þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Ohio | 31-1469837 | |
(State or other jurisdiction of | (I.R.S. Employer Identification Number) | |
incorporation or organization) |
Large accelerated filers o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
2
Item 1. | Financial Statements |
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Cash and due from financial institutions |
$ | 11,996 | $ | 10,024 | ||||
Interest-bearing deposits |
30,294 | 23,497 | ||||||
Total cash and cash equivalents |
42,290 | 33,521 | ||||||
Securities available-for-sale |
84,701 | 69,597 | ||||||
Securities held-to-maturity |
1,267 | 1,313 | ||||||
Total securities |
85,968 | 70,910 | ||||||
Loans held for sale, at lower of cost or fair value |
63 | 753 | ||||||
Loans |
380,638 | 424,864 | ||||||
Less allowance for loan losses |
(10,195 | ) | (12,247 | ) | ||||
Net loans |
370,443 | 412,617 | ||||||
Real estate owned |
5,024 | 5,284 | ||||||
Investment in FHLB stock |
3,799 | 3,799 | ||||||
Premises and equipment, net |
12,317 | 13,175 | ||||||
Bank-owned life insurance |
17,658 | 17,073 | ||||||
Accrued interest receivable and other assets |
6,100 | 7,973 | ||||||
Total assets |
$ | 543,662 | $ | 565,105 | ||||
LIABILITIES |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 69,535 | $ | 63,695 | ||||
Interest-bearing |
382,450 | 401,381 | ||||||
Total deposits |
451,985 | 465,076 | ||||||
Federal funds purchased and other short-term borrowings |
1,296 | 1,265 | ||||||
Federal Home Loan Bank advances |
50,816 | 58,502 | ||||||
Accrued interest payable and other liabilities |
2,665 | 2,848 | ||||||
Total liabilities |
506,762 | 527,691 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Common stock, no par value, 7,500,000 shares authorized, 4,273,908 issued |
3,785 | 3,785 | ||||||
Retained earnings |
46,339 | 47,883 | ||||||
Treasury stock, at cost, 556,523 shares |
(13,494 | ) | (13,494 | ) | ||||
Accumulated other comprehensive income (loss) |
270 | (760 | ) | |||||
Total shareholders equity |
36,900 | 37,414 | ||||||
Total liabilities and shareholders equity |
$ | 543,662 | $ | 565,105 | ||||
3
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest and dividend income |
||||||||||||||||
Loans |
$ | 4,948 | $ | 6,097 | $ | 15,382 | $ | 18,856 | ||||||||
Taxable securities |
550 | 621 | 1,600 | 2,026 | ||||||||||||
Tax-exempt securities |
72 | 145 | 252 | 526 | ||||||||||||
Federal funds sold and other |
27 | 33 | 84 | 79 | ||||||||||||
Total interest income |
5,597 | 6,896 | 17,318 | 21,487 | ||||||||||||
Interest expense |
||||||||||||||||
Deposits |
713 | 1,056 | 2,112 | 3,408 | ||||||||||||
Borrowings |
556 | 686 | 1,778 | 2,069 | ||||||||||||
Total interest expense |
1,269 | 1,742 | 3,890 | 5,477 | ||||||||||||
Net interest income |
4,328 | 5,154 | 13,428 | 16,010 | ||||||||||||
Provision for loan losses |
625 | 4,531 | 3,836 | 9,878 | ||||||||||||
Net interest income after provision for loan losses |
3,703 | 623 | 9,592 | 6,132 | ||||||||||||
Noninterest income |
||||||||||||||||
Service charges on deposit accounts |
697 | 652 | 2,076 | 1,915 | ||||||||||||
Trust department income |
223 | 225 | 688 | 718 | ||||||||||||
Net gain on sales of securities |
| 63 | | 143 | ||||||||||||
Net gain (loss) on sale of assets |
(98 | ) | 28 | (2 | ) | 114 | ||||||||||
Gains on sale of loans |
23 | 144 | 61 | 251 | ||||||||||||
Treasury management fees |
69 | 117 | 263 | 361 | ||||||||||||
Data processing servicing fees |
79 | 163 | 506 | 463 | ||||||||||||
Earnings on bank owned life insurance |
169 | 167 | 585 | 577 | ||||||||||||
Total other-than-temporary impairment losses |
| | (75 | ) | (80 | ) | ||||||||||
Portion of loss reclassified from other comprehensive loss (before taxes) |
| | (17 | ) | (950 | ) | ||||||||||
Net impairment losses recognized in income |
| | (92 | ) | (1,030 | ) | ||||||||||
Other |
167 | 152 | 492 | 428 | ||||||||||||
Total noninterest income |
1,329 | 1,711 | 4,577 | 3,940 | ||||||||||||
Noninterest expense |
||||||||||||||||
Salaries and other employee benefits |
2,255 | 2,611 | 7,427 | 7,834 | ||||||||||||
Occupancy and equipment |
960 | 1,104 | 2,907 | 3,149 | ||||||||||||
Professional services |
371 | 475 | 1,132 | 1,178 | ||||||||||||
Advertising |
89 | 121 | 266 | 294 | ||||||||||||
Postage, freight and courier |
61 | 77 | 219 | 286 | ||||||||||||
Supplies |
43 | 43 | 130 | 102 | ||||||||||||
State franchise taxes |
98 | 152 | 348 | 456 | ||||||||||||
Federal deposit insurance premiums |
319 | 375 | 1,208 | 1,167 | ||||||||||||
Other |
799 | 1,284 | 2,610 | 3,001 | ||||||||||||
Total noninterest expense |
4,995 | 6,242 | 16,247 | 17,467 | ||||||||||||
Net income (loss) before income tax expense (credits) |
37 | (3,908 | ) | (2,078 | ) | (7,395 | ) | |||||||||
Income tax expense (credits) |
(239 | ) | 5,151 | (531 | ) | 4,580 | ||||||||||
Net income (loss) |
$ | 276 | $ | (9,059 | ) | $ | (1,547 | ) | $ | (11,975 | ) | |||||
Basic and diluted income (loss) per common share |
$ | 0.07 | $ | (2.44 | ) | $ | (0.42 | ) | $ | (3.22 | ) | |||||
Dividends per share |
$ | | $ | | $ | | $ | | ||||||||
4
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 276 | $ | (9,059 | ) | $ | (1,547 | ) | $ | (11,975 | ) | |||||
Reclassification adjustment for realized losses
included in net income, net of taxes of $0, $22, $0 and $49 |
| (42 | ) | | (95 | ) | ||||||||||
Unrealized gains on securities available-for-sale,
net of taxes of $238, $167, $515 and $476 |
462 | 325 | 1,000 | 923 | ||||||||||||
Net unrealized gains on securities
held-to-maturity for which a portion
of an other-than-temporary impairment
has been recognized in income,
net of realized losses and net of taxes of $0,
$11, $16, and $344 |
| 21 | 30 | 667 | ||||||||||||
Comprehensive income (loss) |
$ | 738 | $ | (8,755 | ) | $ | (517 | ) | $ | (10,480 | ) | |||||
5
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows provided by operating activities |
$ | (2,789 | ) | $ | 1,474 | |||
Cash flows provided by investing activities |
||||||||
Securities |
||||||||
Purchases |
(34,493 | ) | (19,734 | ) | ||||
Maturities, principal payments and calls |
20,583 | 25,739 | ||||||
Sales |
| 9,435 | ||||||
Net change in loans |
44,228 | 32,895 | ||||||
Proceeds from sale of real estate owned |
2,083 | 2,465 | ||||||
Investment in unconsolidated affiliate |
| (184 | ) | |||||
Premises and equipment expenditures |
(97 | ) | (334 | ) | ||||
Net cash flows provided by investing activities |
32,304 | 50,282 | ||||||
Cash flows used in financing activities |
||||||||
Net change in deposits |
(13,091 | ) | (45,633 | ) | ||||
Net change in federal funds purchased and other short-term borrowings |
31 | (1,912 | ) | |||||
Repayment of Federal Home Loan Bank advances |
(7,686 | ) | (3,761 | ) | ||||
Net cash used in financing activities |
(20,746 | ) | (51,306 | ) | ||||
Net change in cash and cash equivalents |
8,769 | 450 | ||||||
Cash and cash equivalents at beginning of period |
33,521 | 41,453 | ||||||
Cash and cash equivalents at end of period |
$ | 42,290 | $ | 41,903 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest on deposits and borrowings |
$ | 3,878 | $ | 4,885 | ||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Transfers from loans to real estate owned |
$ | 1,782 | $ | 2,356 | ||||
Cash dividends declared but unpaid |
$ | | $ | |
6
Three and Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Weighted-average common shares outstanding (basic) |
3,717,385 | 3,717,385 | ||||||
Dilutive effect of assumed exercise of stock options |
| | ||||||
Weighted-average common shares outstanding (diluted) |
3,717,385 | 3,717,385 | ||||||
7
8
Nine Months Ended | ||||||||||
September 30, | ||||||||||
2011 | ||||||||||
Weighted | ||||||||||
Weighted | Average Remaining | |||||||||
Average Exercise | Contractual | |||||||||
Shares | Price | Life | ||||||||
Outstanding at beginning of period |
285,806 | $ | 11.87 | 8.6 years | ||||||
Granted |
500 | 3.35 | 9.7 years | |||||||
Forfeited |
(52,873 | ) | 10.48 | |||||||
Outstanding at end of period |
233,433 | $ | 12.37 | 7.3 years | ||||||
Options exercisable at period end |
93,133 | $ | 21.61 | |||||||
Weighted-average fair value of options
granted during the year |
$ | 0.01 | ||||||||
Year Ended | ||||||||||
December 31, | ||||||||||
2010 | ||||||||||
Weighted | ||||||||||
Weighted | Average Remaining | |||||||||
Average Exercise | Contractual | |||||||||
Shares | Price | Life | ||||||||
Outstanding at beginning of year |
204,883 | $ | 24.77 | 8.6 years | ||||||
Granted |
131,816 | 3.50 | 9.9 years | |||||||
Forfeited |
(50,893 | ) | 21.30 | |||||||
Outstanding at end of year |
285,806 | $ | 11.87 | 8.6 years | ||||||
Options exercisable at year end |
81,800 | $ | 18.27 | |||||||
Weighted-average fair value of
options granted during the year |
$ | 0.76 | ||||||||
9
Range of | ||
Number Outstanding | Exercise Prices | |
63,738 | $23.00 $30.70 | |
35,377 | $14.15 $16.90 | |
134,318 | $3.35 $9.00 |
10
11
12
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Costs | Gains | Losses | Value | |||||||||||||
U.S. Government and agency obligations |
$ | 46,789 | $ | 1,573 | $ | (3 | ) | $ | 48,359 | |||||||
State and municipal obligations |
10,041 | 452 | | 10,493 | ||||||||||||
Mortgage-backed securities |
24,712 | 1,137 | | 25,849 | ||||||||||||
Total |
$ | 81,542 | $ | 3,162 | $ | (3 | ) | $ | 84,701 | |||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Costs | Gains | Losses | Value | |||||||||||||
U.S. Government and agency obligations |
$ | 29,510 | $ | 599 | $ | (123 | ) | $ | 29,986 | |||||||
State and municipal obligations |
12,153 | 193 | (84 | ) | 12,262 | |||||||||||
Mortgage-backed securities |
26,290 | 1,059 | | 27,349 | ||||||||||||
Total |
$ | 67,953 | $ | 1,851 | $ | (207 | ) | $ | 69,597 | |||||||
Adjusted | Gross | Estimated | ||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains | Value | ||||||||||
Collateralized Debt Obligations |
$ | 1,267 | $ | 3 | $ | 1,270 | ||||||
Adjusted | Gross | Estimated | ||||||||||
Amortized | Unrealized | Fair | ||||||||||
Cost | Gains | Value | ||||||||||
Collateralized Debt Obligations |
$ | 1,313 | $ | 367 | $ | 1,680 | ||||||
13
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Credit losses on debt securities held |
||||||||
Beginning of period |
$ | 3,924 | $ | 2,621 | ||||
Additions related to other-than-temporary losses not
previously recognized |
92 | 1,030 | ||||||
Reductions due to sales |
| | ||||||
Reductions due to change in intent or likelihood of sale |
| | ||||||
Additions related to increases in previously recognized
other-than-temporary losses |
| | ||||||
Reductions due to increases in expected cash flows |
| | ||||||
End of period |
$ | 4,016 | $ | 3,651 | ||||
14
(Less than 12 months) | (12 months or longer) | Total | ||||||||||||||||||||||||||||||||||
Description of | Number of | Fair | Unrealized | Number of | Fair | Unrealized | Number of | Fair | Unrealized | |||||||||||||||||||||||||||
Securities | investments | value | losses | investments | value | losses | investments | value | losses | |||||||||||||||||||||||||||
U.S. Government and
agency obligations |
2 | $ | 2,017 | $ | (3 | ) | | $ | | $ | | 2 | $ | 2,017 | $ | (3 | ) | |||||||||||||||||||
State and municipal
obligations |
| | | | | | | | | |||||||||||||||||||||||||||
Mortgage-backed
securities and other |
| | | | | | | | | |||||||||||||||||||||||||||
Total securities |
2 | $ | 2,017 | $ | (3 | ) | | $ | | $ | | 2 | $ | 2,017 | $ | (3 | ) | |||||||||||||||||||
(Less than 12 months) | (12 months or longer) | Total | ||||||||||||||||||||||||||||||||||
Description of | Number of | Fair | Unrealized | Number of | Fair | Unrealized | Number of | Fair | Unrealized | |||||||||||||||||||||||||||
Securities | investments | value | losses | investments | value | losses | investments | value | losses | |||||||||||||||||||||||||||
U.S. Government and
agency obligations |
10 | $ | 9,904 | $ | (123 | ) | | $ | | $ | | 10 | $ | 9,904 | $ | (123 | ) | |||||||||||||||||||
State and municipal
obligations |
9 | 3,575 | (84 | ) | | | | 9 | 3,575 | (84 | ) | |||||||||||||||||||||||||
Mortgage-backed
securities and other |
| | | | | | | | | |||||||||||||||||||||||||||
Total securities |
19 | $ | 13,479 | $ | (207 | ) | | $ | | $ | | 19 | $ | 13,479 | $ | (207 | ) | |||||||||||||||||||
15
Available-for-sale | Held-to-maturity | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Due in one year or less |
$ | | $ | | $ | | $ | | ||||||||
Due from one to five years |
23,185 | 23,570 | | | ||||||||||||
Due from five to ten years |
22,659 | 24,024 | | | ||||||||||||
Due after ten years |
10,986 | 11,258 | 1,267 | 1,270 | ||||||||||||
Mortgage-backed and
related securities |
24,712 | 25,849 | | | ||||||||||||
Total |
$ | 81,542 | $ | 84,701 | $ | 1,267 | $ | 1,270 | ||||||||
16
September 30, 2011 |
December 31, 2010 |
|||||||
Commercial and industrial |
$ | 132,203 | $ | 155,410 | ||||
Commercial real estate |
139,257 | 152,374 | ||||||
Residential real estate and home equity |
88,619 | 93,646 | ||||||
Consumer and credit card |
20,544 | 23,411 | ||||||
380,623 | 424,841 | |||||||
Add: Net deferred loan origination costs |
15 | 23 | ||||||
Total loans receivable |
$ | 380,638 | $ | 424,864 | ||||
17
18
19
Residential | ||||||||||||||||||||
Real Estate | ||||||||||||||||||||
Consumer and | Commercial and | Commercial | and Home | |||||||||||||||||
Credit Card | Industrial | Real Estate | Equity | Total | ||||||||||||||||
Beginning Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
Charge Offs |
(458 | ) | (1,861 | ) | (3,772 | ) | (78 | ) | (6,169 | ) | ||||||||||
Recoveries |
197 | 51 | 25 | 8 | 281 | |||||||||||||||
Provision |
14 | (482 | ) | 4,416 | (112 | ) | 3,836 | |||||||||||||
Ending Balance |
$ | 549 | $ | 1,882 | $ | 7,455 | $ | 309 | $ | 10,195 | ||||||||||
Individually
evaluated for
impairment |
$ | | $ | 288 | $ | 6,377 | $ | | $ | 6,665 | ||||||||||
Collectively
evaluated for
impairment |
549 | 1,594 | 1,078 | 309 | 3,530 | |||||||||||||||
Ending Balance |
$ | 549 | $ | 1,882 | $ | 7,455 | $ | 309 | $ | 10,195 | ||||||||||
Financing Receivables |
||||||||||||||||||||
Individually
evaluated for
impairment |
$ | | $ | 14,054 | $ | 39,745 | $ | | $ | 53,799 | ||||||||||
Collectively
evaluated for
impairment |
20,544 | 118,149 | 99,512 | 88,619 | 326,824 | |||||||||||||||
Total |
$ | 20,544 | $ | 132,203 | $ | 139,257 | $ | 88,619 | $ | 380,623 | ||||||||||
20
Residential | ||||||||||||||||||||
Real Estate | ||||||||||||||||||||
Consumer and | Commercial and | Commercial | and Home | |||||||||||||||||
Credit Card | Industrial | Real Estate | Equity | Total | ||||||||||||||||
Beginning Balance |
$ | 874 | $ | 2,476 | $ | 6,817 | $ | 312 | $ | 10,479 | ||||||||||
Charge Offs |
(824 | ) | (2,261 | ) | (6,175 | ) | (498 | ) | (9,758 | ) | ||||||||||
Recoveries |
200 | 270 | 4 | 12 | 486 | |||||||||||||||
Provision |
546 | 3,689 | 6,140 | 665 | 11,040 | |||||||||||||||
Ending Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
Individually
evaluated for
impairment |
$ | | $ | 2,812 | $ | 5,158 | $ | | $ | 7,970 | ||||||||||
Collectively
evaluated for
impairment |
796 | 1,362 | 1,628 | 491 | 4,277 | |||||||||||||||
Ending Balance |
$ | 796 | $ | 4,174 | $ | 6,786 | $ | 491 | $ | 12,247 | ||||||||||
Financing Receivables |
||||||||||||||||||||
Individually
evaluated for
impairment |
$ | | $ | 18,967 | $ | 42,104 | $ | | $ | 61,071 | ||||||||||
Collectively
evaluated for
impairment |
23,411 | 136,443 | 110,270 | 93,646 | 363,770 | |||||||||||||||
Total |
$ | 23,411 | $ | 155,410 | $ | 152,374 | $ | 93,646 | $ | 424,841 | ||||||||||
21
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With No Related Allowance
Recorded |
||||||||||||||||||||
Consumer and Credit Card |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Commercial and Industrial |
3,902 | 3,980 | | 4,441 | 145 | |||||||||||||||
Commercial Real Estate |
9,900 | 14,362 | | 12,711 | 281 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
With Allowance Recorded |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
10,152 | 12,336 | 288 | 11,384 | 447 | |||||||||||||||
Commercial Real Estate |
29,845 | 35,861 | 6,377 | 27,132 | 1,126 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
Total |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
14,054 | 16,316 | 288 | 15,825 | 592 | |||||||||||||||
Commercial Real Estate |
39,745 | 50,223 | 6,377 | 39,843 | 1,407 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
Total |
$ | 53,799 | $ | 66,539 | $ | 6,665 | $ | 55,668 | $ | 1,999 | ||||||||||
22
Unpaid | Average | Interest | ||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | ||||||||||||||||
With No Related Allowance
Recorded |
||||||||||||||||||||
Consumer and Credit Card |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Commercial and Industrial |
5,615 | 5,757 | | 4,196 | 295 | |||||||||||||||
Commercial Real Estate |
17,529 | 20,855 | | 14,597 | 993 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
With Allowance Recorded |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
13,352 | 15,238 | 2,812 | 13,651 | 741 | |||||||||||||||
Commercial Real Estate |
24,575 | 28,823 | 5,158 | 25,209 | 821 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
Total |
||||||||||||||||||||
Consumer and Credit Card |
| | | | | |||||||||||||||
Commercial and Industrial |
18,967 | 20,995 | 2,812 | 17,847 | 1,036 | |||||||||||||||
Commercial Real Estate |
42,104 | 49,678 | 5,158 | 39,806 | 1,814 | |||||||||||||||
Residential RE and Home
Equity |
| | | | | |||||||||||||||
Total |
$ | 61,071 | $ | 70,673 | $ | 7,970 | $ | 57,653 | $ | 2,850 | ||||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Consumer and credit card |
$ | 46 | $ | 33 | ||||
Commercial and industrial |
3,053 | 6,043 | ||||||
Commercial real estate |
8,722 | 10,102 | ||||||
Residential real estate and home equity |
685 | 389 | ||||||
Total |
$ | 12,506 | $ | 16,567 | ||||
23
Commercial and | Commercial Real | |||||||
Category | Industrial | Estate | ||||||
Prime-1 |
$ | 4,456 | $ | 561 | ||||
Good-2 |
17,450 | 17,918 | ||||||
Fair-3 |
39,554 | 30,423 | ||||||
Compromised-4 |
32,137 | 42,390 | ||||||
Vulnerable-5 |
18,794 | 4,673 | ||||||
Substandard-6 |
19,812 | 43,292 | ||||||
Doubtful-7 |
| | ||||||
Loss-8 |
| | ||||||
Total |
$ | 132,203 | $ | 139,257 | ||||
Commercial and | Commercial Real | |||||||
Category | Industrial | Estate | ||||||
Prime-1 |
$ | 8,459 | $ | 561 | ||||
Good-2 |
22,355 | 20,404 | ||||||
Fair-3 |
45,853 | 39,067 | ||||||
Compromised-4 |
31,628 | 27,692 | ||||||
Vulnerable-5 |
22,154 | 11,785 | ||||||
Substandard-6 |
24,959 | 52,865 | ||||||
Doubtful-7 |
2 | | ||||||
Loss-8 |
| | ||||||
Total |
$ | 155,410 | $ | 152,374 | ||||
24
| At inception, the loan was properly underwritten and did not possess an unwarranted level of credit risk; also the loan met the above criteria for a risk grade of 1 (Prime), 2 (Good), 3 (Fair) or 4 (Compromised). |
| At inception, the loan was secured with collateral possessing a loan-to-value adequate to protect the Bank from loss. |
| The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. |
| During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the business is in an industry which is known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. |
| Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, is uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss. |
| Loans are inadequately protected by the current net worth and paying capacity of the obligor. |
| The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees. |
| Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. |
| Unusual courses of action are needed to maintain a high probability of repayment. |
| The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments. |
| The lender is forced into a subordinated or unsecured position due to flaws in documentation. |
| Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms. |
| The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. |
| There is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions. |
25
| Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable. |
| The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. |
| The possibility of loss is high, but, because of certain important pending factors, which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established during this period of deferring the realization of the loss. |
Residential Real | ||||||||
Consumer and | Estate and Home | |||||||
Payment Category | Credit Card | Equity | ||||||
Performing |
$ | 20,333 | $ | 87,763 | ||||
Non-Performing |
211 | 856 | ||||||
Total |
$ | 20,544 | $ | 88,619 | ||||
Residential Real | ||||||||
Consumer and | Estate and Home | |||||||
Payment Category | Credit Card | Equity | ||||||
Performing |
$ | 22,970 | $ | 92,832 | ||||
Non-Performing |
441 | 814 | ||||||
Total |
$ | 23,411 | $ | 93,646 | ||||
26
Recorded | ||||||||||||||||||||||||||||
60-89 | Investment | |||||||||||||||||||||||||||
Days | 90 Days | Total | > 90 days | |||||||||||||||||||||||||
30-59 Days | Past | and Greater | Total | Financing | and | |||||||||||||||||||||||
Category | Past Due | Due | Past Due | Past Due | Current | Receivables | Accruing | |||||||||||||||||||||
Consumer and Credit
Card |
$ | 142 | $ | 52 | $ | 211 | $ | 405 | $ | 20,139 | $ | 20,544 | $ | 165 | ||||||||||||||
Commercial and
Industrial |
205 | 16 | 819 | 1,040 | 131,163 | 132,203 | 819 | |||||||||||||||||||||
Commercial Real
Estate |
82 | | 7,996 | 8,078 | 131,179 | 139,257 | | |||||||||||||||||||||
Residential Real
Estate and Home
Equity |
23 | 211 | 856 | 1,090 | 87,529 | 88,619 | 172 | |||||||||||||||||||||
Total |
$ | 452 | $ | 279 | $ | 9,882 | $ | 10,613 | $ | 370,010 | $ | 380,623 | $ | 1,156 | ||||||||||||||
Recorded | ||||||||||||||||||||||||||||
60-89 | Investment | |||||||||||||||||||||||||||
Days | 90 Days | Total | > 90 days | |||||||||||||||||||||||||
30-59 Days | Past | and Greater | Total | Financing | and | |||||||||||||||||||||||
Category | Past Due | Due | Past Due | Past Due | Current | Receivables | Accruing | |||||||||||||||||||||
Consumer and Credit
Card |
$ | 300 | $ | 104 | $ | 441 | $ | 845 | $ | 22,566 | $ | 23,411 | $ | 407 | ||||||||||||||
Commercial and
Industrial |
359 | 3 | 1,373 | 1,735 | 153,675 | 155,410 | 991 | |||||||||||||||||||||
Commercial Real
Estate |
885 | 2,050 | 10,118 | 13,053 | 139,321 | 152,374 | 35 | |||||||||||||||||||||
Residential Real
Estate and Home
Equity |
472 | 123 | 814 | 1,409 | 92,237 | 93,646 | 425 | |||||||||||||||||||||
Total |
$ | 2,016 | $ | 2,280 | $ | 12,746 | $ | 17,042 | $ | 407,799 | $ | 424,841 | $ | 1,858 | ||||||||||||||
27
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||
Post-Modification | Post-Modification | |||||||||||||||
Number of | Outstanding | Number of | Outstanding | |||||||||||||
Contracts | Recorded Investment | Contracts | Recorded Investment | |||||||||||||
Consumer and Credit Card |
| $ | | 9 | $ | 56 | ||||||||||
Commercial and Industrial |
| | 3 | 1,583 | ||||||||||||
Commercial Real Estate |
9 | 4,854 | 18 | 17,437 | ||||||||||||
Residential Real Estate and
Home Equity |
| | 2 | 14 | ||||||||||||
Total |
9 | $ | 4,854 | 32 | $ | 19,090 | ||||||||||
Loans modified as a TDR within the previous | Loans modified as a TDR within the previous 12 | |||||||||||||||
12 months that subsequently defaulted during | months that subsequently defaulted during | |||||||||||||||
the Three Months Ended | the Nine Months Ended | |||||||||||||||
September 30, 2011 | September 30, 2011 | |||||||||||||||
Number of | Recorded Investment | Number of | Recorded Investment | |||||||||||||
Contracts | as of period end (1) | Contracts | as of period end (1) | |||||||||||||
Consumer and Credit Card |
2 | $ | 18 | 2 | $ | 18 | ||||||||||
Commercial and Industrial |
| | | | ||||||||||||
Commercial Real Estate |
| | 4 | 3,381 | ||||||||||||
Residential Real Estate and
Home Equity |
| | | | ||||||||||||
Total |
2 | $ | 18 | 6 | $ | 3,399 | ||||||||||
(1) | Period end balances are inclusive of all partial pay downs and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported. |
28
29
Level 1 | Quoted prices in active markets for identical assets or liabilities. | ||
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
30
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
U.S. Government and agency
obligations |
$ | 48,359 | $ | | $ | 48,359 | $ | | ||||||||
State and municipal
obligations |
10,493 | | 10,493 | | ||||||||||||
Mortgage-backed
securities and other |
25,849 | | 25,849 | | ||||||||||||
Total |
$ | 84,701 | $ | | $ | 84,701 | $ | | ||||||||
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
U.S. Government and agency
obligations |
$ | 29,986 | $ | | $ | 29,986 | $ | | ||||||||
State and municipal
obligations |
12,262 | | 12,262 | | ||||||||||||
Mortgage-backed securities and
other |
27,349 | | 27,349 | | ||||||||||||
Total |
$ | 69,597 | $ | | $ | 69,597 | $ | | ||||||||
31
32
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Collateralized debt obligations |
$ | 1,270 | $ | | $ | | $ | 1,270 | ||||||||
Impaired loans |
33,332 | | | 33,332 | ||||||||||||
Real estate owned |
2,907 | | | 2,907 |
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Collateralized debt obligations |
$ | 1,313 | $ | | $ | | $ | 1,313 | ||||||||
Impaired loans |
24,187 | | | 24,187 | ||||||||||||
Real estate owned |
449 | | | 449 |
33
September 30, | December 31, | |||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 42,290 | $ | 42,290 | $ | 33,521 | $ | 33,521 | ||||||||
Securities available-for-sale |
84,701 | 84,701 | 69,597 | 69,597 | ||||||||||||
Securities held-to-maturity |
1,267 | 1,270 | 1,313 | 1,680 | ||||||||||||
Loans held for sale |
63 | 63 | 753 | 753 | ||||||||||||
Loans |
370,443 | 364,502 | 412,617 | 401,967 | ||||||||||||
FHLB stock |
3,799 | 3,799 | 3,799 | 3,799 | ||||||||||||
Accrued interest receivable |
1,514 | 1,514 | 1,673 | 1,673 |
September 30, | December 31, | |||||||||||||||
2011 | 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial liabilities |
||||||||||||||||
Noninterest-bearing deposits |
$ | 69,535 | $ | 69,535 | $ | 63,695 | $ | 63,695 | ||||||||
Interest-bearing deposits |
382,450 | 383,075 | 401,381 | 402,131 | ||||||||||||
Federal funds purchased and
other short-term borrowings |
1,296 | 1,296 | 1,265 | 1,265 | ||||||||||||
FHLB advances |
50,816 | 51,467 | 58,502 | 60,581 | ||||||||||||
Accrued interest payable |
348 | 348 | 336 | 336 |
Item 1A. | Risk Factors |
34
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
35
| During the second quarter 2011 the Corporation developed a restructuring plan that included a reduction in force (RIF), branch closures and a restructure of the retail division in order to realign staff with the Corporation strategies to increase retail deposits and retail lending. The restructure will result in the elimination of approximately 32 full-time equivalent employees and the closure of five branch locations. For the second quarter, the Corporation recognized approximately $255 of restructure costs which mainly consists of severance payments for affected employees. The restructure is expected to save the Corporation approximately $1,000 per year on an annualized basis. |
| The Corporation and its wholly-owned subsidiary, The Delaware County Bank & Trust Co. currently operate under various written orders from regulatory bodies. Among other things, the Bank was required to reach a tier-1 capital ratio of 9% and a risk-based capital level of 13% by January 2011. The Bank has not yet achieved these numbers, but continues to explore various options and alternatives designed to address those requirements. |
| The Corporation is in ongoing communication with both the Federal Deposit Insurance Corp. (FDIC) and the Ohio Division of Financial Institutions (ODFI), and is subject to ongoing examination for compliance with the written agreements. The Corporation cannot predict when all terms of the written agreements will be satisfied, but will continue to work diligently with the agencies, and believes that it is making progress towards addressing all facets of the agreements. |
| The Corporations assets totaled $543,662 at September 30, 2011 compared to $565,105 at December 31, 2010, a decrease of $21,443, or 4.0%. The decrease in assets was mainly attributed to a decrease in cash and cash equivalents used to fund the reduction in CDARS deposits and FHLB borrowings. |
| Overall, loan balances continue to decline due to lower market activity. Loans, excluding loans held for sale, stood at $380,638 at September 30, 2011 compared to $424,864 at December 31, 2010, a decline of $44,226. |
| Net income (loss) for the three and nine months ended September 30, 2011 totaled $276 and ($1,547), respectively, compared to net losses in the same periods in 2010 of $9,059 and $11,975. The decline in losses is mainly attributed to the decline in the provision for loan losses period to period, offset by a decline in net interest income. |
| The provision for loan losses totaled $625 and $3,836 for the three and nine month periods ended September 30, 2011 compared to $4,531 and $9,878 for the three and nine month periods ended September 30, 2010. The Bank maintains an allowance for loan losses at a level to absorb managements estimate of probable inherent credit losses in its portfolio. The decline in provision from the prior year is attributed to the stabilization of problem credits and the improvement in related credit metrics. |
| The Corporation did not write down its investment in preferred trust securities during the third quarter 2011. It did recognize a $92 other-than-temporary impairment charge on these investments in the first quarter 2011. The credit quality of these bonds has stabilized, but additional future losses for other-than-temporary impairment could occur if the credit quality of the collateral supporting these bonds declines. |
36
| The Corporations net interest income declined from the same periods in 2010. Net interest income decreased to $4,328 for the third quarter and $13,428 for the nine months ended September 30, 2011 compared to $5,154 and $16,010 for the comparable periods in 2010. The lower net interest income is mainly attributed to the overall decline in interest earning assets within the loan and investment portfolios. |
| The ability to generate earnings is impacted in part by competitive pricing on loans and deposits, and by changes in the rates on various U.S. Treasury, U.S. Government agency obligations and State and political subdivision issues which comprise a significant portion of the Banks investment portfolio. The Bank is competitive with interest rates and loan fees that it charges, in pricing and variety of accounts it offers to the depositor. The Corporation confirms this by completing regular rate shops and comparisons versus competing financial services companies. |
| The dominant pricing mechanism on loans is the prime interest rate as published in the Wall Street Journal, on a fixed rate plus spread over the index. The interest spread depends on the overall account relationship and the creditworthiness of the borrower. |
| Deposit rates are reviewed weekly by management and are generally discussed by the Asset/Liability Committee on a monthly basis. The Banks primary objective in setting deposit rates is to remain competitive in the market area, and develop funding opportunities while earning an adequate interest rate margin. |
| FHLB advances decreased to $50,816 at September 30, 2011 from $58,502 at December 31, 2010. This is mainly due to a reduced reliance on borrowed funds because of the improved ability to raise the need deposits from its core customer base to support its current balance sheet structure. Additionally, Management has used excess cash to reduce the overall size of the balance sheet by paying down debt, in turn, supporting its capital ratios. |
37
38
39
40
41
42
Payment Due by Year | ||||||||||||||||||||
Less than 1 | More than | |||||||||||||||||||
Contractual Obligations | Total | year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
FHLB advances |
$ | 50,816 | $ | 31,000 | $ | 10,856 | $ | 6,273 | $ | 2,687 | ||||||||||
Federal funds purchased and
other
short-term borrowings |
1,296 | 1,296 | | | | |||||||||||||||
Operating lease obligations |
3,595 | 663 | 1,535 | 889 | 508 | |||||||||||||||
Loan and line of credit
commitments |
67,624 | 35,165 | | | 32,459 | |||||||||||||||
Total Contractual Obligations |
$ | 123,331 | $ | 68,124 | $ | 12,391 | $ | 7,162 | $ | 35,654 | ||||||||||
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
43
Item 4. | Controls and Procedures |
44
Item 1 Legal Proceedings: |
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds: |
(a) | (b) | (c) | (d) | |||||||||||||
Maximum Number | ||||||||||||||||
Total Number of | (or Approximate | |||||||||||||||
Shares (or Units) | Dollar Value) of | |||||||||||||||
Total Number | Purchased as Part | Shares (or Units) that | ||||||||||||||
of Shares (or | Average Price | of Publicly | May Yet Be | |||||||||||||
Units) | Paid per Share | Announced Plans | Purchased Under the | |||||||||||||
Period | Purchased | (or Unit) | or Programs(1) | Plans or Programs | ||||||||||||
Month #l
7/1/2011 to
7/31/2011 |
| | | | ||||||||||||
Month #2
8/1/2011 to
8/31/2011 |
| | | | ||||||||||||
Month #3
9/1/2011 to
9/30/2011 |
| | | | ||||||||||||
Total |
| | | 184,907 | ||||||||||||
(1) | On August 16, 2007, the Company announced a repurchase program which authorizes the repurchase of up to 200,000 of its common shares over a two year period commencing August 15, 2007. |
45
Item 3 Defaults Upon Senior Securities: |
Item 4 Submission of Matters to a Vote of Security Holders: |
Item 5 Other Information: |
Item 6 Exhibits: |
Exhibit No. | Exhibit | |||
3.1 | Amended and Restated Articles of Incorporation of DCB Financial Corp,
incorporated by reference to the Companys Report on Form 10-Q filed with the
Commission on November 14, 2003. |
|||
3.2 | Amended and Restated Articles of Incorporation of DCB Financial Corp,
incorporated by reference to the Companys Report on Form 10-Q filed with the
Commission on November 14, 2003. |
|||
31.1 | Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification pursuant to 18 U.S.C. 1350, as enacted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 |
46
DCB FINANCIAL CORP (Registrant) |
||||
Date: November 14, 2011 | /s/ Ronald J. Seiffert | |||
Ronald J. Seiffert | ||||
President and Chief Executive Officer | ||||
Date: November 14, 2011 | /s/ John A. Ustaszewski | |||
John A. Ustaszewski | ||||
Senior Vice President and Chief Financial Officer | ||||
47
EXHIBIT | ||||
NUMBER | DESCRIPTION | |||
3.1 | Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference
to the
Companys Report on Form 10-Q filed with the Commission on November 14, 2003. |
|||
3.2 | Amended and Restated Articles of Incorporation of DCB Financial Corp, incorporated by reference to
the
Companys Report on Form 10-Q filed with the Commission on November 14, 2003. |
|||
31.1 | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification pursuant to 18 U.S.C. 1350, as enacted Pursuant to section 906 of the
Sarbanes-Oxley Act
of 2002. |
|||
32.2 | Certification pursuant to 18 U.S.C. 1350, as enacted Pursuant to section 906 of the
Sarbanes-Oxley Act
of 2002. |
48
1. | I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
Date: November 14, 2011 | /s/ Ronald J. Seiffert | |||||
Ronald J. Seiffert | ||||||
Title: | President and Chief Executive Officer |
1. | I have reviewed this quarterly report on Form 10-Q of DCB Financial Corp; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
Date: November 14, 2011 | /s/ John A. Ustaszewski | |||||
John A. Ustaszewski | ||||||
Title: | Senior Vice President and Chief Financial Officer |
/s/ Ronald J. Seiffert
|
||
President and Chief Executive Officer |
||
November 14
, 2011 |
/s/ John A. Ustaszewski
|
||
Senior Vice President and Chief Financial Officer |
||
November 14, 2011 |
Condensed Consolidated Balance Sheets (Parenthetical) (USD $) | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
SHAREHOLDERS' EQUITY | ||
Common stock, par value | ||
Common stock, shares authorized | 7,500,000 | 7,500,000 |
Common stock, shares issued | 4,273,908 | 4,273,908 |
Treasury stock, shares | 556,523 | 556,523 |
Document and Entity Information (USD $) | 9 Months Ended | ||
---|---|---|---|
Sep. 30, 2011 | Nov. 04, 2011 | Jun. 30, 2010 | |
Document and Entity Information [Abstract] | |||
Entity Registrant Name | DCB FINANCIAL CORP | ||
Entity Central Index Key | 0001025877 | ||
Document Type | 10-Q | ||
Document Period End Date | Sep. 30, 2011 | ||
Amendment Flag | false | ||
Document Fiscal Year Focus | 2011 | ||
Document Fiscal Period Focus | Q3 | ||
Current Fiscal Year End Date | --12-31 | ||
Entity Well-known Seasoned Issuer | No | ||
Entity Voluntary Filers | No | ||
Entity Current Reporting Status | Yes | ||
Entity Filer Category | Smaller Reporting Company | ||
Entity Public Float | $ 20,814,356 | ||
Entity Common Stock, Shares Outstanding | 3,717,385 |
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Fair Value Measurements | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Measurements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FAIR VALUE MEASUREMENTS |
NOTE 5 — FAIR VALUE MEASUREMENTS
The Corporation accounts for fair value measurements in accordance with FASB ASC 820, which defines
fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements.
FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Following is a description of the valuation methodologies used for instruments measured at fair
value on a recurring basis and recognized in the accompanying balance sheets, as well as the
general classification of such instruments pursuant to the valuation hierarchy.
Securities
Where quoted market prices are available in an active market, securities are classified within
Level 1 of the valuation hierarchy. Level 1 securities include certain equity securities and
U.S. Government and agency obligations. If quoted market prices are not available, then fair
values are estimated by using pricing models, quoted prices of securities with similar
characteristics or discounted cash flows. Level 2 securities include U.S. Government and agency
obligations, state and municipal obligations, corporate bonds and mortgage-backed securities.
In certain cases where Level 1 or Level 2 inputs are not available, securities are classified
within Level 3 of the hierarchy.
The following table presents the fair value measurements of assets recognized in the accompanying
balance sheets measured at fair value on a recurring basis and the level within the fair value
hierarchy in which the fair value measurements fall at September 30, 2011 and December 31, 2010.
September
30, 2011
December
31, 2010
Following is a description of the valuation methodologies used for instruments measured at
fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as
the general classification of such instruments pursuant to the valuation hierarchy.
Securities
Certain collateralized debt obligations are classified as held to maturity. The Corporation
recognized other-than-temporary impairment on the securities as of September 30, 2011, based
upon a Level 3 estimate of fair value, including a discounted cash flows calculation and a fair
value estimate from an independent evaluation of the securities.
Impaired loans
At September 30, 2011 and December 31, 2010, impaired loans consisted primarily of loans secured
by nonresidential and commercial real estate. Management has determined fair value measurements
on impaired loans primarily through evaluations of appraisals performed.
Real Estate Owned
Real estate acquired through, or in lieu of, loan foreclosure is held for sale and initially
recorded at fair value (based on current appraised value) at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed
by management and the assets are carried at the lower of carrying amount or fair value less
estimated costs to sell. Management has determined fair value measurements on real estate owned
primarily through evaluations of appraisals performed.
The following table presents the fair value measurements of assets measured at fair value
on a nonrecurring basis and the level within the fair value hierarchy in which the fair
value measurements fall at September 30, 2011 and December 31, 2010.
September
30, 2011
December
31, 2010
Carrying amount and estimated fair values of financial instruments were as follows:
The estimated fair value of cash and cash equivalents, FHLB stock, accrued interest receivable,
noninterest bearing deposits, federal funds purchased and other short-term borrowings and accrued
interest payable approximates the related carrying amounts.
For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing
or repricing limits, fair value is based on discounted cash flows using current market rates
applied to the estimated life and credit risk. Fair value of loans held for sale is based on
market quotes. Fair values of long-term FHLB advances are based on current rates for similar
financing. Fair values of off-balance-sheet items are based on the current fee or cost that would
be charged to enter into or terminate such agreements, which are not material.
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Summary of Significant Accounting Policies | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly the financial
position of DCB Financial Corp (the “Corporation”) at September 30, 2011, and its results of
operations and cash flows for the nine month periods ended September 30, 2011 and 2010. All such
adjustments are normal and recurring in nature. The accompanying consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not purport
to contain all necessary financial disclosures required by accounting principles generally accepted
in the United States of America that might otherwise be necessary in the circumstances, and should
be read in conjunction with the consolidated financial statements, and notes thereto, included in
its Annual Report as of December 31, 2010. Refer to the accounting policies of the Corporation
described in the Notes to Consolidated Financial Statements contained in the Corporation’s Annual
Report as of December 31, 2010. The Corporation has consistently followed these policies in
preparing this Form 10-Q. The results of operations for the three and nine month periods ended
September 30, 2011, are not necessarily indicative of the results that may be expected for the
entire year.
The accompanying consolidated financial statements include the accounts of the Corporation and its
wholly-owned subsidiaries, The Delaware County Bank and Trust Company (the “Bank”), DCB Title
Services LLC, Datatasx LLC, DCB Insurance Services, Inc. and ORECO (collectively referred to herein after as the “Corporation”).
All significant intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Management considers the Corporation to operate within one business segment,
banking. In the second quarter of 2011, Management entered into an agreement to sell the
outstanding contracts serviced through Datatasx LLC. Those contracts were converted to the new
provider during the third quarter 2011. On a pre-tax net basis, Datatasx contributed approximately
$298 in the first three quarters of 2011 to the consolidated companies. Management considers both
the net contribution and Datatasx’s balance sheet to be immaterial to financial results on a
consolidated basis.
To prepare financial statements in conformity with accounting principles generally accepted in the
United States of America, management makes estimates and assumptions based on available
information. These estimates and assumptions affect amounts reported in the financial statements
and disclosures provided, and future results could differ. The allowance for loan losses, fair
values of financial instruments and status of contingencies are particularly subject to change.
Income tax expense is based on the effective tax rate expected to be applicable for the entire
year. Deferred tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities, computed using
enacted tax rates. A full valuation allowance was recorded in 2010, reducing the carrying value of
the deferred tax assets to $0. The full valuation allowance has remained throughout 2011.
Earnings per share
Earnings per common share is net income divided by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed including the dilutive effect of additional potential common shares under stock options. Weighted-average shares for basic and diluted earnings per share are presented below.
Options to purchase 233,433 shares of common stock with a weighted-average exercise price of
$12.37, were outstanding at September 30, 2011, but were excluded from the computation of common
share equivalents for the three and nine month periods then ended because the exercise price was
greater than the average fair value of the shares.
Options to purchase 200,742 shares of common stock with a weighted-average exercise price of
$19.59, were outstanding at September 30, 2010, but were excluded from the computation of common
share equivalents for the three and nine month periods then ended because the exercise price was
greater than the average fair value of the shares during the period.
Stock option plan
The Corporation’s shareholders approved an employee share option plan (the “Plan”) in May 2004.
This plan grants certain employees the right to purchase shares at a predetermined price. The plan
is limited to 300,000 shares. The shares granted to employees vest 20% per year over a five year
period. The options expire after ten years. 500 shares were granted during the nine month period
ending September 30, 2011, at a weighted average exercise price of $3.35. At September 30, 2011,
93,133 shares were exercisable and 66,567 shares were available for grant under this plan.
The Corporation recognizes compensation cost for unvested equity-based awards based on their
grant-date fair value. The fair value of each option was estimated on the date of grant using the
modified Black-Scholes options pricing model with the following weighted-average assumptions used
for grants: dividend yield of 0.00% for 2010; expected volatility of 12.0% for 2010; risk-free
interest rates of 1.00% for 2010; and contractual lives of 10 years for each grant. At September
30, 2011, outstanding options had no intrinsic value. The options that were issued in 2011 were
subsequently forfeited so no fair valuation analysis was completed, nor was any expense recognized.
The expected term of the options is based on evaluations of historical and expected future employee
exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of
grant with maturity dates approximately equal to the expected life at the grant date. Volatility
is based on historical volatility of the Corporation’s stock.
The Corporation recorded $30 and $26 in compensation cost for equity-based awards for the three
month period ending September 30, 2011 and 2010, respectively. The Corporation recorded $90 and
$74 in compensation cost for equity-based awards that vested during the nine month periods ended
September 30, 2011 and 2010, respectively. The Corporation has $86 of total unrecognized
compensation cost related to non-vested equity-based awards granted under its stock option plan as
of September 30, 2011, which is expected to be recognized over a weighted-average period of 3.6
years.
A summary of the status of the Corporation’s stock option plan as of September 30, 2011 and
December 31, 2010, and changes during the periods then ended are presented below:
The following information applies to options outstanding at September 30, 2011:
Application of Critical Accounting Policies
DCB’s consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America and follow general practices within the
financial services industry. The application of these principles requires management to make
estimates, assumptions, and judgments that affect the amounts reported in the financial statements
and accompanying notes. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; as this information changes, the financial
statements could reflect different estimates, assumptions, and judgments.
The procedures for assessing the adequacy of the allowance for loan losses reflect our evaluation
of credit risk after careful consideration of all information available to us. In developing this
assessment, we must rely on estimates and exercise judgment regarding matters where the ultimate
outcome is unknown, such as economic factors, developments affecting companies in specific
industries and issues with respect to single borrowers. Depending on changes in circumstances,
future assessments of credit risk may yield materially different results, which may require an
increase or a decrease in the allowance for loan losses.
The allowance is regularly reviewed by management to determine whether the amount is considered
adequate to absorb probable losses. This evaluation includes specific loss estimates on certain
individually reviewed loans, statistical loss estimates for loan pools that are based on historical
loss experience, and general loss estimates that are based upon the size, quality, and
concentration characteristics of the various loan portfolios, adverse situations that may affect a
borrower’s ability to repay, and current economic and industry conditions. Also considered as part
of that judgment is a review of the Bank’s trends in delinquencies and loan losses, as well as
trends in delinquencies and losses for the region and nationally, and economic factors.
The allowance for loan losses is maintained at a level believed adequate by management to absorb
probable losses inherent in the loan portfolio. Management’s evaluation of the adequacy of the
allowance is an estimate based on management’s current judgment about the credit quality of the
loan portfolio. While the Corporation strives to reflect all known risk factors in its
evaluations, judgment errors may occur.
The valuation of other assets requires that management utilize a variety of estimates and analysis
to determine whether an asset is impaired or other-than-temporarily impaired (“OTTI”). After
determining the appropriate methodology for fair value measurement, management then evaluates
whether or not declines in fair value below book value are temporary or other-than-temporary
impairments. When the Corporation does not intend to sell a debt security, and it is more likely
than not, the Corporation will not have to sell the security before recovery of its cost basis, it
recognizes the credit component of an other-than-temporary impairment of a debt security in
earnings and the remaining portion in other comprehensive income. For held-to-maturity debt
securities, the amount of an other-than-temporary impairment recorded in other comprehensive income
for the noncredit portion of a previous
other-than-temporary impairment is amortized prospectively over the remaining life of the security
on the basis of the timing of future estimated cash flows of the security.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or payoff are reported at the principal balance outstanding, net of unearned interest,
unamortized deferred loan fees and costs and the allowance for loan losses.
Interest income is accrued based on the unpaid principal balance and includes amortization of net
deferred loan fees and costs over the loan term. Interest income on mortgage and commercial loans
is 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 or charged-off at an earlier
date if collection of principal or interest is considered doubtful. All interest accrued but not
received for loans placed on nonaccrual status are reversed against interest income. Interest
received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable but
unconfirmed credit losses, increased by the provision for loan losses and decreased by charge-offs
net of recoveries. Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the required allowance balance based on past loan loss experience,
augmented by additional estimates related to the nature and volume of the portfolio, information
about specific borrower situations, estimated collateral values, economic conditions and other
factors.
The allowance consists of both specific and general components. The specific component relates to
loans that are classified as impaired. For those loans that are classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or observable market
price) of the impaired loan is lower than the carrying value of that loan. The general component
covers nonclassified loans and is based on historical charge-off experience and expected loss given
default derived from the Bank’s internal risk rating process. Other adjustments may be made to the
allowance for pools of loans after an assessment of internal or external influences on credit
quality that are not fully reflected in the historical loss or risking rating data.
A loan is impaired when full payment of interest and principal under the original contractual loan
terms is not expected. Commercial and industrial loans, commercial and multi-family real estate,
and land development loans are individually evaluated for impairment. If a loan is impaired, the
loan amount exceeding fair value, based on the most current information available, is reserved.
Large groups of smaller balance homogeneous loans, such as consumer and residential real estate
loans are collectively evaluated for impairment, and accordingly, such loans are not separately
identified for impairment disclosures.
New Accounting Pronouncements: FASB ASU 2011-02, A Creditor’s Determination of Whether a
Restructuring Is a Troubled Debt Restructuring. In April 2011, the FASB issued ASU 2011-02, which
provides additional guidance to help creditors in determining whether a creditor has granted a
concession and whether a debtor is experiencing financial difficulties for purposes of determining
whether a restructuring constitutes a troubled debt restructuring. The amendments in this update
are effective for the Corporation beginning in the quarter ended September 30, 2011 and are to be
applied retrospectively to January 1, 2011. In addition, the modification disclosures described in
ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses, which were subsequently deferred by ASU 2011-01, Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings, are effective on a prospective
basis beginning in the quarter ended September 30, 2011. The adoption of ASU 2011-02 did not have a
material impact on the consolidated financial statements.
FASB ASU 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 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 impact of adoption of this ASU is not expected to be material.
FASB ASU 2011-05, Presentation of Comprehensive Income. In June 2011, the FASB issued ASU 2011-05,
which provides entities with 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. Regardless of whether an entity chooses to present
comprehensive income in a single continuous statement or in two separate but consecutive
statements, the entity is required to present on the face of the financial statements
reclassification adjustments for items that are reclassified from other comprehensive income to net
income in the statement(s) where the components of net income and the components of other
comprehensive income are presented. This update should be applied retrospectively effective for
fiscal years, and interim periods within those years, beginning after December 15, 2011. As the
Corporation currently reports comprehensive income in two separate but consecutive statements with
all of the components required by ASU 2011-05, the adoption of this guidance will not have an
impact on the consolidated financial statements.
|
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (Parenthetical) (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Condensed Consolidated Statements of Comprehensive Income (Loss) [Abstract] | ||||
Reclassification adjustment for realized losses included in net income, net of taxes | $ 0 | $ 22 | $ 0 | $ 49 |
Unrealized gains on securities available-for-sale, net of taxes | 238 | 167 | 515 | 476 |
Net unrealized gains on securities held-to-maturity for which a portion of an other-than-temporary impairment has been recognized in income, net of realized losses and net of taxes | $ 0 | $ 11 | $ 16 | $ 344 |
Securities | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SECURITIES |
NOTE 2 — SECURITIES
The amortized cost and estimated fair values of securities available-for-sale were as follows:
September 30, 2011
December 31, 2010
The amortized cost and estimated fair values of securities held-to-maturity were as follows:
September
30, 2011
December
31, 2010
Credit Losses Recognized on Investments
The following table provides information about debt securities for which only a credit loss was
recognized in income and other losses are recorded in other comprehensive income for the nine month
periods ended September 30, 2011 and 2010.
Accumulated Credit Losses:
The table below indicates the length of time individual securities have been in a continuous
unrealized loss position at September 30, 2011 and December 31, 2010:
September 30, 2011
December 31, 2010
The unrealized losses on the Corporation’s investments in U.S. Government and agency obligations,
state and political subdivision obligations and mortgage-backed securities were caused primarily by
changes in interest rates. The contractual terms of those investments do not permit the issuer to
settle the securities at a price less than the amortized cost bases of the investments. Because
the Corporation does not intend to sell the investments and it is not more likely than not the
Corporation will be required to sell the investments before recovery of their amortized cost bases,
which may be maturity, the Corporation does not consider those investments to be
other-than-temporarily impaired at September 30, 2011 or December 31, 2010.
The Corporation’s unrealized loss on investments in collateralized debt obligations relates to an
original investment of $8,000 in pooled trust securities. The company evaluates those investments
on a quarterly basis for other-than-temporary impairment and other unrealized losses due to
temporary market factors. The unrealized losses were primarily attributed to: declines in the
performance of the underlying collateral due to weakness in the economy, and a lower than
investment grade rating by industry analysts.
Credit losses on these securities are calculated by comparing expected discounted cash flows based
on performance indicators of the underlying assets in the security to the carrying value of the
investment. Because the Corporation does not intend to sell the investment and it is not more
likely than not the Corporation will be required to sell the investment before recovery of its new,
lower amortized cost basis, which may be maturity, it does not consider the remainder of the
investment in the securities to be other-than-temporarily impaired at September 30, 2011.
Substantially all mortgage-backed securities are backed by pools of mortgages that are insured or
guaranteed by the Federal National Mortgage Association (“FNMA”), the Government National Mortgage
Association (“GNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).
At September 30, 2011, there were no holdings of securities of any one issuer, other than the U.S.
Government and its agencies, in an amount greater than 10% of shareholders’ equity other than the
pooled trust securities as noted above.
The amortized cost and estimated fair value of all debt securities at September 30, 2011, by
contractual maturity, are shown below. Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations. Mortgage-backed securities are
shown separately since they are not due at a single maturity date.
Securities with a fair value of $78,584 at September 30, 2011 were pledged to secure public
deposits and other obligations.
|
Loans | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LOANS |
NOTE 3 — LOANS
Loans at September 30, 2011 and December 31, 2010, were as follows:
|
Credit Quality | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Credit Quality [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CREDIT QUALITY |
NOTE 4 — CREDIT QUALITY
Allowance for Credit Losses
The allowance consists of both specific and general components. The specific component relates to
loans that are classified as impaired. For those loans that are classified as impaired, an
allowance is established when the collateral value, or value of expected discounted cash flows of
the impaired loan, is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical charge-off experience and expected loss given
default derived from the Bank’s internal risk rating process. Management utilizes historical loss
rates in the calculation by applying weights, so that the most recent data bears a larger impact on
future loss rate calculations. Management has the ability to adjust these loss rates by utilizing
risk ratings based on current period trends. If current period trends differ either positively or
negatively from the given weighted historical loss rates, adjustments can be made. The risk ratings
either increase the expected loss rates, or decrease the expected loss rates, depending on the
variance on actual versus historical trends. Other adjustments may be made to the allowance for
pools of loans after an assessment of internal or external influences on credit quality that are
not fully reflected in the historical loss or risking rating data.
Management also utilizes its assessment of general economic conditions, and other localized
economic data to more fully support its loan loss estimates. General economic data may include:
inflation rates, savings rates and national unemployment rates. Local data may include:
unemployment rates; housing starts; real estate valuations; and other economic data specific to the
Corporation’s market area. Though not specific to individual loans, these economic trends can have
an impact on portfolio performance as a whole.
A loan is impaired when full payment of interest and principal under the original contractual loan
terms is not expected. Commercial and industrial loans, commercial real estate, including
construction, land development and multi-family real estate loans are individually evaluated for
impairment. If a loan is impaired, the loan amount exceeding fair value based on the most current
information available is reserved. Management has developed a process by which commercial and
commercial real estate loans receiving an internal grade of substandard or doubtful are
individually evaluated for impairment through a loan quality review (“LQR”). The LQR details the
various attributes of the relationship and collateral and determines based on the most recent
available information if a specific reserve needs to be applied and at what level. The LQR process
for all loans meeting the specific review criteria is completed on a quarterly basis.
Large groups of smaller balance homogeneous loans, such as consumer and residential real estate
loans are collectively evaluated for impairment, and accordingly, such loans are not separately
identified for impairment disclosures. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Uncollectability is
usually determined based on a pre-determined number of days in the case of consumer loans, or, in
the case of commercial loans, is based on delinquency, collateral and other legal considerations.
Consumer loans are charged-off prior to 120 days of delinquency, but could be charged off earlier,
depending on the individual circumstances. Mortgage loans are charged down prior to 180 days of
delinquency, but could be charged off sooner, again, depending upon individual circumstance.
Typically, loans collateralized by consumer real estate are partially charged down to the estimated
liquidation value, which is generally based on appraisal less costs to hold and liquidate.
Commercial and commercial real estate loans are evaluated for impairment and typically reserved
based on the results of the analysis, then subsequently charged down to a recoverable value when
loan repayment is deemed to be collateral dependent. Both consumer and commercial loans can be
partially charged down depending on a number of factors including: the remaining strength of the
borrower and guarantor; the type and value of the collateral, and the ease of liquidating
collateral; and whether or not collateral is brought onto the bank’s balance sheet via
repossession.
In the case of commercial and commercial real estate loans, charge-off, partial or whole, takes
place when Management determines that full collectability of principal balance is unlikely to
occur. Subsequent recoveries, if
any, are credited to the allowance. Management’s policies for determining impairment, reserves and
charge-offs are reviewed and approved by the Board of Directors on an annual basis, and were not
materially changed in 2011. Management estimates the required allowance balance based on past loan
loss experience, augmented by additional estimates related to the nature and volume of the
portfolio, information about specific borrower situations, estimated collateral values, economic
conditions and other factors.
An individual loan is placed on a non-accruing status if, in the judgment of Management, it is
unlikely that all principal and interest will be received according to the terms of the note.
Loans on non-accrual may be eligible to be returned to an accruing status after six months of
compliance. However, there are number of factors that could prevent a loan from returning to
accruing status, even after remaining in compliance with loan terms for the aforementioned six
month period. For example: deteriorating collateral, negative cash flow changes and inability to
reduce debt to income ratios.
The following table depicts the charge-offs, recoveries and provision for various categories of
loans in the Corporation’s portfolios and indicates whether loans in those categories were
individually or collectively evaluated for impairment. It also provides the dollar amount of
reserves allocated to those portfolios based on Management’s analysis. Note that the reduced
provision for commercial and industrial loans is the result of loans that were individually
evaluated for impairment and assigned reserves in prior periods either improving their credit
quality or paying off which subsequently reduced the need for carrying reserves.
Nine Months Ended September 30, 2011
Year Ended December 31, 2010
Impaired Loans
A loan is considered impaired when based on current information and events, it is probable the Bank
will be unable to collect all amounts due from the borrower in accordance with the contractual
terms of the loan. Impaired loans include nonperforming commercial loans but also include loans
modified in troubled debt restructurings where concessions have been granted to borrowers
experiencing financial difficulties. These concessions could include a reduction in the interest
rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions
intended to maximize collection. Generally, commercial and commercial real estate loans with risk
grades Substandard, Vulnerable, Doubtful, or Loss, with aggregate relationships greater than $250
are evaluated for impairment. Interest income on impaired loans is recognized when accrued, for
loans that remain in a performing status. Loans that are not performing and in a non-accrual status
recognize interest only on cash basis if circumstances warrant.
The following tables indicate impaired loans with and without an allocated allowance:
At and for the nine months ended September 30, 2011
At and for the year ended December 31, 2010
The allowance for impaired loans is included in the Corporation’s overall allowance for loan
losses. The provision necessary to increase this allowance is included in the Corporation’s
overall provision for losses on loans.
Financing receivables on nonaccrual status at September 30, 2011 and December 31, 2010 are as
follows:
Credit Quality Indicators
Corporate risk exposure by risk profile was as follows at September 30, 2011:
Corporate risk exposure by risk profile was as follows at December 31, 2010:
Risk Category Descriptions
Prime — 1
Prime loans based on liquid collateral, with adequate margin or supported by a strong financial
statement audited with an unqualified opinion from a CPA firm. The character and repayment ability
of the borrowers are excellent and without question. High liquidity, minimum risk, strong ratios,
and low handling costs are common to these loans. This classification will also include all loans
secured by CDs or cash equivalents.
Good — 2
Good loans of above average quality. Borrowers have a modest degree of risk. The margin of
protection is good. Elements of strength are present in areas such as liquidity, stability of
margins and cash flows, diversity of assets, and lack of dependence on one type of business or
customer. Reasonable access to alternative bank financing is present and borrowers can obtain
favorable rates and terms. These are well established regional firms and excellent local companies
operating in a reasonably stable industry that may be moderately affected by the business cycle.
Management and owners have unquestioned character, as demonstrated by repeated performance.
Fair — 3
Satisfactory loans of average or slightly
above average risk — having some deficiency or
vulnerability to changing economic conditions, but still fully collectible. Projects should
clearly demonstrate at least break even debt service coverage. May be some weakness but with
offsetting features of other support readily available. These loans are meeting the terms of
repayment, but which may be susceptible to deterioration if adverse factors are encountered.
Compromised — 4
This risk grade may be established for a loan considered satisfactory but which is of below average
credit risk due to financial weaknesses or uncertainty. The loans warrant a higher than average
level of monitoring to ensure that weaknesses do not advance. The level of risk in Compromised
classification is considered acceptable and within normal underwriting guidelines, so long as the
loan is given the proper level of management supervision. Loans are considered Compromised when the
following conditions apply:
Vulnerable (Special Mention) — 5
Loans which possess some credit deficiency or potential weakness which deserves close attention,
but which do not yet warrant substandard classification. Such loans pose unwarranted financial
risk that, if not corrected, could weaken the loan and increase risk in the future. The key
distinctions of a Vulnerable (Special Mention) classification are that (1) it is indicative of an
unwarranted level of risk, and (2) weaknesses are considered “potential”, versus
“well-defined”, impairments to the primary source of loan repayment.
Substandard — 6
Loans
that are inadequately protected by the current sound net worth and paying capacity of the obligor
or of the collateral pledged, if any. Loans so classified must have well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the Bank will sustain some loss if the deficiencies are not corrected. One or
more of the following characteristics may be exhibited in loans classified Substandard:
Doubtful — 7
One or more of the following characteristics may be exhibited in loans classified Doubtful:
Loss — 8
Loans are considered uncollectible and of such little value that continuing to carry them as assets
on the institution’s financial statements is not feasible. Loans will be classified Loss when it
is neither practical nor desirable to defer writing off or reserving all or a portion of a
basically worthless asset, even though partial recovery may be possible at some time in the future.
Consumer Risk
Consumer risk based on payment activity at September 30, 2011 is as follows.
Consumer risk based on payment activity at December 31, 2010 is as follows.
Age Analysis of Past Due Loans
The following table presents past due loans aged as of September 30, 2011.
The following table presents past due loans aged as of December 31, 2010.
Troubled Debt Restructurings
Information regarding Troubled Debt Restructuring (“TDR”) loans for the three and nine month
periods ended September 30, 2011 is as follows:
The following presents by class loans modified in a TDR from October 1, 2010 through September 30,
2011 that subsequently defaulted (i.e. 60 days or more past due following a modification) during
the three and nine month periods ended September 30, 2011.
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and
the modification constitutes a concession. The Corporation offers various types of concessions when
modifying a loan, however, forgiveness of principal is rarely granted. Depending on the financial
condition of the borrower, the purpose of the loan and the type of collateral supporting the loan
structure; modifications can be either short-term (12 months of less) or long term (greater than
one year). Commercial loans modified in a TDR often involve temporary interest-only payments, term
extensions, and converting revolving credit lines to term loans. Additional collateral, a
co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans modified
in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the
maturity date at an interest rate lower than the current market rate for new debt with similar
risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR
may also involve extending the interest-only payment period.
Land loans are also included in the class of commercial real estate loans. Land loans are typically
structured as interest-only monthly payments with a balloon payment due at maturity. Land loans
modified in a TDR typically involve extending the balloon payment by one to three years, changing
the monthly payments from interest-only to principal and interest, while leaving the interest rate
unchanged.
Loans modified in a TDR are typically already on nonaccrual status and partial charge-offs have in
some cases already been taken against the outstanding loan balance. As a result, loans modified in
a TDR for the Corporation may have the financial effect of increasing the specific allowance
associated with the loan. The allowance for impaired loans that have been modified in a TDR is
measured based on the estimated fair value of the collateral, less any selling costs, if the loan
is collateral dependent or on the present value of expected future cash flows discounted at the
loan’s effective interest rate. Management exercises significant judgment in developing these
estimates.
As mentioned above, an individual loan is placed on a non-accruing status if, in the judgment of
Management, it is unlikely that all principal and interest will be received according to the terms
of the note. Loans on non-accrual may be eligible to be returned to an accruing status after six
months of compliance with the modified terms. However, there are number of factors that could
prevent a loan from returning to accruing status, even after remaining in compliance with loan
terms for the aforementioned six month period. For example: deteriorating collateral, negative cash
flow changes and inability to reduce debt to income ratios.
|
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Condensed Consolidated Statements of Comprehensive Income (Loss) [Abstract] | ||||
Net income (loss) | $ 276 | $ (9,059) | $ (1,547) | $ (11,975) |
Reclassification adjustment for realized losses included in net income, net of taxes of $0, $22, $0 and $49 | (42) | (95) | ||
Unrealized gains on securities available-for-sale, net of taxes of $238, $167, $515 and $476 | 462 | 325 | 1,000 | 923 |
Net unrealized gains on securities held-to-maturity for which a portion of an other-than-temporary impairment has been recognized in income, net of realized losses and net of taxes of $0, $11, $16, and $344 | 21 | 30 | 667 | |
Comprehensive income (loss) | $ 738 | $ (8,755) | $ (517) | $ (10,480) |