The adjustment
to FDIC indemnification asset during the six months ended June 30, 2012
represented a $3.6 million expense related to increases in cash flows on assets
covered by Loss Share Agreements which reduces the FDIC receivable. This
compares to $2.1 million for the six months ended June 30, 2011. The FDIC loss
share receivable is recorded at net realizable value with the discount accreted
into income. The related accretion of income for the six months ended June 30,
2012 and June 30, 2011 was $509,000 and $332,000, respectively.
During the six
months ended June 30, 2012, the Company had sales of $102.5 million of
available for sale securities for a net gain of $1.7 million as compared to no
sales of securities during the six months ended June 30, 2011.
During the six
months ended June 30, 2012, the Bank sold $4.6 million in OREO properties with
a carrying value of $4.6 million and recorded losses on the dispositions of
$25,000 as compared to sales of OREO with a carrying value of $3.8 million for
a net loss of $225,000 for the six months ended June 30, 2011.
Non-interest
expense is comprised of salaries and employee benefits, occupancy and equipment
expense and other operating expenses incurred in supporting our various
business activities. Non-interest expense increased by $4.0 million, or 17.9%,
from $22.3 million for the six months ended June 30, 2011 to $26.3 million for
the six months ended June 30, 2012, primarily due to operations acquired as a
result of the AFI merger in April 2012 and acquisition of Old Harbor in October
2011.
The following
summarizes the changes in non-interest expense accounts for the six months
ended June 30, 2012 compared to the six months ended June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
(Dollars in
thousands)
|
|
June 30,
2012
|
|
June 30,
2011
|
|
Difference
|
|
Salaries and employee benefits
|
|
$
|
11,946
|
|
$
|
10,362
|
|
$
|
1,584
|
|
Occupancy and equipment
|
|
|
3,965
|
|
|
4,105
|
|
|
(140
|
)
|
Data processing
|
|
|
1,815
|
|
|
1,656
|
|
|
159
|
|
Telephone
|
|
|
475
|
|
|
438
|
|
|
37
|
|
Stationery and supplies
|
|
|
263
|
|
|
201
|
|
|
62
|
|
Amortization of intangibles
|
|
|
325
|
|
|
251
|
|
|
74
|
|
Professional fees
|
|
|
818
|
|
|
613
|
|
|
205
|
|
Advertising
|
|
|
135
|
|
|
100
|
|
|
35
|
|
Merger reorganization expense
|
|
|
1,760
|
|
|
910
|
|
|
850
|
|
Regulatory assessment
|
|
|
745
|
|
|
874
|
|
|
(129
|
)
|
OREO expense
|
|
|
763
|
|
|
139
|
|
|
624
|
|
Loan Expense
|
|
|
1,249
|
|
|
895
|
|
|
354
|
|
Other
|
|
|
2,078
|
|
|
1,803
|
|
|
275
|
|
Total
non-interest expense
|
|
$
|
26,337
|
|
$
|
22,347
|
|
$
|
3,990
|
|
Salary and
employee benefits increased by approximately $1.6 million to $11.9 million for the
six months ended June 30, 2012 as compared to $10.4 million for the six months
ended June 30, 2011, due to the increase in personnel from the merger with AFI
in April 2012 and the Old Harbor acquisition in October 2011.
Occupancy and
equipment decreased by approximately $140,000 to $4.0 million for the six
months ended June 30, 2012 as compared to the six months ended June 30, 2011 of
$4.1 million. The Company integrated and closed four banking centers in May
2011, which were added as part of the TBOM acquisition in 2010. This cost was
partially offset by the seven banking centers added from the AFI merger in
April 2012 and Old Harbor acquisition in October 2011.
Data
processing expenses increased by $159,000 to $1.8 million for the six months
ended June 30, 2012, primarily the result of the increase in the number of
transactions from acquisitions.
Professional
fees increased by $205,000 to $818,000 for the six months ended June 30, 2012
due to an increase in loan related processing expenses and computer consulting
expenses as operations continue to expand.
Merger
reorganization expenses represent the costs associated with the integration of
Old Harbor and the merger and integration of AFI during the six months ending
June 30, 2012. The Company integrated the operations of Old Harbor in March
2012 and AFI in June 2012 and does not anticipate further merger reorganization
expense related to these acquisitions. The $910,000 of expense for the six
months ending June 30, 2011 was the result of the integration of TBOM. Costs
include legal and professional, IT integration and conversion, severance and
lease termination fees.
43
Regulatory
assessment decreased by $129,000 or 14.76% to $745,000 for the six months ended
June 30, 2012, as compared to $874,000 for the six months ended June 30, 2011.
The decrease is due to a change in the regulatory assessment methodology period
over period.
OREO expense
increased by $624,000 for the six months ended June 30, 2012, as compared to
$139,000 for the six months ended June 30, 2011. The increase is due to a rise
in the number of OREO properties period over period and the write down of
properties held within the portfolio by $326,000 to market values during the
six months ended June 30, 2012.
Loan expenses
include the costs associated with the resolution of legacy as well as loss
sharing assets. Loan expenses increased by $354,000 from $895,000 for the six
months ended June 30, 2011 to $1.2 million for the six months ended
June 30, 2012. The change was primarily due to foreclosure related expenses associated with the increase in loss share assets as a result of the Old
Harbor acquisition.
Increases in
other non-interest expenses were primarily due to the AFI merger and the
acquisition of Old Harbor.
We recorded
$4.4 million in provision for loan losses for the six months ended June 30,
2012, compared to $3.4 million for the six months ended June 30, 2011. The $4.4
million provision for loan losses for the six months ended June 30, 2012 was
primarily the result of $8.2 million in charge-offs during the period offset
with a reduction in classified and non-performing assets and some moderation on
changes in the values on the underlying collateral on impaired loans. Of the
total charge-offs of $8.2 million, $3.5 of reserves had been provided for at
December 31, 2011. During the six months ending June 30, 2012, the Company
strategically resolved an $11.4 million non-performing loan collateralized by
15 gas stations through acceptance of a bulk sale offer at below appraised values.
The resolution resulted in a $5.2 million charge-off during the six months
ended June 30, 2012 on the $11.4 million loan. The sale of the asset is
expected to be completed in the third quarter 2012 and the assets are currently
held as OREO at June 30, 2012. In addition, the reduction in the general reserve of $730,000 from December 31, 2011 was primarily due to
a decrease in special mention loans of $10.8 million since December 31, 2011 which have a higher allocation of general reserve
coupled with the improvement in the historic loss factor associated with construction and land development loans.
We recorded
income tax expense of $847,000 for the six months ended June 30, 2012, compared
to $915,000 of income tax expense for the six months ended June 30, 2011. The
decrease is due to lower pretax income for the six months ended June 30, 2012
as compared to the six months ended June 30, 2011.
FINANCIAL CONDITION
At June 30,
2012 our total assets were $1.61 billion and our net loans were $933.8 million
or 57.9% of total assets. At December 31, 2011, our total assets were $1.42
billion and our net loans were $868.0 million or 61.1% of total assets. Net
loans increased by approximately $65.8 million to $933.8 million at June 30,
2012 due primarily to the acquisition of loans in the AFI merger, new loan
production during the six months ending June 30, 2012 offset by payoffs and
resolutions on acquired and legacy loans.
At June 30,
2012, the allowance for loan losses was $9.4 million or 0.99% of total loans.
At December 31, 2011, the allowance for loan losses was $12.8 million or 1.46%
of total loans.
At June 30,
2012, our total deposits were $1.358 billion, an increase of $176.7 million or
14.95% when compared to December 31, 2011 of $1.182 billion. Non-interest
bearing deposits represented 31.74% of total deposits at June 30, 2012 compared
to 27.87% at December 31, 2011. The increase was primarily due to the
acquisition of deposits associated with the AFI merger.
Loan Quality
Management
seeks to maintain a high quality loan portfolio through sound underwriting and
lending practices. The banking industry and its regulators view elements of
loan concentrations as a concern that can give rise to deterioration in loan
quality if not managed effectively.
Loan
concentrations are defined as amounts loaned to a number of borrowers engaged
in similar activities, and/or located in the same region, sufficient to cause
them to be similarly impacted by economic or other conditions. We, on a routine
basis, monitor these concentrations in order to consider adjustments in our
lending practices to reflect economic conditions, loan-to-deposit ratios, and
industry trends. As of June 30, 2012 and December 31, 2011, there were no
concentration of loans within any portfolio category to any group of borrowers
engaged in similar activities or in a similar business (other than noted below)
that exceeded 10% of total loans, except that as of such dates loans
collateralized with mortgages on real estate represented 84.11% and 84.17%,
respectively, of the total loan portfolio and were to a broad base of borrowers
in varying activities, businesses, locations and real estate types.
At 1
st
United, we consider our focus to be in business banking. Through our business
banking activities, we provide commercial purpose real estate secured loans as
referenced above and also provide commercial and residential real estate
44
loans.
Business banking also provides loan facilities ranging from commercial purpose
non-real estate secured loans, to lines of credit, Export/Import Bank loans,
SBA loans and letters of credit.
Commercial loans, unlike residential real
estate loans (which generally are made on the basis of the borrowers ability
to repay from employment and other income and which are collateralized by real
property with values tending to be more readily ascertainable), are non-real
estate secured commercial loans typically underwritten on the basis of the
borrowers ability to make repayment from the cash flow of its business and
generally are collateralized by a variety of business assets, such
as accounts receivable, equipment and inventory. As a result, the availability
of funds for the repayment of commercial loans may be substantially dependent
on the success of the business itself, which is subject to adverse conditions
in the economy. Commercial loans are generally repaid from operational
earnings, the collection of rent, or conversion of assets. Commercial loans can
also entail certain additional risks when they involve larger loan balances to
single borrowers or a related group of borrowers, resulting in a more
concentrated loan portfolio. Further, the collateral underlying the loans may
depreciate over time, cannot be appraised with as much precision as residential
real estate, and may fluctuate in value based on the success of the business.
The following
charts illustrate the composition of loans in our loan portfolio as of June 30,
2012 and December 31, 2011.
Loan Portfolio as of June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
Total
Loans
|
|
Total
|
|
Percent of
Loan Portfolio
|
|
Percent of
Total Assets
|
|
Loan Types
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgages
|
|
|
501
|
|
$
|
126,772
|
|
|
13.44
|
%
|
|
7.86
|
%
|
HELOCs and equity
|
|
|
327
|
|
|
57,910
|
|
|
6.14
|
%
|
|
3.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
non-real estate
|
|
|
651
|
|
|
122,255
|
|
|
12.96
|
%
|
|
7.58
|
%
|
Secured real
estate
|
|
|
83
|
|
|
45,205
|
|
|
4.79
|
%
|
|
2.80
|
%
|
Unsecured
|
|
|
52
|
|
|
14,976
|
|
|
1.59
|
%
|
|
0.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
232
|
|
|
189,880
|
|
|
20.14
|
%
|
|
11.77
|
%
|
Non-owner occupied
|
|
|
274
|
|
|
276,238
|
|
|
29.29
|
%
|
|
17.12
|
%
|
Multi-family
|
|
|
82
|
|
|
41,383
|
|
|
4.39
|
%
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
6
|
|
|
9,679
|
|
|
1.03
|
%
|
|
0.60
|
%
|
Improved land
|
|
|
39
|
|
|
25,146
|
|
|
2.67
|
%
|
|
1.56
|
%
|
Unimproved land
|
|
|
29
|
|
|
20,943
|
|
|
2.22
|
%
|
|
1.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and
other
|
|
|
216
|
|
|
12,633
|
|
|
1.34
|
%
|
|
0.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total June 30, 2012
|
|
|
2,492
|
|
$
|
943,020
|
|
|
100.0
|
%
|
|
58.45
|
%
|
45
Loan Portfolio as of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
Total
Loans
|
|
Total
|
|
Percent of
Loan Portfolio
|
|
Percent of
Total Assets
|
|
Loan Types
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgages
|
|
|
540
|
|
$
|
140,128
|
|
|
15.91
|
%
|
|
9.86
|
%
|
HELOCs and equity
|
|
|
334
|
|
|
56,552
|
|
|
6.42
|
%
|
|
3.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured non-real estate
|
|
|
573
|
|
|
116,886
|
|
|
13.27
|
%
|
|
8.22
|
%
|
Secured real estate
|
|
|
88
|
|
|
44,716
|
|
|
5.08
|
%
|
|
3.15
|
%
|
Unsecured
|
|
|
39
|
|
|
10,424
|
|
|
1.18
|
%
|
|
0.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
202
|
|
|
173,505
|
|
|
19.70
|
%
|
|
12.21
|
%
|
Non-owner occupied
|
|
|
243
|
|
|
241,902
|
|
|
27.46
|
%
|
|
17.02
|
%
|
Multi-family
|
|
|
96
|
|
|
40,445
|
|
|
4.59
|
%
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Land Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
7
|
|
|
8,173
|
|
|
0.93
|
%
|
|
0.58
|
%
|
Improved land
|
|
|
34
|
|
|
18,447
|
|
|
2.09
|
%
|
|
1.30
|
%
|
Unimproved land
|
|
|
27
|
|
|
17,516
|
|
|
1.99
|
%
|
|
1.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and other
|
|
|
224
|
|
|
12,083
|
|
|
1.38
|
%
|
|
0.85
|
%
|
|
Total December 31, 2011
|
|
|
2,407
|
|
$
|
880,777
|
|
|
100.00
|
%
|
|
61.98
|
%
|
The following chart
illustrates the composition of our construction and land development loan
portfolio as of June 30, 2012 and December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
December 31, 2011
|
|
(Dollars in
thousands)
|
|
Balance
|
|
% of
Total Loans
|
|
Balance
|
|
% of
Total Loans
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
2,061
|
|
|
0.22
|
%
|
$
|
3,135
|
|
|
0.36
|
%
|
Residential spec
|
|
|
|
|
|
|
%
|
|
1,492
|
|
|
0.17
|
%
|
Commercial
|
|
|
7,618
|
|
|
0.81
|
%
|
|
263
|
|
|
0.03
|
%
|
Commercial spec
|
|
|
|
|
|
|
%
|
|
3,283
|
|
|
0.37
|
%
|
Land Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
6,931
|
|
|
0.73
|
%
|
|
1,918
|
|
|
0.22
|
%
|
Residential spec
|
|
|
12,502
|
|
|
1.32
|
%
|
|
19,136
|
|
|
2.17
|
%
|
Commercial
|
|
|
11,944
|
|
|
1.27
|
%
|
|
1,048
|
|
|
0.12
|
%
|
Commercial spec
|
|
|
14,712
|
|
|
1.56
|
%
|
|
13,861
|
|
|
1.57
|
%
|
|
Total
|
|
$
|
55,768
|
|
|
5.91
|
%
|
$
|
44,136
|
|
|
5.01
|
%
|
Generally, interest on loans
accrues and is credited to income based upon the principal balance outstanding.
It is managements policy to discontinue the accrual of interest income and classify
a loan as non-accrual when principal or interest is past due 90 days or more
unless, in the determination of management, the principal and interest on the
loan are well collateralized and in the process of collection. Consumer loans
are generally charged-off after 90 days of delinquency unless adequately
collateralized and in the process of collection. Loans are not returned to
accrual status until principal and interest payments are brought current and
future payments appear reasonably certain. Interest accrued and unpaid at the
time a loan is placed on non-accrual status is charged against interest income.
We have identified certain
assets as non-performing and troubled debt restructuring assets. These assets
include non-accruing loans, foreclosed real estate, loans that are
contractually past due 90 days or more as to principal or interest payments and
still accruing, and troubled debt restructurings. All troubled debt
restructurings, non-accruing loans and loans accruing 90 days or more past due
are considered impaired. These assets present more than the normal risk that we
will be unable to eventually collect or realize their full carrying value.
46
Modifications of terms for
our loans and their inclusion as troubled debt restructurings are based on
individual facts and circumstances. Loan modifications that are included as
troubled debt restructurings may involve a reduction of the stated interest
rate on the loan, extension of the maturity date at a stated rate of interest
lower than the current market rate for new debt with similar risk, deferral of
principal payments and/or forgiveness of principal, regardless of the period of
the modification. Generally, we will allow interest rate reductions for a
period of less than two years after which the loan reverts back to the
contractual interest rate. Each of the loans included as troubled debt
restructurings at June 30, 2012 had either an interest rate modification
ranging from 6 months to 2 years before reverting back to the original interest
rate and/or a deferral of principal payments which can range from 6 to 12
months before reverting back to an amortizing loan. All of the loans were
modified due to financial stress of the borrower. The following is a summary of
the unpaid principal balance of loans classified as troubled debt
restructurings as of June 30, 2012, and December 31, 2011, which are performing
in accordance with their modification agreements.
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
June 30, 2012
|
|
December 31, 2011
|
|
Residential real estate
|
|
$
|
465
|
|
$
|
2,306
|
|
Commercial real estate
|
|
|
14,170
|
|
|
11,394
|
|
Construction and land
development
|
|
|
2,516
|
|
|
6,013
|
|
Commercial
|
|
|
2,322
|
|
|
2,124
|
|
|
Total
|
|
$
|
19,473
|
|
$
|
21,837
|
|
At June 30, 2012, there were
eight loans that were troubled debt restructured loans with a carrying amount
of $6.2 million and specific reserves of $532,000 that were non-accrual and
included in non-accrual loans. There were five loans which were troubled debt
restructured loans with a carrying amount of $7.1 million and specific reserves
of $684,000 that were non-accrual and included in non-accrual loans at December
31, 2011. Loans retain their accrual status at their time of modification. As a
result, if the loan is on non-accrual at the time that it is modified, it stays
on non-accrual, and if a loan is accruing at the time of modification, it
generally stays on accrual. A loan on non-accrual will be individually
evaluated based on sustained adherence to the terms of the modification
agreement prior to being placed on accrual status. Troubled debt restructurings
are considered impaired. The average yield on the loans classified as troubled
debt restructurings was 4.98% and 4.63% at June 30, 2012 and December 31, 2011,
respectively.
During the six months ended
June 30, 2012, we had $4.7 million in loans for which we lowered the interest
rate prior to maturity to competitively retain a loan. During the year ended
December 31, 2011, we had approximately $5.0 million in commercial real estate
loans on which we lowered the interest rate prior to maturity to competitively
retain a loan. Due to the borrowers significant deposit balances and overall
quality of the loans, these loans were not included in troubled debt
restructurings. In addition, each of these borrowers was not considered to be
in financial distress and the modified terms matched current market terms for
borrowers with similar risk characteristics. We had no other loans where we
extended the maturity or forgave principal that were not already included in troubled
debt restructurings or otherwise impaired.
During the three months ended
June 30, 2012 and 2011, interest income not recognized on non-accrual loans
(but would have been recognized if these loans were current) was approximately
$244,000 and $552,000, respectively. During the six months ended June 30, 2012
and 2011, interest income not recognized on non-accrual loans (but would have
been recognized if these loans were current) was approximately $758,000 and
$1.1 million, respectively.
47
Our
non-performing and troubled debt restructuring assets at June 30, 2012 and
December 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
December 31, 2011
|
|
(Dollars in
thousands)
|
|
Assets Not
Subject to
Loss Share
Agreements
|
|
Assets
Subject to
Loss Share
Agreements
|
|
Total
|
|
Assets Not
Subject to
Loss Share
Agreements
|
|
Assets
Subject to
Loss Share
Agreements
|
|
Total
|
|
Non-Accrual Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
2,302
|
|
$
|
3,698
|
|
$
|
6,000
|
|
$
|
5,103
|
|
$
|
4,622
|
|
$
|
9,725
|
|
Home equity
lines
|
|
|
950
|
|
|
66
|
|
|
1,016
|
|
|
644
|
|
|
323
|
|
|
967
|
|
Commercial
real estate
|
|
|
4,776
|
|
|
6,059
|
|
|
10,835
|
|
|
13,038
|
|
|
5,612
|
|
|
18,650
|
|
Construction
and land development
|
|
|
3,738
|
|
|
214
|
|
|
3,952
|
|
|
264
|
|
|
167
|
|
|
431
|
|
Commercial
|
|
|
967
|
|
|
1,120
|
|
|
2,087
|
|
|
11,812
|
|
|
1,241
|
|
|
13,053
|
|
Other
|
|
|
31
|
|
|
|
|
|
31
|
|
|
3
|
|
|
|
|
|
3
|
|
Total
|
|
$
|
12,764
|
|
$
|
11,157
|
|
$
|
23,921
|
|
$
|
30,864
|
|
$
|
11,965
|
|
$
|
42,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing => 90 days past due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Home equity
lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
|
|
|
|
|
|
|
|
|
647
|
|
|
|
|
|
647
|
|
Construction
and land development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
647
|
|
$
|
|
|
$
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-accruing loans
|
|
$
|
12,764
|
|
$
|
11,157
|
|
$
|
23,921
|
|
$
|
30,864
|
|
$
|
11,965
|
|
$
|
42,829
|
|
Accruing
=> 90 days past due
|
|
|
|
|
|
|
|
|
|
|
|
647
|
|
|
|
|
|
647
|
|
Foreclosed
real estate
|
|
|
14,354
|
|
|
12,395
|
|
|
26,749
|
|
|
2,454
|
|
|
11,058
|
|
|
13,512
|
|
Total
non-performing assets
|
|
|
27,118
|
|
|
23,552
|
|
|
50,670
|
|
|
33,965
|
|
|
23,023
|
|
|
56,988
|
|
Trouble debt
restructured loans
|
|
|
19,417
|
|
|
56
|
|
|
19,473
|
|
|
21,781
|
|
|
56
|
|
|
21,837
|
|
Total
non-performing assets and troubled debt restructured loans
|
|
$
|
46,535
|
|
$
|
23,608
|
|
$
|
70,143
|
|
$
|
55,746
|
|
$
|
23,079
|
|
$
|
78,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-accruing and accruing => 90 days past due to total loans
|
|
|
1.35
|
%
|
|
1.18
|
%
|
|
2.54
|
%
|
|
3.58
|
%
|
|
1.36
|
%
|
|
4.94
|
%
|
Total
non-performing assets to total assets
|
|
|
1.68
|
%
|
|
1.46
|
%
|
|
3.14
|
%
|
|
2.39
|
%
|
|
1.62
|
%
|
|
4.01
|
%
|
Total
non-performing assets and troubled debt restructured loans to total assets
|
|
|
2.88
|
%
|
|
1.46
|
%
|
|
4.35
|
%
|
|
3.92
|
%
|
|
1.62
|
%
|
|
5.55
|
%
|
Included in
non-accrual loans are purchase credit impaired loans of $6.9 million that are
subject to loss share agreements in which cash flows could not be reasonably
estimated. Of the non-performing assets and performing troubled debt
restructured loans at June 30, 2012, $23.6 million were acquired in the Old
Harbor, TBOM and Republic transactions and are all covered under the loss share
agreements as compared to $23.1 million at December 31, 2011. These assets were
initially recorded at fair value and as such we do not expect to incur any
additional future losses on these assets.
At June 30,
2012, we had approximately $8.5 million of other real estate owned approved for
sale and pending closing for which no additional losses are expected. Of these
pending sales, $7.8 million are assets not covered under Loss Share Agreements
and $700,000 are assets covered under Loss Share Agreements.
Since December
31, 2011, for non-performing assets not subject to Loss Share Agreements, we
had approximately $8.1 million in non-accrual loans which were charged off,
$16.5 million were paid off or transferred to OREO and approximately $6.5
million were added to non-accrual and no loans were returned to accrual status
during the period.
48
Past due
loans, categorized by loans subject to Loss Share Agreements and those not
subject to Loss Share Agreements, at June 30, 2012 and December 31, 2011 were
as follows:
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
Accruing 30 - 59
|
|
Accruing 60-89
|
|
Non-Accrual or Accrual and
90 days and over
|
|
Total
|
|
|
|
Loans
Subject to
Loss Share
Agreement
|
|
Loans Not
Subject to
Loss Share
Agreement
|
|
Loans
Subject to
Loss Share
Agreement
|
|
Loans Not
Subject to
Loss Share
Agreement
|
|
Loans
Subject to
Loss Share
Agreement
|
|
Loans Not
Subject to
Loss Share
Agreement
|
|
Loans
Subject
to
Loss
Share
Agreement
|
|
Loans Not
Subject to
Loss Share
Agreement
|
|
Residential Real Estate
|
|
$
|
414
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3,764
|
|
$
|
3,252
|
|
$
|
4,178
|
|
$
|
3,252
|
|
Commercial
|
|
|
390
|
|
|
43
|
|
|
|
|
|
308
|
|
|
1,120
|
|
|
967
|
|
|
1,510
|
|
|
1,318
|
|
Commercial Real Estate
|
|
|
296
|
|
|
423
|
|
|
|
|
|
|
|
|
6,059
|
|
|
4,776
|
|
|
6,355
|
|
|
5,199
|
|
Construction and Land Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214
|
|
|
3,738
|
|
|
214
|
|
|
3,738
|
|
Consumer and other
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
32
|
|
Total June 30, 2012
|
|
$
|
1,100
|
|
$
|
467
|
|
$
|
|
|
$
|
308
|
|
$
|
11,157
|
|
$
|
12,764
|
|
$
|
12,257
|
|
$
|
13,539
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
Accruing 30 - 59
|
|
Accruing 60-89
|
|
Non-Accrual or Accrual
and
90 days and over
|
|
Total
|
|
|
|
Loans
Subject to
Loss Share
Agreement
|
|
Loans Not
Subject to
Loss Share
Agreement
|
|
Loans
Subject to
Loss Share
Agreement
|
|
Loans Not
Subject to
Loss Share
Agreement
|
|
Loans
Subject to
Loss Share
Agreement
|
|
Loans Not
Subject to
Loss Share
Agreement
|
|
Loans Subject
to Loss Share
Agreement
|
|
Loans Not
Subject to
Loss Share
Agreement
|
|
Residential Real Estate
|
|
$
|
1,864
|
|
$
|
402
|
|
$
|
|
|
$
|
|
|
$
|
4,945
|
|
$
|
5,747
|
|
$
|
6,809
|
|
$
|
6,149
|
|
Commercial
|
|
|
666
|
|
|
479
|
|
|
|
|
|
146
|
|
|
1,241
|
|
|
11,812
|
|
|
1,907
|
|
|
12,437
|
|
Commercial Real Estate
|
|
|
356
|
|
|
272
|
|
|
|
|
|
318
|
|
|
5,612
|
|
|
13,685
|
|
|
5,968
|
|
|
14,275
|
|
Construction and Land Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
|
264
|
|
|
167
|
|
|
264
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
3
|
|
Total December 31, 2011
|
|
$
|
2,886
|
|
$
|
1,153
|
|
$
|
|
|
$
|
464
|
|
$
|
11,965
|
|
$
|
31,511
|
|
$
|
14,851
|
|
$
|
33,128
|
|
Past due loans
subject to Loss Share Agreements decreased by $2.6 million from $14.9 million
at December 31, 2011 to $12.3 million at June 30, 2012. Past due loans not
subject to loss share agreements decreased by $19.6 from $33.1 million at
December 31, 2011 to $13.5 million at June 30, 2012. The decrease in
non-accruals loans not covered under Loss Share Agreements of $18.7 million was
primarily due to transfers to other real estate on foreclosed loans and
charge-offs during the six month period ending June 30, 2012. Further there
were decreases in loans accruing 30 to 59 days past due of $2.5 million and
loans accruing 60 to 89 days past due of $156,000 between December 31, 2011 and
June 30, 2012. These decreases were due to continued resolution of past due
loans by the Company.
Certain Acquired Loans
: As part of business
acquisitions, the Company evaluated each of the acquired loans under ASC 310-30
to determine whether (1) there was evidence of credit deterioration since
origination, and (2) it was probable that we would not collect all
contractually required payment receivable. The Company determined the best
indicator of such evidence was an individual loans payment status and/or
whether a loan was determined to be classified by us based on our review of
each individual loan. Therefore, generally each individual loan that should
have been or was on nonaccrual at the acquisition date, loans contractually
past due 60 days or more, and each individual loan that was classified by us
were included subject to ASC 310-30. These loans were recorded at the
discounted expected cash flows of the individual loan and are currently
disclosed in Note 4.
Loans which
were evaluated under ASC 310-30, and where the timing and amount of cash flows
can be reasonably estimated, were accounted for in accordance with ASC
310-30-35. The Company applies the interest method for these loans under this
subtopic and the loans are excluded from non-accrual. If at acquisition we
identified loans that we could not reasonably estimate cash flows or if
subsequent to acquisition such cash flows could not be estimated, such loans
would be included in non-accrual. These acquired loans are recorded at the
allocated fair value, such that there is no carryover of the sellers allowance
for loan losses. Such acquired loans are accounted for individually. The
Company estimates the amount and timing of expected cash flows for each
purchased loan, and the expected cash flows in excess of the allocated fair
value
49
is recorded as
interest income over the remaining life of the loan (accretable yield). The
excess of the loans contractual principal and interest over expected cash
flows is not recorded (non-accretable difference). Over the life of the loan,
expected cash flows continue to be estimated. If the present value of expected
cash flows is less than the carrying amount, a loss is recorded through the
allowance for loan losses. If the present value of expected cash flows is
greater than the carrying amount, it is recognized as part of future interest
income.
Impaired Loans
The following
tables present loans individually evaluated for impairment by class of loan as
of June 30, 2012 and December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment in Impaired Loans
|
|
|
|
With Allowance
|
|
With No Allowance
|
|
June 30,
2012
|
|
Loans Subject to Loss
Share Agreements
|
|
Loans Not Subject to
Loss
Share Agreements
|
|
Loans
Subject to
Loss Share
Agreements
|
|
Loans Not
Subject to Loss
Share
Agreements
|
|
(Dollars in
thousands)
|
|
Recorded
Investment
|
|
Allowance
for Loan
Losses
Allocated
|
|
Recorded
Investment
|
|
Allowance
for Loan
Losses
Allocated
|
|
Recorded
Investment
|
|
Recorded
Investment
|
|
Residential Real Estate
|
|
$
|
489
|
|
$
|
88
|
|
$
|
2,224
|
|
$
|
131
|
|
$
|
1,329
|
|
$
|
1,365
|
|
Commercial
|
|
|
|
|
|
|
|
|
1,893
|
|
|
396
|
|
|
|
|
|
1,585
|
|
Commercial Real Estate
|
|
|
1,527
|
|
|
61
|
|
|
7,619
|
|
|
1,060
|
|
|
2,761
|
|
|
9,496
|
|
Construction and Land Development
|
|
|
|
|
|
|
|
|
2,780
|
|
|
1,096
|
|
|
|
|
|
3,474
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total June 30, 2012
|
|
$
|
2,016
|
|
$
|
149
|
|
$
|
14,516
|
|
$
|
2,683
|
|
$
|
4,090
|
|
$
|
15,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded Investment in Impaired Loans
|
|
December
31, 2011
|
|
With Allowance
|
|
With No Allowance
|
|
|
|
Loans Subject to Loss
Share Agreements
|
|
Loans Not Subject to
Loss
Share Agreements
|
|
Loans
Subject to
Loss Share
Agreements
|
|
Loans Not
Subject to Loss
Share
Agreements
|
|
(Dollars in
thousands)
|
|
Recorded
Investment
|
|
Allowance
for Loan
Losses
Allocated
|
|
Recorded
Investment
|
|
Allowance
for Loan
Losses
Allocated
|
|
Recorded
Investment
|
|
Recorded
Investment
|
|
Residential Real Estate
|
|
$
|
810
|
|
$
|
165
|
|
$
|
1,992
|
|
$
|
23
|
|
$
|
423
|
|
$
|
6,006
|
|
Commercial
|
|
|
|
|
|
|
|
|
2,396
|
|
|
1,719
|
|
|
|
|
|
11,540
|
|
Commercial Real Estate
|
|
|
995
|
|
|
124
|
|
|
13,650
|
|
|
2,439
|
|
|
1,616
|
|
|
8,565
|
|
Construction and Land Development
|
|
|
|
|
|
|
|
|
2,516
|
|
|
892
|
|
|
|
|
|
3,761
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total December 31, 2011
|
|
$
|
1,805
|
|
$
|
289
|
|
$
|
20,554
|
|
$
|
5,073
|
|
$
|
2,039
|
|
$
|
29,872
|
|
Overall
impaired loans decreased by $17.7 million from $54.3 million at December 31,
2011 to $36.5 million at June 30, 2012. Impaired loans subject to loss share
agreements increased by $2.3 million as we continue to evaluate acquired
credits. Impaired loans not subject to loss share agreements decreased by $20.0
million from December 31, 2011 to June 30, 2012 primarily due to transfers of
foreclosed loans to other real estate and charge-offs during the period.
Allowance for Loan
Losses
At June 30,
2012, the allowance for loan losses was $9.4 million or 0.99% of total loans. At
December 31, 2011, the allowance for loan losses was $12.8 million or 1.46% of
total loans. The overall reduction in the allowance for loan losses at June 30,
2012 as compared to December 31, 2011 was approximately $3.5 million. The
majority of the decrease relates to the resolution of impaired loans with
specific reserves at December 31, 2011 as compared to June 30, 2012. At
December 31, 2011, we had $20.6 million of impaired loans not covered by
Loss Share Agreements with an allocated allowance for loan loss of $5.1
million, as compared to June 30, 2012 of $14.5 million of impaired loans not
covered by Loss Share Agreements with an allocated allowance of $2.7 million.
Charge-offs for the six months ended June 30, 2012 were
50
$8.2 million
of which $3.5 million was provided for as of December 31, 2011. Approximately
$5.2 million of charge-offs related to the resolution of 1
st
Uniteds largest non-performing asset which had a loan balance of $11.4 million
at December 31, 2011. The loan was collateralized with 15 gas station
properties and during the quarter management determined it was in the best
interest of the Company to sell the assets in bulk, though below its most
current appraised values, and enter into a sale agreement. At June 30, 2012,
this asset was included in OREO at $5.8 million and is anticipated to close
early in the third quarter with no additional loss. In addition, overall loans
graded special mention and substandard not covered by Loss Share Agreements
decreased by $25.6 million (or 27%) from December 31, 2011 to June 30, 2012
which had a positive impact on the allowance for loan losses. In originating
loans, we recognize that credit losses will be experienced and the risk of loss
will vary with, among other things: general economic conditions; the type of
loan being made; the creditworthiness of the borrower and guarantors over the
term of the loan; insurance; whether the loan is covered by a loss share
agreement; and, in the case of a collateralized loan, the quality of the
collateral for such a loan. The allowance for loan losses represents our
estimate of the amount necessary to provide for probable incurred losses in the
loan portfolio. In making this determination, we analyze the ultimate
collectability of the loans in our portfolio, feedback provided by internal
loan staff, the independent loan review function and information provided by
examinations performed by regulatory agencies.
The allowance
for loan losses is evaluated at the portfolio segment level using the same
methodology for each segment. The historical net losses for a rolling three
year period is the basis for the general reserve for each segment which is
adjusted for each of the same qualitative factors (i.e., nature and volume of
portfolio, economic and business conditions, classification, past due and
non-accrual trends) evaluated by each individual segment. Impaired loans and
related specific reserves for each of the segments are also evaluated using the
same methodology for each segment. The qualitative factors totaled
approximately 20 basis points of the allowance for loan losses as of both June
30, 2012 and December 31, 2011.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Loans, for which the terms have been modified, and for which the
borrower is experiencing financial difficulties, are considered troubled debt
restructurings and generally classified as impaired.
Factors
considered by management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays
(loan payments made within 90 days of the due date) and payment shortfalls
(which are tracked as past due amounts) generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior payment record, the
borrowers and guarantors financial condition and the amount of the shortfall
in relation to the principal and interest owed.
Charge-offs of
loans are made by portfolio segment at the time that the collection of the full
principal, in managements judgment, is doubtful. This methodology for
determining charge-offs is consistently applied to each segment.
On a quarterly
basis, management reviews the adequacy of the allowance for loan losses.
Commercial credits are graded by risk management and the loan review function
validates the assigned credit risk grades. In the event that a loan is
downgraded, it is included in the allowance analysis at the lower grade. To
establish the appropriate level of the allowance, we review and classify loans
(including all impaired and non-performing loans) as to potential loss
exposure.
Our analysis
of the allowance for loan losses consists of three components: (i) specific
credit allocation established for expected losses resulting from analysis
developed through specific credit allocations on individual loans for which the
recorded investment in the loan exceeds the fair value; (ii) general portfolio
allocation based on historical loan loss experience for each loan category; and
(iii) qualitative reserves based on general economic conditions as well as
specific economic factors in the markets in which we operate.
The specific
credit allocation component of the allowance for loan losses is based on a
regular analysis of loans where the loan is determined to be impaired as
determined by management. The amount of impairment, if any, is determined based
on either the present value of expected future cash flows discounted at the
loans effective interest rate, the market price of the loan, or, if the loan
is collateral dependent, the fair value of the underlying collateral less cost
of sale. Third party appraisals are used to determine the fair value of
underlying collateral. At a minimum a new appraisal is obtained annually for
all impaired loans based on an as is value. Generally no adjustments, other
than a reduction for estimated disposal costs, are made by the Company to third
party appraisals to determine the fair value of the assets. The impact on the
allowance for loan losses for new appraisals is reflected in the period the
appraisal is received. A loan may also be classified as substandard and not be
classified as impaired by management. A loan may be classified as substandard
by management if, for example, the primary source of repayment is insufficient,
the financial condition of the borrower and/or guarantors has deteriorated or
there are chronic delinquencies. The following is a summary of our loan
classifications at June 30, 2012 and December 31, 2011:
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Subject to Loss Share
Agreements
|
|
Loans Not Subject to Loss Share
Agreements
|
|
(Dollars
in thousands)
|
|
Total
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate
|
|
$
|
184,682
|
|
$
|
95,095
|
|
$
|
2,833
|
|
$
|
3,764
|
|
$
|
70,152
|
|
$
|
7,562
|
|
$
|
5,276
|
|
Commercial
|
|
|
182,436
|
|
|
37,218
|
|
|
422
|
|
|
1,119
|
|
|
131,908
|
|
|
7,180
|
|
|
4,589
|
|
Commercial Real Estate
|
|
|
507,501
|
|
|
196,302
|
|
|
10,670
|
|
|
6,059
|
|
|
256,636
|
|
|
22,319
|
|
|
15,515
|
|
Construction and Land
Development:
|
|
|
55,768
|
|
|
10,758
|
|
|
219
|
|
|
214
|
|
|
37,126
|
|
|
745
|
|
|
6,706
|
|
Consumer and other
|
|
|
12,633
|
|
|
818
|
|
|
|
|
|
|
|
|
11,543
|
|
|
120
|
|
|
152
|
|
Total June 30, 2012
|
|
$
|
943,020
|
|
$
|
340,191
|
|
$
|
14,144
|
|
$
|
11,156
|
|
$
|
507,365
|
|
$
|
37,926
|
|
$
|
32,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Subject to Loss Share
Agreements
|
|
Loans Not Subject to Loss Share
Agreements
|
|
(Dollars
in thousands)
|
|
Total
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate
|
|
$
|
196,680
|
|
$
|
104,207
|
|
$
|
1,363
|
|
$
|
4,945
|
|
$
|
65,930
|
|
$
|
11,016
|
|
$
|
9,219
|
|
Commercial
|
|
|
172,026
|
|
|
43,940
|
|
|
999
|
|
|
1,241
|
|
|
103,800
|
|
|
7,823
|
|
|
14,223
|
|
Commercial Real Estate
|
|
|
455,852
|
|
|
209,965
|
|
|
16,659
|
|
|
5,612
|
|
|
178,317
|
|
|
23,489
|
|
|
21,810
|
|
Construction and Land
Development:
|
|
|
44,136
|
|
|
15,911
|
|
|
222
|
|
|
167
|
|
|
19,820
|
|
|
1,290
|
|
|
6,726
|
|
Consumer and other
|
|
|
12,083
|
|
|
1,069
|
|
|
|
|
|
|
|
|
10,877
|
|
|
5
|
|
|
132
|
|
Total December 31, 2011
|
|
$
|
880,777
|
|
$
|
375,092
|
|
$
|
19,243
|
|
$
|
11,965
|
|
$
|
378,744
|
|
$
|
43,623
|
|
$
|
52,110
|
|
All non-accrual loans and
substantially all troubled debt restructurings are included in substandard
loans.
Substandard loans totaled
$43.4 million at June 30, 2012 (of which $11.2 million were subject to the Loss
Share Agreements) and $64.1 million at December 31, 2011 (of which $12.0
million were subject to the Loss Share Agreements). The decrease of $20.7
million since December 31, 2011 was primarily due to the resolution of loans
not covered under Loss Share Agreements of $19.9 million through sale,
charge-offs or foreclosure and transfer to OREO during the period. There was a
reduction of $809,000 in the total substandard loans not covered under Loss
Share Agreements period over period. We regularly evaluate the classifications
of loans and recommend either upgrades or downgrades to credits as events or
circumstances warrant. In addition, at June 30, 2012, we had $36.5 million (or
3.9% of total loans) loans classified as impaired. This compares to $54.3
million or 6.2% of total loans at December 31, 2011. The decrease was primarily
due to the resolution of loans during the quarter. At June 30, 2012 and
December 31, 2011, the specific credit allocation included in the allowance for
loan losses for loans impaired were approximately $2.8 million and $5.4
million, respectively. The specific credit allocation for impaired loans is
adjusted based on appraisals obtained at least annually. All loans classified
as substandard that are collateralized by real estate are also re-appraised at
a minimum on an annual basis.
We also have loans classified as Special Mention.
We classify loans as Special Mention if there are declining trends in the
borrowers business, questions regarding condition or value of the collateral,
or other weaknesses. At June 30, 2012, we had $52.1 million (5.5% of
outstanding loans), which included $14.1 million in loans subject to Loss Share
Agreements, which compares to $62.9 million (7.14% of outstanding loans) of
which $19.2 million were subject to Loss Share Agreements, at December 31,
2011. Special mention loans not subject to Loss Share Agreements were $37.9
million at June 30, 2011, a decrease of $5.7 million from December 31, 2011.
The decrease is attributable to resolution of loans and ongoing reviews of
loans classified as special mention. If there is further deterioration on these
loans, they may be classified substandard in the future, and depending on
whether the loan is considered impaired, a specific credit allocation may be
needed resulting in increased provisions for loan losses.
We determine the
general portfolio allocation component of the allowance for loan losses
statistically using a loss analysis that examines historical loan loss
experience adjusted for current environmental factors. We perform the loss
analysis quarterly and update loss factors regularly based on actual experience.
The general portfolio allocation element of the allowance for loan losses also
includes consideration of the amounts necessary for concentrations and changes
in portfolio mix and volume.
We base the allowance for loan losses on estimates
and ultimate realized losses may vary from current estimates. We review these
estimates quarterly, and as adjustments, either positive or negative, become
necessary, we make a corresponding increase or decrease in the provision for
loan losses. The methodology used to determine the adequacy of the allowance
for loan losses is consistent with prior years and there were no reallocations.
52
Management remains watchful
of credit quality issues. Should the economic climate deteriorate from current
levels, borrowers may experience difficulty repaying loans and the level of
non-performing loans, charge-offs and delinquencies could rise and require
further increases in loan loss provisions.
During the three and six
months ended June 30, 2012, we recorded $3.1 million and $4.4 million in
provision for loan losses primarily as a result of charge-offs during the
periods offset by a reduction in classified and non-accrual loans and a
moderation of real estate values on the underlying collateral of impaired
loans.
Activity in the allowance
for loan losses for the three months ended June 30, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Commercial
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Construction
and Land
Development
|
|
Consumer
and Other
|
|
Total
|
|
Beginning balance, April 1, 2012
|
|
$
|
4,593
|
|
$
|
1,833
|
|
$
|
3,601
|
|
$
|
2,270
|
|
$
|
69
|
|
$
|
12,366
|
|
Provisions for loan losses
|
|
|
3,335
|
|
|
(66
|
)
|
|
452
|
|
|
(590
|
)
|
|
(31
|
)
|
|
3,100
|
|
Loans charged off
|
|
|
(5,151
|
)
|
|
(357
|
)
|
|
(682
|
)
|
|
|
|
|
|
|
|
(6,190
|
)
|
Recoveries
|
|
|
9
|
|
|
2
|
|
|
69
|
|
|
|
|
|
|
|
|
80
|
|
Ending Balance, June 30, 2012
|
|
$
|
2,786
|
|
$
|
1,412
|
|
$
|
3,440
|
|
$
|
1,680
|
|
$
|
38
|
|
$
|
9,356
|
|
Activity in the allowance for loan losses for
the three months ended June 30, 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Commercial
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Construction
and Land
Development
|
|
Consumer
and Other
|
|
Total
|
|
Beginning balance, April 1, 2011
|
|
$
|
3,412
|
|
$
|
4,088
|
|
$
|
4,206
|
|
$
|
2,287
|
|
$
|
39
|
|
$
|
14,032
|
|
Provisions for loan losses
|
|
|
234
|
|
|
(342
|
)
|
|
569
|
|
|
989
|
|
|
|
|
|
1,450
|
|
Loans charged off
|
|
|
(705
|
)
|
|
(575
|
)
|
|
(301
|
)
|
|
(666
|
)
|
|
|
|
|
(2,247
|
)
|
Recoveries
|
|
|
7
|
|
|
9
|
|
|
22
|
|
|
|
|
|
|
|
|
38
|
|
Ending Balance, June 30, 2011
|
|
$
|
2,948
|
|
$
|
3,180
|
|
$
|
4,496
|
|
$
|
2,610
|
|
$
|
39
|
|
$
|
13,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for loan losses for
the six months ended June 30, 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Commercial
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Construction
and Land
Development
|
|
Consumer
and Other
|
|
Total
|
|
Beginning balance, January 1, 2012
|
|
$
|
3,111
|
|
$
|
1,945
|
|
$
|
5,302
|
|
$
|
2,409
|
|
$
|
69
|
|
$
|
12,836
|
|
Provisions for loan losses
|
|
|
4,827
|
|
|
(6
|
)
|
|
411
|
|
|
(751
|
)
|
|
(81
|
)
|
|
4,400
|
|
Loans charged off
|
|
|
(5,182
|
)
|
|
(641
|
)
|
|
(2,379
|
)
|
|
|
|
|
|
|
|
(8,202
|
)
|
Recoveries
|
|
|
30
|
|
|
114
|
|
|
106
|
|
|
22
|
|
|
50
|
|
|
322
|
|
Ending Balance, June 30, 2012
|
|
$
|
2,786
|
|
$
|
1,412
|
|
$
|
3,440
|
|
$
|
1,680
|
|
$
|
38
|
|
$
|
9,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the provision related to
construction and land development is due to the improvement in historical loss
factors over previous periods. In addition, though the overall balance in loans
held as construction and land development increased from December 2011 to June
2012 by $11.6 million, the increase was primarily due to the acquisition of
loans from AFI of $15.1 million which was partially offset by resolutions and
payments of $3.5 million.
Activity in the allowance for loan losses for the six
months ended June 30, 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Commercial
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Construction
and Land
Development
|
|
Consumer
and Other
|
|
Total
|
|
Beginning balance, January 1, 2011
|
|
$
|
3,832
|
|
$
|
3,026
|
|
$
|
4,145
|
|
$
|
1,895
|
|
$
|
152
|
|
$
|
13,050
|
|
Provisions for loan losses
|
|
|
(38
|
)
|
|
861
|
|
|
1,160
|
|
|
1,348
|
|
|
19
|
|
|
3,350
|
|
Loans charged off
|
|
|
(903
|
)
|
|
(716
|
)
|
|
(841
|
)
|
|
(666
|
)
|
|
(132
|
)
|
|
(3,258
|
)
|
Recoveries
|
|
|
57
|
|
|
9
|
|
|
32
|
|
|
33
|
|
|
|
|
|
131
|
|
Ending Balance, June 30, 2011
|
|
$
|
2,948
|
|
$
|
3,180
|
|
$
|
4,496
|
|
$
|
2,610
|
|
$
|
39
|
|
$
|
13,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
The following tables reflect
the allowance allocation per loan category and percent of loans in each
category to total loans as of June 30, 2012 and December 31, 2011:
As of June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Commercial
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Construction
and Land
Development
|
|
Consumer
and Other
|
|
Total
|
|
Specific Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
396
|
|
$
|
219
|
|
$
|
1,121
|
|
$
|
1,096
|
|
$
|
|
|
$
|
2,832
|
|
Purchase credit impaired loans
|
|
|
119
|
|
|
110
|
|
|
203
|
|
|
|
|
|
|
|
|
432
|
|
Total specific reserves
|
|
|
515
|
|
|
329
|
|
|
1,324
|
|
|
1,096
|
|
|
|
|
|
3,264
|
|
General reserves
|
|
|
2,271
|
|
|
1,083
|
|
|
2,116
|
|
|
584
|
|
|
38
|
|
|
6,092
|
|
Total
|
|
$
|
2,786
|
|
$
|
1,412
|
|
$
|
3,440
|
|
$
|
1,680
|
|
$
|
38
|
|
$
|
9,356
|
|
Total
Loans
|
|
$
|
182,436
|
|
$
|
184,682
|
|
$
|
507,501
|
|
$
|
55,768
|
|
$
|
12,633
|
|
$
|
943,020
|
|
Allowance as percent of loans per category as of June 30, 2012
|
|
|
1.53
|
%
|
|
0.76
|
%
|
|
0.68
|
%
|
|
3.01
|
%
|
|
0.30
|
%
|
|
0.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
Commercial
|
|
Residential
Real Estate
|
|
Commercial
Real Estate
|
|
Construction
and Land
Development
|
|
Consumer
and Other
|
|
Total
|
|
Specific Reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
1,719
|
|
$
|
188
|
|
$
|
2,563
|
|
$
|
892
|
|
$
|
|
|
$
|
5,362
|
|
Purchase credit impaired loans
|
|
|
|
|
|
110
|
|
|
542
|
|
|
|
|
|
|
|
|
652
|
|
Total specific reserves
|
|
|
1,719
|
|
|
298
|
|
|
3,105
|
|
|
892
|
|
|
|
|
|
6,014
|
|
General reserves
|
|
|
1,392
|
|
|
1,647
|
|
|
2,197
|
|
|
1,517
|
|
|
69
|
|
|
6,822
|
|
Total
|
|
$
|
3,111
|
|
$
|
1,945
|
|
$
|
5,302
|
|
$
|
2,409
|
|
$
|
69
|
|
$
|
12,836
|
|
Total
Loans
|
|
$
|
172,026
|
|
$
|
196,680
|
|
$
|
455,852
|
|
$
|
44,136
|
|
$
|
12,083
|
|
$
|
880,777
|
|
Allowance as percent of loans per category as of December 31, 2011
|
|
|
1.81
|
%
|
|
0.99
|
%
|
|
1.16
|
%
|
|
5.46
|
%
|
|
0.57
|
%
|
|
1.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The general reserve as a percentage
of loans collectively evaluated for impairment was .75% at June 30, 2012 which
compares to .95% at December 31, 2011. Excluding the loans acquired as a result
of the AFI merger on April 1, 2012, which as of June 30, 2012 do not have a
general reserve allocated, the general reserve as a percentage of loans
collectively evaluated for impairment would be .88%. The 7 basis point decrease
in this general reserve ratio as compared to December 31, 2011 was primarily a
result of a decrease of 17% ($10.8 million) in special mention loans from
December 31, 2011 to June 30, 2012 which have a higher allocation of general
reserve.
Other Real Estate Owned
Real estate acquired by us
as a result of foreclosure or by deed in lieu of foreclosure is classified as
other real estate owned (OREO). Write-downs in OREO are recorded at the time
management believes additional deterioration in value has occurred and are
charged to non-interest expense. At June 30, 2012, we had $26.7 million of OREO
property, of which $6.7 million was a result of the Old Harbor acquisition,
$3.7 million was a result of the TBOM acquisition and $2.0 million as a result
of the Republic acquisition and all are covered by their respective loss share
agreements. At December 31, 2011, we had $13.5 million of OREO property, of
which $11.1 million were a result of the Old Harbor, TBOM and Republic
acquisitions and were covered under the respective loss share agreements.
The following is a summary
of other real estate owned as of June 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
2012
|
|
December
31,
2011
|
|
(Dollars in thousands)
|
|
Assets
Not
Subject
to Loss
Share
Agreements
|
|
Assets
Subject
to
Loss Share
Agreements
|
|
Total
|
|
Assets
Not
Subject
to Loss
Share
Agreements
|
|
Assets
Subject
to Loss
Share
Agreements
|
|
Total
|
|
Commercial real estate
|
|
$
|
10,854
|
|
$
|
8,370
|
|
$
|
19,224
|
|
$
|
1,922
|
|
$
|
8,067
|
|
$
|
9,989
|
|
Residential real estate
|
|
|
3,500
|
|
|
4,025
|
|
|
7,525
|
|
|
532
|
|
|
2,991
|
|
|
3,523
|
|
Total
|
|
$
|
14,354
|
|
$
|
12,395
|
|
$
|
26,749
|
|
$
|
2,454
|
|
$
|
11,058
|
|
$
|
13,512
|
|
At June 30, 2012, we had
$8.5 million of OREO under contract for sale, of which $7.8 million is not
covered by loss share agreements.
54
Investment Securities
We manage our securities
available for sale portfolio, which represented 17.45% of our average earning
asset base for the three months ended June 30, 2012, as compared to 12.99% at
year ended December 31, 2011, to minimize interest rate risk, maintain sufficient
liquidity, and maximize return. The portfolio includes callable U.S. government
and federal agency bonds, residential mortgage-backed securities, and
collateralized mortgage obligations. Our financial planning anticipates income
streams generated by the securities portfolio based on normal maturity, pay
downs and reinvestment.
FDIC Loss Share Receivable
The FDIC Loss Share
Receivable represents the estimated amounts due from the FDIC related to loss
share agreements. The receivable represents the discounted value of the FDICs
portion of estimated losses expected to be realized on covered assets. The
receivable is reviewed quarterly and adjusted for any changes in expected cash
flows based on recent performance and expectations for future performance of
covered assets. During the six months ended June 30, 2012, the Company received
cash of $11.1 million from the FDIC, recorded an adjustment of $3.6 million
related to the disposal of covered assets at amounts above their carrying value
and recorded discount accretion of $509,000.
Deposits
Total deposits increased by
$176.7 million from December 31, 2011 to total deposits of $1.358 billion at
June 30, 2012, due to deposits acquired in the AFI merger. At June 30, 2012,
non-interest bearing deposits represented approximately 31.74% of deposits
compared to 27.87% at December 31, 2011. Included in the June 30, 2012 deposit
balances is approximately $38 million in noninterest bearing account balances
which is anticipated to be withdrawn in the third quarter of 2012. The Bank had
no brokered deposits at June 30, 2012. However, the Bank does participate in
the CDARS program (reciprocal) with balances of $20.3 million at June 30, 2012.
CAPITAL RESOURCES
We are subject to regulatory
capital requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators. Failure to meet capital
requirements can initiate regulatory action.
The Federal banking
regulatory authorities have adopted certain prompt corrective action rules
with respect to depository institutions. The rules establish five capital
tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. The
various federal banking regulatory agencies have adopted regulations to
implement the capital rules by, among other things, defining the relevant
capital measures for the five capital categories. An institution is deemed to
be well capitalized if it has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1
leverage ratio of 5% or greater and is not subject to a regulatory order,
agreement, or directive to meet and maintain a specific capital level. At June
30, 2012, the Company met the capital ratios of a well capitalized financial
holding company with a total risk-based capital ratio of 21.84%, a Tier 1
risk-based capital ratio of 20.69%, and a Tier 1 leverage ratio of 10.91%.
Depository institutions which fall below the adequately capitalized category
generally are prohibited from making any capital distribution, are subject to
growth limitations, and are required to submit a capital restoration plan.
There are a number of requirements and restrictions that may be imposed on institutions
treated as significantly undercapitalized and, if the institution is
critically undercapitalized, the banking regulatory agencies have the right
to appoint a receiver or conservator.
55
The following
represents 1
st
United Bancorps and 1
st
United Banks
regulatory capital ratios as of June 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Minimum Capital
Adequacy
|
|
Minimum for
Well Capitalized
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
As of June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk-weighted assets
Consolidated
|
|
$
|
176,385
|
|
|
21.84
|
%
|
$
|
64,597
|
|
|
8.00
|
%
|
$
|
80,747
|
|
|
10.00
|
%
|
1
st
United
|
|
|
159,275
|
|
|
19.90
|
%
|
|
64,023
|
|
|
8.00
|
%
|
|
80,029
|
|
|
10.00
|
%
|
Tier I capital to risk-weighted assets
Consolidated
|
|
|
167,029
|
|
|
20.69
|
%
|
|
32,299
|
|
|
4.00
|
%
|
|
48,448
|
|
|
6.00
|
%
|
1
st
United
|
|
|
150,103
|
|
|
18.76
|
%
|
|
32,012
|
|
|
4.00
|
%
|
|
48,017
|
|
|
6.00
|
%
|
Tier I capital to total average assets
Consolidated
|
|
|
167,029
|
|
|
10.91
|
%
|
|
61,224
|
|
|
4.00
|
%
|
|
76,530
|
|
|
5.00
|
%
|
1
st
United
|
|
|
150,103
|
|
|
9.82
|
%
|
|
61,111
|
|
|
4.00
|
%
|
|
76,389
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk-weighted assets
Consolidated
|
|
$
|
165,832
|
|
|
25.23
|
%
|
$
|
52,582
|
|
|
8.00
|
%
|
$
|
65,728
|
|
|
10.00
|
%
|
1
st
United
|
|
|
130,011
|
|
|
19.94
|
%
|
|
52,157
|
|
|
8.00
|
%
|
|
65,196
|
|
|
10.00
|
%
|
Tier I capital to risk-weighted assets
Consolidated
|
|
|
157,559
|
|
|
23.97
|
%
|
|
26,291
|
|
|
4.00
|
%
|
|
39,437
|
|
|
6.00
|
%
|
1
st
United
|
|
|
121,810
|
|
|
18.68
|
%
|
|
26,079
|
|
|
4.00
|
%
|
|
39,118
|
|
|
6.00
|
%
|
Tier I capital to total average assets
Consolidated
|
|
|
157,559
|
|
|
11.79
|
%
|
|
53,466
|
|
|
4.00
|
%
|
|
66,833
|
|
|
5.00
|
%
|
1
st
United
|
|
|
121,810
|
|
|
9.15
|
%
|
|
53,258
|
|
|
4.00
|
%
|
|
66,573
|
|
|
5.00
|
%
|
Bancorp has an
effective shelf registration statement, which may be drawn from time to time
when additional capital is required.
CASH FLOWS AND LIQUIDITY
Our primary
sources of cash are deposit growth, maturities and amortization of loans and
securities, operations, and borrowing. We use cash from these and other sources
to first fund loan growth. Any remaining cash is used primarily to purchase a
combination of short, intermediate, and longer-term investment securities.
We manage our
liquidity position with the objective of maintaining sufficient funds to
respond to the needs of depositors and borrowers and to take advantage of
earnings enhancement opportunities. In addition to the normal inflow of funds
from core-deposit growth together with repayments and maturities of loans and
investments, we use other short-term funding sources such as brokered time deposits,
securities sold under agreements to repurchase, overnight federal funds
purchased from correspondent banks, the acceptance of short-term deposits from
public entities, and Federal Home Loan Bank advances.
We monitor,
stress test and manage our liquidity position on several bases, which vary
depending upon the time period. As the time period is stress test expanded,
other data is factored in, including estimated loan funding requirements,
estimated loan payoffs, investment portfolio maturities or calls, and
anticipated depository buildups or runoffs.
We classify
all of our securities as available-for-sale to maintain significant liquidity.
Our liquidity position is further enhanced by structuring our loan portfolio
interest payments as monthly, complemented by retail credit and residential
mortgage loans in our loan portfolio, resulting in a steady stream of loan
repayments. In managing our investment portfolio, we provide for staggered
maturities so that cash flows are provided as such investments mature.
Our securities
portfolio, federal funds sold, and cash and due from financial institutions
balances serve as primary sources of liquidity for 1
st
United. At
June 30, 2012, we had approximately $460.8 million in cash and cash equivalents
and securities, of which $17.5 million of securities, at fair value, were
pledged.
At June 30,
2012, we had no short-term or long-term borrowings. At June 30, 2012, we had
commitments to originate loans totaling $15.8 million and commitments of $88.4
million in unused lines of credit. Scheduled maturities of certificates of
deposit during the twelve months following June 30, 2012 total $251.2 million,
and loans maturing in the next twelve months total approximately $215.1
million.
56
Management
believes that we have adequate resources to fund all of our commitments, that
substantially all of our existing commitments will be funded in the subsequent
twelve months and, if so desired, that we can adjust the rates on certificates
of deposit and other deposit accounts to retain deposits in a changing interest
rate environment. At June 30, 2012, we had short-term lines available from
correspondent banks totaling $54.0 million, FRB discount window availability of
$37.8 million, and borrowing capacity from the FHLB of $34.7 million based on
collateral pledged, for a total credit available of $126.5 million. In
addition, being well capitalized, the Bank can access wholesale deposits for
approximately $381.3 million based on current policy limits.
OFF-BALANCE SHEET ARRANGEMENTS
We do not
currently engage in the use of derivative instruments to hedge interest rate
risks. However, we are a party to financial instruments with off-balance sheet
risks in the normal course of business to meet the financing needs of our
clients.
At June 30,
2012, we had $15.8 million in commitments to originate loans, $88.4 million in
unused lines of credit and $5.1 million in standby letters of credit.
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract. Commitments
generally have termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a client to a third party. We use the same credit policies
in establishing commitments and issuing letters of credit as we do for
on-balance sheet instruments.
If commitments
arising from these financial instruments continue to require funding at
historical levels, management does not anticipate that such funding will
adversely impact our ability to meet on-going obligations. In the event these
commitments require funding in excess of historical levels, management believes
current liquidity, available lines of credit from the FHLB, investment security
maturities and our revolving credit facility provide a sufficient source of
funds to meet these commitments.
CRITICAL ACCOUNTING POLICIES
Allowance for Loan
Losses
Management
views critical accounting policies as accounting policies that are important to
the understanding of our financial statements and also involve estimates and
judgments about inherently uncertain matters. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the consolidated balance
sheets and assumptions that affect the recognition of income and expenses on
the consolidated statements of income for the periods presented. Actual results
could differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in subsequent periods are
described as follows.
The allowance
for loan losses is established as losses are estimated to have occurred through
a provision for loan losses charged to earnings. Loan losses are charged
against the allowance for loan losses when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance for loan losses.
The allowance
for loan losses is evaluated on a regular basis by management and is based upon
managements periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrowers ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The allowance
consists of specific and general components. The specific component relates to
loans that are individually evaluated for impairment. For such loans, an
allowance for loan losses is established based on either the present value of
expected future cash flows discounted at the loans effective interest rate,
the market price of the loan, or, if the loan is collateral dependent, the fair
value of the underlying collateral less estimated costs of sale.
A loan is
considered impaired when, based on current information and events, it is
probable that we will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays (loan payments made within 90
days of the due date) and payment shortfalls (which are tracked as past due
amounts) on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior payment record, and
the amount of the shortfall in relation to the
57
principal and
interest owed. Management considers loan payments made within 90 days of the
due date to be insignificant payment delays. Payment shortfalls are traced as
past due amounts. Impairment is measured on a loan by loan basis for commercial
and construction and land development loans by either the present value of
expected future cash flows discounted at the loans effective interest rate,
the loans obtainable market price, or the fair value of the collateral less
estimated costs of sale if the loan is collateral dependent.
The general
component considers the actual historical charge-offs over a rolling three year
period by portfolio segment. The actual historical charge-off ratio is adjusted
for qualitative factors including delinquency trends, loss and recovery trends,
classified asset trends, non-accrual trends, economic and business conditions and
other external factors by portfolio segment of loans.
Goodwill and
Intangible Assets
Goodwill
represents the excess of cost over fair value of assets of business acquired.
Goodwill and intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized, but instead tested for
impairment at least annually. Intangible assets with estimable useful lives are
amortized over their respective estimated useful lives to their estimated
residual values. We acquired First Western Bank, on April 7, 2004, Equitable on
February 29, 2008, Citrus on August 15, 2008, Republic on December 11, 2009,
TBOM on December 17, 2010, Old Harbor on October 21, 2011 and AFI on April 1,
2012. Consequently, we were required to record the assets acquired, including
identified intangible assets, and liabilities assumed at their fair value,
which involves estimates based on third party valuations, such as appraisals,
internal valuations based on discounted cash flow analyses or other valuation
techniques. The determination of the useful lives of intangible assets is
subjective, as is the appropriate amortization period for such intangible
assets. In addition, purchase acquisitions typically result in recording
goodwill, which is subject to ongoing periodic impairment tests based on the
fair value of the reporting unit compared to its carrying amount, including
goodwill. As of December 31, 2011, the required annual impairment test of
goodwill was performed and no impairment existed as of the valuation date. If
for any future period we determine that there has been impairment in the
carrying value of our goodwill balances, we will record a charge to our
earnings, which could have a material adverse effect on our net income, but not
to our risk based capital ratios.
Income Taxes
Deferred
income tax assets and liabilities are recorded to reflect the tax consequences
on future years of temporary differences between revenues and expenses reported
for financial statements and those reported for income tax purposes. Deferred
tax assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be realized or settled. A valuation allowance is provided against
deferred tax assets which are not likely to be realized.
FDIC Loss Share
Receivable
The FDIC Loss
Share Receivable represents the estimated amounts due from the FDIC related to
the Loss Share Agreements which were booked as of the acquisition dates of
Republic, TBOM, and Old Harbor. The receivable represents the discounted value
of the FDICs reimbursed portion of estimated losses we expect to realize on
loans and other real estate owned (Covered Assets) acquired as a result of
these acquisitions. The range of discount rates on the FDIC Loss Share
Receivable was 2.12% to 3.97%. As losses are realized on Covered Assets, the
portion that the FDIC pays the Company in cash for principal and up to 90 days
of interest reduces the FDIC loss share receivable.
The FDIC loss
share receivable is reviewed quarterly and adjusted for any changes in expected
cash flows based on recent performance and expectations for future performance
of the Covered Assets. Any increases in cash flows of the Covered Assets will
be accreted into income over the life of the Covered Asset but will reduce
immediately the FDIC loss share receivable. Any decreases in the expected cash
flows of the Covered Assets will result in the impairment to the Covered Asset
and an increase in the FDIC Loss Share Receivable to be reflected immediately.
Non-cash adjustments to the FDIC Loss Share Receivable are recorded to
non-interest income.
I
tem 3.
Quantitative and Qualitative Disclosures about Market Risk
Our net income
is largely dependent on net interest income. Net interest income is susceptible
to interest rate risk to the degree that interest-bearing liabilities mature or
re-price on a different basis than interest-earning assets. When
interest-bearing liabilities mature or re-price more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income. Net interest income is also affected by changes in the portion of
interest-earning assets that are funded by interest-bearing liabilities rather
than by other sources of funds, such as non-interest-bearing deposits and
shareholders equity.
58
We manage our
assets and liabilities through 1
st
Uniteds Asset Liability
Committee (ALCO) Board Committee which meets quarterly and through our
internal management committee which meets more frequently. Management closely
monitors 1
st
Uniteds interest at risk calculations through model
simulations and reports the results of its rate stress testing to ALCO on a
quarterly basis.
We have
established policy limits of risk, which are quantitative measures of the
percentage change in net interest income (a measure of net interest income at
risk) and the fair value of equity capital (a measure of economic value of
equity (EVE) at risk) resulting from a hypothetical change in interest rates
for maturities from one day to 30 years. We measure the potential adverse
impacts that changing interest rates may have on our short-term earnings,
long-term value, and liquidity by employing simulation analysis through the use
of computer modeling. The simulation model captures optionality factors such as
call features and interest rate caps and floors imbedded in investment and loan
portfolio contracts. As with any method of gauging interest rate risk, there
are certain shortcomings inherent in the interest rate modeling methodology
used by us. When interest rates change, actual movements in different
categories of interest-earning assets and interest-bearing liabilities, loan
prepayments, and withdrawals of time and other deposits, may deviate significantly
from assumptions used in the model. Finally, the methodology does not measure
or reflect the impact that higher rates may have on adjustable-rate loan
customers ability to service their debts, or the impact of rate changes on
demand for loan, lease, and deposit products. Our interest rate risk management
goal is to avoid unacceptable variations in net interest income and capital
levels due to fluctuations in market rates. Management attempts to achieve this
goal by balancing, within policy limits, the volume of floating-rate
liabilities with a similar volume of floating-rate assets, by keeping the
average maturity of fixed-rate asset and liability contracts reasonably
matched, by maintaining a pool of administered core deposits, and by adjusting
pricing rates to market conditions on a continuing basis.
The balance
sheet is subject to testing for interest rate shock possibilities to indicate
the inherent interest rate risk. Average interest rates are shocked by plus or
minus 100, 200 and 300 basis points (bp), although we may elect not to use
particular scenarios that we determined are impractical in a current rate
environment. 1
st
United has been consistently within policy limits
on rates stress test up and down 100, 200, and 300 bp, both for net interest
margin and EVE. Management has closely monitored 1
st
Uniteds gap
position which has been liability sensitive during a stable rate environment.
Variations on EVE have consistently shown low volatility.
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012
|
|
Interest rate
scenarios
|
|
|
Percent change
of net interest
income
|
|
Percentage
change of
EVE
|
|
Up 300 basis
points
|
|
|
16
|
%
|
|
(13
|
)%
|
Up 200 basis
points
|
|
|
10
|
%
|
|
(8
|
)%
|
Up 100 basis
points
|
|
|
4
|
%
|
|
(4
|
)%
|
Base
|
|
|
|
|
|
|
|
Down 100
basis points
|
|
|
(3
|
)%
|
|
8
|
%
|
Down 200
basis points
|
|
|
(8
|
)%
|
|
17
|
%
|
Down 300
basis points
|
|
|
(12
|
)%
|
|
27
|
%
|
We had a
positive gap position based on contractual and prepayment assumptions for the
next 12 months, with a positive cumulative interest rate sensitivity gap as a
percentage of total earning assets of 0.96%.
I
TEM 4. CONTROLS
AND PROCEDURES
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
Our Chief
Executive Officer, Rudy E. Schupp, and Chief Financial Officer, John Marino,
have evaluated our disclosure controls and procedures, as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act), as of the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer each have
concluded that our disclosure controls and procedures are effective in ensuring
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange Commissions
rules and forms. Such controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed is accumulated and communicated to our management, including our
principal executive and principal financial officers, to allow timely decisions
regarding disclosure.
59
|
|
(b)
|
Changes in
Internal Control Over Financial Reporting
|
Our
management, including our Chief Executive Officer and Chief Financial Officer,
has reviewed our internal control over financial reporting, as defined in Rule
13a-15(f) under the Exchange Act. There were no changes in internal control
over financial reporting that occurred during the fiscal quarter covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
P
ART II.
OTHER INFORMATION
I
TEM 1. LEGAL
PROCEEDINGS
From
time-to-time we may be involved in litigation that arises in the normal course
of business. As of the date of this Form 10-Q, we are not a party to any
litigation that management believes could reasonably be expected to have a
material adverse effect on our financial position or results of operations for
an annual period.
I
TEM 1A. RISK
FACTORS
In addition to
the other information set forth in this Quarterly Report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our 2011
Form 10-K, as updated in our subsequent quarterly reports. The risks described
in our 2011 Form 10-K are not the only risks facing us. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
I
TEM 5. OTHER
INFORMATION
On July 23,
2012, we announced via press release our financial results for the three and
six month periods ended June 30, 2012. A copy of our press release is included
herein as Exhibit 99.1 and incorporated herein by reference.
The
information furnished under Part II, Item 5 of this Quarterly Report, including
Exhibit 99.1, shall not be deemed filed for purposes of Section 18 of the
Securities Exchange Act of 1934, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933, except as shall be
expressly set forth by specific reference in such filing.
60
I
TEM 6. EXHIBITS
|
|
(a)
|
The
following exhibits are included herein:
|
|
|
|
|
Exhibit No.
|
|
Name
|
|
|
|
|
31.1
|
|
Certification
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
31.2
|
|
Certification
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350
|
|
|
|
99.1
|
|
Press
release to announce earnings, dated July 23, 2012.
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
61
S
IGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
1
ST
UNITED BANCORP, INC.
|
|
(Registrant)
|
|
|
|
Date: July
23, 2012
|
By:/s/John
Marino
|
|
|
JOHN MARINO
|
|
PRESIDENT
AND CHIEF FINANCIAL OFFICER
|
|
(Mr. Marino
is the principal financial officer and has been duly authorized to sign on
behalf of the Registrant)
|
62
EXHIBIT INDEX
|
|
|
EXHIBIT
|
|
DESCRIPTION
|
|
|
|
31.1
|
|
Certification
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
31.2
|
|
Certification
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350
|
|
|
|
99.1
|
|
Press
release to announce earnings, dated July 23, 2012
|
|
|
|
101.INS
|
|
XBRL
Instance Document
|
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
63
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