporation’s securities portfolio is comprised of U.S. government agency securities, mortgage backed securities, taxable municipal securities, corporate bonds, and a CRA mutual fund. The portfolio does not have any non-agency mortgage backed securities or trust preferred securities.

 

At June 30, 2012 the fair value of the securities portfolio totaled $102.8 million, compared to $85.8 million at December 31, 2011. Included in the fair value totals are held-to-maturity securities with an amortized cost of $69.9 million (fair value of $70.4 million) and $40.0 million (fair value of $40.0 million) at June 30, 2012 and December 31, 2011, respectively. Securities classified as available-for-sale are accounted for at fair market value with unrealized gains and losses recorded directly to a separate component of shareholders' equity, net of associated tax effect while held-to-maturity securities are carried at amortized cost. Investment securities are used to provide liquidity, to generate income, and to temporarily supplement loan growth as needed.

 

Restricted Stock

 

Restricted stock consists of FHLB stock and FRB stock. These stocks are classified as restricted stocks because their ownership is restricted to certain types of entities and they lack a market. Restricted stock is carried at cost on the Corporation’s financial statements. Dividends are paid semi-annually on FRB stock and the FHLB has declared quarterly dividends for each quarter in 2011 as well as the first two quarters of 2012.

 

Loans

 

The loan portfolio constitutes the largest component of earning assets and is comprised of commercial real estate – owner occupied, commercial real estate – non-owner occupied, residential real estate, commercial, real estate construction, and consumer loans. All lending activities of the Bank and its subsidiaries are subject to the regulations and supervision of the Comptroller. The loan portfolio does not have any pay option adjustable rate mortgages, loans with teaser rates or subprime loans or any other loans considered “high risk loans”. Loans totaled $582.6 million at June 30, 2012 compared to $569.4 million at December 31, 2011, an increase of $13.2 million. Owner occupied commercial real estate loans increased $8.5 million, non-owner occupied commercial real estate loans increased $492 thousand, residential real estate loans decreased $1.8 million and real estate construction loans decreased $2.8 million. Additionally, commercial loans increased $8.5 million and consumer loans increased $383 thousand. The overall increase in loans reflects a continued improvement in loan demand by local businesses, as seen through the increase in commercial segments of the loan portfolio, and is principally due to improvement in economic conditions in Northern Virginia. Please see Note 4 to the consolidated financial statements for a table that summarizes the composition of the Corporation’s loan portfolio. The following is a summary of the loan portfolio at June 30, 2012.

 

Commercial Real Estate Loans – Owner Occupied: This category of loans represented the largest segment of the loan portfolio and was comprised of owner occupied loans secured by the commercial property, totaling $180.1 million, representing 30.92% of the loan portfolio at June 30, 2012. Commercial real estate loans are secured by the subject property and underwritten to policy standards. Policy standards approved by the Board of Directors from time to time set forth, among other considerations, loan-to-value limits, cash flow coverage ratios, and the general creditworthiness of the obligors.

 

Commercial Real Estate Loans – Non-Owner Occupied: This category of loans represented the fourth largest segment of the loan portfolio and was comprised of loans secured by income producing commercial property, totaling $105.5 million and representing 18.10% of the loan portfolio at June 30, 2012. Commercial real estate loans are secured by the subject property and underwritten to policy standards as listed above.

 

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Residential Real Estate Loans: This category represented the third largest segment of the loan portfolio and included loans secured by first or second mortgages on one to four family residential properties. This segment totaled $126.6 million and comprised 21.74% of the loan portfolio as of June 30, 2012. Of this amount, the following sub-categories existed as a percentage of the whole residential real estate loan portfolio as of June 30, 2012: home equity lines of credit, 19.0%; first trust mortgage loans, 68.7%; and junior trust loans, 12.3%.

 

Home equity lines of credit are extended to borrowers in our target market. Real estate equity is often the largest component of consumer wealth in our marketplace. Once approved, this consumer finance tool allows the borrowers to access the equity in their homes or investment properties and use the proceeds for virtually any purpose. Home equity lines of credit are most frequently secured by a second lien on residential property. The proceeds of first trust mortgage loans are used to acquire or refinance the primary financing on owner occupied and residential investment properties. Junior trust loans are loans to consumers wherein the proceeds have been used for a stated consumer purpose. Examples of consumer purposes are education, refinancing debt, or purchasing consumer goods. The loans are generally extended in a single disbursement and repaid over a specified period of time. Loans in the residential real estate portfolio are underwritten to standards within a traditional consumer framework that is periodically reviewed and updated by management and the Board of Directors and takes into consideration repayment source and capacity, value of the underlying property, credit history, savings pattern, and stability.

 

Commercial Loans: Commercial Loans represented the second largest segment of the loan portfolio, totaling $140.3 million and representing 24.08% of the loan portfolio as of June 30, 2012. These loans are made to businesses or individuals within our target market for business purposes. Typically the loan proceeds are used to support working capital and the acquisition of fixed assets of an operating business. We underwrite these loans based upon our assessment of the obligor(s)’ ability to generate operating cash flows in the future necessary to repay the loan. To address the risks associated with the uncertainties of future cash flows, these loans are generally well secured by assets owned by the business or its principal shareholders/owners and the principal shareholders/owners are typically required to guarantee the loan.

 

Real Estate Construction Loans: Real estate construction loans, also known as construction and land development loans represented the fifth largest segment of the loan portfolio and totaled $26.9 million and represented 4.61% of the loan portfolio as of June 30, 2012. These loans generally fall into one of three categories: first, loans to individuals that are ultimately used to acquire property and construct an owner occupied residence; second, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and third, loans to developers for the purpose of acquiring land that is developed into finished lots for the ultimate construction of residential or commercial buildings. Loans of these types are generally secured by the subject property within limits established by the Board of Directors based upon an assessment of market conditions and updated from time to time. The loans typically carry recourse to principal owners. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category carry construction completion risk. To address this additional risk, loans of this type are subject to additional administration procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications and time frames.

 

Consumer Loans: Consumer loans, which was the smallest segment of the loan portfolio, totaled $3.2 million and represented 0.55% of the loan portfolio as of June 30, 2012. Most loans in this category are well secured with assets other than real estate, such as marketable securities or automobiles. Very few consumer loans are unsecured. As a matter of operation, management discourages unsecured lending. Loans in this category are underwritten to standards within a traditional consumer framework that is periodically reviewed and updated by management and the Board of Directors and takes into consideration repayment capacity, collateral value, savings pattern, credit history, and stability.

 

Loans Held for Sale (“LHFS”)

 

LHFS are residential mortgage loans originated by the mortgage division of the Bank to consumers and underwritten in accordance with standards set forth by an institutional investor to whom we expect to sell the loans for a profit. Loan proceeds are used for the purchase or refinance of the property securing the loan. Loans are sold with the servicing released to the investor. At June 30, 2012, LHFS at fair value totaled $100.3 million compared to $95.1 million at December 31, 2011.

 

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The LHFS loans are closed by the Bank and held on average fifteen to thirty days pending their sale primarily to mortgage banking subsidiaries of large financial institutions. The Bank is also approved to sell loans directly to Fannie Mae and Freddie Mac and is able to securitize loans that are insured by the Federal Housing Administration. During the second quarter of 2012 we originated $265.3 million of loans processed in this manner, compared to $256.9 million in the first quarter of 2012 and $161.9 million for the second quarter of 2011. Loans are sold without recourse and subject to industry standard representations and warranties that may require the repurchase by the Bank of loans previously sold. The repurchase risks associated with this activity center around early payment defaults and borrower fraud.

 

Brokered Loans

 

Brokered loans are underwritten and closed by a third party lender. The Bank is paid a fee for procuring and packaging brokered loans. We have historically brokered loans that do not conform to the products offered by the Bank. As of April 1, 2011 we began a phase out of brokering loans as a result of new disclosure and compensation regulations. This phase out is evidenced when comparing the first six months of 2012 to the same period for 2011. Brokered loans accounted for 0.38%, or $2.0 million, of the total loan volume for the first six months of 2012 compared to 9.9%, or $31.2 million, for the same period of 2011. The change pertaining to brokered loans has not had a material impact on our business.

 

Allowance for Loan Losses

 

The allowance for loan losses totaled $12.0 million at June 30, 2012 compared to $11.7 million at December 31, 2011. The allowance for loan losses was equivalent to 2.06% of total loans held for investment at June 30, 2012 and December 31, 2011. Adequacy of the allowance is assessed and increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible. For additional information about the allowance for loan losses, please see Note 4 to the consolidated financial statements.

 

Non-performing Assets

 

At June 30, 2012 and December 31, 2011, the Bank had non-performing assets totaling $5.2 million and $6.7 million, respectively. Non-performing assets consist of non-accrual and restructured loans. All non-performing loans are carried at the expected liquidation value of the underlying collateral.

 

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The following table is a summary of our non-performing assets at June 30, 2012 and December 31, 2011.

 

   June 30, 2012   December 31, 2011 
  (Dollars In Thousands) 
Non-accrual loans:          
Commercial real estate - owner occupied  $1,668   $2,694 
Commercial real estate - non-owner occupied   313    321 
Residential real estate   2,048    2,249 
Commercial   1,180    1,439 
Real estate construction   -    - 
Consumer   -    - 
Total non-accrual loans  $5,209   $6,703 
           
Other real estate owned ("OREO")   -    - 
           
Total non-performing assets  $5,209   $6,703 
           
Restructured loans included above in non-accrual loans  $1,086   $1,428 
           
Ratio of non-performing assets to:          
Total loans plus OREO   0.89%   1.18%
           
Total Assets   0.62%   0.83%
           
Accruing Past due loans:          
90 or more days past due  $-   $- 

 

At June 30, 2012 and December 31, 2011, the Bank had no loans past due 90 days or more and still accruing interest.

 

Deposits

 

Deposits are the primary sources of funding loan growth. At June 30, 2012, deposits totaled $680.9 million compared to $645.0 million on December 31, 2011, an increase of $35.9 million. Savings and interest-bearing deposits decreased $8.6 million from December 31, 2011 and totaled $173.4 million at June 30, 2012 as compared to $182.0 million at December 31, 2011. Time deposits increased $1.1 million from $349.1 million at December 31, 2011 to $350.2 million at June 30, 2012. Noninterest-bearing deposits increased $43.4 million from $113.9 million at December 31, 2011 to $157.3 million at June 30, 2012. The growth in noninterest-bearing accounts is attributable to new accounts opened during the first half of 2012 and balance fluctuations of existing commercial accounts. The overall increase in deposits allowed the Corporation to decrease its borrowings which, coupled with other factors, contributed to the increase in net interest margin.

 

Shareholders’ Equity

 

Shareholders’ equity totaled $89.0 million at June 30, 2012 compared to $82.8 million at December 31, 2011. The increase in shareholders’ equity is due mainly to retained earnings net of dividends paid. Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank are required to maintain. These risk based capital guidelines take into consideration risk factors, as defined by the banking regulators, associated with various categories of assets, both on and off the balance sheet. Both the Corporation and Bank are classified as well capitalized, which is the highest rating.

 

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The following table outlines the regulatory components of the Corporation’s capital and risk based capital ratios.

 

   June 30,   December 31,     
   2012   2011     
   (In Thousands)     
Tier 1 Capital:               
Common stock  $8,559   $8,511      
Capital surplus   16,753    16,716      
Retained earnings   63,673    57,529      
Less: Net unrealized loss on equity securities   (4)   (2)     
Subordinated debentures   6,000    6,000      
Less: Dissallowed servicing assets   (89)   (110)     
Total Tier 1 capital   94,892    88,644      
                
 Allowance for loan losses   8,209    7,788      
                
Total risk based capital  $103,101   $96,432      
                
Risk weighted assets  $652,513   $618,746      
                
Quarterly average assets  $798,056   $821,995      
              Regulatory 
             Minimum 
Capital Ratios:               
Tier 1 risk based capital ratio   14.54%   14.33%   4.00%
Total risk based capital ratio   15.80%   15.59%   8.00%
Leverage ratio   11.89%   10.78%   4.00%

  

RESULTS OF OPERATIONS

 

Summary

 

Net income for the second quarter of 2012 totaled $3.9 million or $0.38 diluted earnings per share. This compares with $2.7 million or $0.26 diluted earnings per share for the same quarter in 2011. The increase in net income for the three months ended June 30, 2012 as compared to the same period in 2011 is mainly attributable to the increased earnings from the mortgage banking segment.

 

Net income for the six months ended June 30, 2012 totaled $7.3 million or $0.71 diluted earnings per share compared to $5.0 million or $0.48 diluted earnings per share for the same period in 2011. The increase in earnings for the six months ended June 30, 2012 is attributable to a $1.2 million increase in interest and fees on loans and a decrease in interest expense of $932 thousand as well as increased earnings from the mortgage banking segment driven by an increase in loan origination volume.

 

Net Interest Income

 

Net interest income, the principal source of earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits) used to fund earning assets. Net interest income before the provision for loan losses totaled $7.7 million for the three months ended June 30, 2012 compared to $6.8 million for the same period in 2011. The increase in net interest income is primarily due to lower funding costs and changes in the composition of earning assets. The annualized yield on earning assets was 4.64% for the quarter ended June 30, 2012 when compared to 4.98% for the quarter ended June 30, 2011. The stability in the annualized yield on earning assets is primarily attributable to a $71.5 million increase in average loans held for investment, which more than offset a decrease in the rate earned by the loan portfolio from 5.98% for the quarter ended June 30, 2011 to 5.42% for the same period in 2012. The cost of interest-bearing deposits and borrowings decreased from 1.27% for the quarter ended June 30, 2011 to 0.90% for the quarter ended June 30, 2012. Net interest margin was 3.98% for the quarter ended June 30, 2012 compared to 4.00% for the same period in 2011.

 

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Net interest income before the provision for loan losses totaled $15.6 million for the first six months of 2012 compared to $13.4 million for the same period in 2011. The annualized yield on earning assets for the first six months of 2012 was 4.64% compared to 4.80% for the same period in 2011. The cost of interest-bearing deposits and borrowings for the first six months of 2012 was 0.94% compared to 1.30% for the same period in 2011 as most of the segments of deposits and borrowings bore a lower rate of interest in 2012 than in 2011. Net interest margin was 3.95% for the first six months of 2012 compared to 3.77% for the same period in 2011.

 

Volume and Rate Analysis

 

The following table presents the dollar amount of changes in interest income and interest expense for each category of interest earning assets and interest-bearing liabilities.

 

   Three Months Ended June 30, 
   2012 compared to 2011 
   Change Due To: 
   Increase /         
   (Decrease)   Volume   Rate 
   (In Thousands) 
Interest Earning Assets:               
Investments  $34   $(37)  $71 
Loans held for sale   169    267    (98)
Loans   268    1,009    (741)
Interest-bearing deposits   2    (1)   3 
Total increase (decrease) in interest income   473    1,238    (765)
                
Interest-Bearing Liabilities:               
Interest-bearing demand deposits   14    30    (16)
Money market deposit accounts   (32)   13    (45)
Savings accounts   (1)   -    (1)
Time deposits   (10)   250    (260)
Total interest-bearing deposits   (29)   293    (322)
FHLB Advances   -    (10)   10 
Securities sold under agreements to repurchase   (10)   (5)   (5)
Other short-term borrowings   (56)   (28)   (28)
Long-term borrowings   (24)   (30)   6 
FDIC term note   (297)   (149)   (148)
Subordinated debentures   4    -    4 
Total increase (decrease) in interest expense   (412)   71    (483)
                
Increase (decrease) in net interest income  $885   $1,167   $(282)

 

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   Six Months Ended June 30, 
   2012 compared to 2011 
   Change Due To: 
   Increase /         
   (Decrease)   Volume   Rate 
   (In Thousands) 
Interest Earning Assets:               
Investments  $50   $(186)  $236 
Loans held for sale   670    799    (129)
Loans   556    2,060    (1,504)
Interest-bearing deposits   (22)   (20)   (2)
Total increase (decrease) in interest income   1,254    2,653    (1,399)
                
Interest-Bearing Liabilities:               
Interest-bearing demand deposits   38    63    (25)
Money market deposit accounts   (80)   23    (103)
Savings accounts   (1)   -    (1)
Time deposits   (224)   350    (574)
Total interest-bearing deposits   (267)   436    (703)
FHLB Advances   (11)   (18)   7 
Securities sold under agreements to repurchase   (18)   (9)   (9)
Other short-term borrowings   (105)   (53)   (52)
Long-term borrowings   (45)   (49)   4 
FDIC term note   (494)   (349)   (145)
Subordinated debentures   8    -    8 
Total increase (decrease) in interest expense   (932)   (42)   (890)
                
Increase (decrease) in net interest income  $2,186   $2,695   $(509)

 

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

 

The following table presents for the periods indicated the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in dollars and rates.

 

   Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities 
   Three Month Period Ended 
   June 30, 2012   June 30, 2011 
   Average   Income /   Yield /   Average   Income /   Yield / 
   Balance   Expense   Rate   Balance   Expense   Rate 
   (Dollars In Thousands) 
Assets:                              
Interest earning assets:                              
Securities, at amortized cost(1)  $111,277   $614    2.21%  $118,506   $580    1.96%
Loans held for sale   57,721    511    3.54%   29,348    342    4.66%
Loans(2)   579,541    7,858    5.42%   508,010    7,590    5.98%
Interest-bearing balances and federal funds sold   27,613    19    0.28%   28,575    17    0.24%
Total interest earning assets   776,152    9,002    4.64%   684,439    8,529    4.98%
Non-interest earning assets:                              
Cash and due from banks   9,381              10,870           
Premises, land, and equipment   8,561              8,843           
Other assets   16,123              13,204           
Less: allowance for loan losses   (11,945)             (10,789)          
Total non-interest earning assets   22,120              22,128           
Total Assets  $798,272             $706,567           
                               
Liabilities and Shareholders' Equity:                              
Interest-bearing deposits:                              
Interest-bearing demand deposits  $64,481   $40    0.25%  $23,431   $26    0.44%
Money market deposit accounts   118,984    124    0.42%   108,988    156    0.57%
Savings accounts   2,678    1    0.15%   2,848    2    0.28%
Time deposits   324,856    985    1.21%   252,211    995    1.58%
Total interest-bearing deposits   510,999    1,150    0.90%   387,478    1,179    1.22%
                               
Borrowings:                              
FHLB Advances   17,335    24    0.55%   26,484    24    0.36%
Securities sold under agreements to repurchase and federal funds purchased   24,777    9    0.15%   37,097    19    0.20%
Other short-term borrowings   -    -    0.00%   37,142    56    0.60%
FHLB long-term borrowings   3,256    31    3.81%   6,466    55    3.40%
Senior unsecured term note   -    -    0.00%   29,999    297    3.96%
Subordinated Debentures   6,186    56    3.62%   6,186    52    3.36%
Total borrowings   51,554    120    0.93%   143,374    503    1.40%
Total interest-bearing liabilities   562,553    1,270    0.90%   530,852    1,682    1.27%
Noninterest-bearing liabilities:                              
Demand deposits   136,492              94,179           
Other liabilities   10,579