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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

 

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT

For the transition period from              to             

 

 

FIRST CAPITAL BANCORP, INC.

(Name of Small Business Issuer in its charter)

 

 

 

Virginia   001-33543   11-3782033

(State or other jurisdiction of

Incorporation or organization)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

4222 Cox Road, Glen Allen, Virginia 23060

(Address of principal executive offices)

804-273-1160

(Issuer’s telephone number)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   x

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

2,971,171 shares of Common Stock, par value $4.00 per share, were outstanding at November 11, 2011.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I – FINANCIAL INFORMATION

  

Item 1 – Financial Statements

  
 

Consolidated Statements of Financial Condition September 30, 2011 (unaudited) and December 31, 2010

     3   
 

Consolidated Statements of Operations For the Three Months and Nine Months Ended September 30, 2011 and 2010 (unaudited)

     4   
 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income For the Nine Months Ended September 30, 2011 and 2010 (unaudited)

     5   
 

Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2011 and 2010 (unaudited)

     6   
 

Notes to Consolidated Financial Statements (unaudited)

     7   

Item  2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item  3 – Quantitative and Qualitative Disclosures About Market Risk – Not Applicable

     37   

Item 4 – Controls and Procedures

     37   

PART II – OTHER INFORMATION

  

Item 1 – Legal Proceedings – None to Report

     38   

Item 1A – Risk Factors – Not Applicable

     38   

Item  2 – Unregistered Sales of Equity Securities and Use of Proceeds – None to Report

     38   

Item 3 – Defaults Upon Senior Securities – None to Report

     38   

Item 4 – (Removed and Reserved)

     38   

Item 5 – Other Information – None to Report

     38   

Item 6 – Exhibits

     38   

SIGNATURES

     40   

 

2


Table of Contents

PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

(dollars shown in thousands)

 

     September 30,
2011
    December 31,
2010
 
     (Unaudited)     (*)  

ASSETS

    

Cash and due from banks

   $ 8,186      $ 6,210   

Interest-bearing deposits in other banks

     26,040        26,157   

Investment securities:

    

Available for sale, at fair value

     91,566        86,787   

Held to maturity, at cost

     2,885        2,389   

Restricted, at cost

     4,681        4,669   

Loans, net of allowance for losses

     363,986        386,209   

Other real estate owned

     8,536        2,615   

Premises and equipment, net

     11,192        11,400   

Accrued interest receivable

     2,008        2,062   

Bank owned life insurance

     8,834        448   

Deferred tax asset

     2,711        3,530   

Prepaid FDIC premiums

     1,396        2,206   

Other assets

     3,610        1,343   
  

 

 

   

 

 

 

Total assets

   $ 535,631      $ 536,025   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 48,897      $ 40,379   

Interest-bearing

     383,572        386,491   
  

 

 

   

 

 

 

Total deposits

     432,469        426,870   
  

 

 

   

 

 

 

Accrued expenses and other liabilities

     3,373        2,248   

Securities sold under repurchase agreements

     1,477        1,077   

Subordinated debt

     7,155        7,155   

Federal Home Loan Bank advances

     50,000        55,000   
  

 

 

   

 

 

 

Total liabilities

     494,474        492,350   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock, $4.00 par value, $1,000 liquidation preference, 2,000,000 authorized shares, 10,958 issued and outstanding

     44        44   

Common stock, $4.00 par value, 30,000,000 authorized shares, 2,971,171 issued and outstanding

     11,885        11,885   

Additional paid-in capital

     29,834        29,739   

Retained (deficit) earnings

     (2,347     1,643   

Warrants

     661        661   

Discount on preferred stock

     (336     (434

Accumulated other comprehensive income, net of tax

     1,416        137   
  

 

 

   

 

 

 

Total stockholders’ equity

     41,157        43,675   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 535,631      $ 536,025   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

(*) Derived from audited consolidated financial statements

 

3


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

(dollars shown in thousands, except per share amounts)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011     2010  

Interest income

         

Loans

   $ 5,376      $ 5,947       $ 16,269      $ 17,551   

Investments:

         

Taxable interest income

     513        628         1,582        1,867   

Tax exempt interest income

     128        147         430        388   

Dividends

     25        20         83        63   

Federal funds sold and interest bearing deposits

     12        13         42        32   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     6,054        6,755         18,406        19,901   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

         

Deposits

     1,619        2,007         5,031        6,270   

FHLB advances

     414        478         1,234        1,423   

Subordinated debt and other borrowed money

     34        64         104        180   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     2,067        2,549         6,369        7,873   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     3,987        4,206         12,037        12,028   

Provision for loan loss

     4,726        375         8,572        7,121   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest (loss) income after provision for loan loss

     (739     3,831         3,465        4,907   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income

         

Fees on deposits

     81        71         238        204   

Gain on sale of securities

     —          50         644        216   

Other

     232        131         491        378   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     313        252         1,373        798   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expenses

         

Salaries and employee benefits

     1,794        1,487         4,796        4,281   

Occupancy expense

     213        183         626        554   

Data processing

     207        158         590        561   

Professional services

     178        185         540        565   

Advertising and marketing

     136        42         245        110   

FDIC assessment

     275        239         826        738   

Virginia franchise tax

     110        127         380        402   

Write-down and losses on OREO

     —          195         321        737   

Depreciation

     151        129         453        364   

Other

     518        424         1,536        1,290   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expenses

     3,582        3,169         10,313        9,602   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income before provision for income taxes

     (4,008     914         (5,475     (3,897

Income tax (benefit) expense

     (1,416     277         (1,993     (1,413
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income

     (2,592     637         (3,482     (2,484
  

 

 

   

 

 

    

 

 

   

 

 

 

Effective dividend on preferred stock

     170        170         509        508   

Net (loss) income allocable to common shareholders

   $ (2,762   $ 467       $ (3,991   $ (2,992
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic and diluted (loss) income per common share

   $ (0.93   $ 0.16       $ (1.34   $ (1.01
  

 

 

   

 

 

    

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

(dollars shown in thousands)

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Warrants      Discount
on
Preferred
Stock
    Accumulated
Other
Comprehensive
Income
     Total  

Balance December 31, 2009

   $ 44       $ 11,885       $ 29,696       $ 4,493      $ 661       $ (565   $ 244       $ 46,458   

Net loss

     —           —           —           (2,484     —           —          —           (2,484

Other comprehensive income

                     

Unrealized holding gain arising during period, (net of tax, $710)

     —           —           —           —          —           —          1,379         1,379   
                     

 

 

 

Total comprehensive loss

                        (1,105
                     

 

 

 

Preferred stock dividend

     —           —           —           (411     —           —          —           (411

Accretion of discount on preferred stock

     —           —           —           (97     —           97        —           —     

Stock based compensation

     —           —           33         —          —           —          —           33   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance September 30, 2010

   $ 44       $ 11,885       $ 29,729       $ 1,501      $ 661       $ (468   $ 1,623       $ 44,975   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance December 31, 2010

   $ 44       $ 11,885       $ 29,739       $ 1,643      $ 661       $ (434   $ 137       $ 43,675   

Net loss

     —           —           —           (3,482     —           —          —           (3,482

Other comprehensive income

                     

Unrealized holding gain arising during period, (net of tax, $659)

     —           —           —           —          —           —          1,279         1,279   
                     

 

 

 

Total comprehensive loss

                        (2,203
                     

 

 

 

Preferred stock dividend

     —           —           —           (410     —           —          —           (410

Accretion of discount on preferred stock

     —           —           —           (98     —           98        —           —     

Stock based compensation

     —           —           95         —          —           —          —           95   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance September 30, 2011

   $ 44       $ 11,885       $ 29,834       $ (2,347   $ 661       $ (336   $ 1,416       $ 41,157   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2011 and 2010

(dollars shown in thousands)

 

     2011     2010  
     (Unaudited)  

Cash flows from operating activities

    

Net loss

   ($ 3,482   ($ 2,484

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Provision for loan losses

     8,572        7,121   

Depreciation of premises and equipment

     453        364   

Stock based compensation expense

     95        33   

Deferred income taxes

     160        (1,412

Gain on sale of securities

     644        216   

Loss on sale and write-down of OREO

     321        —     

Increase cash surrender value BOLI

     (137     —     

Net amortization of bond premiums/discounts

     597        446   

Decrease in other assets

     (1,457     (1,381

Decrease in accrued interest receivable

     54        221   

Increase in accrued expenses and other liabilities

     1,125        263   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,945        3,387   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from maturities and calls of securities

     6,500        15,950   

Proceeds from paydowns of securities available-for-sale

     8,437        9,741   

Purchase of securities available-for-sale

     (43,736     (40,225

Proceeds from sale of securities available-for-sale

     24,221        4,178   

Proceeds from sale of OREO

     1,075        851   

Purchase Bank owned life insurance

     (8,249     —     

Purchase of FHLB Stock

     (9     (243

Purchase of Federal Reserve Stock

     (3     (268

Purchases of premises and equipment

     (245     (3,771

Net decrease (increase) in loans

     6,334        (7,765
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,675     (21,552
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposits

     5,599        14,403   

(Repayments) advances from FHLB

     (5,000     5,000   

Dividends on preferred stock

     (410     (411

Net decrease in certificates of deposit

     —          (7,703

Net increase in repurchase agreements

     400        224   
  

 

 

   

 

 

 

Net cash provided by financing activities

     589        11,513   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,859        (6,652

Cash and cash equivalents, beginning of period

     32,367        31,667   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 34,226      $ 25,015   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Interest paid during the period

   $ 6,375      $ 7,918   
  

 

 

   

 

 

 

Taxes paid during the period

   $ 611      $ 825   
  

 

 

   

 

 

 

Supplemental schedule of noncash investing and financing activities

    

Transfer of loans to other real estate owned

   $ 7,317      $ 302   
  

 

 

   

 

 

 

Unrealized gain on securities available for sale

   $ 1,938      $ 2,090   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


Table of Contents

First Capital Bancorp, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation

First Capital Bancorp, Inc. (the “Company”) is the holding company of and successor to First Capital Bank (the “Bank”). Effective September 8, 2006, the Company acquired all of the outstanding stock of the Bank in a statutory share exchange transaction (the “Share Exchange”) pursuant to an Agreement and Plan of Reorganization dated September 5, 2006, between the Company and the Bank (the “Agreement”). The Agreement was approved by the shareholders of the Bank at the annual meeting of shareholders held on May 16, 2006. Under the terms of the Agreement, the shares of the Bank’s common stock were exchanged for shares of the Company’s common stock, par value $4.00 per share, on a one-for-one basis. As a result, the Bank became a wholly owned subsidiary of the Company, the Company became the holding company of the Bank and the shareholders of the Bank became shareholders of the Company.

In management’s opinion the accompanying consolidated financial statements, reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial information as of September 30, 2011 and December 31, 2010 and for the three month and nine month period ended September 30, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America. Results for the three month and nine month period ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011.

The organization and business of the Company, accounting policies followed, and other related information are contained in the notes to the financial statements of the Company as of and for the year ended December 31, 2010 filed as part of the Company’s annual report on Form 10-K. These interim financial statements should be read in conjunction with the annual financial statements.

The Company’s critical accounting policy relates to the evaluation of the allowance for loan losses which is based on management’s opinion of an amount that is adequate to absorb losses in the Company’s existing portfolio. The allowance for loan losses is established through a provision for loan loss based on available information including the composition of the loan portfolio, historical loan losses (to the extent available due to limited history), specific impaired loans, availability and quality of the collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in evaluating the adequacy of the Company’s allowance for loan losses could result in material changes in its financial condition and results of operations. The Company’s policies with respect to the methodology for determining the allowance for loan losses involve a high degree of complexity and require management to make subjective judgments that often require assumptions or estimates about certain matters. This critical policy and its assumptions are periodically reviewed with the Company’s Board of Directors.

Note 2 – Use of Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Note 3 – Earnings per share

Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

7


Table of Contents

The basic and diluted earnings per share calculations are as follows:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 
     (dollars shown in thousands, except per share amounts)  
     2011     2010      2011     2010  

Net (loss) income allocable to common shareholders

   $ (2,762   $ 467       $ (3,991   $ (2,992

Weighted average number of shares outstanding

     2,971,171        2,971,171         2,971,171        2,971,171   
  

 

 

   

 

 

    

 

 

   

 

 

 

Loss per common share - basic

   ($ 0.93   $ 0.16       ($ 1.34   ($ 1.01
  

 

 

   

 

 

    

 

 

   

 

 

 

Effect of dilutive securities:

         

Weighted average number of shares outstanding

     2,971,171        2,971,171         2,971,171        2,971,171   

Effect of stock options

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted average shares outstanding

     2,971,171        2,971,171         2,971,171        2,971,171   
  

 

 

   

 

 

    

 

 

   

 

 

 

Loss per common share - assuming dilution

   ($ 0.93   $ 0.16       ($ 1.34   ($ 1.01
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company has excluded 472,157 shares and 439,388 shares for the three months and nine months ended September 30, 2011 and 292,947 shares and 153,764 shares for the three months and nine months ended September 30, 2010 from the calculation of diluted earnings per share as they were anti-dilutive due to the Company’s net losses during the three and nine month periods ended September 30, 2011 and 2010, since the strike price was greater than the average market price during all periods.

Note 4 – Stock Options

Accounting standards require the Company to measure compensation cost for all stock-based awards at fair value on the date of grant and recognizes compensation expense in the consolidated statements of income over the service period that the awards are expected to vest.

A total of 2,500 options were granted in May 2011. These shares vested immediately and the Company expensed the compensation cost in the second quarter of 2011. In the first quarter of 2011, options were granted totaling 130,500. Vesting of 67,500 shares issued to the Directors, will occur over two years. The remaining 63,000 shares, issued to executive officers and employees, will vest over three years.

 

8


Table of Contents

The options were granted at an exercise price equal to 100% of the fair market value of the common stock on the date of grant. The fair value of each stock option was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table:

 

     2011  
     Second Qtr     First Qtr  

Dividend yield

     0.00     0.00

Expected life in years

     6        6   

Expected volatility

     51.77     51.77

Risk-free interest rate

     2.54     2.87

Weighted average fair value per option granted

   $ 1.45      $ 1.35   

The stock based compensation, in thousands, expensed during the three months and nine months ended September 30, 2011 was $36 and $95, respectively and is included in salaries and employee benefits.

Note 5 – Investment Securities

The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities as of September 30, 2011 and December 31, 2010 were as follows:

 

     September 30, 2011  
     Amortized
Costs
     Gross Unrealized      Fair
Values
 
        Gains      Losses     
     (dollars shown in thousands)  

Available-for-sale

  

U.S. Government agencies

   $ —         $ —         $ —         $ —     

Mortgage-backed securities

     15,562         483         —           16,045   

Corporate bonds

     14,538         4         484         14,058   

CMO securities

     38,749         1,103         —           39,852   

State and political subdivisions - taxable

     8,971         594         —           9,565   

State and political subdivisions - tax exempt

     9,911         408         —           10,319   

SBA - Guarantee portion

     1,679         38         —           1,717   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 89,410       $ 2,630       $ 484       $ 91,556   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Amortized
Costs
     Gross Unrealized      Fair
Values
 
        Gains      Losses     
     (dollars shown in thousands)  

Available-for-sale

  

U.S. Government agencies

   $ 6,533       $ 48       $ —         $ 6,581   

Mortgage-backed securities

     14,834         347         159         15,022   

Corporate bonds

     6,412         21         31         6,402   

CMO securities

     30,587         568         111         31,044   

State and political subdivisions - taxable

     12,319         106         419         12,006   

State and political subdivisions - tax exempt

     12,150         88         246         11,992   

SBA - Guarantee portion

     3,743         12         15         3,740   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 86,578       $ 1,190       $ 981       $ 86,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     September 30, 2011  
     Amortized
Costs
     Gross Unrealized      Fair
Values
 
        Gains      Losses     
     (dollars shown in thousands)  

Held-to-maturity

           

Tax-exempt municipal bonds

   $ 2,885       $ 237       $ 2       $ 3,120   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,885       $ 237       $ 2       $ 3,120   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Amortized
Costs
     Gross Unrealized      Fair
Values
 
        Gains      Losses     
     (dollars shown in thousands)  

Held-to-maturity

  

Tax-exempt municipal bonds

   $ 2,389       $ 54       $ 81       $ 2,362   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,389       $ 54       $ 81       $ 2,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

In the second quarter of 2009, the Company adopted Other-Than-Temporary Impairment (“OTTI”) guidance, as amended, for debt securities regarding recognition and disclosure. The major change in the guidance was that impairment is other-than-temporary if any of the following conditions exists:

 

   

the entity intends to sell the security;

 

   

it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or

 

   

the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell).

If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss.

The Company conducts an assessment of its securities portfolio for OTTI consideration during each quarter. The assessment considers factors such as external credit ratings, delinquency ratios, market price, management’s judgment, expectations of future performance and relevant industry research and analysis. All unrealized losses are considered by management to be temporary given investment security credit ratings, the short duration of the unrealized losses and the intent and ability to retain these securities for a period of time sufficient to recover all unrealized losses. Management’s assessment for the current quarter ended September 30, 2011 resulted in no recognition of OTTI.

The following table details unrealized loss and related fair values in the Company’s available-for-sale investment portfolio aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2011 and December 31, 2010.

 

     September 30, 2011  
     Less than 12 Months      12 Months or More      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Number of
Investments
     Fair
Value
     Unrealized
Losses
 
     (dollars shown in thousands)  

Assets:

  

Corporate bonds

   $ 10,060       $ 482       $ 998       $ 2         8       $ 11,058       $ 484   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All securities

   $ 10,060       $ 482       $ 998       $ 2         8       $ 11,058       $ 484   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2010  
     Less than 12 Months      12 Months or More      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Number of
Investments
     Fair
Value
     Unrealized
Losses
 
     (dollars shown in thousands)  

Assets:

  

Mortgage-backed securities

   $ 6,051       $ 160       $ —         $ —           4       $ 6,051       $ 160   

Corporate bonds

     5,337         31         —           —           5         5,337         31   

CMO securities

     6,545         111         —           —           7         6,545         111   

State & political subdivisions-taxable

     10,011         419         —           —           13         10,011         419   

State & political subdivisions-tax exempt

     8,918         326         —           —           16         8,918         326   

SBA

     2,073         15         —           —           2         2,073         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All securities

   $ 38,935       $ 1,062       $ —         $ —           47       $ 38,935       $ 1,062   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 6 – Loans

Major classifications of loans are as follows:

 

     September 30,
2011
     December 31,
2010
 
     Amount      Amount  
     (dollars shown in thousands)  

Commercial

   $ 39,337       $ 48,004   

Real estate - 1-4 residential

     123,398         118,209   

Real estate - commercial

     146,021         145,399   

Real estate - construction

     10,696         15,852   

Real estate - land development & land loans

     50,233         66,041   

Consumer

     3,163         3,693   
  

 

 

    

 

 

 

Total loans

     372,848         397,198   

Less:

     

Allowance for loan losses

     9,026         11,036   

Net deferred (income) costs

     164         47   
  

 

 

    

 

 

 

Loans, net

   $ 363,986       $ 386,209   
  

 

 

    

 

 

 

A summary of risk characteristics by loan portfolio classification follows:

Commercial and Industrial Business – These loans include loans to businesses that are not secured by real estate. These loans are typically secured by accounts receivable, inventory, equipment, etc. Commercial loans are typically granted to local businesses that have a strong track record of profitability and performance. This category of loans sustained lower than average losses in 2010 and 2011.

Real Estate – 1-4 Residential – This portfolio primarily consists of investor loans secured by properties in the Bank’s normal lending area. Those investor loans are typically a five year rate adjustment loans. These loans generally have an original loan-to-value (“LTV”) of 80% or less. This category also includes home equity lines of credit (“HELOC”). The HELOCs generally had an adjustable rate tied to prime rate and a term of 10 years. Given the declining value of residential properties over the past several years, these loans possess a higher than average level of risk of loss to the bank. Multifamily residential real estate is moderately seasoned and is generally secured by properties in the Bank’s normal lending area.

 

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Table of Contents

Real Estate – Commercial – This portfolio consists of nonresidential improved real estate which includes shopping centers, office buildings, etc. These properties are generally located in the Bank’s normal lending area. Decreased rental income due to the economic slowdown has caused some deterioration in values. As a result, this category of loans has a higher than average level of risk.

Real Estate – Construction – This portfolio has decreased significantly over the past several years as fewer construction loans have been made during the economic downtown. These loans are located in the Bank’s normal lending area.

Real Estate – Land Development and Land Loans – This portfolio includes raw undeveloped land and developed residential lots held by builders and developers. Given the significant decline in value for both developed and undeveloped land due to reduced demand, this portfolio possesses an increased level of risk compared to other loan portfolios. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for customers.

Consumer – Loans in this portfolio are either unsecured or secured by automobiles, marketable securities, etc. They are generally granted to local customers that have a banking relationship with our Bank.

Activity in the allowance for loan losses for the nine months ended September 30, 2011 and 2010 is as follows:

 

     2011     2010  
     (dollars shown in thousands)  

Balance, beginning of year

   $ 11,036      $ 6,600   

Provision for loan losses

     8,572        7,121   

Recoveries

     845        12   

Charge-offs

     (11,427     (2,710
  

 

 

   

 

 

 

Balance, September 30

   $ 9,026      $ 11,023   
  

 

 

   

 

 

 

Ratio of allowance for loan losses as a percent of loans outstanding at the end of the period

     2.42     2.70
  

 

 

   

 

 

 

The following table presents activity in the allowance for loan losses by portfolio segment:

 

     Three Months Ended September 30, 2011  
     RE-Construction,
Land

and Land
Development
    RE-
Commercial
    Commercial     Consumer      RE-1-4
Residential
    Total  
     (dollars shown in thousands)  

Balance, July 1, 2011

   $ 4,000      $ 2,437      $ 2,415      $ 36       $ 1,265      $ 10,153   

Provision for loan losses

     2,926        150        —          —           1,650        4,726   

Loans charged off

     (3,727     (150     (287     —           (1,715     (5,879

Recoveries

     20        —          2        —           4        26   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, September 30, 2011

   $ 3,219      $ 2,437      $ 2,130      $ 36       $ 1,204      $ 9,026   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Three Months Ended September 30, 2010  
     RE-Construction,
Land

and Land
Development
    RE-
Commercial
    Commercial      Consumer      RE-1-4
Residential
    Total  
     (dollars shown in thousands)  

Balance, July 1, 2010

   $ 4,828      $ 2,569      $ 1,696       $ 15       $ 2,373      $ 11,481   

Provision for loan losses

     —          —          375         —           —          375   

Loans charged off

     (426     (85     —           —           (322     (833

Recoveries

     —          —          —           —           —          —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Balance September 30, 2010

   $ 4,402      $ 2,484      $ 2,071       $ 15       $ 2,051      $ 11,023   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2011  
     RE-Construction,
Land

and Land
Development
    RE-
Commercial
    Commercial     Consumer      RE-1-4
Residential
    Total  
     (dollars shown in thousands)  

Balance, January 1, 2011

   $ 4,000      $ 2,500      $ 3,000      $ 36       $ 1,500      $ 11,036   

Provision for loan losses

     5,370        150        600        —           2,453        8,573   

Loans charged off

     (6,971     (213     (1,477     —           (2,766     (11,427

Recoveries

     820        —          7        —           17        844   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, September 30, 2011

   $ 3,219      $ 2,437      $ 2,130      $ 36       $ 1,204      $ 9,026   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2010  
     RE-Construction,
Land

and Land
Development
    RE-
Commercial
    Commercial     Consumer      RE-1-4
Residential
    Total  
     (dollars shown in thousands)  

Balance, January 1, 2010

   $ 2,500      $ 2,285      $ 800      $ 15       $ 1,000      $ 6,600   

Provision for loan losses

     3,400        500        1,436        —           1,785        7,121   

Loans charged off

     (1,498     (301     (177     —           (734     (2,710

Recoveries

     —          —          12        —           —          12   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance September 30, 2010

   $ 4,402      $ 2,484      $ 2,071      $ 15       $ 2,051      $ 11,023   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The charging off of uncollectible loans is determined on a case-by-case basis. Determination of a collateral shortfall, prospects for recovery, delinquency and the financial resources of the borrower and any guarantor are all considered in determining whether to charge-off a loan. Closed-end retail loans that become past due 120 cumulative days and open-end retail loans that become past due 180 cumulative days from the contractual due date will be charged off.

 

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Table of Contents

The following table presents the aging of the unpaid principal in past due loans as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011  
     30 - 89 Days
Past Due
     90+ Days
Past Due
     Nonaccrual
Loans
     Current
Loans
     Total  
     (dollars shown in thousands)  

Commercial

   $ 92       $ —         $ 1,263       $ 37,982       $ 39,337   

Real Estate

              

Residential

     2,111         —           5,366         115,921         123,398   

Commercial

     140         —           2,929         142,952         146,021   

Construction

     —           —           1,173         9,523         10,696   

Land Development and land loans

     —           —           7,017         43,216         50,233   

Consumer

     —           —           707         2,456         3,163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,343       $    —         $ 18,455       $ 352,050       $ 372,848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
     30 - 89 Days
Past Due
     90+ Days
Past Due
     Nonaccrual
Loans
     Current
Loans
     Total  
     (dollars shown in thousands)  

Commercial

   $ —         $ 993       $ 5,615       $ 41,396       $ 48,004   

Real Estate

              

Residential

     719         564         8,402         108,524         118,209   

Commercial

     —           —           355         145,044         145,399   

Construction

     492         —           1,366         13,994         15,852   

Land Development and land loans

     16         —           6,617         59,408         66,041   

Consumer

     10         —           —           3,683         3,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,237       $ 1,557       $ 22,355       $ 372,049       $ 397,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans are determined past due or delinquent based on the contractual terms of the loan. Payments past due 30 days or more are considered delinquent. The accrual of interest is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual at an earlier date if collection of principal or interest is considered doubtful or charged-off if a loss is considered imminent.

All interest accrued but not collected for loans that are placed on nonaccrual are reversed against interest income when the loan is placed on nonaccrual status. Because of the uncertainty of the expected cash flows, the Company is accounting for nonaccrual loans under the cost recovery method, in which all cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future collection of principal and interest are reasonably assured. The number of payments needed to meet this criteria varies from loan to loan. However, as a general rule, this criteria will be considered to have been met with the timely payment of six consecutive regularly scheduled monthly payments.

 

14


Table of Contents

The following table provides details of the Company’s loan portfolio internally assigned grade at September 30, 2011 and December 31, 2010:

 

     September 30, 2011  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  
     (dollars shown in thousands)  

Commercial

   $ 34,296       $ 3,098       $ 1,944       $ —         $ —         $ 39,338   

Real Estate

                 

Residential

     107,536         5,983         9,878         —           —           123,397   

Commercial

     134,123         5,502         6,397         —           —           146,022   

Construction

     2,239         3,607         4,849         —           —           10,695   

Land Development and land loans

     20,312         14,576         15,345         —           —           50,233   

Consumer

     2,216         150         797         —           —           3,163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 300,722       $ 32,916       $ 39,210       $ —         $ —         $ 372,848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  
     (dollars shown in thousands)  

Commercial

   $ 36,318       $ 3,884       $ 7,802       $ —         $ —         $ 48,004   

Real Estate

                 

Residential

     101,115         4,962         12,087         45         —           118,209   

Commercial

     132,060         12,180         1,159         —           —           145,399   

Construction

     4,009         6,739         5,104         —           —           15,852   

Land Development and land loans

     24,220         21,409         20,412         —           —           66,041   

Consumer

     3,415         188         90         —           —           3,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 301,137       $ 49,362       $ 46,654       $ 45       $ —         $ 397,198   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

These credit quality indicators are defined as follows:

Pass – A “pass” rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.

Special mention – A “special mention” asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A “substandard” asset is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.

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

Loss – Assets classified “loss” are considered uncollectible and of such little value that their continuing to be carried as an asset is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.

 

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Table of Contents

The loan risk rankings were updated for the quarter ended September 30, 2011 on September 20, 21 and 22. The loan risk rankings were updated for the quarter ended September 30, 2010 on September 27, 28 and 29.

The following table provides details regarding impaired loans by segment and class at September 30, 2011 and December 31, 2010:

 

     September 30, 2011      December 31, 2010  
     Recorded
Investment
in Impaired
Loans
     Unpaid
Principal
Balance of
Impaired
Loans
     Related
Allowance
     Recorded
Investment
in Impaired
Loans
     Unpaid
Principal
Balance of
Impaired
Loans
     Related
Allowance
 
     (dollars shown in thousands)  

With no related allowance:

                 

Commercial

   $ 409       $ 409       $ —         $ 543       $ 545       $ —     

Consumer

     707         707         —           —           —           —     

Real Estate

                 

Residential

     3,221         3,295         —           3,312         3,382         —     

Commercial

     34         45         —           —           —           —     

Construction

     1,173         2,423         —           505         505         —     

Land Development and land loans

     6,497         7,501         —           1,942         3,044         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,041       $ 14,380       $ —         $ 6,302       $ 7,476       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance:

                 

Commercial

   $ 821       $ 854       $ 250       $ 5,072       $ 5,088       $ 1,912   

Consumer

     —                    

Real Estate

                 

Residential

     3,151         4,304         962         6,246         6,266         1,977   

Commercial

     2,929         3,627         912         355         367         138   

Construction

     —           6         —           1,474         1,489         241   

Land Development and land loans

     1,425         1,574         950         6,091         6,091         1,450   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,326       $ 10,365       $ 3,074       $ 19,238       $ 19,301       $ 5,718   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Total:

                 

Commercial

   $ 1,230       $ 1,263       $ 250       $ 5,615       $ 5,633       $ 1,912   

Consumer

     707         707         —           —           —           —     

Real Estate

                 

Residential

     6,372         7,599         962         9,558         9,648         1,977   

Commercial

     2,963         3,672         912         355         367         138   

Construction

     1,173         2,429         —           1,979         1,994         241   

Land Development and land loans

     7,922         9,075         950         8,033         9,135         1,450   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,367       $ 24,745       $ 3,074       $ 25,540       $ 26,777       $ 5,718   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides details of the balance of the allowance for loan losses and the recorded investment in financing receivables by impairment method for each loan portfolio segment:

 

     Construction
and Land
Development
     Commercial
Real Estate
     Commercial
and
Industrial
     Consumer      Residential      Total  
     (dollars shown in thousands)  

September 30, 2011

                 

Allowance for loan losses

                 

Individually evaluated for impairment

   $ 950       $ 912       $ 250       $ —         $ 962       $ 3,074   

Collectively evaluated for impairment

     2,269         1,525         1,880         36         242         5,952   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 3,219       $ 2,437       $ 2,130       $ 36       $ 1,204       $ 9,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans

                 

Individually evaluated for impairment

   $ 9,615       $ 2,929       $ 1,264       $ 707       $ 5,852       $ 20,367   

Collectively evaluated for impairment

     51,314         143,092         38,073         2,456         117,546         352,481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 60,929       $ 146,021       $ 39,337       $ 3,163       $ 123,398       $ 372,848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

                 

Allowance for loan losses

                 

Individually evaluated for impairment

   $ 1,691       $ 138       $ 1,912       $ —         $ 1,977       $ 5,718   

Collectively evaluated for impairment

     2,756         2,362         16         15         169         5,318   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance

   $ 4,447       $ 2,500       $ 1,928       $ 15       $ 2,146       $ 11,036   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans

                 

Individually evaluated for impairment

   $ 10,012       $ 355       $ 5,615       $ —         $ 9,558       $ 25,540   

Collectively evaluated for impairment

     71,881         145,044         42,389         3,693         113,302         376,309   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 81,893       $ 145,399       $ 48,004       $ 3,693       $ 122,860       $ 401,849   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments on principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining whether a loan is impaired include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Additionally, management’s policy is generally to evaluate only those loans greater than $250 thousand for impairment as these are considered to be individually significant in relation to the size of the loan portfolio. 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 delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the

 

17


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loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The following table presents interest income recognized and the average recorded investment of impaired loans.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     (dollars shown in thousands)      (dollars shown in thousands)  
     Interest
income
recognized
    Average
Recorded
Investment  in

Impaired
Loans
     Interest
income
recognized
    Average
Recorded
Investment  in

Impaired
Loans
 

2011

         

Real Estate

         

Construction, land and land development

   $ 2      $ 11,630       $ 226      $ 11,630   

Commercial

     —          3,638         —          3,638   

Residential

     (5     8,307         222        8,307   

Commercial

     (8     1,368         87        1,368   

Consumer

     —          236         —          236   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (11   $ 25,179       $ 535      $ 25,179   
  

 

 

   

 

 

    

 

 

   

 

 

 

2010

         

Real Estate

         

Construction, land and land development

   $ (43   $ 9,879       $ 76      $ 9,879   

Commercial

     (21     580         (16     580   

Residential

     330        10,142         423        10,142   

Commercial

     (58     5,257         (58     5,257   

Consumer

     —          1         —          1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 208      $ 25,859       $ 425      $ 25,859   
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash payments received on impaired loans are applied on a cash basis with all cash receipts applied first to principal and any payments received in excess of the unpaid principal balance being applied to interest.

As of September 30, 2011, the Company had $2.7 million accruing loans classified as trouble debt restructurings where the measurement of impairment was based on the present value of expected future cash flows.

Troubled Debt Restructurings

The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the current period ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. The Company identified as troubled debt restructurings certain receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology (ASC 450-20). Upon identifying the reassessed receivables as troubled debt restructurings, the Company also identified them as impaired under the guidance in ASC 310-10-35. The amendments in Accounting Standards Update No. 2011-02 require prospective application of the impairment measurement guidance in Section 310-10-35 for those receivables newly identified as impaired. At the end of the first interim period of adoption for the Company (September 30, 2011), the Company determined that there were no receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35.

 

18


Table of Contents

Modification Categories

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

Rate Modification – A modification in which the interest rate is changed.

Term Modification – A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification – Any other type of modification, including the use of multiple categories above.

As of September 30, 2011 and December 31, 2010, there were no available commitments outstanding for troubled debt restructurings.

The following tables present troubled debt restructurings as of September 30, 2011 and December 31, 2010:

 

     September 30, 2011  
     Accrual
Status
     Non-Accrual
Status
     Total Number
of Contracts
     Total
Modifications
 
     (dollars shown in thousands)  

Commercial

   $ 2,200       $ 186         6       $ 2,386   

Real estate - 1-4 residential

     487         3,844         11         4,331   

Real estate - commercial

     —           —           —           —     

Real estate - construction

     —           1,153         5         1,153   

Real estate - land development and land loans

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,687       $ 5,183         22       $ 7,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
     Accrual
Status
     Non-Accrual
Status
     Total Number
of Contracts
     Total
Modifications
 
     (dollars shown in thousands)  

Commercial

   $ —         $ 244         4       $ 244   

Real estate - 1-4 residential

     490         4,942         11         5,432   

Real estate - commercial

     —           —           —           —     

Real estate - construction

     —           1,078         4         1,078   

Real estate - land development and land loans

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 490       $ 6,264         19       $ 6,754   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain. The Company’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

 

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Table of Contents

Loans reviewed for consideration of modification are reviewed for potential impairment at the time of the restructuring. Any identified impairment is recognized as a reduction in the allowance.

The following tables present newly restructured loans that occurred during the three and nine months ended September 30, 2011 and 2010, respectively, of which all loans presented the same outstanding recorded investment both pre-modification and post modification:

 

     Three months ended
September 30, 2011
 
     Number of Contracts      Rate
Modifications
     Term
Modifications
     Interest Only
Modifications
     Payment
Modifications
     Combination
Modifications
     Total
Modifications
 
     (dollars shown in thousands)  

Commercial

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

Real estate - 1-4 residential

     —           —           —           —           —           —           —     

Real estate - commercial

     —           —           —           —           —           —           —     

Real estate - construction

     1         —           —           —           —           107         107   

Real estate - land development and land loans

     —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ —         $ —         $ —         $ —         $ 107       $ 107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three months ended
September 30, 2010
 
     Number of Contracts      Rate
Modifications
     Term
Modifications
     Interest Only
Modifications
     Payment
Modifications
     Combination
Modifications
     Total
Modifications
 
     (dollars shown in thousands)  

Commercial

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

Real estate - 1-4 residential

     8         —           —           —           —           1,879         1,879   

Real estate - commercial

     —           —           —           —           —           —           —     

Real estate - construction

     —           —           —           —           —           —           —     

Real estate - land development and land loans

     —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8       $ —         $ —         $ —         $ —         $ 1,879       $ 1,879   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine months ended
September 30, 2011
 
     Number of Contracts      Rate
Modifications
     Term
Modifications
     Interest Only
Modifications
     Payment
Modifications
     Combination
Modifications
     Total
Modifications
 
     (dollars shown in thousands)  

Commercial

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

Real estate - 1-4 residential

     —           —           —           —           —           —           —     

Real estate - commercial

     —           —           —           —           —           —           —     

Real estate - construction

     3         —           —           —           —           2,307         2,307   

Real estate - land development and land loans

     —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ —         $ —         $ —         $ —         $ 2,307       $ 2,307   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine months ended
September 30, 2010
 
     Number of Contracts      Rate
Modifications
     Term
Modifications
     Interest Only
Modifications
     Payment
Modifications
     Combination
Modifications
     Total
Modifications
 
     (dollars shown in thousands)  

Commercial

     1       $ —         $ —         $ —         $ —         $ 134       $ 134   

Real estate - 1-4 residential

     9         —           —           —           —           2,068         2,068   

Real estate - commercial

     —           —           —           —           —           —           —     

Real estate - construction

     3         —           —           —           —           113         113   

Real estate - land development and land loans

     —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13       $ —         $ —         $ —         $ —         $ 2,315       $ 2,315   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following tables represent financing receivables modified as troubled debt restructurings and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three and nine month periods ended September 30, 2011 and 2010, respectively:

 

     Three months ended  
     September 30, 2011      September 30, 2010  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 
     (dollars shown in thousands)  

Commercial

     —         $ —           1       $ 134   

Real estate - 1-4 residential

     1         139         6         1,194   

Real estate - commercial

     —           —           —           —     

Real estate - construction

     1         108         —           —     

Real estate - land development and land loans

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 247         7       $ 1,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine months ended  
     September 30, 2011      September 30, 2010  
     Number of
Contracts
     Recorded
Investment
     Number of
Contracts
     Recorded
Investment
 
     (dollars shown in thousands)  

Commercial

     —         $ —           1       $ 134   

Real estate - 1-4 residential

     1         139         6         1,194   

Real estate - commercial

     —           —           —           —     

Real estate - construction

     4         220         —           —     

Real estate - land development and land loans

     —           —           —           —     

Consumer

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ 359         7       $ 1,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 7 – Other Real Estate Owned

Changes in other real estate owned were as follows for the nine months ended September 30, 2011 and 2010 in thousands:

 

     Nine Months Ended  
     September 30,  
     2011     2010  
     (dollars shown in thousands)  

Beginning Balance

   $ 2,615      $ 3,388   

Additions

     7,317        1,417   

Sales

     (1,196     (851

Write-downs

     (200     (1,103
  

 

 

   

 

 

 

Balance September 30

   $ 8,536      $ 2,851   
  

 

 

   

 

 

 

Note 8 – Fair Value Disclosures

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would conduct a transaction at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value of a reasonable point within this range is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, we group financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value.

 

   

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities in active markets at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

   

Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on 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 date for substantially the full term of the asset or liability.

 

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Table of Contents
   

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flows methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

Following is a description of the valuation methodologies used for instruments measured as fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). We obtain a single quote for all securities. Quotes for all of our securities are provided by our securities accounting and safekeeping correspondent bank. We perform a review of pricing data by comparing prices received from third party vendors to the previous month’s quote for the same security and evaluate any substantial changes.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. Securities identified as restricted securities, including stock in the Federal Home Loan Bank of Atlanta (FHLB) and the Federal Reserve Bank (FRB), are excluded from the table below since there is no ability to sell these securities except when the FHLB or FRB require redemption based on either our borrowings at the FHLB, or in the case of the FRB, changes in certain portions of our capital.

 

     September 30, 2011  
     Fair Value Measurements Using      Fair
Values
 
     Level 1      Level 2      Level 3     
     (dollars shown in thousands)  

Assets:

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

   $ —         $ 91,556       $ —         $ 91,556   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Fair Value Measurements Using      Fair
Values
 
     Level 1      Level 2      Level 3     
     (dollars shown in thousands)  

Assets:

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

   $ —         $ 86,787       $ —         $ 86,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual loans.

The following describes the valuation techniques used to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Impaired Loans: 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. Fair value is measured based on the value of the collateral securing the loans.

 

23


Table of Contents

Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. In the event a real estate loan becomes a nonperforming loan, or if the valuation is over one year old, either an evaluation by an officer of the Bank or an outside vendor, or an appraisal is performed to determine current market value. We consider the value of a partially completed project for our loan analysis. For nonperforming construction loans, we obtain a valuation of each partially completed project “as is” from a third party appraiser. We use this third party valuation to determine if any charge-offs are necessary.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned: Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell. We believe the fair value component in our valuation of OREO follows the provisions of accounting standards.

The following tables summarize our financial assets that were measured at fair value on a nonrecurring basis during the periods.

 

     September 30, 2011  
     Fair Value Measurements Using      Fair
Values
 
     Level 1      Level 2      Level 3     
     (Dollars shown in thousands)  

Impaired loans

   $ —         $ —         $ 17,293       $ 17,293   

Other real estate owned

     —           —           8,536         8,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 25,829       $ 25,829   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
     Fair Value Measurements Using      Fair
Values
 
     Level 1      Level 2      Level 3     
     (dollars shown in thousands)  

Impaired loans

   $ —         $ —         $ 19,822       $ 19,822   

Other real estate owned

     —           —           2,615         2,615   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 22,437       $ 22,437   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:

Cash and due from banks – The carrying amounts of cash and due from banks approximate their fair value.

Available-for-sale and held-to-maturity securities – Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relaying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities

 

24


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exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. The carrying value of restricted FRB and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

Loans receivable – Fair values are based on carrying values for variable-rate loans that reprice frequently and have no significant change in credit risk. Fair values for certain mortgage loans (for example, one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The interest rates on loans at September 30, 2011 and December 31, 2010 are current market rates for their respective terms and associated credit risk.

Deposit liabilities – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Accrued interest – The carrying amounts of accrued interest approximate their fair values.

Advances from Federal Home Loan Bank The carrying value of advances from the FHLB due within ninety days from the balance sheet date approximate fair value. Fair values for convertible advances are estimated using a discounted cash flow calculation that applies interest rates currently being offered on convertible advances with similar remaining maturities.

Federal Funds purchased and repurchase agreements – The carrying value of federal funds purchased and repurchase agreements due within ninety days from the balance sheet date approximate fair value.

Off-balance-sheet instruments – Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and counterparties’ credit standings. These are not deemed to be material at September 30, 2011 and December 31, 2010.

 

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The estimated fair values of the Company’s financial instruments as of September 30, 2011 and December 31, 2010 are as follows:

 

     September 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
             
     (dollars shown in thousands)  

Financial assets

           

Cash and cash equivalents

   $ 34,226       $ 34,226       $ 32,367       $ 32,367   

Investment securities

     94,451         94,676         89,176         89,149   

Loans receivable, net

     363,986         372,603         386,209         394,489   

Accrued interest

     2,008         2,008         2,062         2,062   

Financial liabilities

           

Deposits

   $ 432,469       $ 441,102       $ 426,871       $ 429,597   

FHLB advances

     50,000         53,957         55,000         57,766   

Federal funds purchased

     —              —           —     

Subordinated debt

     7,155         3,740         7,155         3,455   

Repurchase agreements

     1,477         1,477         1,077         1,077   

Unrecognized financial instruments

           

Standby letters of credit issued

   $ —         $ —         $ —         $ —     

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of our normal operations. As a result, the fair values of our financial instruments will change when interest rates levels change and that change may be either favorable or unfavorable to us. We attempt to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to repay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. We monitor rates and maturities of assets and liabilities and attempt to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate our overall interest rate risk.

Note 9 – Recently Issued Accounting Pronouncements

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in its interim and annual financial statements. Disclosures about Troubled Debt Restructurings (“TDR”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011, the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present. Disclosures related to TDRs under ASU 2010-20 are effective for reporting periods beginning after June 15, 2011.

In April 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. The ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. FASB Accounting Standards Codification Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after

 

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December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently in the process of evaluating the impact that this ASU may have on the consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.“ The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments to the FASB Accounting Standards Codification in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company is currently in the process of evaluating the impact that this ASU may have on the consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU amends the FASB Accounting Standards Codification to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements other than the change in presentation of comprehensive income when this ASU is adopted.

In September 2011, The FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company does not expect the adoption of this ASU to have a material effect on its consolidated financial statements.

 

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ITEM 2.

FIRST CAPITAL BANCORP, INC

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The purpose of this discussion is to focus on important factors affecting the Company’s financial condition and results of operations. The discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements included elsewhere in this report.

This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ materially from those expected included the following:

 

   

General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances.

 

   

Changes in interest rates could reduce income.

 

   

Competitive pressures among financial institutions may increase.

 

   

The businesses that the Company is engaged in may be adversely affected by legislative or regulatory changes, including changes in accounting standards.

 

   

New products developed or new methods of delivering products could result in a reduction in business and income for the Company.

 

   

Adverse changes may occur in the securities market.

OVERVIEW

The net loss for the third quarter of 2011 was $2.6 million, and net loss allocable to common shareholders was $2.8 million, or ($0.93) per fully diluted share compared to a net income of $637 thousand, and a net income allocable to common shareholders of $467 thousand or $0.16 per fully diluted share, in the third quarter of 2010. The loss in the third quarter of 2011 was due primarily to the recognition of losses on several nonaccrual loans and properties included in other real estate owned. In that regard, the Company disposed of other real estate owned and charged-off loans totaling $6.1 million during the third quarter of 2011.

The net loss for the first nine months of 2011 was $3.5 million and the net loss allocable to common shareholders was $4.0 million or ($1.34) per fully diluted share compared to a net loss of $2.5 million and a net loss allocable to common shareholders was $3.0 million or ($1.01) per fully diluted share for the same period of 2010.

During the third quarter of 2011, the Company commenced a mortgage operation. For the third quarter, the Company incurred approximately $180 thousand in start up expenses without production offsets. The Company expects the mortgage operation to make a positive contribution in the fourth quarter of 2011and a positive contribution for 2012.

From a revenue and cost perspective, income before tax and provision for loan losses decreased from $1.3 million for the third quarter of 2010 to $718 thousand for the third quarter of 2011. For the nine months ended September 30, 2011, income pre-tax and pre-provision as compared to the comparable period in 2010 decreased to $3.1 million from

 

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$3.2 million. Contributing to both the three and nine month decrease was the $180 thousand in mortgage operation start-up costs and a reduction in the net interest income for the three months ended September 30, 2011 of $219 thousand due to a reduction in the loan portfolio. The following chart reconciles the above to the net income (loss) for the periods presented.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011     2010  
     (Dollars in thousands)  

Income before tax and provision

   $ 718      $ 1,289       $ 3,097      $ 3,224   

Provision for loan losses

     4,726        375         8,572        7,121   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income tax

     (4,008     914         (5,475     (3,897

Income tax (benefit)

     (1,416     277         (1,993     (1,413
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income

   $ (2,592   $ 637       $ (3,482   $ (2,484
  

 

 

   

 

 

    

 

 

   

 

 

 

Financial Condition

Total assets at September 30, 2011 were $535.6 million, down $394 thousand from $536.0 million at December 31, 2010. Net loans outstanding were $364.0 million at September 30, 2011, a decrease of $22.2 million, compared to the 2010 year-end balance. This was the result of a continued, focused effort by the Bank to decrease its exposure to speculative real estate loans. Deposits increased by $5.6 million to $432.5 million, up 1.3% from December 31, 2010. Our deposit strategy was focused on decreasing noncore funding sources and single service CD relationships and increasing noninterest-bearing deposit accounts which increased $8.5 million or 21.1% from December 31, 2010.

At September 30, 2011, the Company’s investment portfolio totaled $94.5 million, an increase of $5.3 million from $89.2 million at December 31, 2010. Most of the funds that are invested in the Company’s investment portfolio are part of management’s effort to balance interest rate risk, to provide liquidity and income to the Company. Bank owned life insurance of $8.2 million was purchased during the second quarter of 2011 primarily as an investment for the Company.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents a principal source of earnings for the Company. Changes in net interest income during 2011 to date compared to net interest income for the comparable period of 2010 are attributable to decreasing loan portfolio yields, decreasing average balances of loans outstanding and a decrease in total funding costs.

Net interest margin increased 2 basis points for the three months ended September 30, 2011 to 3.26% as compared to 3.24% for the third quarter of 2010, reflecting a decrease in average rate paid on interest-bearing liabilities of 37 basis points from 2.22% for the third quarter of 2010 to 1.85% for the third quarter of 2011. This was offset by a 30 basis point decrease in the average yield on earning assets. The yield on loans, net of discount, was 5.58% and 5.72% for the third quarters of 2011 and 2010, respectively, with the decrease due primarily to decreases in loans outstanding and lower rates during the period. The average yield on investments decreased from 4.00% for the third quarter of 2010 to 3.08% for the third quarter of 2011 while average balances in investments increased from $84.2 million for the third quarter of 2010 to $91.4 million for the third quarter of 2011. Average interest bearing deposits and fed funds sold, which were earning 0.23% for the both quarters of 2010 and 2011, remained unchanged.

For the three months ended September 30, 2011, net interest income was down $482 thousand from $2.5 million for the third quarter of 2010 to $2.1 million for the third quarter of 2011. This decrease is due to the reduction in average loans outstanding of $33.0 million from $412.5 million for the quarter ended September 30, 2010 compared to $379.5 million for the quarter ended September 30, 2011.

 

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Total interest and fees on loans, the largest component of net interest income, decreased $571 thousand or 9.60% to $5.4 million during the third quarter of 2011 compared to $5.9 million for the same period in 2010 primarily due to decreases in loans outstanding of $3.0 million since September 30, 2010.

Interest expense on deposits decreased $388 thousand to $1.6 million, or 19.3% for the third quarter of 2011 compared to the same period of 2010. The decrease in deposit expense is due to the restructuring of the deposit mix and a decrease in overall rates paid on deposits as interest rates paid on interest bearing deposits decreased 35 basis points to 1.68% from the third quarter of 2011 from 2.03% for the third quarter of 2010.

For the nine months ended September 30, 2011, the net interest margin increased 11 basis points from 3.17% for the first nine months of 2010 to 3.28% for the first nine months of 2011. The primary increase in the net interest margin is the reduction of the average rate paid on interest bearing liabilities from 2.35% for the nine months ended September 30, 2010 to 1.93% for the same period of 2011, a reduction in interest expense of $1.5 million from $7.9 million for the first nine months of 2010 to $6.4 million for the comparable period of 2011. This was offset by a reduction in the average loans outstanding from $412.0 million for the nine months ended September 30, 2010 to $388.4 million for the nine months ended September 30, 2011. This resulted in a decrease in interest income on loans of $1.3 million from $17.6 million for the first nine months of 2010 to $16.3 million for the comparable period in 2011.

Net interest income increased $9 thousand for the first nine months of 2011 compared to the comparable period in 2010.

Average Balances, Income and Expenses, Yields and Rates

Net interest income represents our principal source of earnings. Net interest income is the amount by which interest generated from earning assets exceeds the expense of funding those assets. Changes in volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.

Earning assets consist primarily of loans, investment securities and other investments. Interest-bearing liabilities consist principally of deposits, FHLB advances and other borrowings.

The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders’ equity and related income, expense and corresponding weighted-average yields and rates. The average balances used in these tables were calculated using daily average balances.

 

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Average Balances, Income and Expenses, Yields and Rates

 

     Three Months Ended September 30,  
     2011     2010  
     Average
Balance
    Income/
Expense
     Yields/
Rates
    Average
Balance
    Income/
Expense
     Yields/
Rates
 
                
     (Dollars in thousands)  

Assets:

              

Securities:

              

Taxable

   $ 78,746      $ 517         2.60   $ 69,610      $ 628         3.58

Tax exempt (1)

     12,691        194         6.08     14,617        222         6.03
  

 

 

   

 

 

   &nb