ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pending Merger
On October 22, 2012, the Company and F.N.B. entered into the Merger Agreement, pursuant to which the Company will merge with and into FNB, with FNB surviving the merger. As a result of the Merger,
the Company will cease to exist as a separate legal entity and its business will be combined with that of FNBs. As soon as practicable after the completion of the Merger, the Bank will merge with and into FNB Bank, with FNB Bank as the
surviving entity.
Under the terms of the Merger Agreement, shareholders of the Company will be entitled to receive, subject to possible
adjustment, as provided in the Merger Agreement, 1.143 shares of FNBs common stock for each share of the Companys common stock they own and if, prior to the effective time of the Merger, the Company is able to collect in cash part or all
of the amounts due on a particular loan in the amount of approximately $4.6 million, up to $0.36 in cash per share of the Companys common stock they own.
Overview
The following is managements discussion and analysis of the financial
condition and results of operations of Annapolis Bancorp, Inc. on a consolidated basis with its wholly owned subsidiary, BankAnnapolis, for the periods presented, and should be read in conjunction with the consolidated financial statements and the
related notes thereto appearing elsewhere in this annual report.
The Company reported net income for 2012 of $3.1 million, an increase of
$921,000 or 42.4% from net income of $2.2 million in 2011. Net income available to common shareholders after accruing for preferred stock dividends and discount accretion for 2012 was $2.8 million compared to net income available to common
shareholders of $1.7 million in 2011. The increase in 2012 earnings was due to lower interest expense, lower provision for credit losses expense, lower noninterest expense, and higher noninterest income. The net income per diluted common share for
2012 was $0.68 compared to a net income of $0.39 per diluted common share in 2011.
The primary source of income of the Bank is interest on
its loan and investment portfolios, while one of the principal expenses of the Bank is interest on its deposit accounts and borrowings. The difference between interest income on interest earning assets and interest expense on interest bearing
liabilities is referred to as net interest income. Net interest income was $16.0 million for 2012, a decrease of $258,000 or 1.6% compared to $16.3 million in 2011. Total assets were $446.4 million as of December 31, 2012, a $4.8 million or a
1.1% increase compared to December 31, 2011 total assets of $441.6 million. The Companys return on average assets was 0.70% and 0.50% for the years ending December 31, 2012, and 2011, respectively. The Companys return on
average common equity was 9.09% and 6.01% for the years ending December 31, 2012, and 2011, respectively.
At December 31, 2012 the
Banks gross loan portfolio totaled $281.2 million. Of this amount, $44.4 million or 15.8% were commercial loans, $116.9 million or 41.6% were commercial real estate loans, $33.3 million or 11.8% were construction loans, $47.9 million or 17.0%
were one- to four-family residential mortgage loans, $31.6 million or 11.3% were home equity loans, and $7.1 million or 2.5% were consumer and other loans.
Application of Critical Accounting Policies
The Companys consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the industries in which it operates. Application of these principles requires management to make
estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have
a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the
value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and
liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are either based on quoted market prices or are provided
by other third-party sources, when available.
14
The most significant accounting policies followed by the Company are presented in Note 1 to the consolidated
financial statements which can be found on page 37 and continuing to page 40. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts,
management has identified the determination of the allowance for credit losses to be the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
The allowance for credit losses represents managements estimate of probable credit losses inherent in the loan portfolio as of the
balance sheet date. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash
flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also
represents the largest asset type on the consolidated balance sheet. Note 1 to the consolidated financial statements found on page 39 describes the methodology used to determine the allowance for credit losses and a discussion of the factors driving
changes in the amount of the allowance for credit losses is included in the Credit Risk Management section of this financial analysis.
Financial Condition as of December 31, 2012 and 2011 and Results of Operations for the Years then Ended
The Company, through its Bank subsidiary,
functions as a financial intermediary, and as such its financial condition and results of operations can be examined in terms of developing trends in its sources and uses of funds. These trends are the result of both external environmental factors,
such as changing economic conditions, regulatory changes and competition, and also internal environmental factors such as managements evaluation as to the best use of funds in these changing conditions.
Total assets increased by $4.8 million or 1.1% during 2012 to $446.4 million from $441.6 million at December 31, 2011 as investment securities,
deposits and securities sold under agreements to repurchase increased. Total deposits and securities sold under agreements to repurchase, the Companys primary sources of funds, increased $5.8 million or 1.6% to $367.5 million from $361.7
million at December 31, 2011. Time deposits totaled $68.8 million or 19.5% of the Banks total deposits at December 31, 2012, compared to $78.3 million or 22.3% in 2011. Savings and money market accounts, the largest portion of the
Banks total deposits, totaled $189.6 million or 53.7% of the Banks total deposits at December 31, 2012, compared to $182.5 million or 52.1% in 2011. NOW accounts totaled $35.9 million or 10.2% and $32.9 million or 9.4% of total
deposits at December 31, 2012 and 2011, respectively. Demand, noninterest bearing accounts totaled $58.5 million or 16.6% of total deposits at December 31, 2012 and $56.7 million or 16.2% at December 31, 2011. Securities sold under
agreements to repurchase increased $3.3 million to $14.6 million at December 31, 2012 from $11.3 million at December 31, 2011. Long-term borrowings remained at $35.0 million at December 31, 2012 and 2011.
On March 26, 2003, Annapolis Bancorp Statutory Trust I (Statutory Trust I), a Connecticut business trust formed, funded and wholly owned
by the Company, issued $5,000,000 of variable-rate capital securities to institutional investors. The proceeds of the securities were used to provide funding for future growth and to improve the Companys capital ratios. The current cost of
these securities is 3.46%.
The Companys primary uses of funds are for loans and investments. Loans excluding deferred fees/costs and
discounts and the allowance for credit losses, decreased $9.6 million or 3.3% to $281.2 million at December 31, 2012 from $290.8 million a year earlier. Commercial real estate balances increased $2.0 million or 1.7% due to several new customer
relationships. Commercial and industrial loans decreased $3.2 million or 6.8%. Construction loans decreased $1.7 million or 4.8% and residential real estate loan balances decreased by $4.8 million or 5.7%. Installment and other consumer loans
decreased by $1.9 million or 20.4%. Investment security balances increased $18.7 million during the year as proceeds from loan payoffs and increased deposit and repurchase agreement balances were placed in investment securities.
Operating Results
The following
discussion outlines some of the more important factors and trends affecting the earnings of the Company as presented in its consolidated statements of income.
Net Interest Income
Net interest income is the difference between interest income and
interest expense and is generally affected by increases or decreases in the amount of outstanding interest earning assets and interest bearing liabilities (volume variance). This volume
15
variance coupled with changes in interest rates on these same assets and liabilities (rate variance) equates to the total change in net interest income in any given period. The table on page 16
sets forth certain information regarding changes in interest income and interest expense attributable to (1) changes in volume (change in volume multiplied by the old rate); (2) changes in rates (change in rate multiplied by the old
volume); and (3) changes in rate/volume (change in rate multiplied by change in volume).
Net interest income for the year ended
December 31, 2012, was $16.0 million, representing a decrease of $258,000 or 1.6% from net interest income of $16.3 million for the year ended December 31, 2011. The decrease in net interest income is due primarily to a decrease in yields
on the loan and securities portfolios, offset by a decrease in the yield on deposits and repurchase agreements. The net interest margin was 3.80% for the year ended December 31, 2012 and 3.93% for the year ended December 31, 2011. The
yield on earning assets decreased to 4.49% for the year ended December 31, 2012 compared to 4.80% for the year ended December 31, 2011 while the cost of interest bearing liabilities decreased to 0.84% from 1.04% for the same periods,
respectively. Net interest income for 2012 includes $333,000 of interest collected on a cash basis related to loans on nonaccrual status, compared to $350,000 of interest collected on nonaccrual loans in 2011.
Rate/Volume Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 vs. 2011
|
|
|
2011 vs. 2010
|
|
|
|
|
|
|
Due to Change in
|
|
|
|
|
|
Due to Change in
|
|
|
|
Increase or
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/
Volume
|
|
|
Increase or
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
Rate/
Volume
|
|
|
|
(Dollars in thousands)
|
|
Interest income on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
($
|
404
|
)
|
|
|
176
|
|
|
|
(574
|
)
|
|
|
(6
|
)
|
|
$
|
1,144
|
|
|
$
|
724
|
|
|
$
|
401
|
|
|
$
|
19
|
|
Investment securities
|
|
|
(556
|
)
|
|
|
41
|
|
|
|
(588
|
)
|
|
|
(9
|
)
|
|
|
(1,137
|
)
|
|
|
(525
|
)
|
|
|
(711
|
)
|
|
|
99
|
|
Interest bearing deposits in other banks
|
|
|
18
|
|
|
|
4
|
|
|
|
12
|
|
|
|
2
|
|
|
|
(11
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
0
|
|
Federal funds sold and other overnight investments
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
0
|
|
|
|
8
|
|
|
|
5
|
|
|
|
3
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(941
|
)
|
|
|
220
|
|
|
|
(1,148
|
)
|
|
|
(13
|
)
|
|
|
4
|
|
|
|
199
|
|
|
|
(313
|
)
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Interest expense on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
(12
|
)
|
|
|
1
|
|
|
|
(13
|
)
|
|
|
0
|
|
|
|
(4
|
)
|
|
|
4
|
|
|
|
(7
|
)
|
|
|
(1
|
)
|
Money market accounts
|
|
|
(40
|
)
|
|
|
51
|
|
|
|
(71
|
)
|
|
|
(20
|
)
|
|
|
(83
|
)
|
|
|
6
|
|
|
|
(87
|
)
|
|
|
(2
|
)
|
Savings accounts
|
|
|
(453
|
)
|
|
|
(46
|
)
|
|
|
(430
|
)
|
|
|
23
|
|
|
|
(488
|
)
|
|
|
(27
|
)
|
|
|
(471
|
)
|
|
|
10
|
|
Certificates of deposit
|
|
|
(165
|
)
|
|
|
(87
|
)
|
|
|
(85
|
)
|
|
|
7
|
|
|
|
(402
|
)
|
|
|
(129
|
)
|
|
|
(298
|
)
|
|
|
25
|
|
Repurchase agreements
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
(33
|
)
|
|
|
(3
|
)
|
|
|
(31
|
)
|
|
|
1
|
|
Long-term borrowing
|
|
|
3
|
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
(24
|
)
|
|
|
(34
|
)
|
|
|
10
|
|
|
|
0
|
|
Junior subordinated debt
|
|
|
9
|
|
|
|
0
|
|
|
|
9
|
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(683
|
)
|
|
|
(81
|
)
|
|
|
(612
|
)
|
|
|
10
|
|
|
|
(1,036
|
)
|
|
|
(183
|
)
|
|
|
(886
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
($
|
258
|
)
|
|
$
|
301
|
|
|
($
|
536
|
)
|
|
($
|
23
|
)
|
|
$
|
1,040
|
|
|
$
|
382
|
|
|
$
|
573
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
The Companys interest income decreased to $18.9 million for the year ended December 31, 2012 compared to $19.9 million for the year ended December 31, 2011, a decrease of $941,000 or 4.7%.
The decrease in interest income can be attributed to a decrease in the yield on the loan portfolio to 5.73% compared to 5.93% for the year ended December 31, 2011. The yield on the securities portfolio dropped to 2.25% from 2.89%. Average
federal funds sold balances decreased $131,000 or 0.8% and interest bearing balances with banks increased $3.0 million or 19.0%. The yield on federal funds sold increased to 0.24% from 0.23% for the year ended 2011 while the yield on interest
bearing balances with banks increased to 0.21% from 0.13% for the same period.
Interest Expense
The Companys interest expense decreased $683,000 or 19.0% to $2.9 million for 2012, compared to $3.6 million for 2011. The decrease in interest
expense for the year ended December 31, 2012 can be attributed primarily to lower interest rates on all of the Banks deposit accounts and repurchase agreement accounts.
Provision for Credit Losses
The Company recorded a provision for credit losses of $684,000
for the year ended December 31, 2012 compared to $2.2 million for the year ended December 31, 2011, a decrease of $1.5 million or 68.8%. The decrease in provision was primarily the result of
16
incorporating historical loss percentages into the calculation of the allowance for credit losses rather than using peer data. The change was made as management determined that the Company had
sufficient quarters of loss data to perform a meaningful analysis of the allowance for credit losses.
Nonperforming assets at year end
increased to $12.1 million for the year ended December 31, 2012 from $8.3 million for the year ended December 31, 2011 primarily due to the addition of one loan with a principal balance of $4.1 million. Nonperforming assets included
$769,000 of foreclosed real estate at December 31, 2012 and $337,000 of repossessed assets. Nonperforming assets of $8.3 million at December 31, 2011 included $1.2 million of foreclosed real estate and $52,000 of repossessed assets.
Net charge-offs totaled $1.5 million for the year ended December 31, 2012 compared to net charge-offs of $1.9 million for the same
period in 2011. The net charge-offs in 2012 included $307,000 in commercial and industrial loans, $834,000 in loans secured by real estate and $408,000 in consumer and installment loans. See the discussion under the heading Provision for
Credit Losses and Credit Risk Management on pages 24 through 26 for greater analysis regarding the Allowance for Credit Losses and related provision.
Noninterest Income
The Companys primary sources of noninterest income are fees
charged on deposit products, fees generated by the Banks VISA check card program and fees recognized on residential mortgage lending. Noninterest income of $1.9 million for the year ended December 31, 2012 was an increase of $74,000 or
4.0% from the year ended December 31, 2011. Included in noninterest income for the year ended December 31, 2011 were gains on the sale of loans in the secondary market of $166,000. There were no loans sold in the secondary market in 2012.
For the year ended December 31, 2012 the Bank recorded net losses on the sale of other assets primarily real estate owned and repossessed assets of $5,000 compared to a gain on the sale of similar assets of $8,000 in 2011. In 2011 the Bank also
recorded a loss of $32,000 on the disposal of fixed assets related to the closure of a branch office. Fees charged on deposit products decreased $23,000 or 1.8%, while other mortgage banking fees totaled $262,000 for the year ended December 31,
2012; an increase of $123,000 or 88.5% from fees of $139 thousand for the year ended December 31, 2011.
Noninterest Expense
Noninterest expense decreased $255,000 or 2.0% to $12.3 million from $12.6 million for the year ended December 31, 2012 compared to
the year ended December 31, 2011. Personnel costs decreased $530,000 and other operating expenses decreased $288,000. These decreases were offset by Merger related expenses of $546,000 in 2012. Merger related expenses consisted primarily of
professional and legal expenses totaling $413,000. Also contributing to the decrease in noninterest expenses was lower FDIC expense. FDIC expense continues to decrease as new regulation changed the method of calculation in the summer of 2011. 2012
was the first full year under the new method. FDIC expense decreased $97,000 for the year ended December 31, 2012 compared to the year ended December 31, 2011 due to changes in the insurance assessment calculations.
The decrease in personnel expense was the result of open staffing requisitions.
The decrease of $288,000 or 15.3% in other operating expenses was due to 2011 results including a partial write-down of $199,000 on a property held for future branch expansion.
Occupancy and equipment expense increased $35,000 or 2.2% primarily due to a partial year of expense on a branch office opened during 2012.
Provision for Income Taxes
The Company
and the Bank file consolidated federal income tax returns and separate Maryland income tax returns. The Company recognized tax expense of $1.8 million for the year ended December 31, 2012 compared to $1.2 million for the year ended
December 31, 2011, for an effective tax rate of 37.2% in 2012 and 35.2% in 2011.
17
Consolidated Average Balances, Yields and Rates
The following table presents a condensed average balance sheet as well as income/expense and yields/costs of funds thereon for the years ended
December 31, 2012 and 2011. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities for the periods shown. Average balances are derived from average daily balances. The yields and costs
include loan fees that are considered adjustments to yields. Net interest spread, the difference between the average rate on interest bearing assets and the average rate on interest bearing liabilities, decreased to 3.65% for the year ended
December 31, 2012 from 3.76% at December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Average
Balance
|
|
|
Interest
(1)
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
(1)
|
|
|
Yield/
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and other overnight investments
|
|
$
|
17,102
|
|
|
$
|
41
|
|
|
|
0.24
|
%
|
|
$
|
17,233
|
|
|
$
|
40
|
|
|
|
0.23
|
%
|
Interest bearing balances in other banks
|
|
|
18,664
|
|
|
|
39
|
|
|
|
0.21
|
%
|
|
|
15,681
|
|
|
|
21
|
|
|
|
0.13
|
%
|
Investment securities (2)
|
|
|
92,632
|
|
|
|
2,083
|
|
|
|
2.25
|
%
|
|
|
91,246
|
|
|
|
2,639
|
|
|
|
2.89
|
%
|
Loans (3)
|
|
|
292,468
|
|
|
|
16,753
|
|
|
|
5.73
|
%
|
|
|
289,502
|
|
|
|
17,157
|
|
|
|
5.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
420,866
|
|
|
|
18,916
|
|
|
|
4.49
|
%
|
|
|
413,662
|
|
|
|
19,857
|
|
|
|
4.80
|
%
|
Noninterest Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
7,378
|
|
|
|
|
|
|
|
|
|
|
|
7,521
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
14,487
|
|
|
|
|
|
|
|
|
|
|
|
14,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
442,731
|
|
|
|
|
|
|
|
|
|
|
$
|
436,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
32,757
|
|
|
$
|
29
|
|
|
|
0.09
|
%
|
|
$
|
32,495
|
|
|
$
|
41
|
|
|
|
0.13
|
%
|
Money market accounts
|
|
|
54,038
|
|
|
|
149
|
|
|
|
0.28
|
%
|
|
|
43,107
|
|
|
|
189
|
|
|
|
0.44
|
%
|
Savings accounts
|
|
|
130,850
|
|
|
|
407
|
|
|
|
0.31
|
%
|
|
|
137,732
|
|
|
|
860
|
|
|
|
0.62
|
%
|
Certificates of deposit
|
|
|
72,038
|
|
|
|
966
|
|
|
|
1.34
|
%
|
|
|
78,031
|
|
|
|
1,131
|
|
|
|
1.45
|
%
|
Repurchase agreements
|
|
|
16,075
|
|
|
|
49
|
|
|
|
0.30
|
%
|
|
|
16,004
|
|
|
|
74
|
|
|
|
0.46
|
%
|
Long-term borrowings
|
|
|
35,000
|
|
|
|
1,130
|
|
|
|
3.18
|
%
|
|
|
35,000
|
|
|
|
1,127
|
|
|
|
3.18
|
%
|
Junior subordinated debt
|
|
|
5,000
|
|
|
|
184
|
|
|
|
3.62
|
%
|
|
|
5,000
|
|
|
|
175
|
|
|
|
3.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
345,758
|
|
|
|
2,914
|
|
|
|
0.84
|
%
|
|
|
347,369
|
|
|
|
3,597
|
|
|
|
1.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposit accounts
|
|
|
58,064
|
|
|
|
|
|
|
|
|
|
|
|
50,331
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
2,721
|
|
|
|
|
|
|
|
|
|
|
|
2,438
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
36,188
|
|
|
|
|
|
|
|
|
|
|
|
35,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
442,731
|
|
|
|
|
|
|
|
|
|
|
$
|
436,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
|
|
|
3.76
|
%
|
Ratio of interest earning assets to interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
121.72
|
%
|
|
|
|
|
|
|
|
|
|
|
119.08
|
%
|
Net interest income and net interest margin
|
|
|
|
|
|
$
|
16,002
|
|
|
|
3.80
|
%
|
|
|
|
|
|
$
|
16,260
|
|
|
|
3.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
No tax-equivalent adjustments are made, as the effect would not be material.
|
(2)
|
Includes Federal Reserve and Federal Home Loan Bank stock.
|
(3)
|
Includes non-accrual loans
|
Risk Management
The Board of Directors is the foundation for effective corporate governance and risk management. The Board demands accountability of
management, keeps stockholders and other constituencies interests in focus, advocates the upholding of the Companys code of ethics, and fosters a strong internal control environment. Through its Audit Committee, the Board actively
reviews critical risk positions, including market, credit, liquidity, and operational risk. The Companys goal in managing risk is to reduce earnings volatility, control exposure to unnecessary risk, and ensure appropriate returns for risk
assumed. Senior management manages risk at the business line level, supplemented with corporate-level oversight through the Asset Liability Committee, internal audit and quality control functions.
Liquidity Risk Management and Capital Resources
The objective of liquidity management is to ensure that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Company are met, taking into account all on- and
off-balance sheet funding demands. Liquidity management also includes ensuring that cash flow needs are met at a reasonable cost. Liquidity risk arises from the possibility the
18
Company may not be able to satisfy current or future financial commitments, or the Company may become unduly reliant on alternative funding sources. The Company maintains a liquidity risk
management policy to address and manage this risk. The policy identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements which comply with regulatory
guidance. The policy is updated at a minimum on a yearly basis. The liquidity position is continually monitored and reported monthly to the Board of Directors.
Deposits, commercial reverse repurchase agreements, and lines of credit are the primary sources of the Banks funds for lending and investing activities. As of December 31, 2012 the
Companys deposit and repurchase agreement balances increased $5.8 million or 1.6% over December 31, 2011 balances. At December 31, 2012 the Company also had available both secured and unsecured lines of credit with the Federal Home
Loan Bank and correspondent banks. Secondary sources of funds are derived from loan repayments and investment maturities. Loan repayments and investment maturities can be considered a relatively stable funding source, while deposit activity is
greatly influenced by interest rates, general market conditions and competition.
The Bank offers a variety of retail deposit account products
to both consumer and commercial deposit customers. The Banks deposit accounts consist of savings, NOW accounts, checking accounts, money market accounts and certificate of deposit accounts. The Bank also offers individual retirement accounts.
Time deposits comprised 19.5% of the deposit portfolio at December 31, 2012. Core deposits, considered to be noninterest bearing and interest bearing demand deposit accounts, savings deposits and money market accounts, accounted for 80.5% of
the deposit portfolio at December 31, 2012. Core deposits accounted for 77.7% of the deposit portfolio at December 31, 2011.
The
Bank intends to continue to emphasize retail deposit accounts as its primary source of liquidity. Deposit products are promoted in periodic newspaper advertisements, along with notices provided in customer account statements. The Banks market
strategy is based on its reputation as a community bank providing quality products and personal customer service.
The Bank pays interest
rates on interest bearing deposit products competitive with rates offered by other financial institutions in its market area. Interest rates on deposits are reviewed by management which considers a number of factors including: (1) the
Banks internal cost of funds; (2) rates offered by competing financial institutions; (3) investing and lending opportunities; and (4) the Banks liquidity position.
Jumbo certificates of deposit are accounts of $100,000 or more. These accounts totaled $38.0 million at December 31, 2012 and consisted principally of time certificates of deposit. The following
table sets forth the amount and maturity of jumbo certificates of deposit at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months or Less
|
|
|
Greater than
Three Months to Six
Months
|
|
|
Greater than Six Months
to One Year
|
|
|
Greater than One Year
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
$
|
10,013
|
|
|
$
|
3,551
|
|
|
$
|
4,472
|
|
|
$
|
19,948
|
|
|
$
|
37,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase represent transactions with customers for correspondent or commercial
account cash management services. Securities underlying the repurchase agreements are maintained in the Companys control. For the years ended December 31, 2012 and 2011, the average cost of these borrowings was 0.30% and 0.46%,
respectively.
The Bank maintains a secured borrowing line with the Federal Home Loan Bank (FHLB) with the potential to draw up to $111.4
million, and may borrow up to $19.2 million under secured and unsecured lines established with correspondent commercial banks. In addition, the Bank has the ability to borrow directly from the Federal Reserve Bank discount window. At
December 31, 2012, the Bank had advances outstanding of $35.0 million under the Federal Home Loan Banks convertible advance program and had no borrowings outstanding under its secured and unsecured lines of credit.
Potential adverse impacts on liquidity can occur as a result of changes in the estimated cash flows from investment, loan, and deposit portfolios. The
Bank manages this inherent risk by maintaining a portfolio of available for sale investments and through secondary sources of liquidity including FHLB advances and reverse repurchase agreements. In addition, the Bank has the ability to increase its
liquidity by raising interest rates on deposit accounts, selling loans in the secondary market or curtailing the volume of loan originations.
19
The Bank maintains the majority of the assets held for liquidity purposes in overnight federal funds and
short-term interest bearing balances with banks.
Interest Rate Risk Sensitivity
Interest rate sensitivity is an important factor in the management of the composition and maturity configurations of the Companys interest earning
assets and funding sources. Additionally, the Banks profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest bearing assets, such as loans and investments, and
its interest expense on its funding sources, such as deposits and borrowings. Accordingly, the Banks results of operations and financial condition are largely dependent on movements in market interest rates and its ability to manage its assets
in response to such movements.
The Bank attempts to manage fluctuations in interest rates by matching the maturities of its interest earning
assets and interest bearing liabilities. The Banks current strategy to manage its sensitivity to interest rate fluctuations is to emphasize adjustable rate loans and short and intermediate-term fixed rate loans. To reduce the negative impact
of engaging in excessive fixed rate lending in a volatile rate environment, the Bank originates long-term fixed rate mortgage loans as a broker for other financial institutions. The partner financial institutions underwrite and fund the loans.
The following table summarizes the anticipated maturities or repricing of the Companys interest earning assets and interest bearing
liabilities as of December 31, 2012, and the Companys interest sensitivity gap (i.e., interest earning assets less interest bearing liabilities). A positive gap for any time period indicates that more interest earning assets will mature
or reprice during that period than interest bearing liabilities. The Companys goal is to maintain a cumulative gap position for the period of one year or less of plus or minus fifteen percent in order to mitigate the impact of changes in
interest rates on liquidity, interest margins and operating results. The actual results show the Bank to be negatively gapped cumulatively in the three to twelve month category.
The analysis presented below represents a modified gap position for interest sensitive assets and liabilities at December 31, 2012.
Interest Sensitivity Gap Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Within
Three
Months
|
|
|
After Three
but within
Twelve
Months
|
|
|
After One
but within
Five Years
|
|
|
After
Five Years
|
|
|
Total
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing balances with banks
|
|
$
|
38,175
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
38,175
|
|
Investment securities (1)
|
|
|
15,003
|
|
|
|
42,630
|
|
|
|
7,989
|
|
|
|
39,938
|
|
|
|
105,560
|
|
Loans (2) (3)
|
|
|
54,337
|
|
|
|
36,438
|
|
|
|
121,720
|
|
|
|
58,510
|
|
|
|
271,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
107,515
|
|
|
$
|
79,068
|
|
|
$
|
129,709
|
|
|
$
|
98,448
|
|
|
$
|
414,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts (5)
|
|
$
|
7,188
|
|
|
|
3,594
|
|
|
|
25,159
|
|
|
$
|
0
|
|
|
$
|
35,941
|
|
Money market accounts (5)
|
|
|
33,699
|
|
|
|
3,629
|
|
|
|
22,280
|
|
|
|
0
|
|
|
|
59,608
|
|
Savings accounts (5)
|
|
|
62,014
|
|
|
|
13,001
|
|
|
|
54,996
|
|
|
|
0
|
|
|
|
130,011
|
|
Certificates of deposit (4)
|
|
|
14,170
|
|
|
|
18,631
|
|
|
|
36,049
|
|
|
|
0
|
|
|
|
68,850
|
|
Commercial repurchase agreements
|
|
|
14,584
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14,584
|
|
Long-term borrowings (6)
|
|
|
30,000
|
|
|
|
0
|
|
|
|
5,000
|
|
|
|
0
|
|
|
|
35,000
|
|
Junior subordinated debt
|
|
|
5,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,655
|
|
|
$
|
38,855
|
|
|
$
|
143,484
|
|
|
$
|
0
|
|
|
$
|
348,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap
|
|
($
|
59,140
|
)
|
|
$
|
40,213
|
|
|
($
|
13,775
|
)
|
|
$
|
98,448
|
|
|
$
|
65,746
|
|
Cumulative interest sensitivity gap
|
|
($
|
59,140
|
)
|
|
($
|
18,927
|
)
|
|
($
|
32,702
|
)
|
|
|
65,746
|
|
|
|
|
|
Cumulative interest sensitivity gap as a percentage of total interest-earning assets
|
|
|
(14.26
|
%)
|
|
|
(4.56
|
%)
|
|
|
(7.88
|
%)
|
|
|
15.85
|
%
|
|
|
|
|
(1)
|
Net of Federal Reserve Bank, Federal Home Loan Bank stock and other equity investments, debt securities by call date.
|
(2)
|
Loans scheduled by contractual maturities.
|
(3)
|
Net of non-accrual loans of $9.9 million.
|
(4)
|
Certificates of deposits scheduled by contractual maturities.
|
(5)
|
NOW, savings and money market accounts are presented using decay rates and historical repricing patterns.
|
(6)
|
Long-term borrowings by call date
|
20
Investment Portfolio
At December 31, 2012, the Banks investment portfolio, which totaled $109.1 million, consisted primarily of U.S. Government Agency securities and mortgage-backed agency securities. Additionally,
the Company owns $626,500 in stock of the Federal Reserve Bank of Richmond, $2.2 million in stock of the Federal Home Loan Bank of Atlanta (FHLB) and a $686,000 investment in a community development activity qualified mutual fund.
Investment decisions are made within policy guidelines established by the Board of Directors. It is the Banks policy to invest in non-speculative
debt instruments, particularly debt instruments that are guaranteed by the U.S. Government or an agency thereof, to maintain a diversified investment portfolio which complements the overall asset/liability and liquidity objectives of the Bank, while
limiting the related credit risk to an acceptable level. The Banks investment policy designates the investment portfolio to be classified as available-for-sale, unless otherwise designated. At December 31, 2012, 100% of the
investment portfolio was classified available-for-sale. The composition of securities at December 31 for each of the past five fiscal years was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency
|
|
$
|
70,368
|
|
|
$
|
48,032
|
|
|
$
|
53,761
|
|
|
$
|
54,788
|
|
|
$
|
47,297
|
|
State and Municipal
|
|
|
1,026
|
|
|
|
1,136
|
|
|
|
1,089
|
|
|
|
1,089
|
|
|
|
834
|
|
Mortgage-backed
|
|
|
34,166
|
|
|
|
37,725
|
|
|
|
40,828
|
|
|
|
61,415
|
|
|
|
32,035
|
|
Equity Securities
|
|
|
686
|
|
|
|
656
|
|
|
|
617
|
|
|
|
591
|
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
106,246
|
|
|
$
|
87,549
|
|
|
$
|
96,295
|
|
|
$
|
117,883
|
|
|
$
|
80,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents maturities and weighted average yields for investments in available-for-sale securities.
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years to Maturity
|
|
|
|
Within One Year
|
|
|
Within One Year to Five Years
|
|
|
Within Five to Ten Years
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency
|
|
$
|
1,015
|
|
|
|
2.00
|
%
|
|
$
|
28,595
|
|
|
|
0.98
|
%
|
|
$
|
35,059
|
|
|
|
1.42
|
%
|
State and Municipal
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
791
|
|
|
|
4.41
|
%
|
|
|
235
|
|
|
|
2.75
|
%
|
Mortgage-backed
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
162
|
|
|
|
5.50
|
%
|
|
|
3,544
|
|
|
|
2.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Securities
|
|
$
|
1,015
|
|
|
|
2.00
|
%
|
|
$
|
29,548
|
|
|
|
1.09
|
%
|
|
$
|
38,838
|
|
|
|
1.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than Ten Years
|
|
|
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Total
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency
|
|
$
|
5,699
|
|
|
|
3.85
|
%
|
|
$
|
70,368
|
|
State and Municipal
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
1,026
|
|
Mortgage-backed
|
|
|
30,460
|
|
|
|
3.57
|
%
|
|
|
34,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Securities
|
|
$
|
36,159
|
|
|
|
3.61
|
%
|
|
$
|
105,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual maturities of these securities may differ from contractual maturities because borrowers may have the right to
prepay obligations with or without call or prepayment penalties.
Lending Activities
The types of loans that the Bank may originate are subject to federal laws and regulations. Interest rates charged by the Bank on loans are affected by
the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors.
These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies.
21
Analysis of Loans
The following table presents the composition of the loan portfolio over the previous five years:
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
44,422
|
|
|
|
15.8
|
%
|
|
$
|
47,683
|
|
|
|
16.4
|
%
|
|
$
|
51,359
|
|
|
|
18.3
|
%
|
|
$
|
59,900
|
|
|
|
21.2
|
%
|
|
$
|
53,366
|
|
|
|
19.9
|
%
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
116,883
|
|
|
|
41.6
|
%
|
|
|
114,883
|
|
|
|
39.5
|
%
|
|
|
94,864
|
|
|
|
33.9
|
%
|
|
|
82,168
|
|
|
|
29.2
|
%
|
|
|
78,215
|
|
|
|
29.1
|
%
|
Construction
|
|
|
33,319
|
|
|
|
11.8
|
%
|
|
|
35,026
|
|
|
|
12.0
|
%
|
|
|
33,534
|
|
|
|
12.0
|
%
|
|
|
36,185
|
|
|
|
12.8
|
%
|
|
|
28,381
|
|
|
|
10.6
|
%
|
One to four-family (1)
|
|
|
47,873
|
|
|
|
17.0
|
%
|
|
|
48,314
|
|
|
|
16.6
|
%
|
|
|
52,960
|
|
|
|
18.9
|
%
|
|
|
57,098
|
|
|
|
20.2
|
%
|
|
|
66,964
|
|
|
|
24.9
|
%
|
Home equity
|
|
|
31,650
|
|
|
|
11.3
|
%
|
|
|
36,005
|
|
|
|
12.4
|
%
|
|
|
36,697
|
|
|
|
13.1
|
%
|
|
|
34,262
|
|
|
|
12.2
|
%
|
|
|
27,072
|
|
|
|
10.1
|
%
|
Consumer loans
|
|
|
7,061
|
|
|
|
2.5
|
%
|
|
|
8,870
|
|
|
|
3.1
|
%
|
|
|
10,664
|
|
|
|
3.8
|
%
|
|
|
12,479
|
|
|
|
4.4
|
%
|
|
|
14,422
|
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
281,208
|
|
|
|
100.0
|
%
|
|
|
290,781
|
|
|
|
100.0
|
%
|
|
|
280,078
|
|
|
|
100.0
|
%
|
|
|
282,092
|
|
|
|
100.0
|
%
|
|
|
268,420
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income
|
|
|
(331
|
)
|
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
Allowance for credit losses
|
|
|
(6,317
|
)
|
|
|
|
|
|
|
(7,182
|
)
|
|
|
|
|
|
|
(6,853
|
)
|
|
|
|
|
|
|
(7,926
|
)
|
|
|
|
|
|
|
(4,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans receivable
|
|
$
|
274,560
|
|
|
|
|
|
|
$
|
283,284
|
|
|
|
|
|
|
$
|
273,063
|
|
|
|
|
|
|
$
|
274,032
|
|
|
|
|
|
|
$
|
264,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes loans held for sale.
|
The Banks
loan portfolio consists of commercial, commercial real estate, residential construction, one- to four-family residential mortgage, home equity and consumer loans. At December 31, 2012 the Banks loan portfolio totaled $281.2 million. All
of the loans in the Banks portfolio are either adjustable-rate with terms to maturity of 30 days to 30 years or short- to intermediate-term fixed-rate loans.
The following table presents the maturity distribution of the loan portfolio:
As of
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
One Year
or Less
|
|
|
Due after
One Year
but before
Five Years
|
|
|
Due after
Five Years
|
|
|
Nonaccrual
Loans
|
|
|
90 Days
Past Due
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial loans
|
|
$
|
19,250
|
|
|
$
|
14,181
|
|
|
$
|
6,511
|
|
|
|
4,480
|
|
|
$
|
0
|
|
|
$
|
44,422
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
10,556
|
|
|
|
76,936
|
|
|
|
27,272
|
|
|
|
2,119
|
|
|
|
0
|
|
|
|
116,883
|
|
Construction
|
|
|
24,677
|
|
|
|
8,642
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33,319
|
|
One to four-family
|
|
|
18,957
|
|
|
|
17,740
|
|
|
|
8,189
|
|
|
|
2,773
|
|
|
|
214
|
|
|
|
47,873
|
|
Home equity
|
|
|
15,703
|
|
|
|
522
|
|
|
|
15,030
|
|
|
|
395
|
|
|
|
0
|
|
|
|
31,650
|
|
Consumer loans
|
|
|
1,748
|
|
|
|
3,429
|
|
|
|
1,779
|
|
|
|
105
|
|
|
|
0
|
|
|
|
7,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
90,891
|
|
|
$
|
121,450
|
|
|
$
|
58,781
|
|
|
$
|
9,872
|
|
|
$
|
214
|
|
|
$
|
281,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After One Year (1)
|
|
|
|
Fixed
Rate
|
|
|
Variable
Rate
|
|
|
Total
|
|
Commercial loans
|
|
$
|
16,006
|
|
|
$
|
4,685
|
|
|
$
|
20,691
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
70,116
|
|
|
|
34,092
|
|
|
|
104,208
|
|
Construction
|
|
|
8,642
|
|
|
|
0
|
|
|
|
8,642
|
|
One to four-family
|
|
|
14,895
|
|
|
|
11,035
|
|
|
|
25,930
|
|
Home equity
|
|
|
15,552
|
|
|
|
0
|
|
|
|
15,552
|
|
Consumer loans
|
|
|
2,105
|
|
|
|
3,103
|
|
|
|
5,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
127,316
|
|
|
$
|
52,915
|
|
|
$
|
180,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes nonaccrual and 90 day past due loans.
|
22
Commercial Lending
. The Bank offers commercial business loans to businesses operating in the
Banks primary market area. These loans consist of lines of credit, which may require an annual repayment, adjustable-rate loans with terms of five to seven years, and fixed-rate loans with terms of up to five years. Such loans are generally
secured by receivables, inventories, equipment and other assets of the business. The Bank generally requires personal guarantees on its commercial loans. The Bank also offers unsecured commercial loans to businesses on a selective basis. These types
of loans are made to existing customers and are of a short duration, generally one year or less. The Bank also originates commercial loans which are guaranteed by the Small Business Administration. The Bank has been a participant in a variety of SBA
loan programs.
Commercial Real Estate Lending
. The Bank originates adjustable-rate commercial real estate loans that are generally
secured by properties used for business purposes such as small office buildings and retail facilities located in the Banks primary market area. The Banks underwriting procedures provide that commercial real estate loans may generally be
made in amounts up to 80-85% of the lower of the appraised value or sales price of the property, subject to the Banks current loans-to-one-borrower limit, which at December 31, 2012, was $6.7 million. These loans may be made with terms up
to 30 years if owner occupied and are generally offered at interest rates which adjust annually or annually after an initial three-, five- or seven-year period in accordance with the prime rate, or the 3 and 5 year U.S. Constant Maturity Indices as
reported in the Wall Street Journal. In reaching a decision whether to make a commercial real estate loan, the Bank considers the value of the real estate to be financed and the credit strength of the borrower and/or the lessee of the real estate
project. The Bank has generally required that properties securing commercial real estate loans have debt service coverage ratios of at least 1.2:1.
Loans secured by commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. The Bank seeks to
minimize these risks through its underwriting standards, which require such loans to be qualified on the basis of the propertys value, debt service coverage ratio, and, under certain circumstances, additional collateral. The Bank generally
requires personal guarantees on its commercial real estate loans.
Construction Lending
. The Bank originates construction loans on both
one- to four-family residences and on commercial real estate properties. The Bank originates two types of residential construction loans, consumer and builder. The Bank originates consumer construction loans to build a primary residence, a secondary
residence, or an investment or rental property. The Bank will originate builder construction loans to companies engaged in the business of constructing homes for resale. These loans may be for homes currently under contract for sale, model homes
from which other homes will be marketed within a subdivision or, on a very limited basis, homes built for speculative purposes to be marketed for sale during construction. The Bank offers permanent end-financing to the Banks construction loan
customers generally on a 3/1 or 5/1 Adjustable Rate Mortgage (ARM) basis.
The Bank originates land acquisition and development
loans with the source of repayment being either the sale of finished lots or the sale of homes to be constructed on the finished lots. The Bank will originate land acquisition, development, and construction loans on a revolving line of credit basis
for subdivisions whereby the borrower may draw upon such line of credit as lots are sold for the purpose of improving additional lots. Construction loans are generally offered with terms up to twelve months for consumer and builder loans, and up to
twenty-four months for land development loans.
Construction loans are generally made in amounts up to 80% of the appraised market value of
the security property. During construction, loan proceeds are disbursed in draws as construction progresses based upon inspections of work in place by independent construction inspectors.
At December 31, 2012, the Bank had construction loans, including land acquisition and development loans, totaling $33.3 million, or 11.8% of the Banks total loan portfolio, of which $2.6
million consisted of one- to four-family owner occupied construction loans, $7.1 million consisted of non-owner occupied construction loans and $23.6 million consisted of land acquisition and development loans. Construction loans are generally
considered to involve a higher degree of credit risk than long-term financing of improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the security propertys
value upon completion of construction as compared to the estimated costs of construction, including interest. Also, the Bank assumes certain risks associated with the borrowers ability to complete construction in a timely and workmanlike
manner. If the estimate of value proves to be inaccurate, or if construction is not performed timely or accurately, the Bank may be faced with a project which, when completed, has a value that is insufficient to assure full repayment.
One- to Four-Family Residential Mortgage Lending.
The Bank currently offers both fixed-rate and adjustable-rate mortgage loans, first and second
mortgage loans secured by one- to four-family residences and lot loans for one- to four-family residences located throughout the Baltimore-Washington Metropolitan area. One- to four-family mortgage loan originations are generally obtained from the
Banks loan representatives and their contacts in the local real estate industry, direct contacts made by the Banks and the Companys directors, existing or past customers, and members of the local communities.
23
At December 31, 2012, one- to four-family residential mortgage loans totaled $47.9 million, or 17.0% of
total loans. Of the one-to four-family mortgage loans outstanding at that date, $23.4 million were fixed-rate loans with terms of up to fifteen years with a balloon payment at the end of the term, and $24.5 million were adjustable-rate loans with
terms of up to 30 years and interest rates which adjust annually from the outset of the loan or which adjust annually after a 3 or 5 year initial period in which the loan has a fixed rate. The interest rates for the majority of the Banks
adjustable-rate mortgage loans are indexed to the one-year Treasury Constant Maturity Index. Interest rate increases on such loans are limited to a 2% annual adjustment cap with a maximum adjustment of 6% over the life of the loan.
The Company also originates fixed-rate residential mortgage loans as a broker for other financial institutions. The partner financial institutions
underwrite and fund the loans. This enables the Company to expand the product offerings to its customers, earn fee income and manage its exposure to increases in interest rates.
The origination of and retention of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps reduce the Banks exposure to increases in interest rates.
However, adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default.
Periodic and lifetime floors on interest rate increases help to reduce the risks associated with the Banks adjustable-rate loans, but also limit
the interest rate sensitivity of its adjustable-rate mortgage loans.
The Bank currently originates one- to four-family residential mortgage
loans in amounts typically up to 80% (or higher with private mortgage insurance) of the lower of the appraised value or the selling price of the property securing the loan. Mortgage loans originated by the Bank generally include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property without the Banks consent. Due-on-sale clauses are an important means of adjusting the
yields on the Banks fixed-rate mortgage loan portfolio and the Bank has generally exercised its rights under these clauses.
Home
Equity Lending
. As of December 31, 2012, home equity loans totaled $31.6 million, or 11.3% of the Banks total loan portfolio. Fixed-rate, fixed-term home equity loans and adjustable rate home equity lines of credit are generally
offered in amounts up to 80% of the market value of the security property. Home equity lines of credit are offered with terms up to twenty years. Of the $31.6 million in home equity loans, $15.7 million are fixed rate with terms up to 10 years. The
remaining $15.9 million of the Banks home equity loans are adjustable rate and reprice with changes in the
Wall Street Journal
prime rate.
Consumer Lending
. The Banks portfolio of consumer loans primarily consists of adjustable rate, personal lines of credit and generally fixed rate installment loans secured by new or used
automobiles, new or used boats, and loans secured by deposit accounts. At December 31, 2012, consumer loans totaled $7.1 million or 2.5% of total loans outstanding. Consumer loans are generally originated in the Banks primary market area.
Provision for Credit Losses and Credit Risk Management
Originating loans involves a degree of risk that credit losses will occur in varying amounts according to, among other factors, the type of loans being made, the credit-worthiness of the borrowers over
the term of the loans, the quality of the collateral for the loan, if any, as well as general economic conditions.
The Banks allowance
for credit losses is established through a provision for loan losses based on managements evaluation of the risks inherent in its loan portfolio and the general economy. The allowance for credit losses is maintained at an amount management
considers adequate to cover estimated losses in loans receivable which are deemed probable and estimable based on information currently known to management. The Bank estimates an acceptable allowance for credit loss with the objective of quantifying
portfolio risk into a dollar figure of inherent losses, thereby translating the subjective risk value into an objective number. Emphasis is placed on independent external loan reviews and regular internal reviews. The determination of the allowance
for loan losses is based on a combination of the Banks historical loss and ten (10) qualitative factors for specific categories and types of loans. The combination of the loss experience factor and the total qualitative factors
(Total ALLL Factor) is expressed as a percentage of the portfolio for specific categories and types of loans to create the inherent loss index for each loan portfolio. Individual loans deemed impaired are separated from the respective
loan portfolios and a specific reserve allocation is assigned based upon Bank managements best estimate as to the loss exposure for each loan. Each Total ALLL Factor is assigned a percentage weight and that total weight is applied to each loan
category. The Total ALLL Factor is different for each loan type and for each risk assessment category within each loan type. Previously (in 2011) due to the Banks limited historical loss experience the loss experience factor was the greater of
either the Banks historical loss experience or the peer group average historical loss experience.
|
|
The Banks historical loss experience is calculated by aggregating the actual loan losses by category for the previous eight quarters and
converting that total into a percentage for each loan category.
|
|
|
Qualitative factors include: levels and trends in delinquencies and non-accruals; trends in volumes and terms of loans; effects of any changes in
lending policies; the experience, ability and depth of management; national and local economic trends and conditions; concentrations of credit; quality of the banks loan review system; and, external factors, such as competition, legal and
regulatory requirements.
|
24
The total allowance for credit losses requires these changes as the percentage weight assigned to each Total
ALLL Factor is increased or decreased due to its particular circumstance, as the various types and categories of loans change as a percentage of total loans and as the aggregate of specific allowances is adjusted due to an increase or decrease in
impaired loans.
Management believes this approach effectively measures the risk associated with any particular loan or group of loans. The
Banks Board of Directors engages an independent loan review consultant to evaluate the adequacy of the Banks allowance for credit losses. In addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Banks allowance for credit losses. Such agencies may require the Bank to make additional provisions for estimated credit losses based upon judgments different from those of management. The Bank recorded a total
provision for credit losses of $684,000 for the year ended December 31, 2012 and $2.2 million in 2011. The decrease in provision was primarily the result of a decrease in loan levels and applying the Banks historical loss percentages when
calculating the allowance for credit losses compared to the use of peer data in prior years. The aggregate provision was based upon the results of quarterly evaluations using a combination of factors including the level of nonperforming loans, the
Banks growth in total gross loans and the Banks net credit loss experience. Total gross loans decreased by $9.6 million for the year ended December 31, 2012. The Bank recorded charge-offs of $1.7 million on loans deemed
uncollectible and recovered $170,000 on previously charged-off loans. As of December 31, 2012, the Banks allowance for credit losses was $6.3 million or 2.25% of total loans and 57.4% of nonperforming loans as compared to $7.2 million, or
2.47% of total loans and 102.3% of nonperforming loans as of December 31, 2011. The Bank had total nonperforming loans of $11.0 million at December 31, 2012 and $7.0 million at December 31, 2011, and nonperforming loans to total
assets of 2.47% and 1.67% at December 31, 2012 and December 31, 2011, respectively.
The Bank places loans on a nonaccrual status
after 90 days of not having received contractual principal or interest payments unless the loan is well secured and in the process of collection. In addition the Bank maintains a watch list of loans on a monthly basis that warrant more than the
normal level of management supervision. At December 31, 2012 the Bank had approximately $25.5 million in watch list loans compared to $42.7 million at December 31, 2011.
At December 31, 2012 $9.9 million in loans were classified as nonaccrual compared to $6.2 million at December 31, 2011. Approximately 28.0% of the year-end nonaccrual total consisted of one- to
four-family loans while commercial mortgages accounted for approximately 21.5% of the total. Home equity loans represented 4.0% of the total, consumer and installment loans accounted for 1.1% and commercial loans 45.4% of the total nonaccrual loans
at December 31, 2012.
The Bank continues to monitor and modify its allowance for credit losses as conditions dictate. While management
believes that, based on information currently available, the Banks allowance for credit losses is sufficient to cover losses inherent in its loan portfolio at this time, no assurances can be given that the Banks level of allowance for
credit losses will be sufficient to cover future loan losses incurred by the Bank or that future adjustments to the allowance for credit losses will not be necessary if economic and other conditions differ substantially from economic and other
conditions at the time management determined the current level of the allowance for credit losses. Management may in the future increase the level of the allowance as its loan portfolio increases or as circumstances dictate.
25
The following table presents the allocation of the allowance for credit losses, reflecting use of the
methodology presented above, along with the percentage of total loans in each category.
At December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Amount
|
|
|
Loan Mix
|
|
|
Amount
|
|
|
Loan Mix
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,381
|
|
|
|
15.8
|
%
|
|
$
|
1,387
|
|
|
|
16.4
|
%
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,177
|
|
|
|
41.6
|
%
|
|
|
2,155
|
|
|
|
39.5
|
%
|
One to four-family
|
|
|
1,770
|
|
|
|
28.3
|
%
|
|
|
1,422
|
|
|
|
29.0
|
%
|
Construction
|
|
|
714
|
|
|
|
11.8
|
%
|
|
|
1,817
|
|
|
|
12.0
|
%
|
Consumer
|
|
|
275
|
|
|
|
2.5
|
%
|
|
|
401
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
6,317
|
|
|
|
100.0
|
%
|
|
$
|
7,182
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analysis of Credit Risk
Activity in the allowance for credit losses for the two years ended December 31 is shown below:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Total loans outstanding at December 31 (1)
|
|
$
|
280,877
|
|
|
$
|
290,466
|
|
Average loans outstanding for the year
|
|
|
292,468
|
|
|
|
289,502
|
|
|
|
|
Allowance for credit losses at beginning of period
|
|
$
|
7,182
|
|
|
$
|
6,853
|
|
|
|
|
|
|
|
|
|
|
Provision charged to expense
|
|
|
684
|
|
|
|
2,190
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
357
|
|
|
|
1,183
|
|
Real estate loans
|
|
|
896
|
|
|
|
810
|
|
Consumer and other loans
|
|
|
466
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,719
|
|
|
|
2,196
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
50
|
|
|
|
19
|
|
Real estate loans
|
|
|
62
|
|
|
|
294
|
|
Consumer and other loans
|
|
|
58
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
170
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
1,549
|
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses at end of year
|
|
$
|
6,317
|
|
|
$
|
7,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses as a percent of total loans
|
|
|
2.25
|
%
|
|
|
2.47
|
%
|
Net charge-offs as a percent of average loans
|
|
|
0.53
|
%
|
|
|
0.64
|
%
|
(1)
|
Net of deferred fees and costs.
|
Nonperforming Loans and Other Delinquent Assets
Management performs reviews of all delinquent loans. Management will generally classify loans as nonaccrual when collection of full principal and interest under the original terms of the loan is not
expected or payment of principal or interest has become 90 days past due. Classifying a loan as non-accrual results in the Company no longer accruing interest on such loan and reversing any interest previously accrued but not collected. A nonaccrual
loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected. The Company will recognize interest on nonaccrual loans only
when received. As of December 31, 2012 and 2011, the Company had $9.9 and $6.2 million of nonaccrual loans, respectively. (See the previous discussion under the heading Provision for Credit Losses and Credit Risk Management for
additional comments regarding nonaccrual loan activity.)
The Company considers a loan to be a troubled debt restructuring when for economic
or legal reasons related to a borrowers financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. The Company may consider granting a concession in an attempt to protect as much of its
investment as possible.
26
The restructuring of a loan may include, but is not necessarily limited to: (1) the transfer from the
borrower to the Bank of real estate, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan (2) the issuance or other granting of an equity interest to the Company by the
borrower to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt in to an equity interest (3) a modification of the loan terms, such as a reduction of the stated interest
rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, or (4) a reduction of the face amount or maturity amount of the debt as
stated in the instrument or other agreement and (5) a reduction of accrued interest. The current outstanding balance of troubled debt restructurings as of December 31, 2012 included $925,000 of loans in accrual status and $1.7 million of
loans classified as nonaccrual.
Property acquired by the Company as a result of foreclosure on a mortgage loan will be classified as
real estate owned. Personal property acquired through repossession will be classified as repossessed assets. Property acquired will be recorded at the lower of the unpaid principal balance or fair value at the date of
acquisition and subsequently carried at the lower of cost or net realizable value. Any required write-down of the loan to its net realizable value will be charged against the allowance for credit losses. As of December 31, 2012 the Company
held $769,000 in real estate owned as a result of foreclosure. The Company held $1.2 million in real estate owned at December 31, 2011. Property held as the result of repossession totaled $337,000 at December 31, 2012 and $52,000 at
December 31, 2011.
The following table shows the amounts of nonperforming assets at December 31 for the past five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,480
|
|
|
$
|
390
|
|
|
$
|
2,107
|
|
|
$
|
6,718
|
|
|
$
|
292
|
|
Real estate
|
|
|
5,287
|
|
|
|
5,308
|
|
|
|
5,054
|
|
|
|
9,532
|
|
|
|
3,397
|
|
Consumer
|
|
|
105
|
|
|
|
484
|
|
|
|
630
|
|
|
|
517
|
|
|
|
604
|
|
Accrual loans past due 90 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33
|
|
|
|
0
|
|
Real estate
|
|
|
214
|
|
|
|
0
|
|
|
|
598
|
|
|
|
0
|
|
|
|
2,005
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Restructured loans
|
|
|
925
|
|
|
|
856
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
11,011
|
|
|
|
7,038
|
|
|
|
8,389
|
|
|
|
16,800
|
|
|
|
6,298
|
|
Real estate owned
|
|
|
769
|
|
|
|
1,222
|
|
|
|
1,608
|
|
|
|
2,398
|
|
|
|
0
|
|
Repossessed assets
|
|
|
337
|
|
|
|
52
|
|
|
|
145
|
|
|
|
122
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
12,117
|
|
|
$
|
8,312
|
|
|
$
|
10,142
|
|
|
$
|
19,320
|
|
|
$
|
6,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses to total nonperforming loans
|
|
|
57.37
|
%
|
|
|
102.03
|
%
|
|
|
81.69
|
%
|
|
|
47.18
|
%
|
|
|
65.47
|
%
|
Ratio of nonperforming loans to total loans
|
|
|
3.92
|
%
|
|
|
2.42
|
%
|
|
|
3.00
|
%
|
|
|
5.96
|
%
|
|
|
2.35
|
%
|
Ratio of nonperforming assets to total assets
|
|
|
2.71
|
%
|
|
|
1.88
|
%
|
|
|
2.35
|
%
|
|
|
4.35
|
%
|
|
|
1.64
|
%
|
Contractual Obligations
The Bank has various financial obligations, including contractual obligations and commitments that may require future cash payments.
The following table presents, as of December 31, 2012, significant fixed and determinable contractual obligations to third parties by payment date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
Total
|
|
|
Less than
one year
|
|
|
One to three
years
|
|
|
Three to
five years
|
|
|
More than five
years
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Deposits with a stated maturity
|
|
$
|
68,850
|
|
|
$
|
32,801
|
|
|
$
|
18,546
|
|
|
$
|
17,503
|
|
|
$
|
0
|
|
Long-term borrowings
|
|
|
35,000
|
|
|
|
0
|
|
|
|
5,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
Junior subordinated debentures
|
|
|
5,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,000
|
|
Operating lease obligations
|
|
|
9,199
|
|
|
|
301
|
|
|
|
1,138
|
|
|
|
1,135
|
|
|
|
6,625
|
|
Data processing contracts
|
|
|
1,005
|
|
|
|
485
|
|
|
|
520
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119,054
|
|
|
$
|
33,587
|
|
|
$
|
25,204
|
|
|
$
|
33,638
|
|
|
$
|
26,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Off-Balance Sheet Arrangements
As of December 31, 2012, the Company had a wholly-owned statutory trust formed for the purpose of issuing junior subordinated debentures in the form of trust preferred securities. The statutory trust
has not been consolidated with the holding company.
The Company does have significant commitments to fund loans in the ordinary course of
business. Such commitments and resulting off-balance sheet risk is discussed further in Note 5 to the consolidated financial statements.
With
the exception of these off-balance sheet arrangements, the Company has no-off balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Companys financial condition, changes in financial
condition, revenues or expenses, results of operations, capital expenditures or capital resources.
Capital Management
Total stockholders equity was $36.2 million at December 31, 2012, representing a decrease of $1.1 million or 3.1% from December 31, 2011.
The decrease in stockholders equity during 2012 as compared to the same period in 2011 was attributable to the redemption of $4.1 million in Fixed Rate Cumulative Preferred Stock, Series A (the Series A Preferred Stock), and a
decrease in other comprehensive income of $137,000 offset by net income of $3.1 million.
On January 30, 2009, the Company
sold 8,152 shares of the Companys Series A Preferred Stock, having a liquidation amount per share equal to $1,000, and a warrant to purchase 299,706 shares of the Companys common stock, at an exercise price of $4.08 per share, to
the Treasury under the CPP for a total purchase price of $8,152,000. On April 18, 2012, Annapolis Bancorp, Inc. (the Company) redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000. On April 18, 2012, The Company
redeemed 4,076 shares of its Series A Preferred Stock for $4,076,000 and on March 6, 2013, the Company redeemed the final 4,076 shares of its Series A Preferred Stock for $4,076,000.
Stockholders equity was also lowered by $264,000 in preferred stock dividends. Stock based compensation, stock purchases through the Companys Employee Stock Purchase Plan and the exercise of
options added $231,000 to the stockholders equity for the period ended December 31, 2012.
Regulatory Capital Requirements
The Federal Reserves capital regulations require state member banks to meet two minimum capital standards: a 4% Tier 1 capital to
total adjusted average assets ratio (the leverage ratio), and an 8% risk-based capital ratio. Tier 1 capital is defined as common stockholders equity (including retained earnings), certain non-cumulative perpetual preferred stock
and related paid in capital, and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships.
The risk-based capital standard requires the maintenance of Tier 1 and Total capital (which is defined as Tier 1 capital plus Tier 2 capital) to
risk-weighted assets of at least 4% and 8%, respectively. A well-capitalized institution has Tier 1 and Total capital to risk-weighted assets of at least 6% and 10%, respectively, and a leverage ratio of at least 5%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the Federal Reserve capital regulations, based on the risks the agency believes are inherent in the
type of asset. The regulators have recently added a market risk adjustment to cover a banks trading account and foreign exchange and commodity positions. The components of Tier 1 capital are equivalent to those discussed above. Tier 2 capital
may include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt, intermediate preferred stock and the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets.
Overall, the amount of Tier 2 capital included as part of total capital cannot exceed 100% of Tier 1 capital.
Trust preferred securities are
considered regulatory capital for purposes of determining the Companys Tier 1 capital ratios. The Dodd-Frank Act requires the Federal Reserve to apply consolidated capital requirements to depository holding companies that are no less stringent
than those that apply to depository institutions. Under these standards, trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank holding company with less than $15
billion in assets. The Companys trust preferred securities were issued prior to May 19, 2010 and will not need to be excluded from Tier 1 capital.
28
At December 31, 2012, the Companys Tier 1 and Total Risk-based capital ratios were 12.7% and
13.9%, respectively. At December 31, 2011, the Banks Tier 1 and Total Risk-based capital ratios were 12.8% and 14.0%, respectively. The Bank was considered well-capitalized for regulatory purposes as of December 31, 2012. Designation
as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators.
See Note 18 of the Consolidated Financial Statements for more information on the Banks risk-based capital ratios.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes
thereto have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Nearly all of the Companys assets and liabilities are monetary in nature. As a result,
interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements are filed
with this report:
Managements Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets December 31, 2012 and 2011
Consolidated
Statements of Income For the years ended December 31, 2012 and 2011
Consolidated Statements of Comprehensive
Income For the years ended December 31, 2012 and 2011
Consolidated Statements of Changes in Stockholders
Equity For the years ended December 31, 2012 and 2011
Consolidated Statements of Cash Flows For the years
ended December 31, 2012 and 2011
Notes to Consolidated Financial Statements
29
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Managements Report
The Management of Annapolis Bancorp, Inc. (the Company) is responsible for the preparation, integrity and fair presentation of the
consolidated financial statements included in this Annual Report on Form 10-K. These financial statements are in conformity with accounting principles generally accepted in the United States of America and, therefore, include amounts based on
informed judgments and estimates. We also accept responsibility for the preparation of other financial information that is included in this document.
Report on Internal Control Over Financial Reporting
The management of the Company,
including its Chairman and Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles in the United States of America. The Companys internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including its
Chairman and Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment management believes that the Company maintained effective internal control over financial reporting
as of December 31, 2012.
This annual report does not include an attestation report of the Companys independent registered public
accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys independent registered public accounting firm pursuant to the rules of the Securities and Exchange
Commission that permit the Company to provide only managements report in this annual report.
|
/s/ Richard M. Lerner
|
Richard M. Lerner
|
Chairman and Chief Executive Officer
|
|
/s/ Edward J. Schneider
|
Edward J. Schneider
|
Principal Financial and Accounting Officer
|
|
March 28, 2013
|
30
ANNAPOLIS BANCORP, INC.
Report of Independent Registered
Public Accounting Firm
Board of Directors and Stockholders
Annapolis Bancorp, Inc. and Subsidiaries
We have audited the accompanying
consolidated balance sheets of Annapolis Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in stockholders equity,
and cash flows for each of the years in the two year period ended December 31, 2012. The Companys management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Annapolis Bancorp, Inc. and subsidiaries as of December 31, 2012 and 2011 and the results of their operations and their cash flows for each of the years in the two year
period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
Baltimore, Maryland
March 28, 2013
31
ANNAPOLIS BANCORP, INC.
Consolidated Balance Sheets ($000)
|
|
|
|
|
|
|
|
|
December 31,
|
|
2012
|
|
|
2011
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
1,920
|
|
|
$
|
2,026
|
|
Interest bearing balances with banks
|
|
|
38,175
|
|
|
|
18,288
|
|
Federal funds sold and other overnight investments
|
|
|
0
|
|
|
|
26,583
|
|
Investment securities available for sale, at fair value
|
|
|
106,246
|
|
|
|
87,549
|
|
Federal Reserve Bank and Federal Home Loan Bank stock
|
|
|
2,864
|
|
|
|
2,992
|
|
Loans, less allowance for credit losses of $6,317 and $7,182
|
|
|
274,560
|
|
|
|
283,284
|
|
Premises and equipment, net
|
|
|
10,113
|
|
|
|
8,418
|
|
Accrued interest receivable
|
|
|
1,284
|
|
|
|
1,279
|
|
Deferred income taxes
|
|
|
2,264
|
|
|
|
2,617
|
|
Investment in bank owned life insurance
|
|
|
5,829
|
|
|
|
5,624
|
|
Prepaid FDIC insurance
|
|
|
873
|
|
|
|
1,198
|
|
Real estate owned
|
|
|
769
|
|
|
|
1,222
|
|
Other assets
|
|
|
1,489
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
446,386
|
|
|
$
|
441,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
58,507
|
|
|
$
|
56,664
|
|
Interest bearing
|
|
|
294,410
|
|
|
|
293,717
|
|
Securities sold under agreements to repurchase
|
|
|
14,584
|
|
|
|
11,344
|
|
Long-term borrowings
|
|
|
35,000
|
|
|
|
35,000
|
|
Guaranteed preferred beneficial interests in junior subordinated debentures
|
|
|
5,000
|
|
|
|
5,000
|
|
Accrued interest and dividends payable
|
|
|
184
|
|
|
|
219
|
|
Other liabilities
|
|
|
2,486
|
|
|
|
2,258
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
410,171
|
|
|
|
404,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share; authorized 5,000,000 shares; Series A, $1,000 per share liquidation preference,
shares issued and outstanding 4,076 shares at December 31, 2012 and 8,152 shares at December 31, 2011, net of discount of zero and $6, respectively
|
|
|
4,076
|
|
|
|
8,146
|
|
Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 4,008,934 shares in 2012 and
3,958,293 shares in 2011
|
|
|
40
|
|
|
|
39
|
|
Warrants
|
|
|
234
|
|
|
|
234
|
|
Paid in capital
|
|
|
12,010
|
|
|
|
11,779
|
|
Retained earnings
|
|
|
19,001
|
|
|
|
16,179
|
|
Accumulated other comprehensive income
|
|
|
854
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
36,215
|
|
|
|
37,368
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
446,386
|
|
|
$
|
441,570
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
32
ANNAPOLIS BANCORP, INC.
Consolidated Statements of Income ($000 except per share data)
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2012
|
|
|
2011
|
|
Interest and Dividend Income
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
16,753
|
|
|
$
|
17,157
|
|
Interest bearing balances with banks
|
|
|
39
|
|
|
|
21
|
|
Federal funds sold and other overnight investments
|
|
|
41
|
|
|
|
40
|
|
Mortgage-backed securities
|
|
|
1,080
|
|
|
|
1,404
|
|
U.S. Treasury securities and obligations of other U.S. Government agencies
|
|
|
859
|
|
|
|
1,111
|
|
State and municipal securities
|
|
|
42
|
|
|
|
44
|
|
Equity securities
|
|
|
102
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
18,916
|
|
|
|
19,857
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Certificates of deposit, $100,000 or more
|
|
|
532
|
|
|
|
563
|
|
Other deposits
|
|
|
1,019
|
|
|
|
1,658
|
|
Securities sold under agreements to repurchase
|
|
|
49
|
|
|
|
74
|
|
Interest on long-term borrowings
|
|
|
1,314
|
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
2,914
|
|
|
|
3,597
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
16,002
|
|
|
|
16,260
|
|
Provision for credit losses
|
|
|
684
|
|
|
|
2,190
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses
|
|
|
15,318
|
|
|
|
14,070
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
Service charges and fees on deposits
|
|
|
1,227
|
|
|
|
1,250
|
|
Mortgage banking fees
|
|
|
262
|
|
|
|
139
|
|
Other fee income
|
|
|
432
|
|
|
|
311
|
|
Net gain on sale of loans
|
|
|
0
|
|
|
|
166
|
|
Net (loss) gain on sale of real estate owned and repossessed assets
|
|
|
(5
|
)
|
|
|
8
|
|
Loss on disposal of fixed assets
|
|
|
0
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
1,916
|
|
|
|
1,842
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
6,519
|
|
|
|
7,049
|
|
Occupancy and equipment
|
|
|
1,595
|
|
|
|
1,560
|
|
Data processing
|
|
|
840
|
|
|
|
847
|
|
Merger related expenses
|
|
|
546
|
|
|
|
0
|
|
Legal and professional fees
|
|
|
540
|
|
|
|
439
|
|
Marketing and advertising
|
|
|
333
|
|
|
|
348
|
|
FDIC insurance
|
|
|
343
|
|
|
|
440
|
|
Other operating expenses
|
|
|
1,592
|
|
|
|
1,880
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
12,308
|
|
|
|
12,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
4,926
|
|
|
|
3,349
|
|
Income Tax Expense
|
|
|
1,834
|
|
|
|
1,178
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
3,092
|
|
|
|
2,171
|
|
Preferred Stock Dividend and Discount Accretion
|
|
|
271
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
|
$
|
2,821
|
|
|
$
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.71
|
|
|
$
|
0.43
|
|
Average common shares outstanding before the effect of grants, options and warrants
|
|
|
3,976,754
|
|
|
|
3,949,717
|
|
Diluted earnings per common share
|
|
$
|
0.68
|
|
|
$
|
0.39
|
|
Average common shares outstanding with the effect of grants, options and warrants
|
|
|
4,120,895
|
|
|
|
4,261,423
|
|
The accompanying notes are an integral part of these financial statements.
33
ANNAPOLIS BANCORP, INC.
Consolidated Statements of Comprehensive Income ($000)
For the years ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Net income
|
|
$
|
3,092
|
|
|
$
|
2,171
|
|
Unrealized net holding (losses) gains, on Available-for-sale portfolios, net of tax (benefit) of ($90) and tax expense of $453,
respectively
|
|
|
(137
|
)
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,955
|
|
|
$
|
2,866
|
|
|
|
|
|
|
|
|
|
|
34
ANNAPOLIS BANCORP, INC.
Consolidated Statements of Changes in Stockholders Equity ($000)
For the years ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Warrants
|
|
|
Paid in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
Stockholders
Equity
|
|
BALANCE JANUARY 1, 2011
|
|
$
|
8,063
|
|
|
$
|
39
|
|
|
$
|
234
|
|
|
$
|
11,643
|
|
|
$
|
14,499
|
|
|
$
|
296
|
|
|
$
|
34,774
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,171
|
|
|
|
0
|
|
|
|
2,171
|
|
Preferred stock dividends declared and discount accretion
|
|
|
83
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(491
|
)
|
|
|
0
|
|
|
|
(408
|
)
|
Stock-based compensation
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
59
|
|
|
|
0
|
|
|
|
0
|
|
|
|
59
|
|
Issuance of restricted stock
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
55
|
|
|
|
0
|
|
|
|
0
|
|
|
|
55
|
|
Stock options exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14
|
|
Employee stock purchase plan
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8
|
|
Unrealized gain on investment securities available for sale, net of income taxes of $453
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
695
|
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2011
|
|
|
8,146
|
|
|
|
39
|
|
|
|
234
|
|
|
|
11,779
|
|
|
|
16,179
|
|
|
|
991
|
|
|
|
37,368
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,092
|
|
|
|
0
|
|
|
|
3,092
|
|
Redemption of Series A Preferred Stock
|
|
|
(4,076
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(4,076
|
)
|
Preferred stock dividends declared and discount accretion
|
|
|
6
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(270
|
)
|
|
|
0
|
|
|
|
(264
|
)
|
Stock-based compensation
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
89
|
|
|
|
0
|
|
|
|
0
|
|
|
|
89
|
|
Stock options exercised
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
138
|
|
|
|
0
|
|
|
|
0
|
|
|
|
138
|
|
Employee stock purchase plan
|
|
|
0
|
|
|
|
1
|
|
|
|
0
|
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5
|
|
Unrealized gain on investment securities available for sale, net of income tax benefit of ($90)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(137
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2012
|
|
$
|
4,076
|
|
|
$
|
40
|
|
|
$
|
234
|
|
|
$
|
12,010
|
|
|
$
|
19,001
|
|
|
$
|
854
|
|
|
$
|
36,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
35
ANNAPOLIS BANCORP, INC.
Consolidated Statements of Cash Flows ($000)
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2012
|
|
|
2011
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,092
|
|
|
$
|
2,171
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
519
|
|
|
|
591
|
|
Provision for credit losses
|
|
|
684
|
|
|
|
2,190
|
|
Origination of loans held for sale
|
|
|
0
|
|
|
|
(8,186
|
)
|
Proceeds from sale of loans held for sale
|
|
|
0
|
|
|
|
9,731
|
|
Stock-based compensation
|
|
|
89
|
|
|
|
114
|
|
Deferred income taxes
|
|
|
443
|
|
|
|
(141
|
)
|
Earnings on life insurance policies
|
|
|
(205
|
)
|
|
|
(182
|
)
|
Amortization of premiums and accretion of discounts, net
|
|
|
280
|
|
|
|
305
|
|
Loss (gain) on sale of real estate owned
|
|
|
17
|
|
|
|
(18
|
)
|
Gain on sale of loans held for sale
|
|
|
0
|
|
|
|
(166
|
)
|
(Gain) loss on sale of repossessed assets
|
|
|
(12
|
)
|
|
|
10
|
|
Loss on write-down and disposals of premise and equipment
|
|
|
0
|
|
|
|
231
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
(5
|
)
|
|
|
288
|
|
Prepaid FDIC insurance
|
|
|
325
|
|
|
|
441
|
|
Real estate owned
|
|
|
0
|
|
|
|
(34
|
)
|
Repossessed assets
|
|
|
(20
|
)
|
|
|
19
|
|
Other assets
|
|
|
(737
|
)
|
|
|
485
|
|
(Decrease) increase in
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
(35
|
)
|
|
|
32
|
|
Accrued income taxes, net of taxes refundable
|
|
|
(28
|
)
|
|
|
198
|
|
Deferred loan origination fees
|
|
|
16
|
|
|
|
153
|
|
Other liabilities
|
|
|
380
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
|
4,803
|
|
|
|
8,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of securities available for sale
|
|
|
58,060
|
|
|
|
45,478
|
|
Purchase of securities available for sale
|
|
|
(77,137
|
)
|
|
|
(35,846
|
)
|
Net decrease (increase) in federal funds sold
|
|
|
26,583
|
|
|
|
(14,599
|
)
|
Net increase in interest bearing certificates of deposit.
|
|
|
(19,887
|
)
|
|
|
(1,432
|
)
|
Net decrease (increase) in loans receivable
|
|
|
7,224
|
|
|
|
(13,943
|
)
|
Proceeds from sale of repossessed assets
|
|
|
187
|
|
|
|
117
|
|
Proceeds from sale of real estate owned
|
|
|
795
|
|
|
|
385
|
|
Purchases of premises and equipment, net of disposals
|
|
|
(2,287
|
)
|
|
|
(440
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,462
|
)
|
|
|
(20,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net increase (decrease) in:
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
(9,406
|
)
|
|
|
636
|
|
Other deposits
|
|
|
11,942
|
|
|
|
8,831
|
|
Securities sold under agreements to repurchase
|
|
|
3,240
|
|
|
|
(3,214
|
)
|
Redemption of preferred stock
|
|
|
(4,076
|
)
|
|
|
0
|
|
Proceeds from stock options exercised
|
|
|
138
|
|
|
|
14
|
|
Proceeds from issuance of common stock
|
|
|
5
|
|
|
|
8
|
|
Payment of preferred stock dividend
|
|
|
(290
|
)
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,553
|
|
|
|
5,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(106
|
)
|
|
|
(5,828
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
2,026
|
|
|
|
7,854
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
1,920
|
|
|
$
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Interest paid, including interest credited to accounts
|
|
$
|
3,214
|
|
|
$
|
3,620
|
|
Income taxes paid
|
|
|
2,322
|
|
|
|
1,298
|
|
Non-cash investing activities
|
|
|
|
|
|
|
|
|
Transfers from loans to other assets and real estate owned
|
|
$
|
800
|
|
|
$
|
97
|
|
The accompanying notes are an integral part of these financial statements.
36
ANNAPOLIS BANCORP, INC.
Notes to Consolidated Financial Statements
($000 except share data)
For the years ended December 31, 2012 and 2011
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting
and reporting policies in the consolidated financial statements conform with accounting principles generally accepted in the United States of America and to general practices within the banking industry. Management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates. Certain reclassifications have been made to the 2011 consolidated financial statements to conform with the 2012 presentation.
Business
Annapolis Bancorp, Inc. (the Company) was incorporated on May 26, 1988, under the laws of the State of Maryland to serve as a bank holding company. The Company (as a bank holding company)
and BankAnnapolis (the Bank) are subject to governmental supervision, regulation, and control.
The principal
business of the Bank is to make loans and other investments and to accept savings and time and demand deposits. The Banks primary market area is in Anne Arundel County, Maryland, although the Banks business development efforts generate
business outside of the area. The Bank offers a broad range of banking products including a full line of business and personal savings and checking accounts, money market demand accounts, certificates of deposit and other banking services.
The Bank funds a variety of loan types including commercial and residential real estate loans, commercial term loans and
lines of credit, consumer loans and letters of credit. The Banks customers are primarily individuals and small businesses.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, BankAnnapolis and Annapolis Bancorp Statutory Trust I. All significant intercompany balances
and transactions have been eliminated in consolidation. The financial statements of Annapolis Bancorp, Inc. (Parent only) include its investment in the Bank under the equity method of accounting.
Cash Equivalents
For purposes of reporting cash flows, cash and demand balances due from banks are considered cash equivalents for financial reporting purposes.
Investment Securities
As securities are purchased, management determines if the securities should be classified as held to maturity or available for sale. Securities which management has the intent and ability to hold to
maturity are recorded at amortized cost. Securities which may be sold before maturity are classified as available for sale and carried at fair value with unrealized gains and losses included in accumulated other comprehensive income, a separate
component of stockholders equity, on an after-tax basis. Investments in Federal Home Loan Bank and Federal Reserve stock are excluded from securities classified as available for sale and are carried at cost.
Declines in the fair value of individual available for sale or held to maturity securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether an other-than-temporary impairment has occurred include a downgrading of the security by the rating agency or a significant
deterioration in the financial condition of the issuer.
Management systematically evaluates investment securities for
other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value; (2) the financial condition of the issuer or
issuers and (3) the structure of the security.
An impairment loss is recognized in earnings only when (1) the Bank
intends to sell the debt security; (2) it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis or (3) the Bank does not expect to recover the entire amortized cost basis of
the security. In situations where the Bank intends to sell or when it is more likely than not that the Bank will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion
of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in stockholders equity as a component of other comprehensive income, net of deferred taxes.
37
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated useful lives of the assets. Useful lives range from three to 10 years for furniture, fixtures, and equipment; three to five years for software, hardware, and data handling equipment; and 10 to 40
years for buildings and building improvements. Land improvements are amortized over a period of 15 years and leasehold improvements are amortized over the term of the respective lease plus the first optional renewal period, if applicable.
Maintenance and repairs are charged to expense as incurred, while improvements which extend the useful life are capitalized and depreciated over the estimated remaining life of the asset.
Loans Held for Sale
Beginning in 2008 and ending in mid-2011, the Company engaged in the sale of residential mortgage loans. Loans held for sale were carried
at the lower of aggregate cost or fair market value. Fair market value was determined by secondary market quotations for similar instruments. Gains and losses on the sale of these instruments were recognized after the loans sold were no longer
subject to recourse from the purchasers, which was generally 90 days. The gains are shown as a component of noninterest income in the Consolidated Statement of Income.
The Companys current practice is to originate fixed-rate mortgage loans as a broker for other financial institutions. The partner financial institutions underwrite and fund the loans directly. This
allows the Company to expand the product offerings to its customers, earn fee income and manage its exposure to interest rate changes.
Loans
Loans are stated at their principal balance outstanding, plus deferred origination costs, less unearned discounts, less deferred origination fees and the allowance for credit losses.
Interest on loans is credited to income based on the principal amounts outstanding. Origination fees and costs are amortized to income
over the contractual life of the related loans as an adjustment of yield. Discounts on the purchase of mortgage loans are amortized to income over the contractual lives of the loans.
Accrual of interest on a loan is discontinued when the loan is delinquent more than ninety days unless the collateral securing the loan
is sufficient to liquidate the loan. Management considers all loans where the accrual of interest has been discontinued to be impaired.
Loans are considered impaired when, based on current information, it is probable that the Bank will not collect all principal and interest payments according to contractual terms. Generally, loans are
considered impaired once principal and interest payments are past due and they are placed on non-accrual. Management also considers the financial condition of the borrower, cash flows of the loan and the value of the related collateral. Impaired
loans do not include large groups of smaller balance homogeneous credits such as residential real estate and consumer installment loans, which are evaluated collectively for impairment. Loans specifically reviewed for impairment are not considered
impaired during periods of minimal delay in payment (usually ninety days or less) provided eventual collection of all amounts due is expected. Impaired loans are measured based on the present value of expected future cash flows
discounted at the loans effective interest rate, except that as a practical expedient, the Bank may measure impairment based on a loans observable market price or the fair value of the collateral, if the loan is collateral dependent. The
Bank recognizes interest income on impaired loans on a cash basis if the borrower demonstrates the ability to meet the contractual obligation and collateral is sufficient. If there is doubt regarding the borrowers ability to make payments or
the collateral is not sufficient, payments received are accounted for as a reduction in principal. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably
assured.
Impaired loans or portions thereof, are charged-off when deemed uncollectible.
The Companys policy states that when the probability for full repayment of a loan is unlikely, the Bank will initiate a full
charge-off or a partial write-down of the asset based upon the status of the loan.
Consumer loans less than $25,000 for which
payments of principal and/or interest are past due ninety (90) days are charged-off and referred for collection. Consumer loans of $25,000 or more are evaluated for charge-off or partial write-down at the discretion of Bank management.
Any other loan over 120 days past due is evaluated for charge-off or partial write-down at the discretion of Bank management.
Generally, real estate secured loans are charged-off on a deficiency basis after liquidation of the collateral. Bank
management may determine that when the full loan balance is clearly uncollectible and some loss is anticipated a charge-off or write-down is appropriate prior to liquidation of the collateral. An updated evaluation or appraisal of the property may
be required to determine the appropriate level of charge-off or write-down.
38
Allowance for Credit Losses
The allowance for credit losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan
portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual loss experience, current economic events in specific industries and geographic areas including unemployment
levels and other pertinent factors including regulatory guidance and general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash
flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience and consideration of economic trends, all of which may be susceptible to significant change. Credit losses are charged off against the
allowance while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on managements periodic evaluation of the factors previously mentioned, as well as other
pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary.
The components of the
allowance for credit losses represent an estimation done pursuant to FASB guidance in Accounting Standards Codification (ASC) Topic 310 Receivables, and ASC Topic 450 Contingencies. The specific component of the
allowance for credit losses reflects expected losses resulting from analysis developed through credit allocations for individual loans and historical loss experience for each loan category. The determination of the allowance for credit losses is
based on a combination of the Banks historical loss experience plus ten (10) qualitative factors for specific categories and types of loans. Previously (in 2011) due to the Banks limited historical loss experience the loss
experience factor was the greater of either the Banks historical loss experience or the peer group average historical loss experience. In 2012, the loss experience factor was solely based on a rolling eight quarter bank historical loss
experience. The combination of the loss experience factor and the total qualitative factor (Total ALLL Factor) is expressed as a percentage of the portfolio for specific categories and types of loans to create the inherent loss index for
each loan portfolio. Individual loans deemed impaired are separated from the respective loan portfolios and a specific reserve allocation is assigned based upon Bank Managements best estimate as to the loss exposure for each loan. Each Total
ALLL Factor is assigned a percentage weight and that total weight is applied to each loan category. The Total ALLL Factor is different for each loan type and for each risk assessment category within each loan type.
Qualitative factors include: levels and trends in delinquencies and non-accruals; trends in volumes and terms of loans; effects of any
changes in lending policies; the experience, ability and depth of management; national and local economic trends and conditions; concentrations of credit; quality of the banks loan review system; and, external factors, such as competition,
legal and regulatory requirements.
Real Estate Owned
Real estate acquired in satisfaction of a debt is carried at the lower of cost or net realizable value. At the time of foreclosure, the excess if any, of the loan over the net realizable value of the
assets received is charged to the allowance for credit losses. Costs incurred in maintaining foreclosed real estate and subsequent write-downs to reflect declines in the fair value of the properties after acquisition are included in noninterest
expense.
Advertising Costs
Advertising costs are generally expensed when incurred.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. The provision for income taxes is based upon income in the financial statements adjusted for permanent differences, rather
than amounts reported on the Companys income tax return. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities (excluding components of other comprehensive
income).
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a
tax examination, presuming that a tax examination will occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely to be realized on examination. For tax positions not meeting the more likely than
not test, no benefit is recorded. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in other expense. Management considers the likelihood of changes by taxing authorities in its filed income tax returns
and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions in filed income tax returns that
require recognition or disclosure in the accompanying financial statements. The Companys income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.
39
Earnings per Share
Basic earnings per common share is determined by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings
per common share is calculated by including the average dilutive common stock equivalents outstanding during the period.
Dilutive common equivalent shares consist of stock warrants, options and restricted stock grants, calculated using the treasury stock
method.
Stock-Based Compensation
The fair value of stock-based awards is determined on the date of grant, and is recognized as compensation expense over the service period
of the awards.
New Accounting Pronouncements
All pending but not yet effective Accounting Standards Updates (ASU) were evaluated and only those listed below could have a
material impact on the Companys financial condition or results of operation.
In December, 2011 FASB issued ASU
2011-11,
Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities.
ASU 2012-11 amends Topic 210, Balance Sheet, to require an entity to disclose both gross and net information about
financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position
and/or subject to a master netting arrangement or similar agreement. ASU 2011-11 is effective for annual and interim periods beginning on January 1, 2013, and is not expected to have a significant impact on the Companys financial
statements.
In February 2013 FASB issued ASU 2013-02,
Comprehensive Income (Topic 220) Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income.,
The objective of the new guidance is to improve the transparency of reporting reclassifications out of accumulated other comprehensive income (OCI) by requiring
entities to present in one place information about significant amounts reclassified and, in some cases, to provide cross references to related footnote disclosures. The amendments do not change the current requirements for reporting net income or
OCI, nor do they require new information to be disclosed. The amendments should be applied prospectively and are effective for public entities in both interim and annual reporting periods beginning after December 15, 2012.
2. CASH AND DUE FROM BANKS
Banks are
required to carry cash reserves of specified percentages of deposit balances. The Banks normal balances of cash on hand and on deposit with other banks are sufficient to satisfy these reserve requirements.
The Bank normally maintains balances with other banks that exceed the federally insured limit. The average balance maintained in excess
of the limit, including federal funds sold to the same bank, was approximately $6.6 million.
40
3. INVESTMENT SECURITIES
Investment
securities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
|
|
$
|
70,181
|
|
|
$
|
251
|
|
|
$
|
64
|
|
|
$
|
70,368
|
|
State and municipal
|
|
|
961
|
|
|
|
65
|
|
|
|
0
|
|
|
|
1,026
|
|
Residential mortgage-backed securities
|
|
|
33,052
|
|
|
|
1,153
|
|
|
|
39
|
|
|
|
34,166
|
|
Other equity securities
|
|
|
643
|
|
|
|
43
|
|
|
|
0
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104,837
|
|
|
$
|
1,512
|
|
|
$
|
103
|
|
|
$
|
106,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency
|
|
$
|
47,782
|
|
|
$
|
306
|
|
|
$
|
56
|
|
|
$
|
48,032
|
|
State and municipal
|
|
|
1,077
|
|
|
|
59
|
|
|
|
0
|
|
|
|
1,136
|
|
Residential mortgage-backed securities
|
|
|
36,435
|
|
|
|
1,372
|
|
|
|
82
|
|
|
|
37,725
|
|
Other equity securities
|
|
|
618
|
|
|
|
38
|
|
|
|
0
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,912
|
|
|
$
|
1,775
|
|
|
$
|
138
|
|
|
$
|
87,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no sales of securities in 2012 and 2011.
Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous
unrealized loss position at December 31, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Estimated
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
Unrealized
Losses
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government Agency
|
|
$
|
19,986
|
|
|
$
|
64
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
19,986
|
|
|
$
|
64
|
|
Mortgage-backed securities issued by Government Agencies
|
|
|
1,798
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,798
|
|
|
|
0
|
|
Private mortgage-backed securities
|
|
|
0
|
|
|
|
0
|
|
|
|
1,339
|
|
|
|
39
|
|
|
|
1,339
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,784
|
|
|
$
|
64
|
|
|
$
|
1,339
|
|
|
$
|
39
|
|
|
$
|
23,123
|
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government Agency
|
|
$
|
16,044
|
|
|
$
|
56
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
16,044
|
|
|
$
|
56
|
|
Private mortgage-backed securities
|
|
|
0
|
|
|
|
0
|
|
|
|
1,854
|
|
|
|
82
|
|
|
|
1,854
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,044
|
|
|
$
|
56
|
|
|
$
|
1,854
|
|
|
$
|
82
|
|
|
$
|
17,898
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The available-for-sale investment portfolio has a fair value of approximately $106.2 million at December 31, 2012
and $87.5 million at December 31, 2011. As of December 31, 2012, $70.4 million of the investment security portfolio were U.S. Government Agency securities, $1.0 million were state and municipal securities, $34.2 million were
mortgage-backed securities and $686,000 were equity securities. Of the $34.2 million in mortgage-backed securities, $32.9 million were government agency issue while $1.3 million were private issue. As of December 31, 2011, $48.0 million were
U.S. Government Agency securities, $1.1 million were state and municipal securities, $37.7 million were mortgage-backed securities, and $657,000 were equity securities. Of the $37.7 million in mortgage-backed securities, $35.8 million were
government agency issue while $1.9 million were private issue. At December 31, 2012 $23.1 million or 21.9% showed an unrealized loss from the purchase price while $17.9 million or 20.4% showed an unrealized loss from the purchase price at
December 31, 2011. As of December 31, 2012 $20.0 million or 86.6% of these securities were government agency bonds and $3.1 million or 13.4% were mortgage-backed securities. As of December 31, 2011 $16.0 million or 89.6% of these
securities were government agency bonds and $1.9 million or 10.4% were mortgage-backed securities. As of December 31, 2012 and 2011 $1.3 million and $1.9 million, respectively of the mortgaged-back securities showing unrealized losses were
private issue. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, the Company does not consider
those investments to be other-than-temporarily impaired at December 31, 2012. The unrealized losses shown in the table above are the result of market changes in interest rates since the original purchase.
41
The Company has used a variety of tools to analyze the contents of its security portfolio
and at this time does not believe that the unrealized losses in the portfolio shown in the table above are other than temporary. At December 31, 2012 and 2011 mortgage-backed securities with a fair market value of $1.3 million and $1.9 million,
respectively, carried bond ratings below investment grade. These securities were evaluated by an independent third-party consulting firm and were deemed by management not to be other-than-temporarily impaired at December 31, 2012 and 2011. The
valuation uses an expected cash flow model that includes assumptions related to prepayment rates, default trends, and loss severity. At December 31, 2012, both securities were current on both principal and interest payments.
The amortized cost and estimated fair-value of securities by contractual maturities at December 31, 2012 are shown below. Actual
maturities of these securities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
1,000
|
|
|
$
|
1,015
|
|
Due after one through five years
|
|
|
29,443
|
|
|
|
29,548
|
|
Due after five years
|
|
|
73,751
|
|
|
|
74,997
|
|
Equity securities
|
|
|
643
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104,837
|
|
|
$
|
106,246
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012 and 2011 investments available for sale with a carrying value of $14.6 million and $11.4
million, respectively, were pledged as collateral for certain government deposits and for other purposes as required by law.
4. LOANS, ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY
The Banks
loan portfolio consists of commercial, commercial real estate, residential construction, one- to four-family residential mortgage, home equity and consumer loans. The portfolio balances as of December 31, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Commercial
|
|
$
|
44,422
|
|
|
$
|
47,683
|
|
Real estate
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
116,883
|
|
|
|
114,883
|
|
Construction
|
|
|
33,319
|
|
|
|
35,026
|
|
One to four-family
|
|
|
47,873
|
|
|
|
48,314
|
|
Home equity
|
|
|
31,650
|
|
|
|
36,005
|
|
Consumer
|
|
|
7,061
|
|
|
|
8,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281,208
|
|
|
|
290,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan fees, net
|
|
|
(331
|
)
|
|
|
(315
|
)
|
Allowance for credit losses
|
|
|
(6,317
|
)
|
|
|
(7,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,648
|
)
|
|
|
(7,497
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
274,560
|
|
|
$
|
283,284
|
|
|
|
|
|
|
|
|
|
|
42
The maturity and rate repricing distribution of the loan portfolio is as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Repricing or maturing within one year
|
|
$
|
93,910
|
|
|
$
|
100,804
|
|
Maturing over one to five years
|
|
|
127,649
|
|
|
|
132,637
|
|
Maturing over five years
|
|
|
59,649
|
|
|
|
57,340
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
281,208
|
|
|
$
|
290,781
|
|
|
|
|
|
|
|
|
|
|
The Companys goal is to mitigate risks inherent in the loan portfolio. Commercial loans and loans secured by real
estate make up the majority of the loan portfolio, accounting for 97.4% of the portfolio as of December 31, 2012 and 96.8% as of December 31, 2011. To mitigate risk, commercial loans are generally secured by receivables, inventories,
equipment and other assets of the business. Personal guarantees of the borrowers are generally required.
Loans secured by
commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent
on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards, which
require such loans to be qualified on the basis of the propertys value, debt service coverage ratio, and, under certain circumstances, additional collateral. The Bank generally also requires personal guarantees on its commercial real estate
loans.
Construction loans are generally considered to involve a higher degree of credit risk than long-term financing of
improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the security propertys value upon completion of construction as compared to the estimated costs of
construction, including interest. Also, the Bank assumes certain risks associated with the borrowers ability to complete construction in a timely and workmanlike manner. If the estimate of value proves to be inaccurate, or if construction is
not performed timely or accurately, the Bank may be faced with a project which, when completed, has a value that is insufficient to assure full repayment.
The Bank currently originates one- to four-family residential mortgage loans in amounts typically up to 80% (or higher with private mortgage insurance) of the lower of the appraised value or the selling
price of the property securing the loan. The origination of adjustable-rate residential mortgage loans, as opposed to fixed-rate residential mortgage loans, helps to reduce the Banks exposure to increases in interest rates. However,
adjustable-rate loans generally pose credit risks not inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. Periodic and lifetime caps on
interest rate increases help to reduce the risks associated with the Banks adjustable-rate loans, but also limit the interest rate sensitivity of its adjustable-rate mortgage loans.
Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is
employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.
43
The following table shows the allowance for credit losses and recorded investment in loans
receivable for the years ended December 31, 2012 and 2011:
Allowance for Credit Losses and Recorded Investment in Loans
Receivable
for the Years Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2011
|
|
$
|
1,387
|
|
|
$
|
3,972
|
|
|
$
|
1,422
|
|
|
$
|
401
|
|
|
$
|
0
|
|
|
$
|
7,182
|
|
Charge-offs
|
|
|
357
|
|
|
|
476
|
|
|
|
420
|
|
|
|
466
|
|
|
|
0
|
|
|
|
1,719
|
|
Recoveries
|
|
|
50
|
|
|
|
0
|
|
|
|
62
|
|
|
|
58
|
|
|
|
0
|
|
|
|
170
|
|
Provision
|
|
|
301
|
|
|
|
(605
|
)
|
|
|
706
|
|
|
|
282
|
|
|
|
0
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2012
|
|
$
|
1,381
|
|
|
$
|
2,891
|
|
|
$
|
1,770
|
|
|
$
|
275
|
|
|
$
|
0
|
|
|
$
|
6,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ending amount allocated to: Individually evaluated for impairment
|
|
$
|
886
|
|
|
$
|
634
|
|
|
$
|
1,133
|
|
|
$
|
97
|
|
|
$
|
0
|
|
|
$
|
2,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ending amount allocated to: Collectively evaluated for impairment
|
|
$
|
495
|
|
|
$
|
2,257
|
|
|
$
|
637
|
|
|
$
|
178
|
|
|
$
|
0
|
|
|
$
|
3,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ending amount: Loans acquired with deteriorating credit quality
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
5,293
|
|
|
$
|
2,152
|
|
|
$
|
3,600
|
|
|
$
|
281
|
|
|
$
|
0
|
|
|
$
|
11,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans collectively evaluated for impairment
|
|
$
|
39,129
|
|
|
$
|
148,050
|
|
|
$
|
75,923
|
|
|
$
|
6,780
|
|
|
$
|
0
|
|
|
$
|
269,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, December 31, 2009
|
|
$
|
1,868
|
|
|
$
|
3,205
|
|
|
$
|
1,257
|
|
|
$
|
523
|
|
|
$
|
0
|
|
|
$
|
6,853
|
|
Charge-offs
|
|
|
1,183
|
|
|
|
614
|
|
|
|
196
|
|
|
|
203
|
|
|
|
0
|
|
|
|
2,196
|
|
Recoveries
|
|
|
19
|
|
|
|
34
|
|
|
|
260
|
|
|
|
22
|
|
|
|
0
|
|
|
|
335
|
|
Provision
|
|
|
683
|
|
|
|
1,347
|
|
|
|
101
|
|
|
|
59
|
|
|
|
0
|
|
|
|
2,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2011
|
|
$
|
1,387
|
|
|
$
|
3,972
|
|
|
$
|
1,422
|
|
|
$
|
401
|
|
|
$
|
0
|
|
|
$
|
7,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ending amount allocated to: Individually evaluated for impairment
|
|
$
|
195
|
|
|
$
|
731
|
|
|
$
|
475
|
|
|
$
|
161
|
|
|
$
|
0
|
|
|
$
|
1,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ending amount allocated to: Collectively evaluated for impairment
|
|
$
|
1,192
|
|
|
$
|
3,241
|
|
|
$
|
947
|
|
|
$
|
240
|
|
|
$
|
0
|
|
|
$
|
5,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ending amount: Loans acquired with deteriorating credit quality
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
1,397
|
|
|
$
|
2,444
|
|
|
$
|
3,055
|
|
|
$
|
485
|
|
|
$
|
0
|
|
|
$
|
7,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans collectively evaluated for impairment
|
|
$
|
46,286
|
|
|
$
|
147,465
|
|
|
$
|
81,264
|
|
|
$
|
8,385
|
|
|
$
|
0
|
|
|
$
|
283,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans totaled approximately $9.9 million and $6.2 million at December 31, 2012 and 2011, respectively.
As of December 31, 2012 and 2011, $2.7 million and $1.6 million, respectively, of loan loss allowances were allocated to all loans classified as impaired.
Credit Risk Monitoring
As part of the on-going monitoring of the credit
quality of the Companys loan portfolio, management assigns a Risk Assessment Rating (Risk Rating) to extensions of credit based upon the degree of risk, the likelihood of repayment and the effect on the Banks safety and
soundness. The Risk Rating, applied consistently, enables lending personnel and Bank management to monitor the loan portfolio. The Risk Rating is an integral part of the Banks loan loss provision formulation process and, properly maintained,
the Risk Rating assessment can provide an early warning signal of deterioration in a credit.
44
The Company uses a risk rating matrix to assign a risk grade to each loan. The Risk Ratings
are divided into five general categories:
|
1.
|
Risk Ratings 1 7 are assigned to Pass credits.
|
|
2.
|
Risk Rating 7 is assigned to Watch credits.
|
|
3.
|
Risk Rating 8 is assigned to Criticized credits.
|
|
4.
|
Risk Ratings 9 and 10 are assigned to Classified credits.
|
|
5.
|
Risk Rating 11 is assigned to Loss credits.
|
A general description of the characteristics of the risk ratings are described below:
|
|
Risk ratings 1, 2 and 3 these ratings have the highest degree of probability of repayment. Borrowers in these categories are established
entities, well-positioned within their industry with a proven track record of solid financial performance. These ratings are usually reserved for the strongest customers of the Bank who have strong capital, stable earnings and alternative sources of
financing.
|
|
|
Risk ratings 4 and 5 these ratings have a below and average degree of risk. The customers have generally strong to adequate net worth, stable
earnings trends and strong to moderate liquidity.
|
|
|
Risk rating 6 this category represents an above average degree of risk as to repayment with minimal loss potential. Borrowers in this category
generally exhibit adequate operating trends, satisfactory balance sheet trends, moderate leverage and adequate liquidity; however, there is minimal excess operating cushion.
|
|
|
Risk rating 7 this rating includes loans on managements Watch list. Borrowers in this category generally exhibit
characteristics of an acceptable/adequate credit, but may be experiencing income volatility, negative operating trends, and a more highly leveraged balance sheet.
|
|
|
Risk rating 8 this rating is for Other Assets Especially Mentioned in accordance with regulatory guidelines. This rating generally
includes loans to borrowers with currently protected, but potentially weak assets that deserve managements close attention.
|
|
|
Risk rating 9 this rating is for loans considered Substandard in accordance with regulatory guidelines. This rating represents
assets inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness, or weaknesses, that jeopardize liquidation of the debt and are characterized by the
distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.
|
|
|
Risk rating 10 this rating is for loans considered Doubtful in accordance with regulatory guidelines. Borrowers in this category
have all the weaknesses inherent in a Substandard credit with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly improbable.
|
|
|
Risk rating 11 this rating is for loans considered Loss in accordance with regulatory guidelines. This category represents loans
that are considered uncollectible and of such little value that their continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but simply it is neither practical
nor desirable to defer writing off all or some portion of the credit, even though partial recovery may be effected in the future.
|
45
The following table presents credit quality indicators:
Credit Quality Indicators
as of December 31, 2012 and 2011
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Other
|
|
|
|
2012
|
|
|
2012
|
|
|
2012
|
|
Risk Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
36,954
|
|
|
$
|
29,570
|
|
|
$
|
99,883
|
|
Other Assets Especially Mentioned
|
|
|
1,592
|
|
|
|
1,908
|
|
|
|
14,111
|
|
Substandard
|
|
|
5,856
|
|
|
|
1,841
|
|
|
|
1,639
|
|
Doubtful
|
|
|
20
|
|
|
|
0
|
|
|
|
1,250
|
|
Loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,422
|
|
|
$
|
33,319
|
|
|
$
|
116,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
Consumer
|
|
|
|
2012
|
|
|
2012
|
|
Risk Rating:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
70,006
|
|
|
$
|
6,517
|
|
Other Assets Especially Mentioned
|
|
|
4,850
|
|
|
|
322
|
|
Substandard
|
|
|
2,821
|
|
|
|
206
|
|
Doubtful
|
|
|
1,846
|
|
|
|
16
|
|
Loss
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,523
|
|
|
$
|
7,061
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
Commercial
|
|
|
Construction
|
|
|
Other
|
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
Risk Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
41,899
|
|
|
$
|
29,456
|
|
|
$
|
102,495
|
|
Other Assets Especially Mentioned
|
|
|
2,181
|
|
|
|
2,432
|
|
|
$
|
7,944
|
|
Substandard
|
|
|
3,571
|
|
|
|
1,986
|
|
|
|
3,194
|
|
Doubtful
|
|
|
32
|
|
|
|
1,152
|
|
|
|
1,250
|
|
Loss
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,683
|
|
|
$
|
35,026
|
|
|
$
|
114,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
Consumer
|
|
|
|
2011
|
|
|
2011
|
|
Risk Rating:
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
78,402
|
|
|
$
|
8,017
|
|
Other Assets Especially Mentioned
|
|
|
1,867
|
|
|
|
290
|
|
Substandard
|
|
|
2,632
|
|
|
|
348
|
|
Doubtful
|
|
|
1,418
|
|
|
|
215
|
|
Loss
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84,319
|
|
|
$
|
8,870
|
|
|
|
|
|
|
|
|
|
|
46
The following table presents an age analysis of past due loans receivable:
Age Analysis of Past Due Loans Receivable
As of December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
30-59
Days
Past Due
|
|
|
59-89
Days Past
Due
|
|
|
Greater
than 90
Days
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Loans
|
|
|
Recorded
Investment
90 Days
and
Accruing
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
913
|
|
|
$
|
674
|
|
|
$
|
4,450
|
|
|
$
|
6,037
|
|
|
$
|
38,385
|
|
|
$
|
44,422
|
|
|
$
|
0
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
2,617
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,617
|
|
|
|
30,702
|
|
|
|
33,319
|
|
|
|
0
|
|
Other
|
|
|
1,871
|
|
|
|
0
|
|
|
|
636
|
|
|
|
2,507
|
|
|
|
114,376
|
|
|
|
116,883
|
|
|
|
0
|
|
Residential
|
|
|
725
|
|
|
|
508
|
|
|
|
2,518
|
|
|
|
3,751
|
|
|
|
75,772
|
|
|
|
79,523
|
|
|
|
214
|
|
Consumer
|
|
|
197
|
|
|
|
0
|
|
|
|
91
|
|
|
|
288
|
|
|
|
6,773
|
|
|
|
7,061
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,323
|
|
|
$
|
1,182
|
|
|
$
|
7,695
|
|
|
$
|
15,200
|
|
|
$
|
266,008
|
|
|
$
|
281,208
|
|
|
$
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
0
|
|
|
$
|
32
|
|
|
$
|
178
|
|
|
$
|
210
|
|
|
$
|
47,473
|
|
|
$
|
47,683
|
|
|
$
|
0
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
229
|
|
|
|
0
|
|
|
|
1,152
|
|
|
|
1,381
|
|
|
|
33,645
|
|
|
|
35,026
|
|
|
|
0
|
|
Other
|
|
|
482
|
|
|
|
0
|
|
|
|
0
|
|
|
|
482
|
|
|
|
114,401
|
|
|
|
114,883
|
|
|
|
0
|
|
Residential
|
|
|
687
|
|
|
|
0
|
|
|
|
1,972
|
|
|
|
2,659
|
|
|
|
81,660
|
|
|
|
84,319
|
|
|
|
0
|
|
Consumer
|
|
|
23
|
|
|
|
0
|
|
|
|
342
|
|
|
|
365
|
|
|
|
8,505
|
|
|
|
8,870
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,421
|
|
|
$
|
32
|
|
|
$
|
3,644
|
|
|
$
|
5,097
|
|
|
$
|
285,684
|
|
|
$
|
290,781
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans are considered impaired when, based on current information it is probable that the Bank will not collect all
principal and interest payments according to contractual terms. Generally, loans are considered impaired once principal and interest payments are past due and they are placed on non-accrual. Management also considers the financial condition of the
borrower, cash flows of the loan and the value of the related collateral. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate and consumer installment loans, which are evaluated
collectively for impairment. Loans specifically reviewed for impairment are not considered impaired during periods of minimal delay in payment (usually ninety days or less) provided eventual collection of all amounts due is expected.
Impaired loans are measured based on the present value of expected future cash flows discounted at the loans effective interest rate, except that as a practical expedient, the Bank may measure impairment based on a loans observable
market price or the fair value of the collateral, if the loan is collateral dependent. Interest payments on impaired loans are typically applied to principal unless collectability is reasonably assured, in which case interest is recognized on a cash
basis. Impaired loans, or portions thereof, are charged-off when deemed uncollectible.
There were no loans classified as
troubled debt restructuring that within the past twelve months has subsequently defaulted.
47
The following tables presents a summary of impaired loans for the years ended
December 31, 2012 and 2011:
Impaired Loans
for the Year Ended December 31, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,058
|
|
|
$
|
1,058
|
|
|
$
|
0
|
|
|
$
|
1,317
|
|
|
$
|
41
|
|
Commercial real estate
|
|
|
902
|
|
|
|
902
|
|
|
|
0
|
|
|
|
560
|
|
|
|
46
|
|
Residential real estate
|
|
|
439
|
|
|
|
439
|
|
|
|
0
|
|
|
|
896
|
|
|
|
0
|
|
Consumer
|
|
|
69
|
|
|
|
69
|
|
|
|
0
|
|
|
|
93
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,468
|
|
|
|
2,468
|
|
|
|
0
|
|
|
|
2,866
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,235
|
|
|
$
|
4,235
|
|
|
$
|
886
|
|
|
$
|
1,259
|
|
|
$
|
232
|
|
Commercial real estate
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
634
|
|
|
|
4,387
|
|
|
|
2
|
|
Residential real estate
|
|
|
3,161
|
|
|
|
3,161
|
|
|
|
1,133
|
|
|
|
3,328
|
|
|
|
80
|
|
Consumer
|
|
|
212
|
|
|
|
212
|
|
|
|
97
|
|
|
|
432
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,858
|
|
|
|
8,858
|
|
|
|
2,750
|
|
|
|
9,406
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
5,293
|
|
|
$
|
5,293
|
|
|
$
|
886
|
|
|
$
|
2,576
|
|
|
$
|
273
|
|
Commercial real estate
|
|
|
2,152
|
|
|
|
2,152
|
|
|
|
634
|
|
|
|
4,947
|
|
|
|
48
|
|
Residential real estate
|
|
|
3,600
|
|
|
|
3,600
|
|
|
|
1,133
|
|
|
|
4,224
|
|
|
|
80
|
|
Consumer
|
|
|
281
|
|
|
|
281
|
|
|
|
97
|
|
|
|
525
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,326
|
|
|
$
|
11,326
|
|
|
$
|
2,750
|
|
|
$
|
12,272
|
|
|
$
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest Income
Recognized
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
242
|
|
|
$
|
242
|
|
|
$
|
0
|
|
|
$
|
950
|
|
|
$
|
9
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
595
|
|
|
|
0
|
|
Residential real estate
|
|
|
1,074
|
|
|
|
1,074
|
|
|
|
0
|
|
|
|
1,472
|
|
|
|
47
|
|
Consumer
|
|
|
195
|
|
|
|
195
|
|
|
|
0
|
|
|
|
188
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,511
|
|
|
|
1,511
|
|
|
|
0
|
|
|
|
3,205
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,156
|
|
|
$
|
1,156
|
|
|
$
|
195
|
|
|
$
|
700
|
|
|
$
|
4
|
|
Commercial real estate
|
|
|
2,444
|
|
|
|
2,444
|
|
|
|
731
|
|
|
|
3,597
|
|
|
|
196
|
|
Residential real estate
|
|
|
1,981
|
|
|
|
1,981
|
|
|
|
475
|
|
|
|
1,681
|
|
|
|
63
|
|
Consumer
|
|
|
289
|
|
|
|
289
|
|
|
|
161
|
|
|
|
243
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,870
|
|
|
|
5,870
|
|
|
|
1,562
|
|
|
|
6,221
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,398
|
|
|
$
|
1,398
|
|
|
$
|
195
|
|
|
$
|
1,650
|
|
|
$
|
13
|
|
Commercial real estate
|
|
|
2,444
|
|
|
|
2,444
|
|
|
|
731
|
|
|
|
4,192
|
|
|
|
196
|
|
Residential real estate
|
|
|
3,055
|
|
|
|
3,055
|
|
|
|
475
|
|
|
|
3,153
|
|
|
|
110
|
|
Consumer
|
|
|
484
|
|
|
|
484
|
|
|
|
161
|
|
|
|
431
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,381
|
|
|
$
|
7,381
|
|
|
$
|
1,562
|
|
|
$
|
9,426
|
|
|
$
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Interest income that would have been recorded under the original terms of nonaccrual loans
and the interest actually recognized for the years ended December 31, 2012 and 2011 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Interest income that would have been recognized
|
|
$
|
744
|
|
|
$
|
1,045
|
|
Interest income recognized
|
|
|
423
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
Interest income not recognized
|
|
$
|
321
|
|
|
$
|
695
|
|
|
|
|
|
|
|
|
|
|
The Bank lends to customers located primarily in Anne Arundel County and surrounding areas of central Maryland.
Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.
Loans that were
90 days or more past due, including nonaccrual loans were $7.7 million at December 31, 2012 and $3.6 million at December 31, 2011.
Certain officers and directors (and directors companies which have a 10% or more beneficial ownership) have loans with the Bank. Such loans were made in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and are being repaid as agreed.
A summary of the activity of these loans follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Beginning balance
|
|
$
|
15,823
|
|
|
$
|
10,279
|
|
Advances
|
|
|
2,155
|
|
|
|
2,463
|
|
Repayments
|
|
|
(9,253
|
)
|
|
|
(2,265
|
)
|
Change in officers and directors, net
|
|
|
0
|
|
|
|
5,346
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
8,725
|
|
|
$
|
15,823
|
|
|
|
|
|
|
|
|
|
|
The Company considers a loan to be a troubled debt restructuring when for economic or legal reasons related to a
borrowers financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. The Company may consider granting a concession in an attempt to protect as much of its investment as possible.
49
The restructuring of a loan may include, but is not necessarily limited to: (1) the
transfer from the borrower to the Bank of real estate, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan (2) the issuance or other granting of an equity interest to
the Company by the borrower to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt in to an equity interest (3) a modification of the loan terms, such as a reduction of the
stated interest rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, or (4) a reduction of the face amount or maturity amount of
the debt as stated in the instrument or other agreement and (5) a reduction of accrued interest. The current outstanding balance of troubled debt restructurings as of December 31, 2012 included $925,000 of loans in accrual status and $1.7
million of loans classified as nonaccrual. The following table presents a summary of loans that the Company considers to be troubled debt restructurings as of and for the twelve months ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modifications
as of and on December 31,
2012
|
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3
|
|
|
$
|
840
|
|
|
$
|
832
|
|
Commercial real estate
|
|
|
2
|
|
|
|
1,863
|
|
|
|
1,283
|
|
Residential real estate
|
|
|
3
|
|
|
|
453
|
|
|
|
411
|
|
Consumer
|
|
|
1
|
|
|
|
46
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
$
|
3,202
|
|
|
$
|
2,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
|
Recorded
Investment
|
|
|
|
|
Troubled Debt Restructurings that Subsequently Defaulted
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
0
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
Residential real estate
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modifications
as of and on December 31,
2011
|
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3
|
|
|
$
|
840
|
|
|
$
|
840
|
|
Commercial real estate
|
|
|
2
|
|
|
|
1,863
|
|
|
|
1,298
|
|
Residential real estate
|
|
|
3
|
|
|
|
453
|
|
|
|
453
|
|
Consumer
|
|
|
1
|
|
|
|
46
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
$
|
3,202
|
|
|
$
|
2,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
|
Recorded
Investment
|
|
|
|
|
Troubled Debt Restructurings that Subsequently Defaulted
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
0
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
Residential real estate
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
5. CREDIT COMMITMENTS
Loan commitments
outstanding, unused lines of credit and letters of credit are as follows:
|
|
|
|
|
|
|
|
|
Dollars in thousands
|
|
2012
|
|
|
2011
|
|
Loan commitments and lines of credit
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
28,215
|
|
|
$
|
30,413
|
|
Commercial real estate
|
|
|
13,683
|
|
|
|
8,928
|
|
Residential real estate
|
|
|
24,877
|
|
|
|
27,930
|
|
Consumer
|
|
|
531
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,306
|
|
|
$
|
67,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letter of credit
|
|
|
|
|
|
|
|
|
Deposit secured
|
|
$
|
894
|
|
|
$
|
894
|
|
Other
|
|
|
1,727
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,621
|
|
|
$
|
2,256
|
|
|
|
|
|
|
|
|
|
|
Loan commitments including lines of credit are agreements to lend to a customer as long as there is no violation of any
condition to the contract. Loan commitments generally have variable interest rates, fixed expiration dates and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines do not represent future cash requirements
because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. Loan commitments and lines and letters of credit are made
on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss the Company will incur by the funding of these commitments.
51
6. INVESTMENT IN BANK OWNED LIFE INSURANCE
In 2002, the
Bank purchased single premium policies of Bank Owned Life Insurance (BOLI) amounting to $3,110,000. During 2010 an additional single premium policy in the amount of $1.0 million was purchased. The increase in cash surrender value was recorded as
other noninterest income. The Bank recorded $205,000 in BOLI income for 2012 and $182,000 in 2011.
7. PREMISES AND EQUIPMENT
A summary of
premises and equipment and the related depreciation is as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
Land, land improvements and building
|
|
$
|
6,330
|
|
|
$
|
6,308
|
|
Leasehold improvements
|
|
|
4,700
|
|
|
|
3,123
|
|
Furniture, fixtures, and equipment
|
|
|
1,785
|
|
|
|
3,159
|
|
Construction in progress
|
|
|
588
|
|
|
|
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,403
|
|
|
|
13,225
|
|
Accumulated depreciation
|
|
|
3,290
|
|
|
|
4,807
|
|
|
|
|
|
|
|
|
|
|
Net premises and equipment
|
|
$
|
10,113
|
|
|
$
|
8,418
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $519,000 for 2012 and $591,000 for 2011. Capitalized interest totaled $15,000
for the year ended December 31, 2012. No interest was capitalized for the year ended December 31, 2011.
8. LEASE COMMITMENTS
Lease
obligations will require minimum rent payments as follows:
|
|
|
|
|
Period
|
|
Minimum
Rentals
$(000)
|
|
2013
|
|
$
|
301
|
|
2014
|
|
|
514
|
|
2015
|
|
|
624
|
|
2016
|
|
|
572
|
|
2017
|
|
|
563
|
|
Remaining years
|
|
|
6,625
|
|
|
|
|
|
|
|
|
$
|
9,199
|
|
|
|
|
|
|
The leases generally provide for payment of property taxes, insurance and maintenance costs by the Company. The total
rental expense for all real property leases was $412,000 and $339,000 for 2012 and 2011, respectively.
9. DEPOSITS
Major
classifications of deposits are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Demand, noninterest bearing
|
|
$
|
58,507
|
|
|
$
|
56,664
|
|
NOW accounts
|
|
|
35,941
|
|
|
|
32,915
|
|
Savings and Money Market accounts
|
|
|
189,619
|
|
|
|
182,546
|
|
Time deposits, $100,000 and over
|
|
|
37,984
|
|
|
|
47,836
|
|
Other time
|
|
|
30,866
|
|
|
|
30,420
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
352,917
|
|
|
$
|
350,381
|
|
|
|
|
|
|
|
|
|
|
Time deposits mature as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Repricing or maturing within one year
|
|
$
|
32,801
|
|
|
$
|
47,108
|
|
Maturing over one to three years
|
|
|
18,546
|
|
|
|
21,631
|
|
Maturing over three to five years
|
|
|
17,503
|
|
|
|
9,517
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,850
|
|
|
$
|
78,256
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012 and 2011 there were no time deposits with maturities in excess of five years.
52
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold
under agreements to repurchase are securities sold to the Banks customers, at the customers request, under a continuing roll-over contract that matures in one business day. The underlying securities sold are U.S. Government
agencies that are segregated in the Banks correspondent safekeeping account from the Banks other investment securities.
The following table presents certain information for repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Balance outstanding, at year end
|
|
$
|
14,584
|
|
|
$
|
11,344
|
|
Average balance during the year
|
|
|
16,075
|
|
|
|
16,004
|
|
Average interest rate during the year
|
|
|
0.30
|
%
|
|
|
0.46
|
%
|
Maximum month-end balance
|
|
$
|
22,849
|
|
|
$
|
20,893
|
|
11. BORROWINGS
The Company had
other long-term borrowings at December 31, 2012 and 2011 as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
FHLB 2.85% Advance due March 2014
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
FHLB 3.04% Advance due November 2017, Callable February 2013
|
|
|
5,000
|
|
|
|
5,000
|
|
FHLB 3.19% Advance due December 2017, Callable March 2013
|
|
|
5,000
|
|
|
|
5,000
|
|
FHLB 3.42% Advance due December 2017, Callable March 2013
|
|
|
5,000
|
|
|
|
5,000
|
|
FHLB 3.50% Advance due January 2018, Callable January 2013
|
|
|
5,000
|
|
|
|
5,000
|
|
FHLB 3.11% Advance due January 2018, Callable January 2013
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
|
|
|
|
|
|
|
|
|
Interest on these instruments is paid quarterly. FHLB advances are fully collateralized by pledges of loans. The
Company has pledged under a blanket lien all qualifying residential and commercial mortgage loans under the borrowing agreement with the FHLB.
The Company had no short-term borrowings at December 31, 2012 and 2011.
12. GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES
On
March 26, 2003, Annapolis Bancorp Statutory Trust I (Statutory Trust I), a Connecticut business trust formed, funded and wholly owned by the Company, issued $5,000,000 of variable-rate capital securities to institutional investors
in a private pooled transaction. The variable rate on these securities adjusts quarterly based on the 90-day LIBOR rate plus 3.15%. The current rate is 3.46%. The proceeds were up-streamed to the Company as junior subordinated debt under the same
terms and conditions. The Company then down-streamed $4,875,000 to the Bank in the form of additional capital. The Company has, through various contractual arrangements, fully and unconditionally guaranteed all of Statutory Trust Is
obligations with respect to the capital securities. These capital securities currently qualify as Tier I capital and are presented in the Consolidated Balance Sheets as Guaranteed Preferred Beneficial Interests in Junior Subordinated
Debentures. The sole asset of the Statutory Trust I is $5,155,000 of junior subordinated debentures issued by the Company. These junior subordinated debentures carry a variable interest rate of 3.15% over the 90 day LIBOR, payable
semiannually, with a non-call provision over the first five year period. Both the capital securities of Statutory Trust I and the junior subordinated debentures are scheduled to mature on March 26, 2033, unless called by the Company.
Interest expense on the trust preferred securities for the years ended December 31, 2012 and 2011 totaled $184,000 and
$175,000, respectively.
13. PROFIT SHARING AND OTHER EMPLOYEE BENEFIT PLANS
The Company has
a profit sharing plan, qualifying under Section 401(k) of the Internal Revenue Code, for those employees who meet the eligibility requirements set forth in the plan. The plan does not require the Company to match the participants
contributions. The Companys contributions to the plan were $157,000 in 2012 and $166,000 in 2011.
The Company has
entered into individual Supplemental Executive Retirement Agreements (SERAs) with certain of its executives. The SERAs are designed to provide certain post-retirement benefits to enable a targeted level of covered retirement income to be met and to
provide certain death benefits. The Company is accruing the present value of these benefits over the remaining number of years to the executives retirement dates. Benefit accruals included in noninterest expense for 2012 and 2011 were $94,000
and $178,000, respectively.
53
In 2007 the Company created an Employee Stock Purchase Plan (ESPP) whereby under
the terms of the ESPP an employee may purchase Annapolis Bancorp, Inc. common stock at a 5% discount of the market price at the end of a purchase period. During 2012 employees purchased 1,026 shares of common stock under the ESPP and in 2011
employees purchased 2,070 shares of common stock under the ESPP. The ESPP was terminated by the Annapolis Bancorp, Inc. Board of Directors effective October 31, 2012.
14. STOCK-BASED COMPENSATION
In April 1997,
the Company adopted a stock option plan, authorizing the issuance of 177,777 shares of common stock, intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code. The plan provided for granting options to
purchase shares of common stock to the officers and other key employees of the Company and the Bank. Options granted under this plan have ten-year expiration dates with vesting periods from immediate to five years. After April 2000 no additional
options could be granted under this plan.
In April 2000, a new incentive stock option plan was approved by the shareholders
at the annual meeting. Under this plan, the Companys compensation committee has discretionary authority to grant stock options, restricted stock awards, and deferred share awards to employees and directors, including members of the committee.
Under this plan, up to 355,554 shares of Company stock, as adjusted for the August 24, 2001 and December 3, 2006 four-for-three stock splits in the form of stock dividends, may be awarded under the direction of the committee. The plan
provides for the awards to vest over a five-year period of time. Options have a ten-year expiration period. After April 2006 no additional options could be granted under this plan.
In May 2006, a new Company stock incentive plan was approved by shareholders at the annual meeting. Under the plan, up to 200,000 shares
of the Companys common stock may be awarded under the direction of the Companys Compensation Committee. The Compensation Committee, may in its discretion, grant the following types of awards: options, share appreciation rights,
restricted shares, deferred shares and performance awards. During 2012, 16,268 restricted shares were granted under the terms of the plan.
The Company recognized $89,000 in stock-based compensation expense for the year ended December 31, 2012 and $114,000 in 2011. Stock-based compensation expense recognized in the consolidated statement
of income for the years ended December 31, 2012 and 2011 reflects estimated forfeitures.
There were no options granted
during 2012 and 2011.
Net cash proceeds from the exercise of stock options were approximately $138,000 and $14,000 for the
years ending December 31, 2012 and 2011, respectively.
Stock option activity for the years ended December 31, 2012
and 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
92,302
|
|
|
$
|
7.22
|
|
|
|
124,270
|
|
|
$
|
6.06
|
|
Granted
|
|
|
0
|
|
|
|
0.00
|
|
|
|
0
|
|
|
|
0.00
|
|
Exercised
|
|
|
(33,333
|
)
|
|
|
4.14
|
|
|
|
(5,333
|
)
|
|
|
2.64
|
|
Forfeited
|
|
|
(8,888
|
)
|
|
|
9.30
|
|
|
|
0
|
|
|
|
0.00
|
|
Expired
|
|
|
0
|
|
|
|
0.00
|
|
|
|
(26,635
|
)
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
50,081
|
|
|
$
|
8.90
|
|
|
|
92,302
|
|
|
$
|
7.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
50,081
|
|
|
$
|
8.90
|
|
|
|
91,460
|
|
|
$
|
7.21
|
|
Nonvested
|
|
|
0
|
|
|
|
0.00
|
|
|
|
842
|
|
|
|
8.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
50,081
|
|
|
$
|
8.90
|
|
|
|
92,302
|
|
|
$
|
7.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term in years
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
Total intrinsic value of options vested, end of year ($000)
|
|
$
|
147
|
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
The remaining options expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration Date
|
|
Weighted
Average
Exercise Price
|
|
|
Options
Vested
|
|
|
Nonvested
|
|
|
|
|
|
2014
|
|
|
7.68
|
|
|
|
7,463
|
|
|
|
0
|
|
2015
|
|
|
9.24
|
|
|
|
32,368
|
|
|
|
0
|
|
2016
|
|
|
8.77
|
|
|
|
6,040
|
|
|
|
0
|
|
2017
|
|
|
8.77
|
|
|
|
4,210
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,081
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys restricted share awards follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Restricted Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
57,282
|
|
|
$
|
3.86
|
|
|
|
68,384
|
|
|
$
|
3.66
|
|
Granted
|
|
|
16,268
|
|
|
|
4.30
|
|
|
|
17,782
|
|
|
|
4.34
|
|
Vested
|
|
|
(16,282
|
)
|
|
|
4.29
|
|
|
|
(28,884
|
)
|
|
|
3.68
|
|
Forfeited
|
|
|
(13,662
|
)
|
|
|
4.10
|
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
43,606
|
|
|
$
|
3.84
|
|
|
|
57,282
|
|
|
$
|
3.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pre-tax value (that is, the difference between
the closing stock price on the last trading day in the year and the exercise price for those options in the money multiplied by the number of shares) that would have been received by the option holders had all options holders exercised their options
on the last trading day of the year. This amount changes based on the fair market value of the Companys stock. The options that were vested as of December 31, 2012 had $147,000 of intrinsic value while the vested options had no intrinsic
value at December 31, 2011.
As of December 31, 2012, there was no unrecognized compensation costs related to
unvested options, while as of December 31, 2012, $27,000 of total unrecognized compensation costs related to restricted share units is expected to be recognized over a weighted average period of 1.1 years.
15. LINES OF CREDIT
The Bank is a
member of the Federal Home Loan Bank system and has the potential to borrow up to an additional $76.4 million. If funded, this line is secured by one- to four-family residential and commercial mortgage loans held in the Banks portfolio. In
addition, the Bank has available secured and unsecured lines of credit of $19.2 million at December 31, 2012.
16. PREFERRED STOCK
The Company is
authorized to issue up to 5,000,000 shares of preferred stock with a par value of $.01 per share. On January 30, 2009 the Company completed a transaction to participate in the Government sponsored Troubled Asset Relief Program which resulted in
the Treasury purchasing 8,152 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Series A Preferred Stock) at a value of $8.2 million. On April 18, 2012, The Company redeemed 4,076 shares of its Series A
Preferred Stock for $4,076,000 and on March 6, 2013, the Company redeemed the final 4,076 shares of its Series A Preferred Stock for $4,076,000. The Series A Preferred Stock qualifies as Tier 1 Capital. The Series A Preferred Stock pays a
dividend of 5% per annum; payable quarterly for five years then pays a dividend of 9% per annum thereafter. Dividends declared for the years ended December 31, 2012 and 2011 were $264,000 and $408,000, respectively.
55
17. INCOME TAXES
The components
of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,103
|
|
|
$
|
1,072
|
|
State
|
|
|
288
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,391
|
|
|
|
1,318
|
|
Deferred tax expense (benefit)
|
|
|
443
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,834
|
|
|
$
|
1,178
|
|
|
|
|
|
|
|
|
|
|
The components of the deferred tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Provision for credit losses
|
|
$
|
421
|
|
|
($
|
17
|
)
|
Deferred compensation
|
|
|
(25
|
)
|
|
|
(47
|
)
|
Depreciation expense
|
|
|
142
|
|
|
|
(79
|
)
|
Deferred loan fees
|
|
|
(7
|
)
|
|
|
(60
|
)
|
Nonaccrual interest
|
|
|
(52
|
)
|
|
|
91
|
|
Sale of loans
|
|
|
(14
|
)
|
|
|
32
|
|
Sale of or disposal of fixed assets
|
|
|
(28
|
)
|
|
|
(51
|
)
|
Merger related
|
|
|
(39
|
)
|
|
|
0
|
|
Other
|
|
|
45
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax expense (benefit)
|
|
|
443
|
|
|
($
|
140
|
)
|
|
|
|
|
|
|
|
|
|
The components of the net deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
1,829
|
|
|
$
|
2,250
|
|
Deferred compensation
|
|
|
564
|
|
|
|
539
|
|
Deferred loan fees
|
|
|
131
|
|
|
|
124
|
|
Nonaccrual interest
|
|
|
326
|
|
|
|
274
|
|
Property write-down
|
|
|
79
|
|
|
|
51
|
|
Merger related
|
|
|
39
|
|
|
|
0
|
|
Other
|
|
|
31
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,999
|
|
|
|
3,300
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
179
|
|
|
|
37
|
|
Unrealized gain on securities available for sale
|
|
|
556
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
735
|
|
|
|
683
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
2,264
|
|
|
$
|
2,617
|
|
|
|
|
|
|
|
|
|
|
The differences between federal income taxes at statutory rates and the amount reported by the Company follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
Income before income taxes
|
|
$
|
4,926
|
|
|
|
|
|
|
$
|
3,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes computed at the federal income tax rate
|
|
|
1,675
|
|
|
|
34.0
|
%
|
|
$
|
1,139
|
|
|
|
34.0
|
%
|
Increases (decreases) resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
269
|
|
|
|
5.5
|
%
|
|
|
184
|
|
|
|
5.5
|
%
|
Nondeductible expenses
|
|
|
4
|
|
|
|
0.0
|
%
|
|
|
4
|
|
|
|
0.1
|
%
|
Nontaxable income
|
|
|
(114
|
)
|
|
|
(2.3
|
%)
|
|
|
(149
|
)
|
|
|
(4.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
1,834
|
|
|
|
37.2
|
%
|
|
$
|
1,178
|
|
|
|
35.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
18. CAPITAL STANDARDS
The Federal
Reserve Board and the Federal Deposit Insurance Corporation have adopted risk-based capital standards for banking organizations. These standards require ratios of capital to assets for minimum capital adequacy and to be classified as well
capitalized under prompt corrective action provisions. The capital ratios and minimum capital requirements of the Company and the Bank as of December 31, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
Amount
|
|
|
Ratio
|
|
|
Minimum
Capital
Adequacy
Amount
|
|
|
Ratio
|
|
|
To be
Well
Capitalized
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
44,377
|
|
|
|
13.9
|
%
|
|
$
|
25,520
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
44,328
|
|
|
|
13.9
|
%
|
|
$
|
25,512
|
|
|
|
8.0
|
%
|
|
$
|
31,900
|
|
|
|
10.0
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
40,361
|
|
|
|
12.7
|
%
|
|
$
|
12,760
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
40,313
|
|
|
|
12.6
|
%
|
|
$
|
12,756
|
|
|
|
4.0
|
%
|
|
$
|
19,140
|
|
|
|
6.0
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
40,361
|
|
|
|
9.0
|
%
|
|
$
|
17,842
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
40,313
|
|
|
|
9.0
|
%
|
|
$
|
17,837
|
|
|
|
4.0
|
%
|
|
$
|
22,296
|
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
45,464
|
|
|
|
14.0
|
%
|
|
$
|
25,909
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
45,107
|
|
|
|
13.9
|
%
|
|
$
|
25,905
|
|
|
|
8.0
|
%
|
|
$
|
32,381
|
|
|
|
10.0
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
41,377
|
|
|
|
12.8
|
%
|
|
$
|
12,954
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
41,021
|
|
|
|
12.7
|
%
|
|
$
|
12,952
|
|
|
|
4.0
|
%
|
|
$
|
19,429
|
|
|
|
6.0
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
41,377
|
|
|
|
9.4
|
%
|
|
$
|
17,675
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
41,021
|
|
|
|
9.3
|
%
|
|
$
|
17,675
|
|
|
|
4.0
|
%
|
|
$
|
22,094
|
|
|
|
5.0
|
%
|
Tier 1 capital consists of capital stock, paid in capital, and retained earnings. Total capital includes a limited
amount of the allowance for credit losses. In calculating risk-weighted assets, specified risk percentages are applied to each category of asset and off-balance sheet items.
Failure to meet the capital requirements could affect the Banks ability to pay dividends and accept deposits and may significantly affect the operations of the Bank.
The Series A Preferred Stock issued under the TARP transaction that closed on January 30, 2009 qualify as tier one capital.
19. FAIR VALUE MEASUREMENTS
Effective
January 1, 2008, the Company adopted FASBs guidance on
Fair Value Measurements
, which provides a framework for measuring and disclosing fair value under GAAP. The guidance requires disclosures about the fair value of
assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or a nonrecurring basis (for example,
impaired loans).
The guidance defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy, which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a
recurring basis. Additionally, from time to time, the Company may be required to record at fair value all other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair
value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
The guidance establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value
hierarchy is as follows:
Level 1 inputs Unadjusted quoted prices in active markets for identical assets or liabilities
that the entity has the ability to access at the measurement date.
57
Level 2 inputs Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as
interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs Unobservable inputs
for determining the fair values of assets or liabilities that reflect an entitys own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Fair values are measured using independent pricing
models or other model-based valuation techniques such as present value of future cash flows, adjusted for the assets credit rating, prepayment assumptions and other factors such as credit loss assumptions
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available for Sale.
Investment securities available for sale are recorded at fair value on a recurring
basis. Fair value measurement is based upon quoted prices, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds terms and
conditions, among other things. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the securitys
credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in
active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include securities
below investment grade and asset-backed securities in illiquid markets.
Impaired Loans.
The Company does not
report loans at fair value on a recurring basis, however from time to time, a loan is considered impaired and an allowance for credit loss is established. Loans for which it is probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment under the guidance of
Accounting by Creditors for Impairment of a Loan.
The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific
allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At December 31, 2012, substantially all of the totally impaired loans were evaluated based upon the fair value
of the collateral. In accordance with the guidance, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised
value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
58
The following tables present information about the Companys assets measured at fair
value on a recurring basis as of December 31, 2012, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
at December 31, 2012
Using
|
|
|
|
|
|
|
|
Description
|
|
Fair Value
December 31,
2012
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Trading
Gains and
(Losses)
|
|
|
Total Changes
in Fair Values
Included in
Period
Earnings
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued by the U.S. Treasury and Government agencies
|
|
$
|
70,368
|
|
|
$
|
0
|
|
|
$
|
70,368
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Issued by State and municipal
|
|
|
1,026
|
|
|
|
0
|
|
|
|
1,026
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Mortgage-backed securities issued by Government agencies
|
|
|
32,827
|
|
|
|
0
|
|
|
|
32,827
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other debt securities
|
|
|
1,339
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,339
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Securities
|
|
$
|
105,560
|
|
|
|
0
|
|
|
|
104,221
|
|
|
|
1,339
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
686
|
|
|
|
0
|
|
|
|
686
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
|
|
686
|
|
|
|
0
|
|
|
|
686
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at Fair Value on a Recurring Basis
|
|
$
|
106,246
|
|
|
$
|
0
|
|
|
$
|
104,907
|
|
|
$
|
1,339
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Roll
Forward
at December 31, 2012
|
|
|
|
Investment Securities Available for Sale Debt Securities
|
|
|
|
|
Beginning Balance at December 31, 2011
|
|
$
|
1,855
|
|
Transfers in to Level 3
|
|
|
0
|
|
Transfers out of Level 3
|
|
|
0
|
|
Unrealized Gains
|
|
|
43
|
|
Repayments
|
|
|
559
|
|
|
|
|
|
|
Ending Balance at December 31, 2012
|
|
$
|
1,339
|
|
|
|
|
|
|
Level 3 securities include two private-label residential one to-four family mortgage backed securities. These 2005
senior tranches in a securitization trust were rated Aa1 and Aaa by Moodys when purchased in 2005 and are currently rated Baa1 and Ca, respectively. In 2010, these securities were transferred from a Level 2
classification to a Level 3 classification in recognition of the rating downgrade and continued market illiquidity for privately-issued securities. It is the Companys policy to recognize transfers at the end of the reporting period. The
Company engages the service of independent third party valuation professionals to estimate the fair value of these securities. The valuation is meant to be Level Three pursuant to FASB ASC Topic 820 Fair Value Measurements and
Disclosures. The valuation uses an expected cash flow model that includes assumptions related to prepayment rates, default trends, and loss severity. At December 31, 2012, both securities were current on both principal and interest payments and
had a fixed weighted average coupon of 5.50%. One security had a weighted average remaining life of 1.2 years while the other had a weighted average remaining life of 0.2 years.
The following table details the Level 3 securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
Par Value
|
|
|
Current Rating
|
(in thousands)
|
|
Class
|
|
Coupon
|
|
|
Moodys
|
|
Fitch
|
|
|
|
|
|
|
CWHL 2005-21
|
|
A13
|
|
5.5% Fixed
|
|
$
|
45
|
|
|
Baa1
|
|
CC
|
WFMBS 2005-14
|
|
IA7
|
|
5.5% Fixed
|
|
|
1,333
|
|
|
Ca
|
|
A
|
59
We calculated fair value for the two securities by using a present value of future cash
flows model, which incorporated assumptions as follows as of December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at December 31, 2012
|
|
|
|
|
|
|
Cumulative
Default (1)
|
|
|
Weighted
Average
Life (2)
|
|
|
Modified
Duration (3)
|
|
|
Yield (4)
|
|
|
|
|
|
|
CWHL 2005-21
|
|
|
11.63
|
%
|
|
|
0.17 years
|
|
|
|
0.16 years
|
|
|
|
8.00
|
%
|
WFMBS 2005-14
|
|
|
7.56
|
%
|
|
|
1.19 years
|
|
|
|
1.06 years
|
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at December 31, 2011
|
|
|
|
|
|
|
Cumulative
Default (1)
|
|
|
Weighted
Average
Life (2)
|
|
|
Modified
Duration (3)
|
|
|
Yield (4)
|
|
|
|
|
|
|
CWHL 2005-21
|
|
|
15.15
|
%
|
|
|
0.65 years
|
|
|
|
0.59 years
|
|
|
|
8.00
|
%
|
WFMBS 2005-14
|
|
|
10.73
|
%
|
|
|
2.10 years
|
|
|
|
1.80 years
|
|
|
|
8.00
|
%
|
(1)
|
The anticipated level of total defaults from the issuer within the pool of performing collateral as of December 31, 2012 and 2011.
|
(2)
|
The average number of years that each dollar of principal remains outstanding.
|
(3)
|
The weighted average of present values for a series of cash flows which accurately indicates the average time until the cash flows are received.
|
(4)
|
The discount rate obtained from taking a sequence of cash flows and an estimated price.
|
The following tables present information about the Companys assets measured at fair value on a recurring
basis as of December 31, 2011, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Fair Value Measurements
at December 31, 2011
Using
|
|
|
|
|
|
|
|
Description
|
|
Fair Value
December 31,
2011
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Trading
Gains and
(Losses)
|
|
|
Total Changes
in Fair Values
Included in
Period
Earnings
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued by the U.S. Treasury and Government agencies
|
|
$
|
48,032
|
|
|
$
|
0
|
|
|
$
|
48,032
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Issued by State and municipal
|
|
|
1,136
|
|
|
|
0
|
|
|
|
1,136
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Mortgage-backed securities issued by Government agencies
|
|
|
35,870
|
|
|
|
0
|
|
|
|
35,870
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other debt securities
|
|
|
1,855
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,855
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt Securities
|
|
|
86,893
|
|
|
|
0
|
|
|
|
85,038
|
|
|
|
1,855
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
|
656
|
|
|
|
0
|
|
|
|
656
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
|
|
656
|
|
|
|
0
|
|
|
|
656
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at Fair Value on a Recurring Basis
|
|
$
|
87,549
|
|
|
$
|
0
|
|
|
$
|
85,694
|
|
|
$
|
1,855
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Roll
Forward
at December 31, 2011
|
|
|
|
Investment Securities Available for Sale Debt Securities
|
|
|
|
|
Beginning Balance at December 31, 2010
|
|
$
|
2,401
|
|
Transfers in to Level 3
|
|
|
0
|
|
Transfers out of Level 3
|
|
|
0
|
|
Unrealized Gains
|
|
|
100
|
|
Repayments
|
|
|
646
|
|
|
|
|
|
|
Ending Balance at December 31, 2011
|
|
$
|
1,855
|
|
|
|
|
|
|
The Company may be required from time to time, to measure certain assets at fair value on a non-recurring basis in
accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The Company has not elected the fair value option for any financial assets or
liabilities at December 31, 2012. Assets measured at fair value on a nonrecurring basis are included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Fair Value Measurements
at December 31, 2012
Using
|
|
|
|
|
|
|
|
Description
|
|
Fair Value
December 31,
2012
|
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level3)
|
|
|
Trading
Gains and
(Losses)
|
|
|
Total
Changes in
Fair Values
Included in
Period
Earnings
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,407
|
|
|
$
|
0
|
|
|
$
|
4,407
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
1,518
|
|
|
|
0
|
|
|
|
1,518
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate
|
|
|
2,467
|
|
|
|
0
|
|
|
|
2,467
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Construction
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
184
|
|
|
|
0
|
|
|
|
184
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
|
8,576
|
|
|
|
0
|
|
|
|
8,576
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate owned
|
|
|
769
|
|
|
|
0
|
|
|
|
769
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other assets (repossessed assets)
|
|
|
337
|
|
|
|
0
|
|
|
|
337
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at Fair Value on a Non Recurring Basis
|
|
$
|
9,682
|
|
|
$
|
0
|
|
|
$
|
9,682
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Fair Value Measurements
at December 31, 2011
Using
|
|
|
|
|
|
|
|
Description
|
|
Fair Value
December 31,
2011
|
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
|
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level3)
|
|
|
Trading
Gains and
(Losses)
|
|
|
Total
Changes in
Fair Values
Included in
Period
Earnings
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,202
|
|
|
$
|
0
|
|
|
$
|
1,202
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
995
|
|
|
|
0
|
|
|
|
995
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate
|
|
|
2,580
|
|
|
|
0
|
|
|
|
2,580
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Construction
|
|
|
719
|
|
|
|
0
|
|
|
|
719
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
323
|
|
|
|
0
|
|
|
|
323
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
|
5,819
|
|
|
|
0
|
|
|
|
5,819
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate owned
|
|
|
1,222
|
|
|
|
0
|
|
|
|
1,222
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other assets (repossessed assets)
|
|
|
52
|
|
|
|
0
|
|
|
|
52
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets Measured at Fair Value on a Non Recurring Basis
|
|
$
|
7,093
|
|
|
$
|
0
|
|
|
$
|
7,093
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the
Banks financial instruments are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation
values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
December 31,
|
|
Carrying
Amount
|
|
|
Estimated Fair
Value
|
|
|
Carrying
Amount
|
|
|
Estimated Fair
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
1,920
|
|
|
$
|
1,920
|
|
|
$
|
2,026
|
|
|
$
|
2,026
|
|
Interest bearing balances with banks
|
|
|
38,175
|
|
|
|
38,175
|
|
|
|
18,288
|
|
|
|
18,288
|
|
Federal funds sold and other overnight investments
|
|
|
0
|
|
|
|
0
|
|
|
|
26,583
|
|
|
|
26,583
|
|
Investment securities available for sale
|
|
|
104,907
|
|
|
|
104,907
|
|
|
|
87,549
|
|
|
|
87,549
|
|
Federal Reserve and Federal Home Loan Stock
|
|
|
2,864
|
|
|
|
2,864
|
|
|
|
2,992
|
|
|
|
2,992
|
|
Loans and loans held for sale, net
|
|
|
274,560
|
|
|
|
274,785
|
|
|
|
283,284
|
|
|
|
283,667
|
|
Accrued interest receivable
|
|
|
1,284
|
|
|
|
1,284
|
|
|
|
1,279
|
|
|
|
1,279
|
|
Bank owned life insurance
|
|
|
5,829
|
|
|
|
5,829
|
|
|
|
5,624
|
|
|
|
5,624
|
|
Real estate owned
|
|
|
769
|
|
|
|
769
|
|
|
|
1,222
|
|
|
|
1,222
|
|
Level 3 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other debt securities
|
|
|
1,339
|
|
|
|
1,339
|
|
|
|
1,855
|
|
|
|
1,855
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
$
|
58,507
|
|
|
$
|
58,507
|
|
|
$
|
56,664
|
|
|
$
|
56,664
|
|
Interest-bearing deposits
|
|
|
294,410
|
|
|
|
295,827
|
|
|
|
293,717
|
|
|
|
298,788
|
|
Securities sold under agreements to repurchase
|
|
|
14,584
|
|
|
|
14,584
|
|
|
|
11,344
|
|
|
|
11,344
|
|
Long-term borrowings
|
|
|
35,000
|
|
|
|
31,321
|
|
|
|
35,000
|
|
|
|
31,357
|
|
Junior subordinated debt
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
5,000
|
|
Accrued interest payable
|
|
|
158
|
|
|
|
158
|
|
|
|
167
|
|
|
|
167
|
|
The carrying amount for cash and due from banks, federal funds sold and interest bearing balances due from banks
approximates fair value.
The fair values of U.S. Treasury and Government agency securities and mortgage backed securities are
determined using market quotations where available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the
securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions.
The fair value of
fixed-rate loans is estimated to be the present value of scheduled payments discounted using interest rates currently in effect. The fair value of variable-rate loans, including loans with a demand feature, is estimated to equal the carrying amount.
The valuation of loans is adjusted for possible credit losses. The carrying value of loans held for sale approximates fair market value since such loans are typically committed to be sold at a profit.
The fair value of bank owned life insurance is assumed to be the cash surrender value.
The fair value of interest-bearing checking, savings and money market deposit accounts is equal to the carrying amount. The fair value of
fixed-maturity time deposits is estimated based on interest rates currently offered for deposits of similar remaining maturities.
The carrying amount for customer repurchase agreements and variable rate borrowings approximate the fair values at the reporting date.
The fair value of fixed rate Federal Home Loan Bank advances is estimated by computing the discounted value of contractual cash flows
payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing
index.
The carrying amount of junior subordinated debentures approximate the fair values at the reporting date.
62
21. EARNINGS PER SHARE
A summary of
shares outstanding for basic and fully diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
In thousands(000)
|
|
2012
|
|
|
2011
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
3,977
|
|
|
|
3,950
|
|
Common stock equivalents
|
|
|
144
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares and equivalents, fully diluted
|
|
|
4,121
|
|
|
|
4,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants outstanding excluded from above as they were antidilutive at December 31,
|
|
|
45
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
4,443
|
|
|
$
|
4,869
|
|
|
$
|
4,796
|
|
|
$
|
4,808
|
|
Interest expense
|
|
|
690
|
|
|
|
710
|
|
|
|
740
|
|
|
|
774
|
|
Net interest income
|
|
|
3,753
|
|
|
|
4,159
|
|
|
|
4,056
|
|
|
|
4,034
|
|
Provision for credit losses
|
|
|
378
|
|
|
|
29
|
|
|
|
110
|
|
|
|
167
|
|
Net income
|
|
|
236
|
|
|
|
1,111
|
|
|
|
921
|
|
|
|
824
|
|
Net income available to common shareholders
|
|
|
185
|
|
|
|
1,060
|
|
|
|
860
|
|
|
|
716
|
|
Comprehensive income
|
|
|
26
|
|
|
|
1,188
|
|
|
|
1,011
|
|
|
|
622
|
|
Earnings per common share basic
|
|
|
0.05
|
|
|
|
0.27
|
|
|
|
0.22
|
|
|
|
0.18
|
|
Earnings per share common diluted
|
|
|
0.04
|
|
|
|
0.26
|
|
|
|
0.21
|
|
|
|
0.18
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
4,966
|
|
|
$
|
5,004
|
|
|
$
|
4,977
|
|
|
$
|
4,910
|
|
Interest expense
|
|
|
835
|
|
|
|
887
|
|
|
|
943
|
|
|
|
932
|
|
Net interest income
|
|
|
4,131
|
|
|
|
4,117
|
|
|
|
4,034
|
|
|
|
3,978
|
|
Provision for credit losses
|
|
|
616
|
|
|
|
338
|
|
|
|
679
|
|
|
|
557
|
|
Net income
|
|
|
668
|
|
|
|
668
|
|
|
|
326
|
|
|
|
509
|
|
Net income available to common shareholders
|
|
|
546
|
|
|
|
545
|
|
|
|
203
|
|
|
|
387
|
|
Comprehensive income (loss)
|
|
|
601
|
|
|
|
1,145
|
|
|
|
840
|
|
|
|
159
|
|
Earnings per common share basic
|
|
|
0.14
|
|
|
|
0.14
|
|
|
|
0.05
|
|
|
|
0.10
|
|
Earnings per share common diluted
|
|
|
0.14
|
|
|
|
0.14
|
|
|
|
0.05
|
|
|
|
0.09
|
|
63
23. PARENT COMPANY FINANCIAL INFORMATION
The balance
sheet and statements of income and cash flows for ANNAPOLIS BANCORP, INC. (Parent Company only) follow:
Balance Sheets
|
|
|
|
|
|
|
|
|
December 31,
|
|
2012
|
|
|
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
72
|
|
|
$
|
368
|
|
Investment in subsidiaries
|
|
|
41,322
|
|
|
|
42,166
|
|
Deferred income taxes and other assets
|
|
|
73
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,467
|
|
|
$
|
42,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Junior subordinated debt
|
|
$
|
5,155
|
|
|
$
|
5,155
|
|
Accrued dividends
|
|
|
26
|
|
|
|
52
|
|
Other liabilities
|
|
|
71
|
|
|
|
9
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
4,076
|
|
|
|
8,146
|
|
Common stock
|
|
|
40
|
|
|
|
39
|
|
Warrants
|
|
|
234
|
|
|
|
234
|
|
Paid in capital
|
|
|
12,010
|
|
|
|
11,779
|
|
Retained earnings
|
|
|
19,001
|
|
|
|
16,179
|
|
Accumulated other comprehensive income
|
|
|
854
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
41,467
|
|
|
$
|
42,584
|
|
|
|
|
|
|
|
|
|
|
Statement of Income
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2012
|
|
|
2011
|
|
Interest income
|
|
$
|
0
|
|
|
$
|
0
|
|
Interest expense
|
|
|
184
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
(184
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
Equity in undistributed income of subsidiaries
|
|
|
(708
|
)
|
|
|
1,802
|
|
Dividends from subsidiary
|
|
|
4,316
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
3,424
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
24
|
|
|
|
59
|
|
Legal
|
|
|
97
|
|
|
|
36
|
|
Merger related expenses
|
|
|
435
|
|
|
|
0
|
|
Shareholder communications
|
|
|
116
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
668
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit
|
|
|
2,756
|
|
|
|
2,029
|
|
Income tax benefit
|
|
|
(336
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,092
|
|
|
$
|
2,171
|
|
Preferred Stock Dividend and Discount Accretion
|
|
|
271
|
|
|
|
(490
|
)
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
|
$
|
2,821
|
|
|
$
|
1,681
|
|
|
|
|
|
|
|
|
|
|
64
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2012
|
|
|
2011
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,092
|
|
|
$
|
2,171
|
|
Due to subsidiaries
|
|
|
0
|
|
|
|
(1
|
)
|
Tax benefit (provided) received
|
|
|
33
|
|
|
|
7
|
|
Stock-based compensation
|
|
|
89
|
|
|
|
114
|
|
Undistributed net income of subsidiary
|
|
|
(3,608
|
)
|
|
|
(2,389
|
)
|
Net decrease in other assets and liabilities
|
|
|
5
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operations
|
|
|
(389
|
)
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Dividends received from Bank
|
|
|
4,316
|
|
|
|
587
|
|
Payment of dividends on preferred stock
|
|
|
(290
|
)
|
|
|
(408
|
)
|
Redemption of preferred stock
|
|
|
(4,076
|
)
|
|
|
0
|
|
Proceeds from stock options exercised and
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
|
|
|
143
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
93
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(296
|
)
|
|
|
96
|
|
Cash and equivalents at beginning of year
|
|
|
368
|
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year
|
|
$
|
72
|
|
|
$
|
368
|
|
|
|
|
|
|
|
|
|
|
65
24. ENTRY INTO AGREEMENT AND PLAN OF MERGER
On
October 22, 2012, the Company and F.N.B. Corporation (FNB) the parent company of First National Bank of Pennsylvania (FNB Bank), entered into an Agreement and Plan of Merger (Merger Agreement) pursuant to
which the Company will merge with and into FNB. Promptly following consummation of the merger, it is expected that the Bank will merge with and into FNB Bank.
Under the terms of the Merger Agreement, the Companys shareholders will receive 1.143 shares (the Exchange Ratio) of FNB common stock for each share of common stock they own. In
addition, a cash credit related adjustment provides that shareholders of the Company may receive up to an additional $0.36 per share in cash for each share of the Companys common stock they own, dependent on the Companys ability to
resolve an agreed-upon credit matter. The Merger Agreement also provides that all options to purchase the Companys stock which are outstanding and unexercised immediately prior to the closing shall be converted into fully vested and
exercisable options to purchase shares of FNB common stock, as adjusted for the Exchange Ratio.
The Merger Agreement provides
that each outstanding share of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the TARP Preferred), unless repurchased or redeemed prior to the merger, will be converted into the right to receive one
share of FNB preferred stock with substantially the same rights, powers and preferences as the TARP Preferred. The outstanding warrant (the TARP Warrant) to purchase the Companys common stock, which was issued on January 30,
2009 to the United States Department of the Treasury, will be converted into a warrant to purchase FNB common stock, subject to appropriate adjustments to reflect the Exchange Ratio. Subject to the receipt of requisite regulatory approvals, the
parties have agreed to use their best efforts to have the TARP Preferred either purchased by FNB or one of its subsidiaries, in which case it is expected to be extinguished upon consummation of the merger, or repurchased or redeemed by the Company.
FNB also may elect to have the TARP Warrant purchased, redeemed or repurchased.
Consummation of the merger is subject to
certain conditions, including, among others, approval of the merger by the Companys common shareholders, governmental filings and regulatory approvals and expiration of applicable waiting periods, accuracy of specified representations and
warranties of the other party, effectiveness of the registration statement to be filed by FNB with the SEC to register shares of FNB common stock to be offered to the Company shareholders, absence of a material adverse effect, receipt of tax
opinions, and the absence of any injunctions or other legal restraints.
For more information about the proposed Merger and
Merger Agreement, please see our Current Report on Form 8-K and 8-K/A, filed October 22, 2012 and October 23, 2012, respectively. Further information concerning the proposed Merger is included the Registration Statement on Form S-4 that
FNB filed with the SEC on January 24, 2013, as amended and the definitive proxy statement that the Company filed with the SEC on February 27, 2013.
As discussed under Legal Proceedings on November 8, 2012, a purported stockholder of the Company filed a derivative complaint on behalf of the Company in the Circuit Court for Anne Arundel
County, Maryland, captioned
Andera v. Lerner, et al.
, Case no. 02C12173766, and naming as defendants the Company, The Companys board of directors and FNB. The lawsuit makes various allegations against the defendants, including that the
merger consideration is inadequate and undervalues the company that the director defendants breached their fiduciary duties to the Company in approving the Merger, and that FNB aided and abetted those alleged breaches. The lawsuit generally seeks an
injunction barring the defendants from consummating the Merger. In addition, the lawsuit seeks rescission of the Merger Agreement to the extent already implemented or, in the alternative, award of rescissory damages, an accounting to plaintiff for
all damages caused by the defendants and for all profits and special benefits obtained as a result of the defendants alleged breaches of fiduciary duties, and an award of the costs and expenses incurred in the action, including a reasonable
allowance for counsel fees and expert fees.
On February 7, 2013, the plaintiff filed an amended complaint with additional
allegations regarding certain purported non-disclosures relating to the proxy statement/prospectus for the pending merger filed with the SEC on January 23, 2013.
On February 22, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, the Company, the Companys board of directors and FNB, on the one hand, and the plaintiff, on the
other hand, reached an agreement in principle to settle the action, and expect to memorialize that agreement in a written settlement agreement. As part of this agreement in principle, FNB and the Company have agreed to disclose additional
information in the proxy statement/prospectus, including but not limited to certain information about the data that was analyzed and presented to the Companys board of directors by the financial advisor, the engagement of the financial advisor
and the negotiations process. No substantive term of the Merger Agreement will be modified as part of this settlement. The settlement set forth in the settlement agreement will be subject to court approval.