Attached files
file | filename |
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EX-31.2 - EX-31.2 - DEARBORN BANCORP INC /MI/ | k50400exv31w2.htm |
EX-32.1 - EX-32.1 - DEARBORN BANCORP INC /MI/ | k50400exv32w1.htm |
EX-32.2 - EX-32.2 - DEARBORN BANCORP INC /MI/ | k50400exv32w2.htm |
EX-31.1 - EX-31.1 - DEARBORN BANCORP INC /MI/ | k50400exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly period ended March 31, 2011
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from
to
Commission file number 000-24478.
DEARBORN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Michigan | 38-3073622 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1360 Porter Street, Dearborn, MI 48124
(Address of principal executive office) (Zip Code)
(Address of principal executive office) (Zip Code)
(313) 565-5700
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files.
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company (as defined in rule 12b-2 of the 1934
Securities and Exchange Act).
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the
Exchange Act. Yes o No þ
Indicate the number of shares outstanding for each of the issuers classes of common stock, as of April 30, 2011.
Class | Shares Outstanding | |
Common Stock | 7,685,706 |
DEARBORN BANCORP, INC.
INDEX
INDEX
2
Table of Contents
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Dearborn Bancorp, Inc.
Dearborn, Michigan
Dearborn Bancorp, Inc.
Dearborn, Michigan
We have reviewed the accompanying condensed consolidated balance sheets of Dearborn Bancorp, Inc.
as of March 31, 2011 and 2010 and the related condensed consolidated statements of operations and
comprehensive loss for the three-month periods ended March 31, 2011 and 2010, and condensed
consolidated statements of cash flows for the three month periods ended March 31, 2011 and 2010.
These interim financial statements are the responsibility of the Corporations management.
We conducted our reviews in accordance with the standards of the Public Company Accounting
Oversight Board (United States). A review of interim financial information consists principally of
applying analytical procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December 31, 2010 and the
related consolidated statements of operations, stockholders equity and cash flows for the year
then ended (not presented herein); and in our report dated March 21, 2011, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of March 31, 2011 is fairly
stated, in all material respects, in relation to the consolidated balance sheet from which it has
been derived.
BKD, LLP
Indianapolis, Indiana
May 13, 2011
May 13, 2011
3
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited | Unaudited | |||||||||||
(Dollars, in thousands) | 3/31/2011 | 12/31/2010 | 3/31/2010 | |||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
||||||||||||
Cash and due from banks |
$ | 7,454 | $ | 6,645 | $ | 8,047 | ||||||
Federal funds sold |
55 | 55 | 57 | |||||||||
Interest bearing deposits with banks |
95,801 | 87,075 | 70,898 | |||||||||
Total cash and cash equivalents |
103,310 | 93,775 | 79,002 | |||||||||
Mortgage loans held for sale |
749 | 353 | 758 | |||||||||
Securities available for sale |
53,117 | 54,811 | 46,267 | |||||||||
Federal Home Loan Bank stock |
3,605 | 3,605 | 3,698 | |||||||||
Loans |
||||||||||||
Loans |
718,187 | 735,851 | 813,961 | |||||||||
Allowance for loan losses |
(27,971 | ) | (27,971 | ) | (30,288 | ) | ||||||
Net loans |
690,216 | 707,880 | 783,673 | |||||||||
Premises and equipment, net |
18,969 | 19,195 | 19,973 | |||||||||
Real estate owned |
22,120 | 21,502 | 24,467 | |||||||||
Accrued interest receivable |
3,310 | 3,286 | 3,595 | |||||||||
Other assets |
1,598 | 11,277 | 9,266 | |||||||||
Total assets |
$ | 896,994 | $ | 915,684 | $ | 970,699 | ||||||
LIABILITIES |
||||||||||||
Deposits |
||||||||||||
Non-interest bearing deposits |
$ | 95,076 | $ | 88,266 | $ | 86,407 | ||||||
Interest bearing deposits |
699,077 | 723,835 | 765,610 | |||||||||
Total deposits |
794,153 | 812,101 | 852,017 | |||||||||
Other liabilities |
||||||||||||
Federal Home Loan Bank advances |
63,668 | 63,716 | 63,799 | |||||||||
Accrued interest payable |
1,079 | 1,056 | 956 | |||||||||
Other liabilities |
1,100 | 1,852 | 747 | |||||||||
Subordinated debentures |
10,000 | 10,000 | 10,000 | |||||||||
Total liabilities |
870,000 | 888,725 | 927,519 | |||||||||
STOCKHOLDERS EQUITY |
||||||||||||
Common stock
- 100,000,000 shares authorized, 7,685,706 shares at 3/31/11,
7,685,706 shares at 12/31/10 and 7,687,470 shares at 3/31/10 |
132,163 | 132,083 | 131,960 | |||||||||
Retained earnings |
(103,944 | ) | (104,099 | ) | (88,721 | ) | ||||||
Accumulated other comprehensive income (loss) |
(1,225 | ) | (1,025 | ) | (59 | ) | ||||||
Total stockholders equity |
26,994 | 26,959 | 43,180 | |||||||||
Total liabilities and stockholders equity |
$ | 896,994 | $ | 915,684 | $ | 970,699 | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
4
Table of Contents
Three Months Ended | Three Months Ended | |||||||
(In thousands, except share data) | 3/31/2011 | 3/31/2010 | ||||||
Interest income |
||||||||
Interest on loans |
$ | 10,369 | $ | 11,778 | ||||
Interest on securities, available for sale |
442 | 168 | ||||||
Interest on deposits with banks |
136 | 37 | ||||||
Interest on federal funds |
1 | 1 | ||||||
Total interest income |
10,948 | 11,984 | ||||||
Interest expense |
||||||||
Interest on deposits |
2,119 | 3,543 | ||||||
Interest on other liabilities |
260 | 386 | ||||||
Total interest expense |
2,379 | 3,929 | ||||||
Net interest income |
8,569 | 8,055 | ||||||
Provision for loan losses |
1,395 | 100 | ||||||
Net interest income after provision for loan losses |
7,174 | 7,955 | ||||||
Non-interest income |
||||||||
Service charges on deposit accounts |
318 | 343 | ||||||
Fees for other services to customers |
35 | 36 | ||||||
Gain on the sale of loans |
22 | 58 | ||||||
Gain on the sale of securities |
| 69 | ||||||
Loss on the sale of real estate owned |
(76 | ) | (11 | ) | ||||
Loss on the write-down of real estate owned |
(326 | ) | (656 | ) | ||||
Other income |
102 | 102 | ||||||
Total non-interest income (loss) |
75 | (59 | ) | |||||
Non-interest expense |
||||||||
Salaries and employee benefits |
3,190 | 3,119 | ||||||
Occupancy and equipment expense |
782 | 854 | ||||||
FDIC assessment |
950 | 950 | ||||||
Advertising and marketing |
33 | 27 | ||||||
Stationery and supplies |
79 | 72 | ||||||
Professional services |
213 | 166 | ||||||
Data processing |
194 | 186 | ||||||
Defaulted loan expense |
1,180 | 1,035 | ||||||
Other operating expenses |
474 | 359 | ||||||
Total non-interest expense |
7,095 | 6,768 | ||||||
Income before federal income tax expense |
154 | 1,128 | ||||||
Income tax expense |
| | ||||||
Net income |
$ | 154 | $ | 1,128 | ||||
Per share data: |
||||||||
Net income basic |
$ | 0.02 | $ | 0.15 | ||||
Net income diluted |
$ | 0.02 | $ | 0.15 | ||||
Weighted average number of shares outstanding basic |
7,645,940 | 7,687,470 | ||||||
Weighted average number of shares outstanding diluted |
7,645,940 | 7,687,470 |
The accompanying notes are an integral part of these condensed consolidated statements.
5
Table of Contents
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended | Three Months Ended | |||||||
(In thousands) | 03/31/2011 | 03/31/2010 | ||||||
Net income |
$ | 154 | $ | 1,128 | ||||
Other comprehensive income , net of tax |
||||||||
Unrealized gains on securities |
||||||||
Unrealized holding gains (losses) arising during period |
(200 | ) | 45 | |||||
Less:
reclassification adjustment for gains included in net income |
| 69 | ||||||
Tax effects |
| 39 | ||||||
Other comprehensive income (loss) |
(200 | ) | 75 | |||||
Comprehensive income (loss) |
$ | (46 | ) | $ | 1,203 | |||
The accompanying notes are an integral part of these condensed consolidated statements.
6
Table of Contents
Three Months Ended March 31, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Cash flows from operating activities |
||||||||
Interest and fees received |
$ | 10,924 | $ | 11,951 | ||||
Interest paid |
(2,356 | ) | (4,019 | ) | ||||
Proceeds from sale of mortgages held for sale |
2,983 | 4,654 | ||||||
Origination of mortgages held for sale |
(3,357 | ) | (4,225 | ) | ||||
Taxes refunded |
7,248 | 4,074 | ||||||
Loss on sale of real estate owned |
(76 | ) | (11 | ) | ||||
Gain on sale of securities |
| (69 | ) | |||||
Cash paid to suppliers and employees |
(3,997 | ) | (7,331 | ) | ||||
Net cash provided by operating activities |
11,369 | 5,024 | ||||||
Cash flows from investing activities |
||||||||
Sale of securities available for sale |
| 8,289 | ||||||
Proceeds
from calls, maturities and repayments of securities available for sale |
915 | 2,514 | ||||||
Purchases of securities available for sale |
| (10,689 | ) | |||||
Decrease in loans, net of payments received |
14,656 | 11,666 | ||||||
Proceeds from the sale of real estate owned |
593 | 742 | ||||||
Purchases of property and equipment |
(2 | ) | (47 | ) | ||||
Net cash provided by investing activities |
16,162 | 12,475 | ||||||
Cash flows from financing activities |
||||||||
Net decrease in non-interest bearing deposits |
6,810 | 2,534 | ||||||
Net increase in interest bearing deposits |
(24,758 | ) | (18,472 | ) | ||||
Repayments on Federal Home Loan Bank advances |
(48 | ) | (56 | ) | ||||
Net cash used in financing activities |
(17,996 | ) | (15,994 | ) | ||||
Increase in cash and cash equivalents |
9,535 | 1,505 | ||||||
Cash and cash equivalents at the beginning of period |
93,775 | 77,497 | ||||||
Cash and cash equivalents at the end of period |
$ | 103,310 | $ | 79,002 | ||||
The accompanying notes are an integral part of these condensed consolidated statements.
7
Table of Contents
DEARBORN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended March 31, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Reconciliation of net loss to net cash provided by operating activities
|
||||||||
Net loss |
$ | 154 | $ | 1,128 | ||||
Adjustments
to reconcile net income to net cash provided by operating activities |
||||||||
Provision for loan losses |
1,395 | 100 | ||||||
Depreciation expense |
228 | 268 | ||||||
Restricted stock award expense |
66 | 16 | ||||||
Stock option expense |
15 | 16 | ||||||
Accretion of discount on investment securities |
| (41 | ) | |||||
Amortization of premium on investment securities |
579 | 105 | ||||||
Write-down of real estate owned |
326 | 798 | ||||||
(Increase) decrease in mortgages held for sale |
(396 | ) | 371 | |||||
Increase in interest receivable |
(24 | ) | (33 | ) | ||||
Increase (decrease) in interest payable |
23 | (90 | ) | |||||
Decrease in other assets |
9,755 | 3,324 | ||||||
Increase in other liabilities |
(752 | ) | (938 | ) | ||||
Net cash provided by operating activities |
$ | 11,369 | $ | 5,024 | ||||
Supplemental noncash disclosures: |
||||||||
Transfers from loans to real estate owned |
$ | 1,613 | $ | 2,572 |
The accompanying notes are an integral part of these condensed consolidated statements.
8
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting and Reporting Policies
The condensed consolidated financial statements of Dearborn Bancorp, Inc. (the
Corporation) include the consolidation of its only subsidiary, Fidelity Bank (the
Bank). The accounting and reporting policies of the Corporation are in accordance with
accounting principles generally accepted in the United States of America and conform to
practice within the banking industry.
The condensed consolidated financial statements of the Corporation as of March 31, 2011
2010 and December 31, 2010 and for the three month periods ended March 31, 2011 and 2010
reflect all adjustments, consisting of normal recurring items which are in the opinion of
management, necessary for a fair presentation of the results for the interim period. The
condensed consolidated balance sheet of the Corporation as of December 31, 2010 has been
derived from the audited consolidated balance sheet as of that date. The operating results
for the three month period ended March 31, 2011 are not necessarily indicative of results
of operations for the entire year.
The condensed consolidated financial statements as of March 31, 2011 and 2010, and for the
three month periods ended March 31, 2011 and 2010 included herein have been prepared by the
Corporation, without an audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally included in
interim financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant to such
rules and regulations. These financial statements should be read in conjunction with the
financial statements and notes thereon included in the Corporations 2010 Annual Report on
Form 10-K.
Certain of the Corporations accounting policies are important to the portrayal of the
Corporations financial condition, since they require management to make difficult, complex
or subjective judgments, some of which may relate to matters that are inherently uncertain.
Estimates associated with these policies are susceptible to material changes as a result
of changes in facts and circumstances. Facts and circumstances which could affect these
material judgments include, but without limitation, changes in interest rates, in the
performance of the economy or in the financial condition of borrowers. Management believes
that its critical accounting policies include determining the allowance for loan losses and
determining the fair value of securities and other financial instruments and assessing
other than temporary impairments of securities.
9
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A. Accounting and Reporting Policies (cont)
Income (Loss) Per Share
Basic income per share is net income divided by the weighted average number of common shares
outstanding during the period. Diluted income per share includes the dilutive effect of
additional potential common shares issuable under stock options. Income per share is
restated for all stock splits and dividends through the date of issue of the financial
statements.
Factors in the basic and diluted income per share calculation follow (in thousands, except
share and per share data):
Three Months Ended | ||||||||
3/31/2011 | 3/31/2010 | |||||||
Basic |
||||||||
Net income |
$ | 154 | $ | 1,128 | ||||
Weighted average common shares |
7,645,940 | 7,645,940 | ||||||
Basic earnings per common share |
$ | 0.02 | $ | 0.15 | ||||
Diluted |
||||||||
Net income |
$ | 154 | $ | 1,128 | ||||
Weighted average common shares outstanding |
7,645,940 | 7,645,940 | ||||||
Weighted average common shares |
$ | 0.02 | $ | 0.15 |
Stock options for 541,621 and 511,717 shares of common stock were not considered in
computing diluted earnings per common share for the three months ended March 31, 2011 and
2010, respectively, because they were antidilutive.
10
Table of Contents
A. Accounting and Reporting Policies (cont)
ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. In July 2010, the Financial Accounting
Standards board (FASB) issued ASU No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance
for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit
quality of a companys loans and the allowance for loan losses held against those loans. A
company is required to disaggregate new and existing disclosure based on how it develops its
allowance for loan losses and how it manages credit exposures. Existing disclosures to be
presented on a disaggregated basis include a roll-forward of the allowance for loan losses,
the related recorded investment in such loans, the nonaccrual status of loans, and impaired
loans. Additional disclosure is also required about the credit quality indicators of loans
by class at the end of the reporting period, the aging of past due loans, information about
troubled debt restructurings, and significant purchases and sales of loans during the
reporting period by class. For public companies, ASU 2010-20 requires certain disclosures as
of the end of a reporting period effective for periods ending on or after December 15, 2010.
Other required disclosures about activity that occurs during a reporting period are
effective for periods beginning on or after December 15, 2010. The Corporation adopted the
applicable required additional disclosures effective December 31, 2010 and the disclosure of
activity during the three months ended March 31, 2011, and adoption of these additional
disclosures did not have a material effect on its financial position or results of
operations.
Receivables: In April 2011, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2011-02 Receivables (Topic 310) A Creditors
Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02
clarifies whether loan modifications constitute troubled debt restructuring. In evaluating
whether a restructuring constitutes a troubled debt restructuring, a creditor must
separately conclude that both of the following exist: (a) the restructuring constitutes a
concession; and (b) the debtor is experiencing financial difficulties. ASU 2011-02 is
effective for the first interim and annual period beginning on or after June 15, 2011, and
should be applied retrospectively to the beginning of the annual period of adoption. We are
assessing the impact of ASU 2011-02 on our financial condition, results of operations, and
disclosures.
11
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B. Securities
The amortized cost and fair value of securities available for sale are as follows (in
thousands):
March 31, 2011 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Government sponsored
enterprises (GSE) - mortgage backed securities |
$ | 54,092 | $ | 1 | $ | (1,226 | ) | $ | 52,867 | |||||||
Other securities |
250 | | | 250 | ||||||||||||
Totals |
$ | 54,342 | $ | 1 | $ | (1,226 | ) | $ | 53,117 | |||||||
December 31, 2010 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Government sponsored
enterprises (GSE) - mortgage backed securities |
$ | 55,586 | $ | 1 | $ | (1,026 | ) | $ | 54,561 | |||||||
Other securities |
250 | | | 250 | ||||||||||||
Totals |
$ | 55,836 | $ | 1 | $ | (1,026 | ) | $ | 54,811 | |||||||
The amortized cost and fair value of securities available for sale at March 31, 2011
by contractual maturity are shown below (in thousands):
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in over ten years |
$ | 250 | $ | 250 | ||||
GSE mortgage backed securities |
54,092 | 52,867 | ||||||
Totals |
$ | 54,342 | $ | 53,117 | ||||
The entire portfolio has a net unrealized loss of $1,225,000 at March 31, 2011 compared
to net unrealized loss of $1,025,000 at December 31, 2010.
Securities with unrealized losses at March 31, 2011 and December 31, 2010, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position are as follows:
12
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B. Securities (cont)
March 31, 2011 | ||||||||||||||||||||||||
Less than one year | One year or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Investment category | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
GSE mortgage backed
securities |
$ | 52,842 | $ | (1,226 | ) | | | $ | 52,842 | $ | (1,226 | ) | ||||||||||||
Total temporarily impaired |
$ | 52,842 | $ | (1,226 | ) | $ | | $ | | $ | 52,842 | $ | (1,226 | ) | ||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Less than one year | One year or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Investment category | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
GSE mortgage backed
securities |
$ | 54,526 | $ | (1,026 | ) | | | $ | 54,526 | $ | (1,026 | ) | ||||||||||||
Total temporarily impaired |
$ | 54,526 | $ | (1,026 | ) | $ | | $ | | $ | 54,526 | $ | (1,026 | ) | ||||||||||
The unrealized losses on the Corporations investments at December 31, 2010 were caused
by interest rate increases. Additionally, these securities are issued by an agency of the
United States of America and are backed fully by the United States Government. Because the
Corporation does not intend to sell the investments and it is not more likely than not the
Corporation will be required to sell the investments before recovery of their amortized cost
bases, which may be maturity, the Corporation does not consider those investments to be
other-than-temporarily impaired at March 31, 2011.
Sales of available for sale securities for the three months ended March 31, 2011 and 2010
are as follows (in thousands):
For the three months ended | ||||||||
3/31/2011 | 3/31/2010 | |||||||
Gross Gains |
$ | | $ | 69 | ||||
Gross Losses |
| |
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C. Loans and Allowance for Loan Losses
Major segments of loans included in the loan portfolio are as follows (in thousands):
3/31/11 | 12/31/10 | 3/31/10 | ||||||||||
Consumer loans |
$ | 25,477 | $ | 25,871 | $ | 28,623 | ||||||
Commercial, financial and other |
106,859 | 121,015 | 141,338 | |||||||||
Construction and land development |
52,402 | 55,126 | 78,777 | |||||||||
Commercial real estate mortgages |
495,919 | 495,501 | 521,701 | |||||||||
Residential real estate mortgages |
37,530 | 38,338 | 43,522 | |||||||||
Total Loans |
718,187 | 735,851 | 813,961 | |||||||||
Allowance for loan losses |
(27,971 | ) | (27,971 | ) | (30,288 | ) | ||||||
Loans, net |
$ | 690,216 | $ | 707,880 | $ | 783,673 | ||||||
The following is a summary of non-performing assets and problems loans (in thousands):
3/31/11 | 12/31/10 | 3/31/10 | ||||||||||
Troubled debt restructuring |
$ | 48,499 | $ | 48,527 | $ | 31,737 | ||||||
Over 90 days past due and still accruing |
236 | | 1,127 | |||||||||
Non-accrual loans |
71,953 | 66,563 | 81,163 | |||||||||
Total non-performing loans |
120,688 | 115,090 | 114,027 | |||||||||
Real estate owned |
22,120 | 21,502 | 24,467 | |||||||||
Other repossessed assets |
| | | |||||||||
Other non-performing assets |
22,120 | 21,502 | 24,467 | |||||||||
Total non-performing assets |
$ | 142,808 | $ | 136,592 | $ | 138,494 | ||||||
The most significant proportion of the Banks non-performing loans continues to be in
the commercial real estate mortgages segment of the Banks loan portfolio. These loans
comprise 69% of loans and 48% of non-accrual loans at March 31, 2011.
14
Table of Contents
C. Loans and Allowance for Loan Losses (cont)
The collectability of all loans is monitored regularly by management. Interest income on
mortgage and commercial loans is generally discontinued at the time the loan is 90 days
delinquent unless the credit is well-secured and in process of
collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are
placed on non-accrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful. Once a loan has returned to performing status for a period
of six months, it will be returned to accrual status. Delinquency status reports are
reviewed by senior loan managers and individual loan officers on a weekly basis. The
circumstances of these accounts are discussed and appropriate action to be taken is
determined.
The following is a summary of non-accrual loans (in thousands):
3/31/11 | 12/31/10 | 3/31/10 | ||||||||||
Consumer loans |
$ | 2,179 | $ | 1,533 | $ | 924 | ||||||
Commercial, financial, & other |
13,617 | 13,688 | 12,749 | |||||||||
Land development loans residential property |
10,890 | 11,904 | 23,260 | |||||||||
Land development loans non- residential property |
1,943 | 1,734 | 1,558 | |||||||||
Commercial real estate construction residential property |
7,302 | 7,763 | 9,573 | |||||||||
Commercial real estate construction non- residential
property |
258 | 317 | 2,870 | |||||||||
Commercial real estate mortgages |
34,802 | 28,458 | 27,863 | |||||||||
Residential real estate mortgages |
962 | 1,166 | 2,366 | |||||||||
Total non-accrual loans |
$ | 71,953 | $ | 66,563 | $ | 81,163 | ||||||
The increase in non-accrual loans during the three months ended March 31, 2011 was
primarily due to the downgrading of 24 loans to non-accrual status for $9,477,000 and
partially offset by net charge-offs of $1,395,000 and the transfer of 5 loans to other real
estate for $1,613,000. This increase was primarily due to the migration of previously
identified classified loans. These loans have been identified as impaired loans and have
been charged down to the value of the collateral or an appropriate reserve has been
identified in the allowance for loan loss. Loans transferred to non-accrual status during
2011 in the amount of $9,348,000 were identified at December 31, 2010 as classified loans
with reserves for losses established accordingly. As these loans were identified as
classified loans with the appropriate risk allocation in the allowance for loan losses at
December 31, 2010, the migration of these loans to non-accrual status did not have a
significant impact on the allowance for loan losses.
An aging analysis of loans at March 31, 2011 and December 31, 2010 is listed below (in
thousands):
15
Table of Contents
C. | Loans and Allowance for Loan Losses (cont) |
At March 31, 2011
90 Days | ||||||||||||||||||||
30 - 59 | 60 - 89 | or More | ||||||||||||||||||
Days | Days | Past Due or | Total | |||||||||||||||||
Past Due | Past Due | Non-Accrual | Current | Loans | ||||||||||||||||
Consumer loans |
$ | 25 | $ | 217 | $ | 2,179 | $ | 23,056 | $ | 25,477 | ||||||||||
Commercial, financial and other |
1,890 | 1,153 | 15,881 | 87,935 | 106,859 | |||||||||||||||
Land Development Residential |
| | 8,357 | 11,392 | 19,749 | |||||||||||||||
Land Development Non Residential |
4,231 | | 1,943 | 3,422 | 9,596 | |||||||||||||||
Commercial Construction Residential |
1,017 | | 6,819 | 1,999 | 9,835 | |||||||||||||||
Commercial Construction
Non-Residential |
| | 258 | 12,964 | 13,222 | |||||||||||||||
Commercial real estate mortgages |
2,840 | 6,278 | 35,790 | 451,011 | 495,919 | |||||||||||||||
Residential real estate mortgages |
388 | | 962 | 36,180 | 37,530 | |||||||||||||||
Total Loans |
$ | 10,391 | $ | 7,648 | $ | 72,189 | $ | 627,959 | $ | 718,187 | ||||||||||
At December 31, 2010
90 Days | ||||||||||||||||||||
30 - 59 | 60 - 89 | or More | ||||||||||||||||||
Days | Days | Past Due or | Total | |||||||||||||||||
Past Due | Past Due | Non-Accrual | Current | Loans | ||||||||||||||||
Consumer loans |
$ | 47 | $ | 168 | $ | 1,533 | $ | 24,123 | $ | 25,871 | ||||||||||
Commercial, financial and other |
951 | 524 | 15,729 | 103,811 | 121,015 | |||||||||||||||
Land Development Residential |
| | 9,111 | 13,214 | 22,325 | |||||||||||||||
Land Development Non Residential |
4,000 | | 1,734 | 4,236 | 9,970 | |||||||||||||||
Commercial Construction Residential |
| | 7,763 | 2,500 | 10,263 | |||||||||||||||
Commercial Construction
Non-Residential |
| | 317 | 12,251 | 12,568 | |||||||||||||||
Commercial real estate mortgages |
4,478 | 8,134 | 29,210 | 453,679 | 495,501 | |||||||||||||||
Residential real estate mortgages |
| | 1,166 | 37,172 | 38,338 | |||||||||||||||
Total Loans |
$ | 9,476 | $ | 8,826 | $ | 66,563 | $ | 650,986 | $ | 735,851 | ||||||||||
Impaired loans and non-performing loans are defined differently. Impaired loans are loans for which the collection of principal and interest according to the contractual terms of the agreement is not probable. Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. |
16
Table of Contents
C. Loans and Allowance for Loan Losses (cont)
A loan is considered impaired when, based on current information and events, it is probable
that the Corporation will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Loan
relationships that are rated substandard and are on non-accrual
status are considered to be
impaired. All impaired loans over $500,000 are individually evaluated. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for
the delay, the borrowers prior payment record and the amount of the shortfall in relation
to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the loans effective
interest rate, the loans obtainable market price or the fair value of the collateral if
the loan is collateral dependent. Impaired loans over $500,000 are evaluated at least
quarterly and the impairment or shortfall is a component of the Corporations allowance for
loan losses. The impairment of a loan is determined by assessing the underlying value of
the collateral that supports a loan or the present value of expected future cash flows
discounted at the loans effective interest rate.
Impaired loans consist of non-accrual loans and loans classified as troubled debt
restructurings. Troubled debt restructurings are loans that have been restructured in some
manner due to the financial need of the borrower. Interest is accrued on the outstanding
balance of troubled debt restructurings.. Payments on non-accrual loans are recorded as
principal payments by the Corporation. Payments on troubled debt restructurings are
recorded as normal loan payments of principal and interest by the
Corporation.
An analysis of impaired loans by loan type at March 31, 2011 and December 31, 2010 (in
thousands) is listed below:
17
Table of Contents
C. | Loans and Allowance for Loan Losses (cont) |
Loans at March 31, 2011
Average | ||||||||||||||||||||
Unpaid | Investment | Interest | ||||||||||||||||||
Principal | Recorded | Specific | In Impaired | Income | ||||||||||||||||
Balance | Investment | Allowance | Loans | Recognized | ||||||||||||||||
Without a specific valuation
allowance |
||||||||||||||||||||
Consumer loans |
$ | 2,532 | $ | 2,179 | $ | | $ | 1,856 | $ | | ||||||||||
Commercial, financial and other |
19,255 | 13,703 | | 15,088 | 20 | |||||||||||||||
Construction and land development |
24,664 | 17,402 | | 17,556 | 67 | |||||||||||||||
Commercial real estate mortgages |
45,394 | 40,144 | | 38,481 | 199 | |||||||||||||||
Residential real estate mortgages |
1,027 | 962 | | 1,064 | | |||||||||||||||
Total |
$ | 92,872 | $ | 74,390 | $ | | $ | 74,045 | $ | 286 | ||||||||||
With a specific valuation allowance |
||||||||||||||||||||
Consumer loans |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Commercial, financial and other |
4,202 | 4,202 | 228 | 4,056 | 18 | |||||||||||||||
Construction and land development |
21,473 | 20,259 | 6,064 | 19,278 | 72 | |||||||||||||||
Commercial real estate mortgages |
20,713 | 21,601 | 6,035 | 21,114 | 57 | |||||||||||||||
Residential real estate mortgages |
| | | | | |||||||||||||||
Total |
$ | 46,388 | $ | 46,062 | $ | 12,327 | $ | 44,448 | $ | 147 | ||||||||||
Total |
||||||||||||||||||||
Consumer loans |
$ | 2,532 | $ | 2,179 | $ | | $ | 1,856 | $ | | ||||||||||
Commercial, financial and other |
23,457 | 17,905 | 228 | 19,144 | 38 | |||||||||||||||
Construction and land development |
46,137 | 37,661 | 6,064 | 36,834 | 139 | |||||||||||||||
Commercial real estate mortgages |
66,107 | 61,745 | 6,035 | 59,595 | 256 | |||||||||||||||
Residential real estate mortgages |
1,027 | 962 | | 1,064 | | |||||||||||||||
Total Impaired Loans |
$ | 139,260 | $ | 120,452 | $ | 12,327 | $ | 118,493 | $ | 433 | ||||||||||
Loans at December 31, 2010
Average | ||||||||||||||||||||
Unpaid | Investment | Interest | ||||||||||||||||||
Principal | Recorded | Specific | In Impaired | Income | ||||||||||||||||
Balance | Investment | Allowance | Loans | Recognized | ||||||||||||||||
Without a specific valuation
allowance |
||||||||||||||||||||
Consumer loans |
$ | 1,886 | $ | 1,533 | $ | | $ | 1,102 | $ | | ||||||||||
Commercial, financial and other |
22,412 | 16,472 | | 17,827 | 125 | |||||||||||||||
Construction and land development |
31,156 | 17,709 | | 22,530 | 96 | |||||||||||||||
Commercial real estate mortgages |
41,773 | 36,818 | | 38,794 | 927 | |||||||||||||||
Residential real estate mortgages |
1,323 | 1,166 | | 2,181 | | |||||||||||||||
Total |
$ | 98,550 | $ | 73,698 | $ | 0 | $ | 82,434 | $ | 1,148 | ||||||||||
With a specific valuation allowance |
||||||||||||||||||||
Consumer loans |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Commercial, financial and other |
3,910 | 3,910 | 1,135 | 3,933 | 90 | |||||||||||||||
Construction and land development |
18,364 | 18,296 | 5,280 | 10,976 | 240 | |||||||||||||||
Commercial real estate mortgages |
22,174 | 20,628 | 4,310 | 17,545 | 497 | |||||||||||||||
Residential real estate mortgages |
| | | | | |||||||||||||||
Total |
$ | 44,448 | $ | 42,834 | $ | 10,725 | $ | 32,454 | $ | 827 | ||||||||||
Total |
||||||||||||||||||||
Consumer loans |
$ | 1,886 | $ | 1,533 | $ | | $ | 1,102 | $ | | ||||||||||
Commercial, financial and other |
26,322 | 20,382 | 1,135 | 21,760 | 215 | |||||||||||||||
Construction and land development |
49,520 | 36,005 | 5,280 | 33,506 | 336 | |||||||||||||||
Commercial real estate mortgages |
63,947 | 57,446 | 4,310 | 56,339 | 1,424 | |||||||||||||||
Residential real estate mortgages |
1,323 | 1,166 | | 2,181 | | |||||||||||||||
Total Loans |
$ | 142,998 | $ | 116,532 | $ | 10,725 | $ | 114,888 | $ | 1,975 | ||||||||||
18
Table of Contents
C. | Loans and Allowance for Loan Losses (cont) | |
The Corporation utilizes a rating system to assign a risk rating to all loans in the loan portfolio. The rating system used consists of classification grading from one through nine which identifies the inherent risk associated with a loan. These risk ratings are assigned by the loan officer and subsequently reviewed by the First Vice President Credit. Subsequently, each loan is regularly reviewed by the First Vice President Credit. The frequency of this review is dependent on the current risk rating and the balance of the loan. | ||
Excellent Quality (Pass) | ||
Borrower may be a privately held company with a strong balance sheet, consistent earnings, and worthy of unsecured credit. Leverage and liquidity are average to slightly better than average within industry. History of profitable operations, but conditions exist that would suggest borrowers earnings could temporarily decline due to market or economic conditions. Cash flow is adequate and profit margins are slightly above average within the industry. | ||
Good Quality (Pass) | ||
Subject to normal degree of risk. Cash flow adequate to service debt, but is susceptible to some deterioration due to seasonal or economic fluctuations. Balance sheet contains some leverage, and liquidity could be temporarily tight. There could be some asset concentration. | ||
Satisfactory Quality (Pass) | ||
Reasonable risk. Some unfavorable characteristics would be reliance on single product or major customer concentration, volatility of earnings or increasing leverage which is still within normal industry parameters. | ||
Acceptable Risk (Pass) | ||
More unpredictability in earnings and cash flow. Borrower may have experienced modest and presumably temporary losses (less than 10% of capital), however cash flow is still sufficient to meet debt service. Leverage and liquidity are below normal industry standards. Secondary source of repayment may be limited. | ||
Watch | ||
A Watch asset is not considered rated or classified for regulatory purpose, but is considered a criticized asset, which bears watching due to some modest deterioration in financial performance or external threats, such as lawsuit, environmental issue, or potential loss of a significant customer. The following points are characteristics which a Monitor asset may exhibit: financial condition has taken a negative turn and may be temporarily strained; borrower may have experienced recent losses from operations up to 20% of net worth, cash flow may be insufficient to service debt in the most recent six month period. This rating also applies to all other real estate loans performing at a level slightly under the parameters as originally underwritten. |
19
Table of Contents
C. | Loans and Allowance for Loan Losses (cont) | |
Special Mention | ||
A Special Mention asset has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan, or in the institutions credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The following are some of the attributes of a Special Mention credit: loans are currently protected, but are potentially weak due to negative trends in the balance sheet or income statement; there is a lack of effective control over the collateral or documentation deficiencies exists; there is a potential risk of payment default; managements ability to cope with the current financial condition is questioned; collateral coverage is becoming strained but is still acceptable; operating losses may exceed 20% of capital. This rating applies to all other real estate loans performing at a level significantly under the level as originally underwritten. | ||
Substandard | ||
This grade includes Substandard loans in accordance with regulatory guidelines. Loans categorized in this grade possess a well defined credit weakness and the likelihood of repayment from the primary source is uncertain. Significant financial deterioration has occurred and very close attention is warranted to ensure the full repayment without loss. Collateral coverage may be marginal. All non-accrual loans will be rated 7 or worse. | ||
Doubtful | ||
This grade includes Doubtful loans in accordance with regulatory guidelines. Such loans have been placed on non-accrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable. | ||
Loss | ||
Assets classified as Loss are determined to be uncollectible based on current facts. Accordingly, they should be classified as Loss and promptly charged off. | ||
Loans segregated by risk category based on internally assigned risk ratings at March 31, 2011 and December 31, 2010 are listed below (in thousands): |
At March 31, 2011
Special | Total | |||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Loans | ||||||||||||||||
Consumer loans |
$ | 22,407 | $ | 59 | $ | 2,530 | $ | 481 | $ | 25,477 | ||||||||||
Commercial, financial and other |
71,818 | 14,026 | 20,642 | 374 | 106,860 | |||||||||||||||
Land Development Residential |
5,719 | 1,910 | 11,618 | 502 | 19,749 | |||||||||||||||
Land Development Non Residential |
2,032 | 1,027 | 6,537 | | 9,596 | |||||||||||||||
Commercial Construction Residential |
108 | | 9,727 | | 9,835 | |||||||||||||||
Commercial Construction
Non-Residential |
996 | | 12,226 | | 13,222 | |||||||||||||||
Commercial real estate mortgages |
335,090 | 47,316 | 112,689 | 823 | 495,918 | |||||||||||||||
Residential real estate mortgages |
35,158 | 763 | 1,609 | | 37,530 | |||||||||||||||
Total Loans |
$ | 473,328 | $ | 65,101 | $ | 177,578 | $ | 2,180 | $ | 718,187 | ||||||||||
20
Table of Contents
C. | Loans and Allowance for Loan Losses (cont) |
At December 31, 2010
Special | Total | |||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Loans | ||||||||||||||||
Consumer loans |
$ | 22,988 | $ | | $ | 2,798 | $ | 85 | $ | 25,871 | ||||||||||
Commercial, financial and other |
77,076 | 14,298 | 29,641 | | 121,015 | |||||||||||||||
Land Development Residential |
9,456 | 1,511 | 11,358 | | 22,325 | |||||||||||||||
Land Development Non Residential |
3,571 | 4,035 | 2,364 | | 9,970 | |||||||||||||||
Commercial Construction Residential |
47 | | 10,216 | | 10,263 | |||||||||||||||
Commercial Construction
Non-Residential |
281 | | 12,287 | | 12,568 | |||||||||||||||
Commercial real estate mortgages |
338,194 | 56,410 | 100,897 | | 495,501 | |||||||||||||||
Residential real estate mortgages |
35,750 | 771 | 1,817 | | 38,338 | |||||||||||||||
Total Loans |
$ | 487,363 | $ | 77,025 | $ | 171,378 | $ | 85 | $ | 735,851 | ||||||||||
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Charge-offs are recommended by the First Vice President Credit and approved by the Senior Vice President & Head of Lending or the President of the Corporation. | ||
The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. | ||
Loans have various types and levels of risk. All loans have repayment risk. Real estate loans also have valuation risk, as the value of the underlying collateral can decline for various reasons. Commercial real estate loans have historically involved more risk than residential loans, because loan balances are greater and repayment is dependent upon the borrowers operations. Other types of commercial loans are typically secured by other assets. Commercial real estate loans and other commercial loans typically have personal guarantees provided by the borrowers. Management addresses these various types and levels of risk by utilizing a stringent underwriting and loan approval process. Management has instituted a diligent loan monitoring process and formed a special assets department, which is responsible for managing most non-performing loans. The special assets department meets on a bi-weekly basis with the President , Senior Vice President & Head of Lending and the First Vice President-Credit to discuss loans in the special assets portfolios. |
21
Table of Contents
C. | Loans and Allowance for Loan Losses (cont) | |
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Corporations internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. | ||
Activity in the allowance for loan losses during the three months ended March 31, 2011 by loan type is further described below (in thousands): |
For the three months ended March 31, 2011
Commercial , | Construction | Commercial | Residential | |||||||||||||||||||||
Financial | and Land | Real Estate | Real Estate | |||||||||||||||||||||
Consumer | & Other | Development | Mortgages | Mortgages | Total | |||||||||||||||||||
Balance at January 1, 2011 |
$ | 1,115 | $ | 6,571 | $ | 7,870 | $ | 12,102 | $ | 313 | $ | 27,971 | ||||||||||||
Provision for loan
losses |
130 | (523 | ) | 972 | 891 | (75 | ) | 1,395 | ||||||||||||||||
Charge-offs |
| 136 | 534 | 795 | 99 | 1,564 | ||||||||||||||||||
Recoveries |
8 | 11 | 140 | 10 | | 169 | ||||||||||||||||||
Net Charge-offs |
(8 | ) | 125 | 394 | 785 | 99 | 1,395 | |||||||||||||||||
Balance at March 31, 2011 |
$ | 1,253 | $ | 5,923 | $ | 8,448 | $ | 12,208 | $ | 139 | $ | 27,971 | ||||||||||||
22
Table of Contents
C. | Loans and Allowance for Loan Losses (cont) | |
The Loan portfolio and allowance for loan losses segregated by evaluation methodology at March 31, 2011 and December 31, 2010 is further described below (in thousands): |
Allowance For Loan Losses Evaluated at March 31, 2011 | ||||||||||||||||||||||||
Commercial , | Construction | Commercial | Residential | |||||||||||||||||||||
Financial | and Land | Real Estate | Real Estate | |||||||||||||||||||||
Consumer | & Other | Development | Mortgages | Mortgages | Total | |||||||||||||||||||
Individually
Evaluated
For Impairment |
$ | | $ | 228 | $ | 6,064 | $ | 6,035 | $ | | $ | 12,327 | ||||||||||||
Collectively
Evaluated
For Impairment |
1,253 | 5,695 | 2,384 | 6,173 | 139 | 15,644 | ||||||||||||||||||
Allowance for
loan losses |
$ | 1,253 | $ | 5,923 | $ | 8,448 | $ | 12,208 | $ | 139 | $ | 27,971 | ||||||||||||
Loans Evaluated at March 31, 2011 | ||||||||||||||||||||||||
Commercial , | Construction | Commercial | Residential | |||||||||||||||||||||
Financial | and Land | Real Estate | Real Estate | |||||||||||||||||||||
Consumer | & Other | Development | Mortgages | Mortgages | Total | |||||||||||||||||||
Individually
Evaluated
For Impairment |
$ | 2,179 | $ | 17,905 | $ | 37,661 | $ | 61,745 | $ | 962 | $ | 120,452 | ||||||||||||
Collectively
Evaluated
For Impairment |
23,298 | 88,954 | 18,842 | 430,073 | 36,568 | 597,735 | ||||||||||||||||||
Total loans |
$ | 25,477 | $ | 106,859 | $ | 56,503 | $ | 491,818 | $ | 37,530 | $ | 718,187 | ||||||||||||
Allowance For Loan Losses Evaluated at December 31, 2010 | ||||||||||||||||||||||||
Commercial , | Construction | Commercial | Residential | |||||||||||||||||||||
Financial | and Land | Real Estate | Real Estate | |||||||||||||||||||||
Consumer | & Other | Development | Mortgages | Mortgages | Total | |||||||||||||||||||
Individually
Evaluated For
Impairment |
$ | | $ | 373 | $ | 5,280 | $ | 5,072 | $ | | $ | 10,725 | ||||||||||||
Collectively
Evaluated For
Impairment |
1,136 | 6,292 | 2,036 | 7,438 | 344 | 17,246 | ||||||||||||||||||
Allowance for
loan losses |
$ | 1,136 | $ | 6,665 | $ | 7,316 | $ | 12,510 | $ | 344 | $ | 27,971 | ||||||||||||
Loans Evaluated at December 31, 2010 | ||||||||||||||||||||||||
Commercial , | Construction | Commercial | Residential | |||||||||||||||||||||
Financial | and Land | Real Estate | Real Estate | |||||||||||||||||||||
Consumer | & Other | Development | Mortgages | Mortgages | Total | |||||||||||||||||||
Individually
Evaluated For
Impairment |
$ | 1,533 | $ | 20,382 | $ | 36,005 | $ | 57,446 | $ | 1,166 | $ | 116,532 | ||||||||||||
Collectively
Evaluated For
Impairment |
24,338 | 100,633 | 19,121 | 438,055 | 37,172 | 619,319 | ||||||||||||||||||
Total loans |
$ | 25,871 | $ | 121,015 | $ | 55,126 | $ | 495,501 | $ | 38,338 | $ | 735,851 | ||||||||||||
23
Table of Contents
D. Incentive Stock Plans | ||
Incentive stock awards have been granted to officers and employees under two Incentive Stock Plans. The first plan is the 1994 Stock Option Plan. Options to buy common stock have been granted to officers and employees under the 1994 Stock Option Plan, which provides for issue of up to 738,729 shares. Exercise price is the market price at date of grant. The maximum option term is ten years, and options vest fully after six months from the date of grant. | ||
There was no activity in the shares or options of the plan during the three months ended March 31, 2011. For the options outstanding at March 31, 2011, the range of exercise prices was $7.69 to $14.65 per share with a weighted-average remaining contractual term of 1.3 years. At March 31, 2011, options for 242,991 shares were exercisable at weighted average exercise price of $10.25 per share. There was no intrinsic value at March 31, 2011. | ||
During 2005, the Corporation initiated the 2005 Long-Term Incentive Plan. Under this plan, up to 347,248 shares may be granted to officers and employees of the Bank. This plan provides that stock awards may take the form of any combination of options, restricted shares, restricted share units or performance awards. | ||
The administration of the plan, including the granting of awards and the nature of those awards is determined by the Corporations Compensation Committee. The Corporations Board of Directors approved grants of stock options and restricted stock in 2005, 2006 and 2008. The awards have a term of ten years and typically vest fully three years from the grant date. In order for vesting to occur with some grants, the Corporation must meet certain performance criteria over the vesting period. The expected compensation cost of the 2005 plan is being calculated assuming the Corporations attainment of target performance goals over the vesting period of the awards. The actual cost of these awards could range from zero to 100% of the currently recorded compensation cost, depending on the Corporations actual performance. The awards granted in 2005 and 2006 did have such performance criteria. The awards granted in 2008 did not have performance criteria. | ||
Stock Options Granted Stock options were awarded to officers in 2005, 2006 and 2008. The incentive stock options were granted with exercise prices equal to market prices on the day of grant. At March 31, 2011, there were stock options outstanding for 258,865 shares with a weighted average exercise price of $4.17 per share. | ||
The Corporation recognized stock option compensation expense of $15,000 during the three months ended March 31, 2011 and 2010. Compensation cost of $98,000 and $36,000 is expected to be recognized during 2011 and 2012, respectively. | ||
Restricted Stock Grants Restricted stock was awarded to officers in 2005, 2006 and 2008. The restricted stock is eligible to vest three years from grant date. Upon full vesting, restricted shares are transferred to common shares. At March 31, 2011, there were 39,765 shares of restricted stock outstanding. |
24
Table of Contents
D. | Incentive Stock Plans (cont) | |
The Corporation recognized restricted stock compensation expense of $66,000 and $16,000, respectively during the three months ended March 31, 2011, respectively. Compensation cost of $176,000 and $0 is expected to be recognized during 2011 and 2012, respectively. | ||
E. Fair Value of Assets and Liabilities | ||
The Corporation has adopted fair value guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. | ||
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. | ||
A fair value hierarchy was also established which requires an entity to maximize the use of observable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: |
Level 1 | Quoted prices in active markets for identical assets or liabilities. | ||
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Observable inputs may include available credit information and bond terms and conditions of similar securities, market spreads, cash flow analysis and market concensus prepayment speeds. | ||
Level 2 securities include U.S. government sponsored enterprise mortgage-backed securities. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. | |||
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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E. | Fair Value of Assets and Liabilities ( cont) | |
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such instruments pursuant to our valuation hierarchy. | ||
Securities available for sale | ||
Fair values of securities, available for sale are estimated by a third party using inputs that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy. | ||
The following table presents the fair value measurements of the Corporations assets recognized in the accompanying balance sheet measured at fair value on a recurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall at March 31, 2011 and December 31, 2010 (in thousands): |
At 03/31/2011
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Fair | Identical Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
GSE mortgage backed securities |
$ | 52,867 | $ | | $ | 52,867 | $ | | ||||||||
Other securities |
250 | | 250 | | ||||||||||||
Total securities, available for sale |
$ | 53,117 | $ | | $ | 53,117 | $ | | ||||||||
At 12/31/2010
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Fair | Identical Assets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
GSE mortgage backed securities |
$ | 54,561 | $ | | $ | 54,561 | $ | | ||||||||
Other securities |
250 | | 250 | | ||||||||||||
Total securities, available for sale |
$ | 54,811 | $ | | $ | 54,811 | $ | | ||||||||
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E. | Fair Value of Assets and Liabilities ( cont) | |
Impaired loans and other real estate owned | ||
Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Corporations other real estate owned is determined using Level 3 inputs, which include current and prior appraisals and estimated costs to sell. | ||
The following table presents the fair value measurements of the Corporations assets and liabilities recognized in the accompanying balance sheet measured at fair value on a non-recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2011 and December 31, 2010 (in thousands): |
At 03/31/2011
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans (collateral dependent) |
$ | 69,234 | $ | | $ | | $ | 69,234 | ||||||||
Other real estate |
$ | 12,442 | $ | | $ | | $ | 12,442 |
At 12/31/2010
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Impaired loans (collateral dependent) |
$ | 66,977 | $ | | $ | | $ | 66,977 | ||||||||
Other real estate |
$ | 10,003 | $ | | $ | | $ | 10,003 |
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E. | Fair Value of Assets and Liabilities ( cont) | |
The carrying amounts and estimated fair value of principal financial assets and liabilities were as follows (in thousands): |
At March 31, 2011 | At December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 103,310 | $ | 103,310 | $ | 93,775 | $ | 93,775 | ||||||||
Mortgage loans held for sale |
749 | 761 | 353 | 356 | ||||||||||||
Securities available for sale |
53,117 | 53,117 | 54,836 | 54,811 | ||||||||||||
Federal Home Loan Bank Stock |
3,605 | 3,605 | 3,605 | 3,605 | ||||||||||||
Loans |
718,187 | 717,469 | 735,851 | 734,106 | ||||||||||||
Accrued interest receivable |
3,310 | 3,310 | 3,286 | 3,286 | ||||||||||||
Liabilities: |
||||||||||||||||
Deposits |
794,153 | 796,968 | 812,101 | 815,582 | ||||||||||||
Federal Home Loan Bank
advances |
63,668 | 63,926 | 63,716 | 64,060 | ||||||||||||
Subordinated debentures |
10,000 | 5,005 | 10,000 | 4,718 | ||||||||||||
Accrued interest payable |
1,079 | 1,079 | 1,216 | 1,216 |
Fair Value of Financial Instruments | ||
The following methods and assumptions were used by the Corporation in estimating its fair value disclosure for financial instruments: | ||
Cash and Cash Equivalents, Securities Sold Under Agreements to Repurchase, Interest-bearing Deposits and Federal Home Loan Bank Stock | ||
The carrying amount approximates fair value. | ||
Loans Held for Sale | ||
Fair value is based upon the quoted price for the sale of those loans. |
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E. | Fair Value of Assets and Liabilities ( cont) | |
Loans | ||
The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value. | ||
Deposits | ||
Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. | ||
Interest Receivable and Interest Payable | ||
The carrying amount approximates fair value. | ||
Federal Home Loan Bank Advances | ||
Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value. | ||
Subordinated Debentures | ||
Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. | ||
Commitments to Originate Loans, Forward Sale Commitments, Letters of Credit and Lines of Credit | ||
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of forward sale commitments is estimated based on current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of such arrangements are not considered material to this presentation. |
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F. Capital and Operating Matters | ||
Stockholders equity at March 31, 2011 was $26,994,000 compared to $26,959,000 as of December 31, 2010, an increase of $35,000. The increase was primarily due to net income during the period. | ||
Based on the respective regulatory capital ratios, the Bank is considered to be undercapitalized at March 31, 2011 and December 31, 2010. | ||
The following is a presentation of the Corporations and Banks regulatory capital ratios (in thousands): |
Minimum | ||||||||||||||||||||||||
To Be Well Capitalized | ||||||||||||||||||||||||
Minimum for Capital | Under Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of March 31, 2011 |
||||||||||||||||||||||||
Total capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
47,543 | 6.54 | % | 58,189 | 8.00 | % | N/A | N/A | ||||||||||||||||
Bank |
47,640 | 6.55 | % | 58,179 | 8.00 | % | 72,724 | 10.00 | % | |||||||||||||||
Tier 1 capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
38,219 | 5.25 | % | 29,095 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
38,316 | 5.27 | % | 29,090 | 4.00 | % | 43,634 | 6.00 | % | |||||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
38,219 | 4.21 | % | 36,304 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
38,316 | 4.23 | % | 36,239 | 4.00 | % | 45,299 | 5.00 | % | |||||||||||||||
As of December 31, 2010 |
||||||||||||||||||||||||
Total capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
47,591 | 6.34 | % | 60,012 | 8.00 | % | N/A | N/A | ||||||||||||||||
Bank |
46,169 | 6.17 | % | 59,902 | 8.00 | % | 74,877 | 10.00 | % | |||||||||||||||
Tier 1 capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
37,984 | 5.06 | % | 30,006 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
36,580 | 4.89 | % | 29,951 | 4.00 | % | 44,926 | 6.00 | % | |||||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
37,984 | 4.09 | % | 37,135 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
36,580 | 3.95 | % | 37,077 | 4.00 | % | 46,346 | 5.00 | % |
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F. Capital and Operating Matters (con't) | ||
The capital ratios disclosed in the middle column of the table above are minimum requirements. Due to our financial condition, the Bank entered into a formal enforcement action (Consent Order) with the Federal Deposit Insurance Corporation (FDIC) and the Office of Financial and Insurance Regulation for the State of Michigan (OFIR) which conveys specific actions needed to address certain findings from their examination and to address our current financial condition. The Consent Order includes a capital directive, which requires the Bank to have and maintain its level of tier 1 capital as a percentage of total assets (capital ratio) at a minimum of 9% and its level of qualifying total capital as a percentage of risk-weighted assets (total risk-based capital ratio) at a minimum of 12%. These ratios are in excess of the statutory minimums to be well-capitalized. | ||
Applicable federal prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Based on its regulatory capital ratios, the Bank is undercapitalized at March 31, 2011. Undercapitalized institutions are subject to close monitoring by their federal bank regulator, restrictions on asset growth and expansion, and other significantly greater regulatory restrictions than apply to well-capitalized or adequately capitalized institutions. | ||
The Corporation needs to raise sufficient capital to be in compliance with the Consent Order. Management is pursuing various sources of capital and estimates the need to raise approximately $40 million to be in compliance with its Consent Order with the FDIC and OFIR. Given the current economic environment, there can be no assurance the Corporation will be able to raise the estimated capital needed. Additionally, if real estate values in the Corporations market area continue to decline, this will negatively impact the loan portfolio and values of other real estate owned. Additional declines in real estate values would result in the need for additional provision expense resulting in increased losses and further reducing the Corporations and the Banks capital. | ||
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, action by the regulators that, if undertaken, could have a direct material effect on the Corporations financial statements and raise substantial doubt about the Corporations ability to continue as a going concern. | ||
G. Consent Order and Federal Reserve Bank Agreement | ||
Consent Order | ||
Due to our financial condition, the Federal Deposit Insurance Corporation (FDIC) and the Office of Financial and Insurance Regulation for the State of Michigan (OFIR) required that our Board of Directors sign a formal enforcement action (Consent Order) with the FDIC and OFIR which conveys specific actions needed to address certain findings from their examination and to address our current financial condition. We entered into the Consent Order on February 12, 2010, which contains a list of requirements that are to be met by specific dates. Certain requirements are listed below: | ||
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G. Consent Order and Federal Reserve Bank Agreement (con't) |
| Completion of a senior management study by an independent consultant |
| Plans for the reduction of delinquencies and classified assets | ||
| Plans for lending and collection policies | ||
| Plans for the reduction of loan concentrations | ||
| The revision and implementation of a comprehensive strategic plan | ||
| The revision of its Liquidity Plan and the submission of weekly liquidity reports to the FDIC and OFIR |
The Consent Order also includes a capital directive, which requires the Bank to have and maintain its level of tier 1 capital as a percentage of total assets (capital ratio) at a minimum of 9% and its level of qualifying total capital as a percentage of risk-weighted assets (total risk-based capital ratio) at a minimum of 12%. These ratios are in excess of the statutory minimums to be well-capitalized. At March 31, 2011, the Banks total risk-based capital ratio was 6.36%. Additionally, the Bank is prohibited from declaring or paying any cash dividends without prior written consent of the FDIC. | ||
The Bank submitted a Capital Restoration Plan (CRP) to the FDIC and OFIR on December 15, 2009, due to our undercapitalized status based on our September 30, 2009 regulatory report of condition and income. This CRP was rejected because capital has not been successfully raised within the 120 days of the issuance of the consent order. An amended CRP was submitted on May 24, 2010. This CRP was also rejected because capital has not been successfully raised. The CRP addresses, among other things, the steps management will take to cause our capital levels to return to the minimum level to be adequately capitalized. | ||
The Bank is currently undercapitalized. Failure to meet the minimum ratios set forth in the Consent Order could result in regulators taking additional enforcement action against us. With the exception of raising additional capital, management believes that it has met all of the provisions of the consent order. | ||
Federal Reserve Board Agreement | ||
Due to our financial condition, the Federal Reserve Bank of Chicago (FRB) required that our Board of Directors sign a formal enforcement action (Consent Order) with the FRB which conveys specific actions needed to address certain findings from their examination and to address our current financial condition. We entered into the Written Order on June 15, 2010, which contains certain requirements that are to be met by specific dates, including the submission of a capital plan, the submission of annual cash flow projections and the submission of quarterly update reports. | ||
With the exception of raising additional capital, management believes that it has met all of the provisions of the written order. |
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The following discussion and analysis are intended to address significant factors affecting the financial condition and results of operations of the Corporation. The discussion provides a more comprehensive review of the financial position and operating results than can be obtained from a reading of the financial statements and footnotes presented elsewhere in this report. | ||
Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations. Words such as anticipates, believes, estimates, expects, forecasts, intends, is likely, plans, projects, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (Future Factors) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Actual results and outcomes may materially differ from what is expressed in forward-looking statements. The Corporation undertakes no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise. | ||
Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies, trends in customer behavior as well as their ability to repay loans; actions by bank regulators; availability of capital; changes in local real estate values; changes in the national and local economy; and other factors, including risk factors disclosed in this report, the Corporations 2010 Annual Report on Form 10-K, or disclosed from time to time in other filings made by the Corporation with the Securities and Exchange Commission. These are representative of the Future Factors and could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. |
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Company Overview
Dearborn Bancorp, Inc. was incorporated as a Michigan business corporation on September 30, 1992.
The Corporation was formed to acquire all of the Banks issued and outstanding stock and to engage
in the business of a bank holding company under the Bank Holding Company Act of 1956, as amended
(the Act).
Community Bank of Dearborn (the Bank), a Michigan banking corporation, commenced business on
February 28, 1994 in Dearborn, Michigan. On April 30, 2007, Community Bank of Dearborn was renamed
Fidelity Bank. Management believes that its new name, Fidelity Bank, represents a more accurate
portrayal to our customers and prospects of the financial products and services offered by the Bank
and the Banks market area.
The Bank is the only commercial bank headquartered in Dearborn, Michigan and offers a full line of
loan and deposit products and services. The Bank offers excellent customer service to its loan and
deposit customers and maintains strong relationships with the communities served by the Bank. The
Bank emphasizes strong loan quality, excellent customer service and efficient operations in order
to maximize profitability and shareholder value.
Subsequent to the commencement of business in Dearborn, Michigan in 1994, the Bank opened five
additional offices in Wayne County, Michigan. Since 2001, the Bank opened two offices in Macomb
County, Michigan and in 2003, the Bank opened an office in Oakland County, Michigan.
In 2004, the Corporation acquired the Bank of Washtenaw from Pavillion Bancorp. The Bank of
Washtenaws three banking offices, all of which are located in Washtenaw County, Michigan were
successfully consolidated into the Bank.
In 2007, the Corporation acquired Fidelity Financial Corporation of Michigan (Fidelity), the
holding company for Fidelity Bank, a commercial bank with seven offices in Oakland County,
Michigan. The acquisition has significantly expanded the Banks presence in Oakland County,
Michigan. Additionally, the Bank opened a full service banking office in Shelby Township, Michigan
on April 30, 2007. The Bank currently operates seventeen banking offices in Wayne, Macomb, Oakland
and Washtenaw Counties, Michigan.
The Bank has also formed two subsidiaries that offer additional or specialized services to the
Banks customers. The Banks subsidiaries, their formation date and the type of services offered
are listed below:
Date Formed | Name | Services Offered | ||
August 1997
|
Community Bank Insurance Agency, Inc. | Limited insurance related activities | ||
March 2002
|
Community Bank Audit Services, Inc. | Internal auditing and compliance services for financial institutions |
The date opened, branch location and branch type of each branch is listed on the following
page:
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Table of Contents
Date Opened | Location | Type of office | ||
February 1994
|
22290 Michigan Avenue | Full service retail branch with ATM | ||
Dearborn, Michigan 48123 | Regional lending center | |||
December 1995
|
24935 West Warren Avenue | Full service retail branch | ||
Dearborn Heights, Michigan 48127 | ||||
August 1997
|
44623 Five Mile Road | Full service retail branch with ATM | ||
Plymouth, Michigan 48170 | ||||
May 2001
|
1325 North Canton Center Road | Full service retail branch with ATM | ||
Canton, Michigan 48187 | ||||
November 2002
|
19100 Hall Road | Full service retail branch with ATM | ||
Clinton Township, Michigan 48038 | ||||
February 2003
|
12820 Fort Street | Full service retail branch with ATM | ||
Southgate, Michigan 48195 | ||||
May 2003
|
3201 University Drive, Suite 180 | Full service retail branch | ||
Auburn Hills, Michigan 48326 | ||||
October 2004
|
450 East Michigan Avenue | Full service retail branch with ATM | ||
Saline, Michigan 48176 | ||||
October 2004
|
250 West Eisenhower Parkway | Full service retail branch with ATM | ||
Ann Arbor, Michigan 48103 | Regional lending center | |||
December 2004
|
1360 Porter Street | Loan production office | ||
Dearborn, Michigan 48123 | Regional lending center | |||
January 2007
|
1040 E. Maple | Full service retail branch with ATM | ||
Birmingham, Michigan 48009 | Regional lending center | |||
January 2007
|
3681 W. Maple | Full service retail branch with ATM | ||
Bloomfield Township, Michigan 48301 | ||||
January 2007
|
30700 Telegraph | Full service retail branch with ATM | ||
Bingham Farms, Michigan 48025 | ||||
January 2007
|
20000 Twelve Mile Road | Full service retail branch with ATM | ||
Southfield, Michigan 48076 | ||||
January 2007
|
200 Galleria Officenter | Full service retail branch with ATM | ||
Southfield, MI 48076 | ||||
April 2007
|
7755 23 Mile Road | Full service retail branch with ATM | ||
Shelby Township, Michigan 48075 |
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The Banks market area consists primarily of the Metropolitan Detroit area. This is a large
real estate market and the Banks loan portfolio accounts for less than one percent of this market.
The Detroit real estate market has been negatively impacted by the unfavorable economic conditions in
the State of Michigan.
The Corporations earnings depend primarily on net interest income. Management strives to maximize
net interest income through monitoring the economic and competitive environment and making
appropriate adjustments in the characteristics and pricing of our products and services.
Other factors that contribute significantly to our earnings are the maintenance of asset quality
and efficient operations. Management continually monitors the quality of the loan portfolio and
the impact of the economic and competitive environment and works to maintain asset quality.
The Corporation recorded net income of $154,000 during the three months ended March 31, 2011,
compared to a net income of $1,128,000 during the same period during 2010. The net income was
primarily the result of net interest income, partially offset by costs related to non-performing
assets, such as the provision for loan losses and write-downs to real estate owned.
The Corporation reported provision for loan losses of $1,395,000 for the three month period ended
March 31, 2011, compared to $100,000 for the same period in 2010, an increase of $1,295,000. The
provision for loan losses were primarily due to net charge-offs during the three month ended March
31, 2011. Net charge-offs during the first quarter of 2011 amounted to $1,395,000. The
charge-offs recorded during the first quarter of 2011 had allocations of $396,000 in the allowance
for loan loss as of December 31, 2010. The difference between the charge-offs recorded during the
three months ended March 31, 2011 and the allocation in the allowance for loan losses at December
31, 2010 was primarily due to full charge-offs taken on loans which are not specifically analyzed
because the outstanding balance of those loans were less than $500,000. These loans were assigned
an allocation based on historical charge-offs. The Corporations policy is to specifically analyze
all impaired loans with a balance over $500,000. The Corporation also reported write-downs on real
estate of $326,000 for the three months ended March 31, 2011 compared to $656,000 for the same
period in 2010, a decrease of $330,000 or 50%.
As a result of the loss recorded during 2009, the capitalization status of the Bank declined from
well capitalized to undercapitalized. As a result of the decline in the Banks capitalization
level, the Bank is limited in its utilization of brokered deposits. The Bank is also restricted in
the setting of deposit interest rates. Additionally, there are limitations in the borrowing terms
and capacity with the Federal Reserve Bank. The Bank submitted a Capital Restoration Plan (CRP)
to the FDIC and OFIR on December 15, 2009, due to our undercapitalized status based on our
September 30, 2009 regulatory report of condition and income. An amended CRP was submitted to the
FDIC and OFIR on May 18, 2010. This CRP was rejected because capital has not been
successfully raised within the 120 days of the issuance of the consent order. An amended CRP was
submitted on May 24, 2010. This CRP was also rejected because capital has not been successfully
raised. The CRP addresses, among other things, the steps management will take to cause our capital
levels to return to the minimum level to be adequately capitalized.
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Table of Contents
Due to our financial condition, the Federal Reserve Bank of Chicago (FRB) required that our Board
of Directors sign a formal enforcement action (Consent Order) with the FRB which
conveys specific actions needed to address certain findings from
their examination and to address
our current financial condition. We entered into the Written Order on June 15, 2010, which
contains certain requirements that are to be met by specific dates, including the submission of a
capital plan, the submission of annual cash flow projections and the submission of quarterly update
reports.
Management continues to supplement its Special Assets Department, which is responsible for the
management of most non-performing loans and the liquidation of real estate owned. During 2011, the
Bank will continue to focus on the reduction of non-performing assets. The Special Assets
Department was created in 2008 to evaluate and manage the special assets portfolio effectively and
to reduce the amount of non-performing assets. In 2009 and 2010, additional resources were
provided to this department by adding a Special Assets Manager in 2009 and additional loan officer
in 2009 and 2010 in this department. The reduction of non-performing assets is a primary objective
of management and is critical to the future success of the Corporation.
Net Interest Income
2011 Compared to 2010. As noted on the chart on the following page, net interest income for the
three month period ended March 31, 2011 was $8,569,000, compared to $8,055,000 for the same period
in 2010, an increase of $514,000 or 6% for the period. This increase was caused primarily by the
decline in the cost of liabilities. Similarly, the increase in the Corporations net interest
spread and net interest margin was primarily due to the decline in the cost on interest bearing
liabilities. The Corporations interest rate margin was 3.96% for the three month period ended
March 31, 2011 compared to 3.47% for the same period in 2010. The Corporations interest rate
spread was 3.84% for the three month period ended March 31, 2011 compared to 3.27% for the same
period in 2010.
Average Balances, Interest Rates and Yields. Net interest income is affected by the difference
(interest rate spread) between rates of interest earned on interest-earning assets and rates of
interest paid on interest-bearing liabilities and the relative amounts of interest-bearing
liabilities and interest-earning assets. When the total of interest-earning assets approximates or
exceeds the total of interest-bearing liabilities, any positive interest rate spread will generate
net interest income. Financial institutions have traditionally used interest rate spreads as a
measure of net interest income. Another indication of an institutions net interest income is its
net yield on interest-earning assets or net interest margin, which is net interest income
divided by average interest-earning assets.
The following table sets forth certain information relating to the Corporations consolidated
average interest-earning assets and interest-bearing liabilities and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average daily balance of assets or liabilities,
respectively, for the periods presented. During the periods indicated, non-accruing loans, if any,
are included in the loan category.
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Three months ended March 31, 2011 | Three months ended March 31, 2010 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
(In thousands) | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||
Assets |
||||||||||||||||||||||||
Interest bearing deposits with banks |
$ | 93,261 | $ | 136 | 0.59 | % | $ | 65,286 | $ | 37 | 0.23 | % | ||||||||||||
Federal funds sold |
55 | 1 | 7.37 | % | 119 | 1 | 3.41 | % | ||||||||||||||||
Securities, available for sale |
54,131 | 442 | 3.31 | % | 49,835 | 168 | 1.37 | % | ||||||||||||||||
Loans |
729,132 | 10,369 | 5.77 | % | 826,719 | 11,778 | 5.78 | % | ||||||||||||||||
Sub-total earning assets |
876,579 | 10,948 | 5.07 | % | 941,959 | 11,984 | 5.16 | % | ||||||||||||||||
Other assets |
31,030 | 31,949 | ||||||||||||||||||||||
Total assets |
$ | 907,609 | $ | 973,908 | ||||||||||||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||
Interest bearing deposits |
$ | 712,596 | $ | 2,119 | 1.21 | % | $ | 769,744 | $ | 3,543 | 1.87 | % | ||||||||||||
Other borrowings |
73,692 | 260 | 1.43 | % | 73,828 | 386 | 2.12 | % | ||||||||||||||||
Sub-total interest bearing liabilities |
786,288 | 2,379 | 1.23 | % | 843,572 | 3,929 | 1.89 | % | ||||||||||||||||
Non-interest bearing deposits |
90,050 | 84,327 | ||||||||||||||||||||||
Other liabilities |
2,993 | 2,442 | ||||||||||||||||||||||
Stockholders equity |
28,278 | 43,567 | ||||||||||||||||||||||
Total liabilities and stockholders
equity |
$ | 907,609 | $ | 973,908 | ||||||||||||||||||||
Net interest income |
$ | 8,569 | $ | 8,055 | ||||||||||||||||||||
Net interest rate spread |
3.84 | % | 3.27 | % | ||||||||||||||||||||
Net interest margin on earning assets |
3.96 | % | 3.47 | % | ||||||||||||||||||||
Rate/Volume Analysis. The following table analyzes net interest income in terms of changes in
the volume of interest-earning assets and interest-bearing liabilities and changes in yields and
rates. The table reflects the extent to which changes in the interest income and interest expense
are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined
impact of volume and rate have been allocated proportionately to changes due to volume and changes
due to rate.
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Table of Contents
2011/2010 | ||||||||||||
Change in Interest Due to: | ||||||||||||
Average | Average | Net | ||||||||||
(In thousands) | Balance | Rate | Change | |||||||||
Assets |
||||||||||||
Interest bearing deposits with banks |
$ | 40 | $ | 59 | $ | 99 | ||||||
Federal funds sold |
(1 | ) | 1 | | ||||||||
Investment securities, available for sale |
33 | 241 | 274 | |||||||||
Loans |
(1,388 | ) | (21 | ) | (1,409 | ) | ||||||
Total earning assets |
($1,316 | ) | $ | 280 | ($1,036 | ) | ||||||
Liabilities |
||||||||||||
Interest bearing deposits |
($159 | ) | ($1,265 | ) | ($1,424 | ) | ||||||
Other borrowings |
1 | (127 | ) | (126 | ) | |||||||
Total interest bearing liabilities |
($159 | ) | ($1,391 | ) | ($1,550 | ) | ||||||
Net interest income |
$ | 514 | ||||||||||
Net interest rate spread |
0.57 | % | ||||||||||
Net interest margin on earning assets |
0.49 | % | ||||||||||
Provision for Loan Losses
2011 Compared to 2010. The provision for loan losses was $1,395,000 for the three month period
ended March 31, 2011, compared to $100,000 for the same period in 2010, an increase of $1,295,000
or 1295% for the period. The provision for loan losses were primarily due to net charge-offs
during the period, which amounted to $1,395,000 for the period and was substantiated by
managements internal analysis of the adequacy of the allowance for loan losses.
Non-accrual loans were $71,953,000 at March 31, 2011 compared to $66,563,000 at December 31, 2010,
an increase of $5,390,000 during the three months ended March 31, 2011. This increase was due to
the migration of primarily previously identified classified loans. These loans have been
identified as impaired loans and have been charged down to the value of the collateral or an
appropriate reserve has been identified in the allowance for loan loss. Of this increase, all but
approximately $1,183,000 were identified at December 31, 2010 as classified loans with reserves
for losses established accordingly.
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Table of Contents
The decline in the economic environment in Southeastern Michigan during 2009 and 2010 has
negatively impacted many or the Banks commercial borrowers. This decline in economic conditions
is heavily impacted by conditions and events that have recently impacted the
automotive industry, including the bankruptcy of two major automotive manufacturers and resulting
shut down of production and layoffs of employees. These two automotive manufacturers were
reorganized in 2009. Subsequently, the domestic automotive manufacturing industry and the economic
environment in Southeastern Michigan began to show signs of improvement during the second half of
2010. However, this improvement in the economic environment in Southeastern Michigan has not yet
led to an improvement in the level of delinquent or non-performing loans in the Banks loan
portfolio or to an increase in the underlying collateral value of our loan portfolio or holdings of
other real estate. Management has recognized this trend in our analysis of the allowance for loan
losses at March 31, 2011.
The adequacy of the allowance for loan losses was based upon managements assessment of relevant
factors, including types and amounts of non-performing loans, historical loss experience on such
types of loans, and current economic conditions.
Non-interest Income (Loss)
2011 Compared to 2010. Non-interest income was $75,000 for the three month period ended March 31,
2011 compared to a non-interest loss of ($59,000) for the same period in 2010. The increase in
non-interest income was primarily due to the decline in the amount of write-downs on other real
estate during 2011. During the three months ended March 31, 2011, the Corporation recorded
write-downs on real estate in the amount of $326,000 compared to $656,000 during the same period in
2010.
When transactions related to other real estate and securities are excluded, non-interest income for
the three month period ended March 31, 2011 amounted to $477,000 compared to $539,000 during the
same period in 2010, a decrease of $62,000 or 11% for the period. This decrease is primarily caused
by the decrease in the service charges on deposit accounts and the gain on the sale of loans during
the period in 2011.
Non-interest Expense
2011 Compared to 2010. Non-interest expense was $7,095,000 for the three month period ended March
31, 2011, compared to $6,768,000 for the same period in 2010, an increase of $327,000 or 5% during
the period. The increase was primarily due to the increase in defaulted loan expense and insurance
expense during the period.
Salaries and employee benefits amounted to $3,190,000 for the three month period ended March 31,
2011, compared to $3,119,000 for the same period in 2010, an increase of $71,000 or 2% for the
period. As of March 31, 2011, the number of full time equivalent employees was 190 compared to 195
as of March 31, 2010.
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Income Tax Provision
2011 Compared to 2010. Income tax expense was $0 for the three month periods ended March 31, 2011
and 2010. Management recorded a valuation allowance on the Corporations deferred tax
asset during 2009. This valuation allowance amounted to $30,428,000 at March 31, 2011. Until this
valuation allowance is retired, the Corporation will not record any income tax expense or benefit.
Comparison of Financial Condition at March 31, 2011 and December 31, 2010
Assets. Total assets at March 31, 2011 were $896,994,000 compared to $915,684,000 at December 31,
2010, a decrease of $18,690,000 or 2%. The decrease was primarily due to the decrease in loans.
Interest bearing deposits with banks. Total interest bearing deposits with banks at March 31, 2011
were $95,801,000 compared to $87,075,000 at December 31, 2010, an increase of $8,726,000 or 10%.
Interest bearing deposits with banks consists primarily of overnight deposits with the Federal
Reserve Bank, business accounts with other correspondents banks and time deposits from other banks.
These time deposits are fully insured and mature in less than thirty months.
Mortgage Loans Held for Sale. Total mortgage loans held for sale at March 31, 2011 were $749,000
compared to $353,000 at December 31, 2010, an increase of $396,000 or 112%. This increase was a
result of the increase in the level of residential real estate mortgage loans waiting to be
purchased by mortgage correspondents.
Securities Available for Sale. Total securities, available for sale, at March 31, 2011 were
$53,117,000 compared to $54,811,000 at December 31, 2010, a decrease of $1,694,000 or 3%. The
decrease is primarily due to principal payments received on mortgage backed securities.
Please refer to Note B of the Notes to Condensed Consolidated Financial Statements for the
amortized cost and estimated market value of securities, available for sale. The entire portfolio
has a net unrealized loss of $1,225,000 at March 31, 2011. The unrealized loss is reflected by an
adjustment to stockholders equity.
Federal Home Loan Bank Stock. Federal Home Loan Bank stock was valued at $3,605,000 at March 31,
2011 and December 31, 2010.
Loans. Total loans at March 31, 2011 were $718,187,000 compared to $735,851,000 at December 31,
2010, a decrease of $17,664,000 or 2%. The decrease was primarily due to net charge-offs of
$1,395,000, the transfer of loans in the amount of $1,613,000 to other real estate and normal loan
amortization during the period. Management expects loan balances to continue to decline during
2011. Major categories of loans included in the loan portfolio are as follows (in thousands):
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Table of Contents
3/31/11 | 12/31/10 | 3/31/10 | ||||||||||
Consumer loans |
$ | 25,477 | $ | 25,871 | $ | 28,623 | ||||||
Commercial, financial, & other |
106,859 | 121,015 | 141,338 | |||||||||
Land development loans residential property |
19,749 | 21,975 | 36,089 | |||||||||
Land development loans non-residential property |
9,596 | 9,970 | 9,711 | |||||||||
Commercial real estate construction residential property |
9,835 | 10,613 | 12,164 | |||||||||
Commercial real estate construction non-residential
property |
13,222 | 12,568 | 20,813 | |||||||||
Commercial real estate mortgages |
495,919 | 495,501 | 521,701 | |||||||||
Residential real estate mortgages |
37,530 | 38,338 | 43,522 | |||||||||
718,187 | 735,851 | 813,961 | ||||||||||
Allowance for loan losses |
(27,971 | ) | (27,971 | ) | (30,288 | ) | ||||||
$ | 690,216 | $ | 707,880 | $ | 783,673 | |||||||
The following is a summary of non-performing assets and problems loans (in thousands):
3/31/11 | 12/31/10 | 3/31/10 | ||||||||||
Troubled debt restructuring |
$ | 48,499 | $ | 48,527 | $ | 31,737 | ||||||
Over 90 days past due and still accruing |
236 | | 1,127 | |||||||||
Non-accrual loans |
71,953 | 66,563 | 81,163 | |||||||||
Total non-performing loans |
120,688 | 115,090 | 114,027 | |||||||||
Real estate owned |
22,120 | 21,502 | 24,467 | |||||||||
Other repossessed assets |
| | | |||||||||
Other non-performing assets |
22,120 | 21,502 | 24,467 | |||||||||
Total non-performing assets |
$ | 142,808 | $ | 136,592 | $ | 138,494 | ||||||
The increase in non-performing loans was largely due to the increase in non-accrual loans,
which amount to $71,953,000 and $66,563,000 at March 31, 2011 and December 31, 2010, respectively.
The distribution of non-accrual loans by loan type (in thousands) is as follows:
Number of | ||||||||
Loans | Balance | |||||||
Consumer loans |
23 | $ | 2,179 | |||||
Commercial, financial, & other |
44 | 13,617 | ||||||
Land development loans residential property |
13 | 10,890 | ||||||
Land development loans non-residential property |
3 | 1,943 | ||||||
Commercial real estate construction residential property |
7 | 7,302 | ||||||
Commercial real estate construction non-residential property |
1 | 258 | ||||||
Commercial real estate mortgages |
62 | 34,802 | ||||||
Residential real estate mortgages |
13 | 962 | ||||||
Total non-accrual loans |
166 | $ | 71,953 | |||||
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The increase in non-accrual loans during the period was primarily due to the downgrading of
24 loans to non-accrual status for $9,477,000 and partially offset by net charge-offs of
$1,395,000 and the transfer of 5 loans to other real estate for $1,613,000. This increase was
primarily due to
the migration of previously identified classified loans. These loans have been identified as
impaired loans and have been charged down to the value of the collateral or an appropriate reserve
has been identified in the allowance for loan loss. Loans transferred to non-accrual status during
2011 in the amount of $9,348,000 were identified at December 31,
2010 as classified loans with
reserves for losses established accordingly. As these loans were identified as classified loans
with the appropriate risk allocation in the allowance for loan losses at December 31, 2010, the
migration of these loans to non-accrual status did not have a significant impact on the allowance
for loan losses.
A summary of the loans transferred to non-accrual status during the three months ended March 31,
2011 is listed below (balances, in thousands):
Number of | ||||||||
Loans | Balance | |||||||
Consumer loans |
5 | $ | 656 | |||||
Commercial, financial, & other |
6 | 687 | ||||||
Land development loans residential property |
2 | 455 | ||||||
Land development loans non residential property |
1 | 210 | ||||||
Commercial real estate mortgages |
8 | 7,353 | ||||||
Residential real estate mortgages |
2 | 116 | ||||||
Total non-accrual loans |
24 | $ | 9,477 | |||||
Loans qualifying as troubled debt restructuring amounted to $48,499,000 and $48,526,000 at
March 31, 2011 and December 31, 2010, respectively. These loans qualified as troubled debt
restructuring primarily due to the temporary change in payment type from principal and interest to
interest only or the lengthening the amortization period of certain loans. Loans categorized as
troubled debt restructuring at March 31, 2011 are in compliance with their modified terms. The
specific allowance of loans categorized as troubled debt restructuring was $6,023,000 and
$6,310,000 at March 31, 2011 and December 31, 2010, respectively.
The most significant proportion of the Banks non-performing loans continues to be in the land
development and commercial real estate construction segments of the Banks loan portfolio. These
loans comprise 8% of loans and 28% of non-accrual loans at March 31, 2011. Management has
implemented a strategy to decrease the amount of loans in these segments. These loans have
decreased 5% during the first three months of 2011, while the loan portfolio has declined by 2%
during the same period.
Management has identified substandard loans over $500,000. These loans are individually discussed
by management and strategies are developed and implemented to manage these loans most effectively.
Additionally, these loans have been evaluated under ASC 310-40 and appropriate reserve has been
set up in the allowance for loan losses.
Allowance for Loan Losses. The allowance for loan losses was $29,971,000 at March 31, 2011 and
December 31, 2010. The percentage of allowance for loan loss to loans was 3.89%, 3.80%
and 3.72 at March 31, 2011, December 31, 2010 and March 31, 2010, respectively. The Corporation
recorded net charge-offs of $1,395,000 during the three months ended March 31, 2011. The loans
charged off during the three months ended March 31, 2011 has allocation in the allowance for loan
losses at December 31, 2010 amounting to $396,000.
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The decline in the economic environment in Southeastern Michigan during 2009 and 2010 has
negatively impacted many or the Banks commercial borrowers. This decline in economic conditions
is heavily impacted by conditions and events that have recently impacted the automotive industry,
including the bankruptcy of two major automotive manufacturers and resulting shut down of
production and layoffs of employees. These two automotive manufacturers were reorganized in 2009.
Subsequently, the domestic automotive manufacturing industry and the economic environment in
Southeastern Michigan began to show signs of improvement during the second half of 2010. However,
this improvement in the economic environment in Southeastern Michigan has not yet led to an
improvement in the level of delinquent or non-performing loans in the Banks loan portfolio or to
an increase in the underlying collateral value of our loan portfolio or holdings of other real
estate.
Management has recognized this trend in our analysis of the allowance for loan losses at March 31,
2011. The allowance for loan losses was based upon managements assessment of relevant factors,
including loan growth, types and amounts of non-performing loans, historical and anticipated loss
experience on such types of loans, and current economic conditions. If collateral values continue
to decline, additions to the allowance for loan losses will be required and will have an adverse
effect on the Corporations earnings through increases to the provision for loan losses.
The following is an analysis of the allowance for loan losses (in thousands):
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Three Months | Year | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
03/31/11 | 12/31/10 | 03/31/10 | ||||||||||
Balance, beginning of year |
$ | 27,971 | $ | 35,125 | $ | 35,125 | ||||||
Charge-offs: |
||||||||||||
Consumer loans |
| 1,019 | 342 | |||||||||
Commercial, financial & other |
136 | 6,385 | 1,521 | |||||||||
Land development loans residential property |
157 | 1,887 | 1,292 | |||||||||
Land development loans non-residential property |
| 36 | 229 | |||||||||
Commercial real estate construction residential property |
319 | 10,046 | 906 | |||||||||
Commercial real estate construction non-residential
property |
58 | 300 | 36 | |||||||||
Commercial real estate mortgages |
795 | 4,455 | 558 | |||||||||
Residential real estate mortgages |
99 | 276 | 109 | |||||||||
Recoveries: |
||||||||||||
Consumer loans |
8 | 203 | 23 | |||||||||
Commercial, financial & other |
11 | 330 | 15 | |||||||||
Land development loans residential property |
89 | 43 | 9 | |||||||||
Land development loans non-residential property |
| | | |||||||||
Commercial real estate construction residential property |
51 | 1 | 1 | |||||||||
Commercial real estate construction non-residential
property |
| | | |||||||||
Commercial real estate mortgages |
10 | 622 | 8 | |||||||||
Residential real estate mortgages |
| 73 | | |||||||||
Net charge-offs (recoveries) |
1,395 | 23,132 | 4,937 | |||||||||
Provision for loan losses |
1,395 | 15,978 | 100 | |||||||||
Balance, end of period |
$ | 27,971 | $ | 27,971 | $ | 30,288 | ||||||
Allowance to total loans |
3.89 | % | 3.80 | % | 3.72 | % | ||||||
Allowance to nonperforming assets |
23.18 | % | 24.30 | % | 26.56 | % | ||||||
Net charge-offs to average loans |
0.19 | % | 2.94 | % | 0.60 | % | ||||||
Premises and Equipment. Bank premises and equipment at March 31, 2011 were $18,969,000
compared to $19,195,000 at December 31, 2010, a decrease of $226,000 or 1%. The decrease is
primarily due to depreciation during the period.
Other Real Estate. Other real estate at March 31, 2011 was $22,120,000 compared to $21,502,000 at
December 31, 2010, an increase of $618,000 or 3%. The distribution of other real estate by
property type is listed below (in thousands):
Number of | ||||||||
Property Type | Properties | Amount | ||||||
Single Family Homes |
21 | $ | 1,539 | |||||
Multi-Family |
2 | 550 | ||||||
Condominium |
21 | 1,341 | ||||||
Vacant Land |
25 | 11,187 | ||||||
Commercial |
10 | 3,490 | ||||||
Office/Retail |
7 | 4,013 | ||||||
Total |
86 | $ | 22,120 | |||||
Other real estate is comprised of real estate owned of $19,188,000 and real estate in
redemption status of $2,933,000. Thirteen properties with a book value of $2,055,000 are currently
generating rental income.
Accrued Interest Receivable. Accrued interest receivable at March 31, 2011 was $3,310,000 compared
to $3,286,000 at December 31, 2010, an increase of $24,000 or 1%. The increase was primarily due
to the increase in the accrued interest receivable on loans.
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Table of Contents
Other Assets. Other assets at March 31, 2011 were $1,598,000 compared to $11,277,000 at
December 31, 2010, a decrease of $9,679,000 or 86%. The decrease was primarily due to the receipt
of income tax refunds for 2004 through 2007 in the amount of $7,248,000.
Deposits. Total deposits at March 31, 2011 were $794,153,000 compared to $812,101,000 at
December 31, 2010, a decrease of $17,948,000 or 2%. The following is a summary of the distribution
of deposits (in thousands):
03/31/11 | 12/31/10 | 03/31/10 | ||||||||||
Non-interest bearing: |
||||||||||||
Demand |
$ | 95,075 | $ | 88,267 | $ | 86,407 | ||||||
Interest bearing: |
||||||||||||
Checking |
$ | 71,853 | $ | 73,107 | $ | 79,566 | ||||||
Money market |
56,274 | 53,499 | 57,864 | |||||||||
Savings |
43,101 | 41,214 | 44,992 | |||||||||
Time, under $100,000 |
277,615 | 291,478 | 296,370 | |||||||||
Time, $100,000 and over |
250,235 | 264,536 | 286,818 | |||||||||
699,078 | 723,834 | 765,610 | ||||||||||
Total deposits |
$ | 794,153 | $ | 812,101 | $ | 852,017 | ||||||
The decrease in deposits was primarily due to the decrease in brokered time deposits during a
period of decreasing interest rates and the accelerated liquidation of a wholesale money market
deposit program by management. Management continues to implement a strategy to change the mix of
the deposit portfolio by limiting its exposure to wholesale deposits and focusing on retail
deposits.
The Bank has implemented a strategy to utilize retail deposits as the primary funding for the
Banks growth. Public funds and secured borrowings are also utilized as funding sources. The mix
of these sources is determined by the Banks Asset and Liability Committee.
Public funds consist of interest checking and time deposits of local governmental units. They are
the result of strong relationships between the Bank and the communities in the Banks marketing
area.
Brokered deposits are included in the Time, $100,000 and over category. Brokered deposits were $0,
$0 and $8,767,000 at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.
46
Table of Contents
The following is a summary of the distribution of municipal deposits (in thousands):
03/31/11 | 12/31/10 | 03/31/10 | ||||||||||
Interest bearing checking |
$ | 2,795 | $ | 2,940 | $ | 2,485 | ||||||
Time, $100,000 and over |
3,496 | 3,546 | 4,368 | |||||||||
Total municipal deposits |
$ | 6,291 | $ | 6,486 | $ | 6,853 | ||||||
Federal Home Loan Bank Advances. Federal Home Loan Bank advances were $63,668,000 at March
31, 2011 compared to $63,716,000 at December 31, 2010, a decrease of $48,000. The decrease was
due to the scheduled partial repayment of a Federal Home Loan Bank advance.
Accrued Interest Payable. Accrued interest payable at March 31, 2011 was $1,079,000 compared to
$1,056,000 at December 31, 2010, an increase of $23,000 or 2%. The increase was primarily due to
the timing of deposit maturies.
Other Liabilities. Other liabilities at March 31, 2011 were $1,100,000 compared to $1,852,000 at
December 31, 2010, a decrease of $752,000 or 41%. The decrease was primarily due to the decrease
in accrued liabilities during the period.
Subordinated Debentures. Subordinated debentures were $10,000,000 at March 31, 2011 and December
31, 2010. On December 19, 2002, the Corporation issued $10,000,000 of floating rate obligated
mandatory redeemable securities through a special purpose entity as part of a pooled offering. The
securities have a term of thirty years. The Corporation may redeem the securities after five years
at face value. They are considered to be Tier 1 capital for regulatory capital purposes. Debt
issue costs of $300,000 have been entirely amortized. During the third quarter of 2009, the
Corporation elected to defer regularly scheduled quarterly interest payments on the Corporations
subordinated debentures. The terms of the subordinated debentures allow for the deferral of
regularly scheduled quarterly interest payments for up to twenty consecutive quarters.
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Table of Contents
Capital
Stockholders equity at March 31, 2011 was $26,994,000 compared to $26,959,000 as of December 31,
2010, an increase of $35,000. The increase was due to net income during the period.
The Corporation has experienced large net losses during 2008, 2009 and 2010 due to the continued
decline in economic conditions in Southeastern Michigan. The recent bankruptcy of two major
automotive manufacturers and resulting shut down of production and layoffs of employees have
negatively affected the operating results even though the Corporation does not have any direct
exposure to the automotive industry. Additionally, economic conditions have continued to erode the
value of residential real estate and commercial real estate in the Banks market area causing
write-downs in the real estate owned portfolio further contributing to net losses.
The regulatory capital ratios of the Corporations and the Bank are presented in Note F. Based on
the respective regulatory capital ratios, the Bank is considered to be undercapitalized at March
31, 2011 and December 31, 2010. The decline in the Banks regulatory capital position has been
caused primarily by the losses sustained by the Bank.
The capital ratios disclosed in the middle column of the table in Note F are minimum requirements.
Higher capital ratios may be required by federal and state bank regulators if warranted by the
particular circumstances or risk profiles of specific institutions.
Applicable federal prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Based on its regulatory capital ratios at March 31, 2011, the Bank is
undercapitalized. Undercapitalized institutions are subject to close monitoring by their federal
bank regulator, restrictions on asset growth and expansion, and other significantly greater
regulatory restrictions than apply to well-capitalized or adequately capitalized institutions.
Without the prior approval of the FDIC, the Bank is prohibited from paying any dividend, or making
any other capital distribution to, the Corporation. The Bank is also forbidden to pay any
management fee to the Corporation. These restrictions may materially adversely affect the cash
flow of the Corporation.
Any proposed addition of any individual to the board of directors of the Corporation or the Bank,
or the proposed employment of any individual as a senior executive officer of either, is subject to
30 days prior written notice to, and the absence of disapproval by, the FDIC. Moreover, an
application to, and approval by, the FDIC will be required before the Bank may (i) enter into any
agreement with any current or former director, officer, employee, or shareholder of the Bank or the
Corporation (or any other current or former institution affiliated party of either) for a golden
parachute payment or excess nondiscriminatory severance pay plan or arrangement (within the meaning
of applicable FDIC regulations), or (ii) make any golden parachute payments or excess
nondiscriminatory severance pay plan payments to any such persons.
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In addition, unless consistent with an approved capital restoration plan and accompanied by a
proportionate improvement in its capital ratios which will allow it to become adequately
capitalized in a reasonable time, the Bank may not permit any increase, from quarter to quarter, in
its average total assets. Further, unless the FDIC has approved its capital restoration plan, the
Bank is implementing that plan, and the FDIC finds the proposed action is consistent with the plan,
the Bank may not, directly or indirectly, acquire any company, depository institution or additional
branch office, or engage in any new line of business.
The Bank is also prohibited from accepting funds obtained, directly or indirectly, by or through
any deposit broker. Further, the Bank may not accept employee benefit plan deposits.
The Corporation needs to raise sufficient capital during 2011 to return the Bank to
well-capitalized status. Management is pursuing various sources of capital and estimates the need
to raise approximately $40 million in capital to be in compliance with its Consent Order with the
FDIC and OFIR. Given the current economic environment, there can be no assurance the Corporation
will be able to raise the estimated capital needed.
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PART I FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity Analysis. The Corporation has sought to manage its exposure to changes
in interest rates by matching the effective maturities or repricing characteristics of the
Corporations interest-earning assets and interest-bearing liabilities. The matching of the assets
and liabilities may be analyzed by examining the extent to which the assets and liabilities are
interest rate sensitive and by monitoring the expected effects of interest rate changes on net
interest income.
An asset or liability is interest rate sensitive within a specific time period if it will mature or
reprice within that time period. If the Corporations assets mature or reprice more quickly or to
a greater extent that its liabilities, the Corporations net portfolio value and net interest
income would tend to increase during periods of rising interest rates but decrease during periods
of falling interest rates. If the Corporations assets mature or reprice more slowly or to a
lesser extent than its liabilities, its net portfolio value and net interest income would tend to
decrease during periods of rising interest rates but increase during periods of falling interest
rates.
The matching of assets and liabilities may be analyzed by examining the extent to which such assets
and liabilities are interest rate sensitive and by monitoring an institutions interest rate
sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific
period if it will mature or reprice within that period. The interest rate sensitivity gap is the
difference between the amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the
amount of interest rate sensitive liabilities, and is considered negative when the amount of
interest rate sensitive liabilities exceed the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would be expected to adversely affect net interest
income while a positive gap would be expected to result in an increase in net interest income,
while conversely during a period of declining interest rates, a negative gap would be expected to
result in an increase in net interest income and a positive gap would be expected to adversely
affect net interest income.
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Different types of assets and liabilities with the same or similar maturities may react differently
to changes in overall market rates or conditions, and thus changes in interest rates may affect net
interest income positively or negatively even if an institution were perfectly matched in each
maturity category. Additionally, the gap analysis does not consider many factors as banking
interest rates move. While the interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to predict the effect
of changing interest rates solely on that measure, without accounting for alterations in the
maturity or repricing characteristics of the balance sheet that occur during changes in market
interest rates.
During periods of rising interest rates, the Corporations assets tend to have prepayments that are
slower than those in an interest rate sensitivity gap and would increase the negative gap position.
Conversely, during a period of declining interest rates, the Corporations assets would tend to
prepay faster than originally expected thus decreasing the negative gap position. In addition,
some of the Corporations assets, such as adjustable rate mortgages, have caps on the amount by
which their interest rates can change in any single period, and therefore may not reprice as
quickly as liabilities in the same maturity category.
The following table sets forth the amounts of interest earning assets and interest bearing
liabilities outstanding at March 31, 2011, which are expected to mature or reprice in each of the
time periods shown below.
Interest Rate Sensitivity Period | ||||||||||||||||||||
1-90 | 91-365 | 1-5 | Over | |||||||||||||||||
(In thousands) | Days | Days | Years | 5 Years | Total | |||||||||||||||
Earning assets |
||||||||||||||||||||
Federal funds sold |
$ | 55 | $ | | $ | | $ | | $ | 55 | ||||||||||
Interest bearing deposits with Banks |
52,814 | 8,311 | 34,676 | | 95,801 | |||||||||||||||
Mortgage loans held for sale |
749 | | | | 749 | |||||||||||||||
Securities available for sale |
0 | 5 | 21 | 53,091 | 53,117 | |||||||||||||||
Federal Home Loan Bank stock |
3,605 | | | | 3,605 | |||||||||||||||
Total loans, net of non-accrual |
142,286 | 145,303 | 333,045 | 25,599 | 646,233 | |||||||||||||||
Total earning assets |
199,509 | 153,619 | 367,742 | 78,690 | 799,560 | |||||||||||||||
Interest bearing liabilities |
||||||||||||||||||||
Total interest bearing deposits |
175,076 | 361,222 | 162,516 | 263 | 699,077 | |||||||||||||||
Federal Home Loan Bank advances |
53,500 | | 10,168 | | 63,668 | |||||||||||||||
Other Borrowings |
| | | | | |||||||||||||||
Subordinated debentures |
10,000 | | | | 10,000 | |||||||||||||||
Total interest bearing liabilities |
238,576 | 361,222 | 172,684 | 263 | 772,745 | |||||||||||||||
Net asset (liability) funding gap |
(39,067 | ) | (207,603 | ) | 195,058 | 78,427 | $ | 26,815 | ||||||||||||
Cumulative net asset (liability) funding gap |
($39,067 | ) | ($246,670 | ) | ($51,612 | ) | $ | 26,815 | ||||||||||||
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Liquidity. Liquidity refers to readily available funds to meet the needs of borrowers and
depositors. Levels of liquidity are closely monitored in conjunction with loan funding
requirements and deposit outflows. Adequate liquidity protects institutions from raising funds
under duress at excessive expense and provides a necessary cushion for occasional unpredictable
aberrations in demand. While adequate liquidity is imperative, excessive liquidity in lower
yielding cash investments or other easily marketable assets reduces potential interest income.
Thus, an appropriate balance must be maintained to protect the institution and at the same time,
prudently maximize income opportunities. Sources of liquidity include federal funds sold,
securities available for sale, loan repayments, core deposits, Federal Home Loan Bank advances and
a federal funds purchase credit facility. Liquidity is continually measured and discussed. When
liquidity and funding projections indicate that liquidity levels are not adequate to meet the
current or projected liquidity needs of the Bank, management intends to make adjustments to improve
the liquidity position.
The Corporation reduced its reliance on federal funds lines of credit as a primary source of funds
during the second and third quarters of 2008. During the third quarter of 2008, the credit
environment became very unstable and the ability to use unsecured federal funds lines of credit
became very limited. As the Corporation had already reduced its reliance upon these lines of
credit as a funding source, the Corporation was not significantly affected. However, this
situation has affected managements process of maintaining adequate levels of liquidity. As this
source of overnight funding has decreased significantly, management has increased the amount of
cash and cash equivalents in order to maintain an adequate level of liquidity. Management has also
increased the amount of securities, available for sale and interest bearing deposits with banks
that can be utilized as collateral against short-term borrowings. The increase in the amount of
cash and cash equivalents and securities, available for sale is funded primarily with deposits and
decreases in loans.
During the third quarter of 2009, the Corporation elected to defer regularly scheduled quarterly
interest payments on the Corporations subordinated debentures for the purpose of supplementing
holding company liquidity. The terms of the subordinated debentures allow for the deferral of
regularly scheduled quarterly interest payments for up to twenty consecutive quarters. The
deferral of interest on the subordinated debentures will result in a corresponding annual deferral
of distributions on the trust preferred securities of approximately $500,000, based on current
interest rates.
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The following tables provide information about the Banks contractual obligations and commitments
at March 31, 2011 (in thousands):
Contractual Obligations
Payments Due By Period | ||||||||||||||||||||
Less Than 1 Year | 1-3 Years | 3-5 Years | Over 5 Years | Total | ||||||||||||||||
Certificates of deposit |
$ | 439,338 | $ | 75,945 | $ | 9,091 | $ | 3,476 | $ | 527,850 | ||||||||||
Long-term borrowings |
53,668 | 10,000 | | | 63,668 | |||||||||||||||
Lease commitments |
522 | 420 | 161 | | 1,103 | |||||||||||||||
Subordinated debentures |
| | | 10,000 | 10,000 | |||||||||||||||
Totals |
$ | 493,528 | $ | 86,365 | $ | 9,252 | $ | 13,476 | $ | 602,621 | ||||||||||
Unused Loan Commitments and Letters of Credit
Amount Of Commitment Expiration Per Period | ||||||||||||||||||||
Less Than 1 Year | 1-3 Years | 3-5 Years | Over 5 Years | Total | ||||||||||||||||
Unused loan commitments |
$ | 23,108 | $ | 7,178 | $ | 4,225 | $ | 7,059 | $ | 41,570 | ||||||||||
Standby letters of credit |
375 | 12 | | | 387 | |||||||||||||||
Totals |
$ | 23,483 | $ | 7,190 | $ | 4,225 | $ | 7,059 | $ | 41,957 | ||||||||||
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Item 4. Controls and Procedures
Disclosure Controls and Procedures As of the end of the period covered by this report,
the registrant carried out an evaluation, under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the registrants disclosure controls and procedures.
Based on the review of the disclosure controls of the registrant, the Chief Executive Officer and
the Chief Financial Officer have concluded that the registrants disclosure controls and procedures
were effective as of March 31, 2011.
Internal Controls Over Financial Reporting There has been no change in the registrants
internal control over financial reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect the registrants
internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the risk factors disclosed in the Corporations annual report on Form 10-K for the
year ended December 31, 2010, the following risk factors may affect the Corporations business,
financial condition or results of operations. All of the risk factors should be considered in
connection with evaluating the forward-looking statements contained in this report because they
could cause the actual results and conditions to differ materially from those projected in
forward-looking statements. The risks highlighted here and in the Corporations annual report are
not the only ones the Corporation faces. If the adverse matters referred to in any of the risk
factors actually occurs, the Corporations business, financial condition or operations could be
adversely and materially affected. In that case, the trading price of the Corporations common
stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
We are subject to restrictions and conditions of a Consent Order issued by the FDIC and OFIR, and
an FRB Written Agreement. We have incurred and expect to continue to incur significant additional
regulatory compliance expense in connection with these enforcement actions, Failure to comply with
the Consent Order or the FRB Written Agreement could result in additional enforcement action
against us, including the imposition of further operating restrictions and monetary penalties.
The FDIC and OFIR have issued a Consent Order with Fidelity Bank and the Company has entered into
an FRB Written Agreement. The Consent Order contains a number of significant directives, including
higher capital requirements, requirements to reduce the level of our classified assets, operating
restrictions and restrictions on dividend payments by the Bank. These restrictions may impede our
ability to operate our own business. Certain directives are listed below:
| Plans for the reduction of delinquencies and classified assets | ||
| Plans for lending and collection policies | ||
| Plans for the reduction of loan concentrations | ||
| The revision and implementation of a comprehensive strategic plan | ||
| The revision of its Liquidity Plan and the submission of weekly liquidity reports to the FDIC and OFIR |
With the exception of raising additional capital, management believes that it has met all of the
provisions of the Consent Order and the Written Order.
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If we fail to comply with the terms and conditions of the Consent Order or the FRB Written
Agreement, the appropriate regulatory authority could take additional enforcement action against
us, including the imposition further operating restrictions and monetary penalties. We could also
be directed to seek a merger partner. We have incurred and expect to continue to incur significant
additional regulatory compliance expense in connection with the enforcement actions, and we will
incur ongoing expenses attributable to compliance with the terms of the enforcement actions.
Although we do not expect it, it is possible regulatory compliance expenses related to the
enforcement actions could have a material adverse impact on us in the future. In addition, our
ability to independently make certain changes to our business is restricted by the terms of the
Consent Order and the FRB Written Agreement, which could negatively impact the scope and
flexibility of our business activities. While we believe that we will be able to take actions that
will result in the Consent Order and the FRB Written Agreement being terminated in the future, we
cannot guarantee that such actions will result in the termination of the Consent Orders and / or
the FRB Written Agreement. Further, the imposition of the Consent Order and the FRB Written
Agreement may make it more difficult to attract and retain qualified employees.
ITEM 6. EXHIBITS
Exhibit 31.1
|
CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 31.2
|
CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1
|
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.2
|
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dearborn Bancorp, Inc. (Registrant) |
||||
/s/ John E. Demmer | ||||
John E. Demmer | ||||
Chairman | ||||
/s/ Michael J. Ross | ||||
Michael J. Ross | ||||
President and Chief Executive Officer | ||||
/s/ Jeffrey L. Karafa | ||||
Jeffrey L. Karafa | ||||
Treasurer and Chief Financial Officer | ||||
Date: May 13, 2011
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Exhibit Index
Exhibit | Description | |
31.1
|
CEO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
CFO Certification. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
58