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Monarch Community Bancorp 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2012

or

 

¨ Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from             to             

Commission file number: 000-49814

 

 

MONARCH COMMUNITY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   04-3627031

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification no.)

375 North Willowbrook Road, Coldwater, MI 49036

(Address of principal executive offices)

517-278-4566

(Registrant’s telephone number)

 

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

 

Large Accelerated Filer     ¨      Accelerated Filer   ¨
Non-Accelerated Filer     ¨      Smaller reporting company   x

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: At October 25, 2012, there were 2,049,485 shares of the issuer’s Common Stock outstanding.

 

 

 


Monarch Community Bancorp, Inc.

Index

 

PART I - FINANCIAL INFORMATION     1   

Item 1 -

 

Condensed Financial Statements:

    1   
  Condensed Consolidated Balance Sheets - September 30, 2012 and December 31, 2011     1   
 

Condensed Consolidated Statements of Income - Three Months and Nine Months Ended September  30, 2012 and 2011

    2   
  Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2012 and 2011     3   
  Notes to Condensed Consolidated Financial Statements     4-27   

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

    28-35   

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

    35   

Item 4 - Controls and Procedures

    36   

PART II - OTHER INFORMATION

 

Item 1 - Legal Proceedings

    36   

Item 1A - Risk Factors

    36   

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

    36   

Item 3 - Defaults Upon Senior Securities

    36   

Item 4 - Mine Safety Disclosures

    36   

Item 5 - Other Information

    36   

Item 6 - Exhibits

    36   

SIGNATURES

    37   

CERTIFICATIONS

    39-41   


PART I - FINANCIAL INFORMATION

 

Item 1. CONDENSED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

 

     (Unaudited)
September 30,
2012
    December 31,
2011
 
    

(Dollars in thousands,

except per share data)

 
Assets     

Cash and due from banks

   $ 11,142      $ 7,701   

Federal Home Loan Bank overnight time and other interest bearing deposits

     12,885        16,410   
  

 

 

   

 

 

 

Total cash and cash equivalents

     24,027        24,111   

Securities - Available for sale

     12,353        12,536   

Other securities

     5,351        5,351   

Loans held for sale

     2,132        653   

Loans, net

     137,702        148,495   

Foreclosed assets, net

     1,776        4,433   

Premises and equipment

     4,042        4,004   

Core deposit intangible

     143        248   

Other assets

     6,942        8,275   
  

 

 

   

 

 

 

Total assets

   $ 194,468      $ 208,106   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits:

    

Non-interest bearing

   $ 18,602      $ 19,683   

Interest bearing

     155,847        154,502   
  

 

 

   

 

 

 

Total deposits

     174,449        174,185   

Federal Home Loan Bank advances

     7,175        20,175   

Accrued expenses and other liabilities

     3,125        2,604   
  

 

 

   

 

 

 

Total liabilities

     184,749        196,964   

Stockholders’ Equity

    

Preferred stock - $.01 par value, 5,000,000 shares authorized, and 6,785 shares, fixed rate cumulative perpetual preferred stock, series A, $1,000 per share liquidation preference, issued and outstanding as of September 30, 2012

     6,770        6,762   

Common stock - $0.01 par value, 20,000,000 shares authorized, 2,049,485 shares issued and outstanding at September 30, 2012 and December 31, 2011

     20        20   

Additional paid-in capital

     21,077        21,077   

Retained earnings

     (17,822     (16,334

Accumulated other comprehensive income

     134        77   

Unearned compensation

     (460     (460
  

 

 

   

 

 

 

Total stockholders’ equity

     9,719        11,142   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 194,468      $ 208,106   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


Condensed Consolidated Statements of Income (Unaudited)

 

     Three Months
Ended
September 30,
2012
    Three Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2012
    Nine Months
Ended
September 30,
2011
 
     (Dollars in thousands, except per share data)  

Interest Income

        

Loans, including fees

   $ 2,003      $ 2,416      $ 6,294      $ 7,723   

Investment securities

     93        113        282        353   

Federal funds sold and overnight deposits

     5        12        34        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     2,101        2,541        6,610        8,092   

Interest Expense

        

Deposits

     370        579        1,184        1,901   

Federal Home Loan Bank advances

     125        301        508        988   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     495        880        1,692        2,889   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     1,606        1,661        4,918        5,203   

Provision for Loan Losses

     5        41        58        304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income After Provision for Loan Losses

     1,601        1,620        4,860        4,899   

Non-interest Income

        

Fees and service charges

     484        484        1,350        1,387   

Loan servicing fees

     96        114        303        332   

Net gain on sale of loans

     430        245        1,103        675   

Net gain on sale of securities

     9        469        9        469   

Other income

     11        (101     269        123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     1,030        1,211        3,034        2,986   

Non-interest Expense

        

Salaries and employee benefits

     1,462        1,164        4,131        3,268   

Occupancy and equipment

     296        233        816        680   

Data processing

     224        213        677        635   

Amortization of mortgage servicing rights

     108        105        321        293   

Professional services

     203        198        626        541   

Amortization of core deposit intangible

     35        35        106        106   

NOW account processing

     51        50        146        149   

ATM/Debit card processing

     79        62        222        185   

Foreclosed property expense

     213        221        666        455   

Other general and administrative

     473        382        1,371        1,187   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     3,144        2,663        9,082        7,499   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) - Before income taxes

     (513     168        (1,188     386   

Income Taxes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

   $ (513   $ 168      $ (1,188   $ 386   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and amortization of discount on preferred stock

     102        89        300        266   

Net Income (loss) available to common stockholders

     (615     79        (1,488     120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

        

Net Income

     (513     168        (1,188     386   

Change in unrealized gain on securities, net of tax and reclassification effects

     25        (277     57        (199
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

     (488     (109     (1,131     187   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings(Loss) Per Share

        

Basic

   $ (0.31   $ 0.04      $ (0.74   $ 0.06   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.31   $ 0.04      $ (0.74   $ 0.06   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     Nine Months Ended
September 30,
 
     2012     2011  
     (Dollars in thousands)  

Cash Flows From Operating Activities

    

Net Income (Loss)

   $ (1,188   $ 386   

Adjustments to reconcile net income (loss) to net cash from operating activities

    

Depreciation and amortization

     802        749   

Provision for loan losses

     58        304   

Stock option expense

     —          8   

Write down on foreclosed assets

     1,203        —     

Gain on sale of foreclosed assets

     (147     (153

Mortgage loans originated for sale

     (34,955     (22,472

Proceeds from sale of mortgage loans

     33,926        22,558   

Gain on sale of mortgage loans

     (1,103     (675

(Gain) Loss on sale of available for sale securities

     (9     (469

Earned Stock Compensation

     —          —     

Net change in:

    

Deferred loan fees

     (36     (74

Accrued interest receivable

     (20     57   

Other assets

     1,032        836   

Accrued expenses and other liabilities

     50        642   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (387     1,697   

Cash Flows From Investing Activities

    

Activity in available for sale securities:

    

Purchases

     (2,008     (4,855

Proceeds from maturities of securities

     1,967        1,477   

Proceeds from sale of securities

     254        8,550   

Activity in held-to-maturity securities:

    

Proceeds from maturities of securities

     —          10   

Loan originations and principal collections, net

     10,437        24,681   

Proceeds from sale of foreclosed assets

     3,038        2,150   

Proceeds from sale of FHLB Stock

     —          495   

Purchase of premises and equipment

     (349     (182
  

 

 

   

 

 

 

Net cash provided by investing activities

     13,339        32,326   

Cash Flows From Financing Activities

    

Net increase (decrease) in deposits

     264        (19,104

Cash Dividends-preferred stock

     (300     (266

Repayment of FHLB advances

     (13,000     (14,000
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (13,036     (33,370
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     (84     653   

Cash and Cash Equivalents - Beginning

     24,111        41,974   
  

 

 

   

 

 

 

Cash and Cash Equivalents - End

   $ 24,027      $ 42,627   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid for:

    

Interest

     1,638        3,015   

Noncash investing activities:

    

Loans transferred to foreclosed assets

     1,437        3,614   

See accompanying notes to condensed consolidated financial statements.

 

3


MONARCH COMMUNITY BANCORP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Monarch Community Bancorp, Inc. (the “Corporation”) was incorporated in 2002 under Maryland law to hold all of the common stock of Monarch Community Bank (the “Bank”), formerly known as Branch County Federal Savings and Loan Association. The Bank converted to a stock savings institution effective August 29, 2002. In connection with the conversion, the Corporation sold 2,314,375 shares of its common stock in a subscription offering.

Monarch Community Bank provides a broad range of banking services to its primary market area of Branch, Calhoun and Hillsdale counties in Michigan. The Bank operates five full service offices and nine loan production offices. The Bank owns 100% of First Insurance Agency. First Insurance Agency is a licensed insurance agency established to allow for the receipt of fees on insurance services provided to the Bank’s customers. The Bank also owns a 24.98% interest in a limited partnership formed to construct and operate multi-family housing units.

BASIS OF PRESENTATION

The condensed consolidated financial statements of the Corporation include the accounts of Monarch Community Bank and First Insurance Agency. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements for interim periods are unaudited; however, in the opinion of the Corporation’s management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Corporation’s financial position and results of operations have been included.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates and assumptions.

The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes required by generally accepted accounting principles in annual consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Corporation’s Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

The results of operations for the nine month period ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year period.

ALLOWANCE FOR LOAN LOSSES

The appropriateness of the allowance for loan losses is reviewed by management based upon our evaluation of existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in delinquencies, nonperforming loans and foreclosed assets expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that these conditions were believed to have had on the collectability of the loan. Senior management reviews these conditions at least quarterly.

To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of this condition may be reflected as a specific allowance applicable to this credit or portfolio segment. The specific components as mentioned, which relate to identifiable problem credits, are loans classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of the loan.

The allowance also consists of general and unallocated components The general component covers non-classified loans and is based on historical loss experience. Actual losses, which cover an eighteen month historical period, are carried at a weighted average with the most recent nine months weighted 60% and the later weighted 40%. Our methodology as described permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management’s judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the loss factors. Management estimates probable losses by evaluating quantitative and qualitative factors for each loan portfolio segment, including net charge-off trends, internal risk ratings, changes in internal risk ratings, loss forecasts, collateral values, geographic location, delinquency rates, nonperforming and restructured loans, origination channel, product mix, underwriting practices, industry conditions, and economic trends.

 

4


As of September 30, 2012 the residential loan historical loss ratios were increased by .08% to 2.39%. Multi-family real estate loan historical loss ratios were increased by .07% to 2.07%. All other commercial real estate loan historical loss ratios were increased .97% to 2.07%. Construction loan historical loss ratios were increased by .04% to .50%, consumer loan historical loss ratios increased by .50% to .60% and commercial and industrial loan historical loss ratios increased by .28% to 2.52%. As of September 30, 2012, 19.4% of the allowance for loan loss reserve was attributable to adjustments to the loss factors. Adjustments were made to the loss factors in the second quarter of 2012 largely due to the segmentation of loans classified as special mention and substandard (but not impaired) in several categories of the loan portfolio and to the elimination of several segments of the commercial loan portfolio that were no longer material. By assessing the estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.

The unallocated component is maintained to cover uncertainties that could affect management’s estimates of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

RECLASSIFICATIONS

Certain 2011 amounts have been reclassified to conform to the 2012 presentation.

NOTE 2 - SECURITIES

The amortized cost and fair value of securities at period-end were as follows (dollars in thousands):

 

September 30, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Market Value
 

Available-for-sale securities:

           

Collateralized Mortgage obligations

   $ 6,981       $ 109       $ —         $ 7,090   

U.S. government agency obligations

     4,430         34         —           4,464   

Mortgage-backed securities

     661         55            716   

Obligations of states and political subdivisions

     78         5         —           83   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 12,150       $ 203       $ —         $ 12,353   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Market Value
 

Available-for-sale securities:

           

Collateralized Mortgage obligations

   $ 7,732       $ 48       $ —         $ 7,780   

U.S. government agency obligations

     3,423         3         —           3,426   

Mortgage-backed securities

     938         60         —           998   

Obligations of states and political subdivisions

     326         6         —           332   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 12,419       $ 117       $ —         $ 12,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from sales of securities available for sale in the first nine months ended September 30, 2012 were $254,000 compared to $8.5 million in 2011.

 

5


The amortized cost and fair value of securities available for sale at September 30, 2012 by contractual maturity follow (dollars in thousands). The actual maturity may differ from the contractual maturity because issuers may have a right to call or prepay obligations.

 

     September 30, 2012
Available for Sale Securities
 
     Amortized
Cost
     Fair
Value
 
     (Dollars in Thousands)  

Due in one year or less

   $ —         $ —     

Due from one to five years

     3,083         3,117   

Due from five to ten years

     1,425         1,430   

Due after ten years

     —           —     
  

 

 

    

 

 

 

Total

     4,508         4,547   

Mortgage-backed securities

     661         716   

CMO securities

     6,981         7,090   
  

 

 

    

 

 

 

Total available-for-sale securities

   $ 12,150       $ 12,353   
  

 

 

    

 

 

 

Other-Than Temporary-Impairment

Our portfolio of available for sale securities is reviewed quarterly for other-than-temporary-impairment (OTTI) in value. In performing this review many factors are considered including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospect of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether management intends to sell the security, or it is more likely than not that management will be required to sell the security at a loss before anticipated recovery.

Management determined that there were no securities with OTTI at September 30, 2012.

 

6


NOTE 3 - EARNINGS PER SHARE

A reconciliation of the numerators and denominators used in the computation of the basic earnings per share and diluted earnings per share is presented below (000s omitted except per share data):

 

    Three Months
Ended
September 30, 2012
    Three Months
Ended
September 30, 2011
    Nine Months
Ended
September 30, 2012
    Nine Months
Ended
September 30, 2011
 

Basic earnings per share

       

Numerator:

       

Net Income (Loss)

  $ (513   $ 168      $ (1,188   $ 386   

Dividends and amortization of discount on preferred stock

    102        89        300        266   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) available to common stock

    (615     79        (1,488     120   
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

       

Weighted average common shares outstanding

    2,049        2,049        2,049        2,049   

Less: Average unallocated ESOP shares

    (48     (56     (48     (56

Less: Average non-vested RRP shares

    —          (1     —          (1
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding for basic earnings (loss) per share

    2,001        1,992        2,001        1,992   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per share

    (0.31     0.04        (0.74     0.06   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

       

Numerator:

       

Net Income (Loss) available to common stock

    (615     79        (1,488     120   
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

       

Weighted average common shares outstanding for basic earnings per share

    2,001        1,992        2,001        1,992   

Add: Dilutive effects of restricted stock, stock options and warrants

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and dilutive potential common shares outstanding

    2,001        1,992        2,001        1,992   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per share

  $ (0.31   $ 0.04      $ (0.74   $ 0.06   
 

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 4 - FAIR VALUE MEASUREMENTS

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

 

7


The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at September 30, 2012, and December 31, 2011, and the valuation techniques used by the Corporation to determine those fair values (in thousands).

 

    Quoted Prices in Active
Markets for Identical
Assets (Level 1)
    Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
    Balance at
September 30, 2012
 

Assets:

       

September 30, 2012-Investment Securities

       

Collateralized Mortgage obligations

  $ —        $ 7,090      $ —        $ 7,090   

U.S. government agency obligations

    —          4,464        —          4,464   

Mortgage-backed securities

    —          716        —          716   

Obligations of states and political subdivisions

    —          83        —          83   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ —        $ 12,353      $ —        $ 12,353   
 

 

 

   

 

 

   

 

 

   

 

 

 
    Quoted Prices in Active
Markets for Identical
Assets (Level 1)
    Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
    Balance at
December 31, 2011
 

Assets:

       

December 31, 2011-Investment Securities

       

Collateralized Mortgage obligations

  $ —        $ 7,780      $ —        $ 7,780   

U.S. government agency obligations

    —          3,426        —          3,426   

Mortgage-backed securities

    —          998        —          998   

Obligations of states and political subdivisions

    —          332        —          332   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ —        $ 12,536      $ —        $ 12,536   
 

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include loans and foreclosed assets. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Adjustments in 2012 and 2011 to the impaired loans were recorded as additional allocations to the allowance for loan and lease losses. Adjustments in 2012 and 2011 to foreclosed assets were recorded as additional allocations to the allowance for loan and lease losses.

 

8


The following table presents the Corporation’s assets at fair value on a nonrecurring basis as of September 30, 2012 and December 31, 2011 (000s omitted):

 

    Assets Measured at Fair Value on a Nonrecurring Basis  
    Balance at
September 30,
2012
    Quoted Prices in Active
Markets for Identical
Assets (Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Impaired Loans accounted for under FASB ASC 310

  $ 10,009      $ —        $ —        $ 10,009   

Foreclosed Assets

  $ 1,776      $ —        $ —        $ 1,776   

 

    Assets Measured at Fair Value on a Nonrecurring Basis  
    Balance at
December 31,
2011
    Quoted Prices in Active
Markets for Identical
Assets (Level 1)
    Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Impaired Loans accounted for under FASB ASC 310

  $ 7,975      $ —        $ —        $ 7,975   

Foreclosed Assets

  $ 4,433      $ —        $ —        $ 4,433   

The fair value of impaired loans is estimated using either discounted cash flows or collateral value. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Impaired loans where a specific reserve is established based on the fair value of the collateral require classification in the fair value hierarchy. Impaired loans are categorized as level 3 assets because the values are based on available collateral (typically based on outside appraisals obtained at least annually and discounted per current market conditions). Management reviews the impaired loans no less than quarterly for potential additional impairment and when there is little prospect of collecting principal or interest, loans or portions thereof may be charged off to the allowance for loan losses. Losses are recognized in the period a debt becomes uncollectible. The recognition of a loss does not mean that the loan has no recovery or salvage value, but rather it is not practical or desirable to defer writing off the loan even though a partial recovery may occur in the future.

Foreclosed assets, which include real estate owned and real in estate in judgment and subject to redemption, acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are performed annually by management and the assets are carried at the lower of carrying amount or fair value less estimated selling expenses, which consist primarily of commissions that will be paid to an independent real estate agent upon sale of the property. The valuations consist of obtaining a broker price opinion or a new appraisal depending on the value of the asset. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Assets held as real estate in judgment may be subject to redemption for a period of six to twelve months depending on the collateral, following the foreclosure sale. Assets may be redeemed by the borrower for the foreclosure sale price, accrued interest and foreclosure costs. Any asset redeemed would be treated as a paid off loan. As of September 30, 2012 the Corporation held $1.8 million in foreclosed assets owned as a result of foreclosure or the acceptance of a deed in lieu and $4.4 million in foreclosed assets as of December 31, 2011. No assets were redeemed in 2011 or in the first nine months of 2012 by the borrower.

Fair Value of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’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. Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC), FASB ASC 820-10-50, Fair Value Measurements and Disclosures, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.

 

9


The fair value of all financial instruments not discussed below (cash and cash equivalents, federal funds sold, Federal Home Loan Bank stock, accrued interest receivable, federal funds purchased and interest payable) are estimated to be equal to their carrying amounts as of September 30, 2012 and December 31, 2011. The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments:

Securities - Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Mortgage Loans Held for Sale - Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Loans Receivable - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses using current market rates applied to the estimated life. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit 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.

Federal Home Loan Bank Advances - The fair values of the Corporation’s Federal Home Loan Bank advances are estimated using discounted cash flow analyses based on the Corporation’s current incremental borrowing rates for similar types of borrowing arrangements.

The estimated fair values, and related carrying or notional amounts, of the Corporation’s financial instruments are as follows (000s omitted):

 

     September 30, 2012  
     Carrying Amount      Level 1      Level 2      Level 3      Total Estimated
Fair Value
 

Assets:

              

Cash and cash equivalents

   $ 24,027       $ 24,027       $ —         $ —         $ 24,027   

Securities - Available for sale

     12,353         —           12,353         —           12,353   

Other securities

     5,351         —           5,351         —           5,351   

Loans held for sale

     2,132         —           2,196         —           2,196   

Net loans

     137,702         —           —           139,474         139,474   

Liabilities:

              

Deposits

     174,449         —           175,787            175,787   

Federal Home Loan Bank advances

   $ 7,175       $ —         $ 7,250          $ 7,250   

 

     December 31, 2011  
     Carrying Amount      Level 1      Level 2      Level 3      Total Estimated
Fair Value
 

Assets:

              

Cash and cash equivalents

   $ 24,111       $ 24,111       $ —         $ —         $ 24,111   

Securities - Available for sale

     10,555         —           12,536         —           12,536   

Other securities

     5,351         —           5,351         —           5,351   

Loans held for sale

     653         —           662         —           662   

Net loans

     148,495         —           —           156,794         156,794   

Liabilities:

              

Deposits

     174,185         —           175,720         —           175,720   

Federal Home Loan Bank advances

   $ 20,175       $ —         $ 20,566       $ —         $ 20,566   

 

10


NOTE 5 - LOANS

The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated (000’s):

 

     September 30, 2012     December 31, 2011  
     Amount      Percent     Amount      Percent  
     (Dollars in thousands)  

Real Estate Loans:

          

One-to-four family

     71,900         50.8        78,500         51.2   

Multi-family

     1,191         0.9        765         0.5   

Commercial

     52,352         37.0        54,308         35.4   

Construction or development

     1,768         1.2        1,639         1.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate loans

     127,211         89.9        135,212         88.2   

Other loans:

          

Consumer loans:

          

Home equity

     8,712         6.2        10,499         6.8   

Other

     2,042         1.4        2,516         1.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer loans

     10,754         7.6        13,015         8.4   

Commercial Business Loans

     3,553         2.5        5,212         3.4   
  

 

 

    

 

 

   

 

 

    

Total other loans

     14,307         10.1        18,227         11.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Loans

     141,518         100.0     153,439         100.0
     

 

 

      

 

 

 

Allowance for loan losses

     3,565           4,656      

Less: Net deferred loan fees

     251           288      
  

 

 

      

 

 

    

Total Loans, net

     137,702           148,495      
  

 

 

      

 

 

    

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. All loan classes on which principal or interest is in default for 90 days or more are put on nonaccrual status, unless there is sufficient documentation to conclude that the loan is well secured and in the process of collection. Loans will also be placed on nonaccrual status if the Bank cannot reasonably expect full and timely repayment. All nonaccrual loans are also deemed to be impaired unless they are residential loans whose status as nonaccrual loans is based solely on having reached 90 days past due, are in the process of collection, but whose status as well secured has not yet been established.

A loan is considered impaired when it is probable that the Corporation will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. All impaired loans are also classified as nonaccrual loans unless they are deemed to be impaired solely due to their status as a troubled debt restructure and, 1) the borrower is not past due or, 2) there is verifiable adequate cash flow to support the restructured debt service or, 3) there is an adequate collateral valuation supporting the restructured loan.

 

11


An age analysis of past due loans including nonaccrual loans, segregated by class of loans, as of September 30, 2012 and December 31, 2011 are as follows (000’s):

 

     September 30, 2012  
     30-59
Days Past
Due
     60-89
Days Past
Due
     Loans 90 Days
or More Past
Due
     Total Past
due Loans
     Current
Loans
     Total Loans  

Commercial

   $ —         $ —         $ 125       $ 125       $ 3,428       $ 3,553   

Commercial Real Estate:

                 

Multi-family

     —           —           —           —           1,191         1,191   

Commercial Real Estate - other

     —           234         1,328         1,562         50,790         52,352   

Consumer:

                 

Consumer - Helocs and other

     106         67         9         182         10,572         10,754   

Residential:

                 

Residential - prime

     1,881         —           379         2,260         55,187         57,447   

Residential - subprime

     321         10         278         609         13,844         14,453   

Construction:

                 

Construction - prime

     —           —           —           —           1,768         1,768   

Construction - subprime

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,308       $ 311       $ 2,119       $ 4,738       $ 136,780       $ 141,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     30-59
Days Past
Due
     60-89
Days Past
Due
     Loans 90 Days
or More Past
Due
     Total Past
due Loans
     Current
Loans
     Total Loans  

Commercial

   $ 147       $ —         $ 1,166       $ 1,313       $ 3,899       $ 5,212   

Commercial Real Estate:

                 

Multi-family

     —           —           —           —           765         765   

Commercial Real Estate - other

     105         246         3,016         3,367         50,941         54,308   

Consumer:

                 

Consumer - Helocs and other

     74         —           —           74         12,941         13,015   

Residential:

                 

Residential - prime

     632         105         478         1,215         62,094         63,309   

Residential - subprime

     216         123         67         406         14,785         15,191   

Construction:

                 

Construction - prime

     —           —           —           —           1,639         1,639   

Construction - subprime

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,174       $ 474       $ 4,727       $ 6,375       $ 147,064       $ 153,439   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


All commercial loans will be assigned a risk rating by the Credit Analyst at inception. The risk rating system is composed of eight levels of quality and utilizes the following definitions.

Risk Rating Scores by definition:

 

1. Zero (0) Unclassified. Any loan which has not been assigned a classification.

 

2. One (1) Excellent. A well structured credit relationship to an established borrower. Loans to entities with a strong financial condition and solid earnings history.

 

3. Two (2) Above Average Quality. Loans to borrowers with a sound financial condition and positive trend in earnings.

 

4. Three (3) Acceptable. Loans to entities with a satisfactory financial condition and further characterized by:

 

   

Working capital adequate to support operations.

 

   

Cash flow sufficient to pay debts as scheduled.

 

   

Management experience and depth appear favorable.

 

   

Debt to worth ratio of 2.50:1 or less.

 

   

Acceptable sales and steady earning history.

 

   

Industry outlook is stable.

 

   

Loan structure within policy guidelines.

 

   

Loan performing according to terms.

 

   

If loan is secured, collateral is acceptable and loan is fully protected.

 

5. Four (4) Average. Loans to entities which are considered bankable risks, although some signs of weaknesses are shown:

 

   

Marginal liquidity and working capital.

 

   

Short or unstable earnings history.

 

   

Would include most start-up businesses.

 

   

Would be enrolled in Small Business Administration or Michigan Strategic Fund programs.

 

   

Occasional instances of trade slowness or repayment delinquency - may have been 10-30 days slow within the past 12 months.

 

   

Management abilities are apparent yet unproven.

 

   

Debt to worth ratio of 3.50 or less.

 

   

Weakness in primary source of repayment with adequate secondary source of repayment.

 

   

If secured, loan is protected but collateral is marginal.

 

   

Industry outlook is uncertain; may be cyclical or highly competitive.

 

   

Loan structure generally in accordance with policy.

 

6. Five (5) Special Mention. Special Mention loans have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank’s credit position at some future date. Loans to entities that constitute an undue and unwarranted credit risk but not to the point of justifying or classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan. The following characteristics may apply:

 

   

Downward trend in sales, profit levels and margins.

 

   

Impaired working capital positions.

 

   

Cash flow is strained in order to meet debt repayment.

 

   

Loan delinquency (30-60 days) and overdrafts may occur.

 

   

Management abilities are questionable.

 

   

Highly leveraged, debt to worth ratio over 3.50:1.

 

   

Industry conditions are weak.

 

   

Inadequate or outdated financial information.

 

   

Litigation pending against borrower.

 

   

Loan may need to be restructured to improve collateral position and/or reduce payment amount.

 

   

Collateral / guaranty offers limited protection.

 

13


7. Six (6) Substandard. A substandard loan is inadequately protected by the current sound worth and repayment capacity of the borrower. Loans so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. There is a distinct possibility that the Bank will implement collection procedures if the loan deficiencies are not corrected. The following characteristics may apply:

 

   

Sustained losses have severely eroded the equity and cash flow.

 

   

Deteriorating liquidity.

 

   

Serious management problems.

 

   

Chronic trade slowness; may be placed on COD by vendors.

 

   

Likelihood of bankruptcy.

 

   

Inability to access other funding sources.

 

   

Reliance on secondary source of repayment.

 

   

Interest non-accrual may be warranted.

 

   

Collateral provided is of little or no value.

 

   

Repayment dependent upon the liquidation of non-current assets.

 

   

Repayment may require litigation.

 

8. Seven (7) Doubtful. A doubtful loan has all the weakness inherent in a substandard loan with the added characteristic that collection and/or liquidation is pending. Loans or portions of loans with one or more weaknesses which, on the basis of currently existing facts, conditions, and values, makes ultimate collection of all principal highly questionable. The possibility of loss is high and specific loan loss reserve allocations should be made or charge offs taken on anticipated collateral shortfalls. However, the amount or the certainty of eventual loss may not allow for a specific reserve or charge off because of specific pending factors. Pending factors include proposed merger or acquisition, completion or liquidation in progress, injection of new capital in progress, refinancing plans in progress, etc. “Pending Factors” not resolved after six months must be disregarded. The following characteristics may apply:

 

   

Normal operations are severely diminished or have ceased.

 

   

Seriously impaired cash flow.

 

   

Secondary source of repayment is inadequate.

 

   

Survivability as a “going concern” is impossible.

 

   

Placement on interest non-accrual

 

   

Collection process has begun.

 

   

Bankruptcy petition has been filed.

 

   

Judgments have been filed.

 

   

Portion of the loan balance has been charged-off.

 

9. Eight (8) Loss. Loans classified loss are considered uncollectible and of such little value that their continuance as bankable asset is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. Further characterized by:

 

   

Liquidation or reorganization under bankruptcy, with poor prospects of collection.

 

   

Fraudulently overstated assets and/or earnings.

 

   

Collateral has marginal or no value.

 

   

Debtor cannot be located.

 

14


The following table represents the risk category of loans by class based on the analysis performed as of September 30, 2012 and December 31, 2011 (in thousands):

 

     September 30, 2012  
Credit Rating    Commercial
2012
     Commercial Real Estate
Multi-family

2012
     Commercial Real Estate
Other

2012
 

0

   $ —         $ 31       $ 1,827   

1-2

     —           —           11   

3

     70         —           2,415   

4

     2,870         608         28,421   

5

     192         102         2,443   

6

     421         450         17,235   

7

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,553       $ 1,191       $ 52,352   
  

 

 

    

 

 

    

 

 

 
     December 30, 2011  
Credit Rating    Commercial
2011
     Commercial Real  Estate
Multi-family

2011
     Commercial Real  Estate
Other

2011
 

0

   $ —         $ 34       $ 2,542   

1-2

     —           —           —     

3

     112         154         2,548   

4

     3,082         18         29,583   

5

     435         105         2,376   

6

     466         454         15,551   

7

     1,117         —           1,708   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,212       $ 765       $ 54,308   
  

 

 

    

 

 

    

 

 

 

Loans with a credit rating of zero consist mainly of bare ground and are not rated.

 

15


For consumer residential real estate, and other, the Corporation also evaluates credit quality based on the aging status of the loan which was previously stated, and by payment activity. The following tables present the recorded investment in those classes based on payment activity and assigned grades as of September 30, 2012 and December 31, 2011 (in thousands).

 

     September 30, 2012  
     Residential - Prime     Residential - Subprime  

Grade

    

Pass

   $ 55,229      $ 13,841   

Substandard

     2,218        612   
  

 

 

   

 

 

 

Total

   $ 57,447      $ 14,453   
  

 

 

   

 

 

 
     Consumer - Heloc and other        

Performing

   $ 10,571     

Nonperforming

     183     
  

 

 

   

Total

   $ 10,754     
  

 

 

   
     Construction - Prime        

Performing

   $ 1,768     

Nonperforming

     —       
  

 

 

   

Total

   $ 1,768     
  

 

 

   
     December 30, 2011  
     Residential - Prime     Residential - Subprime  

Grade

    

Pass

   $ 62,895      $ 15,027   

Substandard

     414        164   
  

 

 

   

 

 

 

Total

   $ 63,309      $ 15,191   
  

 

 

   

 

 

 
     Consumer - Heloc and other        

Performing

   $ 12,925     

Nonperforming

     90     
  

 

 

   

Total

   $ 13,015     
  

 

 

   
     Construction - Prime        

Performing

   $ 1,639     

Nonperforming

     —       
  

 

 

   

Total

   $ 1,639     
  

 

 

   

 

16


The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2012 and December 31, 2011 (in thousands).

 

     September 30, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

        

Commercial

   $ 375       $ 436       $ —     

Commercial Real Estate:

        

Commercial Real Estate - Mulit-family

     —           —           —     

Commercial Real Estate - other

     10,169         15,875         —     

Consumer:

        

Consumer - Helocs and other

     231         231         —     

Residential:

        

Residential - prime

     3,509         3,524         —     

Residential - subprime

     4,761         4,761         —     

With an allowance recorded:

        

Commercial

     —           —           —     

Commercial Real Estate:

        

Commercial Real Estate - Multi-family

     450         463         49   

Commercial Real Estate - other

     4,072         4,863         165   

Consumer:

        

Consumer - Helocs and other

     —           —           —     

Residential:

        

Residential - prime

     1,150         1,176         406   

Residential - subprime

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

        

Commercial

   $ 15,066       $ 21,637       $ 214   
  

 

 

    

 

 

    

 

 

 

Consumer

   $ 231       $ 231       $ —     
  

 

 

    

 

 

    

 

 

 

Residental

   $ 9,420       $ 9,461       $ 406   
  

 

 

    

 

 

    

 

 

 

 

17


     December 31, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

        

Commercial

   $ 404       $ 454       $ —     

Commercial Real Estate:

        

Commercial Real Estate - Mulit-family

     —           —           —     

Commercial Real Estate - other

     8,783         14,052         —     

Consumer:

        

Consumer - Helocs and other

     260         260         —     

Residential:

        

Residential - prime

     2,469         2,478         —     

Residential - subprime

     4,879         4,879         —     

With an allowance recorded:

        

Commercial

     —           —           —     

Commercial Real Estate:

        

Commercial Real Estate - Multi-family

     454         467         35   

Commercial Real Estate - other

     6,445         6,958         480   

Consumer:

        

Consumer - Helocs and other

     —           —           —     

Residential:

        

Residential - prime

     131         149         81   

Residential - subprime

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

        

Commercial

   $ 16,086       $ 21,931       $ 515   
  

 

 

    

 

 

    

 

 

 

Consumer

   $ 260       $ 260       $ —     
  

 

 

    

 

 

    

 

 

 

Residental

   $ 7,479       $ 7,506       $ 81   
  

 

 

    

 

 

    

 

 

 

 

18


The following table presents loans individually evaluated for impairment by class of loans for the three months ended September 30, 2012 and September 30, 2011 (in thousands).

 

     Three Months Ended September 30, 2012      Three Months Ended September 30, 2011  
     Average Recorded
Investment
     Interest Income      Average Recorded
Investment
     Interest Income  

With no related allowance recorded:

           

Commercial

   $ 438       $ —         $ 1,925       $ —     

Commercial Real Estate:

           

Commercial Real Estate - Mulit-family

     —           —           —           —     

Commercial Real Estate - other

     12,429         39         15,131         46   

Consumer:

           

Consumer - Helocs and other

     231         3         357         5   

Residential:

           

Residential - prime

     3,394         38         2,929         31   

Residential - subprime

     4,556         78         4,950         85   

With an allowance recorded:

           

Commercial

     —           —           —           —     

Commercial Real Estate:

           

Commercial Real Estate - Multi-family

     464         —           454         8   

Commercial Real Estate - other

     4,877         —           4,949         54   

Consumer:

           

Consumer - Helocs and other

     —           —           —           —     

Residential:

           

Residential - prime

     1,176         —           650         —     

Residential - subprime

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

           

Commercial

   $ 18,208       $ 39       $ 22,459       $ 108   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ 231       $ 3       $ 357       $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Residental

   $ 9,126       $ 116       $ 8,529       $ 116   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


The following table presents loans individually evaluated for impairment by class of loans for the nine months ended September 30, 2012 and September 30, 2011 (in thousands).

 

     Nine Months Ended September 30, 2012      Nine Months Ended September 30, 2011  
     Average Recorded
Investment
     Interest Income      Average Recorded
Investment
     Interest Income  

With no related allowance recorded:

           

Commercial

   $ 444       $ —         $ 1,881       $ —     

Commercial Real Estate:

           

Commercial Real Estate - Mulit-family

     —           —           —           —     

Commercial Real Estate - other

     12,431         117         15,231         136   

Consumer:

           

Consumer - Helocs and other

     231         9         357         16   

Residential:

           

Residential - prime

     3,394         112         3,009         92   

Residential - subprime

     4,556         232         4,950         251   

With an allowance recorded:

           

Commercial

     —           —           —           —     

Commercial Real Estate:

           

Commercial Real Estate - Multi-family

     465         —           454         24   

Commercial Real Estate - other

     4,914         —           4,953         162   

Consumer:

           

Consumer - Helocs and other

     —           —           —           —     

Residential:

           

Residential - prime

     1,142         —           655         —     

Residential - subprime

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

           

Commercial

   $ 18,254       $ 117       $ 22,519       $ 322   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ 231       $ 9       $ 357       $ 16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Residental

   $ 9,092       $ 344       $ 8,614       $ 343   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Payments received on loans in nonaccrual status are typically applied to reduce the recorded investment in the asset. While a loan is in nonaccrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining recorded investment in the asset (i.e., after charge-off of identified losses, if any) is deemed to be fully collectible. The following presents by class, the recorded investment in loans and leases on non-accrual status as of September 30, 2012 and December 31, 2011 (in thousands).

Financing Receivables on Nonaccrual Status

 

     September 30, 2012  

Commercial

   $ 324   

Commercial real estate:

  

Commercial Real Estate - mulit-family

     —     

Commercial Real Estate - other

     7,639   

Consumer:

  

Consumer - Helocs and other

     —     

Residential:

  

Residential - prime

     1,630   

Residential - subprime

     208   

Construction

  

Construction - prime

     —     

Construction - subprime

     —     
  

 

 

 

Total

   $ 9,801   
  

 

 

 

Financing Receivables on Nonaccrual Status

 

     December 31, 2011  

Commercial

   $ 1,521   

Commercial real estate:

  

Commercial Real Estate - mulit-family

     —     

Commercial Real Estate - other

     6,278   

Consumer:

  

Consumer - Helocs and other

     —     

Residential:

  

Residential - prime

     786   

Residential - subprime

     180   

Construction

  

Construction - prime

     —     

Construction - subprime

     —     
  

 

 

 

Total

   $ 8,765   
  

 

 

 

Loans in which the Bank elects to grant a concession, providing terms more favorable than those prevalent in the market (e.g., rate, amortization term), and are formally restructured due to the weakening credit status of a borrower are reported as trouble debt restructure ( TDR). All other modifications in which the new terms are at current market conditions and are granted to clients due to competitive pressures and because of the customer’s favorable past and current performance and credit risk do not constitute a TDR loan and are not monitored.

 

21


In order to maximize the collection of loan balances, we evaluate troubled loans on a case-by-case basis to determine if a loan modification would be appropriate. We pursue loan modifications when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt. For loans secured by either commercial or residential real estate, if the client demonstrates a loss of income such that the client cannot reasonably support even a modified loan, we may pursue foreclosure, short sales and/or deed-in-lieu arrangements. For all troubled loans, we review a number of factors, including cash flows, loan structures, collateral values, and guarantees. Based on our review of these factors and our assessment of overall risk, we evaluate the benefits of renegotiating the terms of the loans so that they have a higher likelihood of continuing to perform. To date, we have restructured loans in a variety of ways to help our clients service their debt and to mitigate the potential for additional losses. The primary restructuring methods being offered to our clients are reductions in interest rates and extensions in terms. Loans that, after being restructured, remain in compliance with their modified terms and whose modified interest rate yielded a market rate at the time the loan was restructured, are reviewed annually and may be reclassified as non-TDR, provided they conform with the prevailing regulatory criteria. As of September 30, 2012 there have been no loans in which the TDR designation has been removed.

 

22


The following table represents the modifications completed during the three months ended September 30, 2012 (in thousands).

 

    

Modifications

Three Months Ended September 30, 2012

    

Modifications

Three Months Ended September 30, 2011

 
     Number of
Contracts
     Pre-Modification
Outstanding

Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded

Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

                 

Commercial

     —           —           —           —           —           —     

Commercial real estate:

                 

Commercial Real Estate - mulit-family

     —           —           —           —           —           —     

Commercial Real Estate - other

     —           —           —           1         10         10   

Consumer:

                 

Consumer - Helocs and other

     —           —           —           2         72         72   

Residential:

                 

Residential - prime

     —           —           —           3         160         160   

Residential - subprime

     —           —           —           —           —           —     

Construction

                 

Construction - prime

     1         158         157         —           —           —     

Construction - subprime

     1         44         46         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 202       $ 203         6       $ 242       $ 242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Number of
Contracts
     Recorded
Investment
            Number of
Contracts
     Recorded Investment         

Troubled Debt Restructurings

                 

That Subsequently Defaulted

                 

Commercial

     —           —              1         78      

Commercial real estate:

                 

Commercial Real Estate - mulit-family

     —           —              —           —        

Commercial Real Estate - other

     1         2,534            2         329      

Consumer:

                 

Consumer - Helocs and other

     3         54            —           —        

Residential:

                 

Residential - prime

     2         143            3         331      

Residential - subprime

     8         350            1         136      

Construction

                 

Construction - prime

     —           —              —           —        

Construction - subprime

     —           —              —           —        
  

 

 

    

 

 

       

 

 

    

 

 

    
     14       $ 3,081            7       $ 874      
  

 

 

    

 

 

       

 

 

    

 

 

    

 

23


The following table represents the modifications completed during the nine months ended September 30, 2012 (in thousands).

 

    

Modifications

Nine Months Ended September 30, 2012

    

Modifications

Nine Months Ended September 30, 2011

 
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded

Investment
     Post-Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded

Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

                 

Commercial

     1         50         50         4         1,379         1,337   

Commercial real estate:

                 

Commercial Real Estate - mulit-family

     —           —           —           1         425         454   

Commercial Real Estate - other

     —           —           —           14         17,000         12,299   

Consumer:

                 

Consumer - Helocs and other

     —           —           —           22         467         428   

Residential:

                 

Residential - prime

     6         862         865         36         3,955         2,701   

Residential - subprime

     —           —           —           82         5,139         5,037   

Construction

                 

Construction - prime

     1         158         157         —           —           —     

Construction - subprime

     1         44         46         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     9       $ 1,114       $ 1,118         159       $ 28,365       $ 22,256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Number of
Contracts
     Recorded Investment             Number of
Contracts
     Recorded Investment         

Troubled Debt Restructurings

                 

That Subsequently Defaulted

                 

Commercial

     —           —              5         1,197      

Commercial real estate:

                 

Commercial Real Estate - mulit-family

     —           —              1         187      

Commercial Real Estate - other

     1         2,534            14         5,559      

Consumer:

                 

Consumer - Helocs and other

     4         56            4         137      

Residential:

                 

Residential - prime

     4         241            12         1,264      

Residential - subprime

     8         350            4         352      

Construction

                 

Construction - prime

     —           —              —           —        

Construction - subprime

     —           —              —           —        
  

 

 

    

 

 

       

 

 

    

 

 

    
     17       $ 3,181            40       $ 8,696      
  

 

 

    

 

 

       

 

 

    

 

 

    

All TDR loans are considered impaired. When individually evaluating loans for impairment, we may measure impairment using (1) the present value of expected future cash flows discounted at the loan’s effective interest rate (i.e., the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan), (2) the loan’s observable market price, or (3) the fair value of the collateral. If the present value of expected future cash flows discounted at the loan’s effective interest rate is used as the means of measuring impairment the change in the present value attributable to the passage time is recognized as bad-debt expense. As previously mentioned all impaired loans are also classified as nonaccrual loans unless they are deemed to be impaired solely due to their status as a troubled debt restructure and, 1) the borrower is not past due or, 2) there is verifiable adequate cash flow to support the restructured debt service or, 3) there is an adequate collateral valuation supporting the restructured loan. Nonaccruing TDR loans that demonstrate a history of repayment performance in accordance with their modified terms are reclassified to accruing restructured status, typically after six months of repayment performance and are supported by a current credit evaluation of the borrower’s financial condition and expectations for repayment under the revised terms.

 

24


NOTE 6 - ALLOWANCE FOR LOAN LOSSES

Analysis related to the allowance for credit losses (in thousands) for the three months ended September 30, 2012 and 2011 is as follows (000’s):

 

     For the three months ended September 30, 2012  
     Commercial     Commercial
Real Estate
Other
    Multi Family     Consumer     Residential -
Prime
    Residential -
Subprime
    Construction     Total  

ALLOWANCE FOR CREDIT LOSSES:

                

Beginning Balance

     17        1,002        128        223        1,670        707        19        3,766   

Charge-Offs

     —          (48     —          (76     (101     (48     —          (273

Recoveries

     3        12        1        50        1        —          —          67   

Provision

     (1     70        (45     (30     104        (87     (6     5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     19        1,036        84        167        1,674        572        13        3,565   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

     —          165        49        —          406        —          —          620   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

     19        871        35        167        1,268        572        13        2,945   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     For the three months ended September 30, 2011  
     Commercial     Commercial
Real Estate
Other
    Multi Family     Consumer     Residential -
Prime
    Residential -
Subprime
    Construction     Total  

ALLOWANCE FOR CREDIT LOSSES:

                

Beginning Balance

   $ 116      $ 1,442      $ 306      $ 330      $ 2,905      $ 787      $ 31      $ 5,917   

Charge-Offs

     (20     (350     —          (104     (316     (58     —          (848

Recoveries

     —          —          2        40        4        —          2        48   

Provision

     (32     103        (278     (4     190        58        4        41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     64        1,195        30        262        2,783        787        37        5,158   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

     —          246        —          —          306        —          —          552   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 64      $ 949      $ 30      $ 262      $ 2,477      $ 787      $ 37      $ 4,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Analysis related to the allowance for credit losses (in thousands) for the nine months ended September 30, 2012 and 2011 is as follows:

 

    For the Nine Months Ended September 30, 2012  
    Commercial     Commercial
Real Estate
Other
    Multi Family     Consumer     Residential -
Prime
    Residential -
Subprime
    Construction     Total  

ALLOWANCE FOR CREDIT LOSSES:

               

Beginning Balance

    45        1,262        45        259        2,280        664        101        4,656   

Charge-Offs

    —          (256     —          (213     (756     (170     —          (1,395

Recoveries

    6        39        1        177        20        3        —          246   

Provision

    (32     (9     38        (56     130        75        (88     58   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

    19        1,036        84        167        1,674        572        13        3,565   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

    —          165        49        —          406        —          —          620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

    19        871        35        167        1,268        572        13        2,945   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Nine months ended September 30, 2011  
    Commercial     Commercial
Real Estate
Other
    Multi Family     Consumer     Residential -
Prime
    Residential -
Subprime
    Construction     Total  

ALLOWANCE FOR CREDIT LOSSES:

               

Beginning Balance

  $ 71      $ 1,790      $ 474      $ 503      $ 3,495      $ 458      $ 59      $ 6,850   

Charge-Offs

    (80     (449     (286     (263     (1,056     (313     (13     (2,460

Recoveries

    7        228        2        153        31        41        2        464   

Provision

    66        (374     (160     (131     313        601        (11     304   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

    64        1,195        30        262        2,783        787        37        5,158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

    —          246        —          —          306        —          —          552   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 64      $ 949      $ 30      $ 262      $ 2,477      $ 787      $ 37      $ 4,606   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The allowance for loan losses was $3.6 million at September 30, 2012 representing 2.59% of total loans, compared to $4.7 million at December 31, 2011 or 3.14% of total loans. The allowance for loan losses to non-performing loans ratio was 36.4% at September 30, 2012 compared to 53.1% at December 31, 2011. At September 30, 2012 we believe that our allowance appropriately considers incurred losses in our loan portfolio.

 

26


Analysis related to the allowance for financing receivables (in thousands) for the nine months ended September 30, 2012 and December 31, 2011 is as follows:

 

    September 30, 2012  
    Commercial     Commercial
Real Estate
Other
    Multi Family     Consumer     Residential -
Prime
    Residential -
Subprime
    Construction     Total  

FINANCING RECEIVABLES:

               

Ending Balance

  $ 3,553      $ 52,352      $ 1,191      $ 10,754      $ 57,447      $ 14,453      $ 1,768      $ 141,518   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

    375        14,241        450        231        4,659        4,761        —          24,717   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 3,178      $ 38,111      $ 741      $ 10,523      $ 52,788      $ 9,692      $ 1,768      $ 116,801   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2011  
    Commercial     Commercial
Real Estate
Other
    Multi Family     Consumer     Residential -
Prime
    Residential -
Subprime
    Construction     Total  

FINANCING RECEIVABLES: