September 30, 2012
Note A – Basis of Presentation
The accompanying consolidated financial statements, which are unaudited, include all of the accounts of City Holding Company (“the Parent Company”) and its wholly-owned subsidiaries (collectively, “the Company”). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2012. The Company’s accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management’s estimates.
The consolidated balance sheet as of December 31, 2011 has been derived from audited financial statements included in the Company’s 2011 Annual Report to Shareholders. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the 2011 Annual Report of the Company.
Certain amounts in the financial statements have been reclassified. Such reclassifications had no impact on shareholders’ equity or net income for any period.
Note B – Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “
Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.
” This ASU amends Topic 820, “
Fair Value Measurements and Disclosures
,” to converge the fair value measurement guidance contained in U.S. generally accepted accounting principles and International Financial Reporting Standards (“IFRS”). The provisions of ASU No. 2011-04 clarify existing fair value measurements, amend certain principles set forth in Topic 820 and requires additional fair value disclosures. ASU No. 2011-04 became effective for the Company’s reporting period that began on January 1, 2012. The adoption of ASU No. 2011-04 did not have a material impact on the Company’s financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “
Comprehensive Income (Topic 220) – Presentation of Comprehensive Income
.” ASU 2011-05 amends Topic 220, “
Comprehensive Income
,” to require that all non-owner changes in shareholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate, but consecutive statements, thus eliminating the option to present components of comprehensive income within the statement of changes in shareholders’ equity. ASU No. 2011-05 is effective for the Company’s reporting period that began on January 1, 2012; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12, “
Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassification Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
,” as further discussed below. The adoption of ASU No. 2011-05 did not have a material impact on the Company’s financial statements.
In September 2011, the FASB issued ASU No. 2011-08, “
Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment
.” Under this ASU, an entity has the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If an entity determines, as a result of this qualitative assessment, that it is not more than likely that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. ASU No. 2011-08 is effective for the Company’s reporting period that began on January 1, 2012. The adoption of ASU No. 2011-08 did not have a material impact on the Company’s financial statements.
In December 2011, the FASB issued ASU No. 2011-12, “
Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
.” This ASU defers the changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. ASU No. 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to ASU No. 2011-05. All other requirements in ASU No. 2011-05 are not affected. ASU No. 2011-12 is effective for the Company’s reporting period that began on January 1, 2012. The adoption of ASU No. 2011-12 did not have a material impact on the Company’s financial statements.
Note C – Acquisitions
On May 31, 2012, the Company acquired 100% of the outstanding common and preferred stock of Virginia Savings Bancorp, Inc. and its wholly owned subsidiary, Virginia Savings Bank (collectively, “VSB”). As a result of this acquisition, the Company acquired five branches which expanded its footprint into Virginia. At the time of closing, VSB had total assets of $132 million, loans of $82 million, deposits of $120 million and shareholders’ equity of $11 million.
The total transaction was valued at $12.4 million, consisting of cash of $4.7 million and approximately 240,000 shares of common stock valued at $7.7 million. The common stock was valued based on the closing price of $32.18 for the Company’s common shares on May 31, 2012. The preliminary purchase price has been allocated as follows:
|
|
|
|
|
|
May 31, 2012
|
|
Consideration:
|
|
|
|
Cash
|
|
$
|
4,672
|
|
Common stock
|
|
|
7,723
|
|
|
|
$
|
12,395
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
24,947
|
|
Investment securities
|
|
|
14,082
|
|
Loans
|
|
|
73,448
|
|
Premises and equipment
|
|
|
5,158
|
|
Other assets
|
|
|
8,931
|
|
Total identifiable assets
|
|
|
126,566
|
|
|
|
|
|
|
Identifiable liabilities:
|
|
|
|
|
Deposits
|
|
|
122,755
|
|
Other liabilities
|
|
|
698
|
|
Total identifiable liabilities
|
|
|
123,453
|
|
|
|
|
|
|
Net identifiable assets
|
|
|
3,113
|
|
Goodwill
|
|
|
8,009
|
|
Core deposit intangible
|
|
|
1,273
|
|
|
|
$
|
12,395
|
|
In determining the estimated fair value of the acquired loans, management considered several factors, such as estimated future credit losses, estimated prepayments, remaining lives of the acquired loans, estimated value of the underlying collateral and the net present value of the cash flows expected to be received. For smaller loans not specifically reviewed, management grouped the loans into their respective homogeneous loan pool and applied a loss estimate accordingly.
Acquired loans are accounted for using one of the two following accounting standards:
(1)
|
ASC Topic 310-20 is used to value loans that do not have evidence of credit quality deterioration. For these loans, the difference between the fair value of the loan and the amortized cost of the loan would be amortized or accreted into income using the interest method.
|
(2)
|
ASC Topic 310-30 is used to value loans that have evidence of credit quality deterioration. For these loans, the expected cash flows that exceed the fair value of the loan represent the accretable yield, which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. The non-accretable difference represents the difference between the contractually required principal and interest payments and the cash flows expected to be collected based upon management’s estimation. Subsequent decreases in the expected cash flows will require the Company to evaluate the need for additions to the Company’s allowance for loan losses. Subsequent increases in the expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges with a corresponding adjustment to the accretable yield, which will result in the recognition of additional interest income over the remaining lives of the loans. The accretable difference represents the difference between the expected cash flows and the net present value of expected cash flows. This difference is accreted into earnings using the level-yield method over the expected cash flow periods of the loans. In determining the net present value of expected cash flows, management used various discount rates based upon the risk characteristics for each loan type.
|
The following table presents the loans acquired in conjunction with the VSB acquisition:
|
|
|
|
|
|
May 31, 2012
|
|
|
|
|
|
Contractually required principal and interest
|
|
$
|
11,567
|
|
Contractual cash flows not expected to be collected (non-accretable difference)
|
|
|
(3,973
|
)
|
Expected cash flows
|
|
|
7,594
|
|
Interest component of expected cash flows (accretable difference)
|
|
|
(954
|
)
|
Estimated fair value of purchased credit impaired loans acquired
|
|
$
|
6,640
|
|
|
|
|
|
|
Estimated fair value of performing loans acquired
|
|
|
66,808
|
|
Estimated fair value of loans acquired
|
|
$
|
73,448
|
|
The fair values of non-time deposits approximated their carrying value at the acquisition date. For time deposits, the fair values were estimated based on discounted cash flows, using interest rates that are currently being offered compared to the contractual interest rates. Based on this analysis, management recorded a premium on time deposits acquired of $2.3 million, which is being amortized over five years.
The Company believes that the customer relationships with the deposits acquired have an intangible value. In connection with the acquisition, the Company recorded a core deposit intangible asset of $1.3 million, which represents the value of the relationship that VSB had with their deposit customers. The fair value was estimated based on a discounted cash flow methodology that considered type of deposit, deposit retention and the cost of the deposit base. The core deposit intangible is being amortized over ten years, with an annual charge of less than $0.2 million per year. The following table presents a rollforward of the Company’s intangible assets from the beginning of the year:
|
|
|
|
|
|
Intangible Assets
|
|
Balance, January 1, 2012
|
|
$
|
1,274
|
|
Core deposit intangible acquired in conjunction with the acquisition of VSB
|
|
|
1,273
|
|
Amortization expense
|
|
|
(343
|
)
|
Balance, September 30, 2012
|
|
$
|
2,204
|
|
Under GAAP, management has up to twelve months following the date of the acquisition to finalize the fair values of acquired assets and liabilities. The measurement period ends as soon as the Company receives information it was seeking about facts and circumstances that existed as of the acquisition date or learns more information is not obtainable. Any subsequent adjustments to the fair value of the acquired assets and liabilities, intangible assets or other purchase accounting adjustments will result in adjustments to the goodwill recorded. The measurement period is limited to one year from the acquisition date. The goodwill recorded in conjunction with the VSB acquisition is not expected to be deductible for tax purposes. The following table presents a rollforward of goodwill from the beginning of the year:
|
|
|
|
|
Goodwill
|
|
Balance, January 1, 2012
|
|
$
|
54,890
|
|
Goodwill acquired in conjunction with the acquisition of VSB
|
|
|
8,009
|
|
Balance, September 30, 2012
|
|
$
|
62,899
|
|
On August 2, 2012, the Company entered into a definitive agreement to acquire Community Financial Corporation and its wholly owned subsidiary Community Bank (“Community”). Community is a $500 million bank and operates eight branches along the I-81 corridor in western Virginia and two branches in Virginia Beach, Virginia. The Company anticipates the transaction will be completed in the first quarter of 2013, pending regulatory approvals, the approval of Community’s shareholders and the completion of other customary closing conditions. The total transaction value is expected to be approximately $26.6 million.
Note D –Investments
The aggregate carrying and approximate market values of securities follow. Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
(In thousands)
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries and U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
government agencies
|
|
$
|
4,310
|
|
|
$
|
105
|
|
|
$
|
-
|
|
|
$
|
4,415
|
|
|
$
|
5,868
|
|
|
$
|
173
|
|
|
$
|
-
|
|
|
$
|
6,041
|
|
Obligations of states and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions
|
|
|
48,334
|
|
|
|
1,814
|
|
|
|
15
|
|
|
|
50,133
|
|
|
|
55,262
|
|
|
|
1,561
|
|
|
|
21
|
|
|
|
56,802
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
285,678
|
|
|
|
8,695
|
|
|
|
45
|
|
|
|
294,328
|
|
|
|
220,815
|
|
|
|
6,966
|
|
|
|
168
|
|
|
|
227,613
|
|
Private label
|
|
|
3,583
|
|
|
|
43
|
|
|
|
-
|
|
|
|
3,626
|
|
|
|
5,117
|
|
|
|
45
|
|
|
|
6
|
|
|
|
5,156
|
|
Trust preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
18,405
|
|
|
|
201
|
|
|
|
3,098
|
|
|
|
15,508
|
|
|
|
48,951
|
|
|
|
941
|
|
|
|
4,735
|
|
|
|
45,157
|
|
Corporate securities
|
|
|
16,178
|
|
|
|
251
|
|
|
|
466
|
|
|
|
15,963
|
|
|
|
16,226
|
|
|
|
160
|
|
|
|
1,988
|
|
|
|
14,398
|
|
Total Debt Securities
|
|
|
376,488
|
|
|
|
11,109
|
|
|
|
3,624
|
|
|
|
383,973
|
|
|
|
352,239
|
|
|
|
9,846
|
|
|
|
6,918
|
|
|
|
355,167
|
|
Marketable equity securities
|
|
|
3,381
|
|
|
|
551
|
|
|
|
11
|
|
|
|
3,921
|
|
|
|
4,318
|
|
|
|
-
|
|
|
|
465
|
|
|
|
3,853
|
|
Investment funds
|
|
|
1,724
|
|
|
|
68
|
|
|
|
-
|
|
|
|
1,792
|
|
|
|
1,724
|
|
|
|
39
|
|
|
|
-
|
|
|
|
1,763
|
|
Total Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
|
|
$
|
381,593
|
|
|
$
|
11,728
|
|
|
$
|
3,635
|
|
|
$
|
389,686
|
|
|
$
|
358,281
|
|
|
$
|
9,885
|
|
|
$
|
7,383
|
|
|
$
|
360,783
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
(In thousands)
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair Value
|
|
Securities held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
13,444
|
|
|
$
|
283
|
|
|
$
|
69
|
|
|
$
|
13,658
|
|
|
$
|
23,458
|
|
|
$
|
675
|
|
|
$
|
710
|
|
|
$
|
23,423
|
|
Total Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
|
|
$
|
13,444
|
|
|
$
|
283
|
|
|
$
|
69
|
|
|
$
|
13,658
|
|
|
$
|
23,458
|
|
|
$
|
675
|
|
|
$
|
710
|
|
|
$
|
23,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-marketable equity securities
|
|
$
|
11,459
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,459
|
|
|
$
|
11,934
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,934
|
|
Total Other Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
$
|
11,459
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,459
|
|
|
$
|
11,934
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,934
|
|
Securities with limited marketability, such as stock in the Federal Reserve Bank or the Federal Home Loan Bank, are carried at cost and are reported as non-marketable equity securities in the table above.
Certain investment securities owned by the Company were in an unrealized loss position (i.e., amortized cost basis exceeded the estimated fair value of the securities) as of September 30, 2012 and December 31, 2011. The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or Greater
|
|
|
Total
|
|
(In thousands)
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,482
|
|
|
$
|
15
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,482
|
|
|
$
|
15
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
|
16,440
|
|
|
|
35
|
|
|
|
2,830
|
|
|
|
10
|
|
|
|
19,270
|
|
|
|
45
|
|
Trust preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
5,497
|
|
|
|
3,098
|
|
|
|
5,497
|
|
|
|
3,098
|
|
Corporate securities
|
|
|
4,070
|
|
|
|
258
|
|
|
|
2,165
|
|
|
|
208
|
|
|
|
6,235
|
|
|
|
466
|
|
Marketable equity securities
|
|
|
127
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
127
|
|
|
|
11
|
|
Total
|
|
$
|
22,119
|
|
|
$
|
319
|
|
|
$
|
10,492
|
|
|
$
|
3,316
|
|
|
$
|
32,611
|
|
|
$
|
3,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,372
|
|
|
$
|
69
|
|
|
$
|
3,372
|
|
|
$
|
69
|
|
|
|
December 31, 2011
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or Greater
|
|
|
Total
|
|
(In thousands)
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
|
Estimated Fair Value
|
|
|
Unrealized Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
992
|
|
|
$
|
11
|
|
|
$
|
394
|
|
|
$
|
10
|
|
|
$
|
1,386
|
|
|
$
|
21
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
|
-
|
|
|
|
-
|
|
|
|
4,333
|
|
|
|
168
|
|
|
|
4,333
|
|
|
|
168
|
|
Private label
|
|
|
3,236
|
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,236
|
|
|
|
6
|
|
Trust preferred securities
|
|
|
6,724
|
|
|
|
520
|
|
|
|
5,402
|
|
|
|
4,215
|
|
|
|
12,126
|
|
|
|
4,735
|
|
Corporate securities
|
|
|
1,791
|
|
|
|
241
|
|
|
|
4,941
|
|
|
|
1,747
|
|
|
|
6,732
|
|
|
|
1,988
|
|
Marketable equity securities
|
|
|
3,810
|
|
|
|
465
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,810
|
|
|
|
465
|
|
Total
|
|
$
|
16,553
|
|
|
$
|
1,243
|
|
|
$
|
15,070
|
|
|
$
|
6,140
|
|
|
$
|
31,623
|
|
|
$
|
7,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
4,823
|
|
|
$
|
212
|
|
|
$
|
8,219
|
|
|
$
|
498
|
|
|
$
|
13,042
|
|
|
$
|
710
|
|
Marketable equity securities consist of investments made by the Company in equity positions of various community banks. Included within this portfolio are meaningful (2-5%) ownership positions in the following community bank holding companies: First National Corporation and First United Corporation.
During the first nine months of 2012, the Company recorded $0.6 million in credit-related net investment impairment losses. The charges deemed to be other-than-temporary were related to pooled bank trust preferred securities with a remaining book value of $5.6 million at September 30, 2012. The credit-related net impairment charges related to the pooled bank trust preferred securities were based on the Company’s quarterly reviews of its investment securities for indications of losses considered to be other than temporary. Based on management’s assessment of the securities the Company owns, the seniority positions of the securities within the pools, the level of defaults and deferred payments within the pools, management concluded that credit-related impairment charges of $0.6 million on the pooled bank trust preferred securities were appropriate for the nine months ended September 30, 2012. During 2011, the Company recorded $1.3 million in credit-related net investment impairment losses. The charges deemed to be other-than-temporary were related to pooled bank trust preferred securities ($0.4 million credit-related net impairment losses for the full year) with a remaining book value of $6.3 million at December 31, 2011, and community bank and bank holding company equity positions ($0.9 million credit-related net impairment losses for the full year) with a remaining book value of $3.9 million at December 31, 2011. The credit-related net impairment charges related to the pooled bank trust preferred securities were based on the Company’s quarterly reviews of its investment securities for indications of losses considered to be other than temporary. Based on management’s assessment of the securities the Company owns, the seniority position of the securities within the pools, the level of defaults and deferred payments within the pools, management concluded that credit-related impairment charges of $0.4 million on the pooled bank trust preferred securities were appropriate for the year ending December 31, 2011. During the year ended December 31, 2011, the Company recognized $0.9 million of credit-related net impairment charges on the Company’s equity positions due to the length of time and extent to which the market value of these securities have been below the Company’s cost basis. As a result of these factors, the Company does not expect the market value of these securities to recover in the near future.
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary would be reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition, capital strength, and near-term (12 months) prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; (iii) the historical volatility in the market value of the investment and/or the liquidity or illiquidity of the investment; (iv) adverse conditions specifically related to the security, an industry, or a geographic area; or (v) the intent to sell the investment security and if it’s more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, management also employs a continuous monitoring process in regards to its marketable equity securities, specifically its portfolio of regional community bank holdings. Although the regional community bank stocks that are owned by the Company are publicly traded, the trading activity for these stocks is minimal, with trading volumes of less than 0.1% of each respective company being traded on a daily basis. Another factor influencing the market value of these equity securities is a depressed stock market, particularly in the smaller community bank financial sector. As part of management’s review process for these securities, management reviews the financial condition of each respective regional community bank for any indications of financial weakness.
Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities. Furthermore, as of September 30, 2012, management does not intend to sell an impaired security and it is not more than likely that it will be required to sell the security before the recovery of its amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread widening on agency-issued mortgage related securities, general financial market uncertainty and unprecedented market volatility. These conditions will not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. As of September 30, 2012, management believes the unrealized losses detailed in the table above are temporary and no impairment loss has been recognized in the Company’s consolidated income statement. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period of the other-than-temporary impairment is identified, while any noncredit loss will be recognized in other comprehensive income.
At September 30, 2012, the book value of the Company’s five pooled trust preferred securities totaled $5.6 million with an estimated fair value of $3.7 million. All of these securities are mezzanine tranches. Pooled trust preferred securities represent beneficial interests in securitized financial assets that the Company analyzes within the scope of ASC 320, “
Investments-Debt and Equity Securities
” and are evaluated quarterly for other-than-temporary-impairment (“OTTI”). Management performs an analysis of OTTI utilizing its internal methodology as described below to estimate expected cash flows to be received in the future. The Company reviews each of its pooled trust preferred securities to determine if an OTTI charge would be recognized in current earnings in accordance with ASC 320, “
Investments-Debt and Equity Securities
”. There is a risk that continued collateral deterioration could cause the Company to recognize additional OTTI charges in earnings in the future.
When evaluating pooled trust preferred securities for OTTI, the Company determines a credit related portion and a noncredit related portion. The credit related portion is recognized in earnings and represents the difference between the present value of expected future cash flows and the amortized cost basis of the security. The noncredit related portion is recognized in other comprehensive income, and represents the difference between the book value and the fair value of the security less the amount of the credit related impairment. The determination of whether it is probable that an adverse change in estimated cash flows has occurred is evaluated by comparing estimated cash flows to those previously projected as further described below. The Company considers this process to be its primary evidence when determining whether credit related OTTI exists. The results of these analyses are significantly affected by other variables such as the estimate of future cash flows, credit worthiness of the underlying issuers and determination of the likelihood of defaults of the underlying collateral.
The Company utilizes a third party model to compute the present value of expected cash flows which considers the structure and term of each of the five respective pooled trust preferred securities and the financial condition of the underlying issuers. Specifically, the third party model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. For issuing banks that have defaulted, management generally assumes no recovery. For issuing banks that have deferred its interest payments, management excludes the collateral balance associated with these banks and assumes no recoveries of such collateral balance in the future. The exclusion of such issuing banks in a current deferral position is based on such bank experiencing a certain level of financial difficulty that raises doubt about its ability to satisfy its contractual debt obligation, and accordingly, the Company excludes the associated collateral balance from its estimate of expected cash flows. Other assumptions used in the estimate of expected cash flows include expected future default rates and prepayments. Specifically, the model assumes annual prepayments of 1.0% with 100% at maturity and assumes 150 basis points of additional annual defaults from banks that are currently not in default or deferral. In addition, the model assumes no recoveries except for one trust preferred security which assumes that one of the banks currently deferring or in default will cure such positions by June 2013. Management compares the present value of expected cash flows to those previously projected to determine if an adverse change in cash flows has occurred. If an adverse change in cash flows has occurred, management determines the credit loss to be recognized in the current period and the portion related to noncredit factors to be recognized in other comprehensive income.
The following table presents a progression of the credit loss component of OTTI on debt and equity securities recognized in earnings during the nine months ended September 30, 2012 and for the year ended December 31, 2011. The credit loss component represents the difference between the present value of expected future cash flows and the amortized cost basis of the security. The credit component of OTTI recognized in earnings during a period is presented in two parts based upon whether the credit impairment in the current period is the first time the security was credit impaired (initial credit impairment) or if there is additional credit impairment on a security that was credit impaired in previous periods.
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Debt Securities
|
|
|
Equity Securities
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
$
|
20,893
|
|
|
$
|
5,130
|
|
|
$
|
26,023
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial credit impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Additional credit impairment
|
|
|
355
|
|
|
|
918
|
|
|
|
1,273
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Called
|
|
|
(638
|
)
|
|
|
-
|
|
|
|
(638
|
)
|
Balance December 31, 2011
|
|
|
20,610
|
|
|
|
6,048
|
|
|
|
26,658
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial credit impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Additional credit impairment
|
|
|
576
|
|
|
|
-
|
|
|
|
576
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sold
|
|
|
-
|
|
|
|
(1,235
|
)
|
|
|
(1,235
|
)
|
Balance September 30, 2012
|
|
$
|
21,186
|
|
|
$
|
4,813
|
|
|
$
|
25,999
|
|
The following table presents additional information about the Company’s trust preferred securities with a credit rating of below investment grade as of September 30, 2012:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deal Name
|
|
Type
|
Class
|
|
Original Cost
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Difference
(1)
|
|
|
Lowest Credit Rating
|
|
|
# of issuers currently performing
|
|
|
Actual deferrals/defaults (as a % of original dollar)
|
|
|
Expected deferrals/defaults (as a % of remaining of performing collateral)
|
|
|
|
|
|
Excess Subordination as a Percentage of Current Performing Collateral
(4)
|
|
|
|
Pooled trust preferred securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporarily impaired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P1
|
|
Pooled
|
Mezz
|
|
$
|
1,115
|
|
|
$
|
451
|
|
|
$
|
175
|
|
|
|
(276
|
)
|
|
Ca
|
|
|
|
12
|
|
|
|
22.8
|
%
|
|
|
17.1
|
%
|
|
|
|
(2)
|
|
|
33.3
|
%
|
|
P2
|
|
Pooled
|
Mezz
|
|
|
3,944
|
|
|
|
1,197
|
|
|
|
892
|
|
|
|
(305
|
)
|
|
Ca
|
|
|
|
12
|
|
|
|
25.9
|
%
|
|
|
15.8
|
%
|
|
|
|
(2)
|
|
|
8.3
|
%
|
|
P3
|
(5)
|
Pooled
|
Mezz
|
|
|
2,962
|
|
|
|
1,419
|
|
|
|
350
|
|
|
|
(1,069
|
)
|
|
Caa3
|
|
|
|
24
|
|
|
|
24.5
|
%
|
|
|
21.5
|
%
|
|
|
|
(2)
|
|
|
0.2
|
%
|
|
P4
|
(6)
|
Pooled
|
Mezz
|
|
|
4,060
|
|
|
|
400
|
|
|
|
400
|
|
|
|
-
|
|
|
Ca
|
|
|
|
10
|
|
|
|
19.2
|
%
|
|
|
23.0
|
%
|
|
|
|
(3)
|
|
|
0.0
|
%
|
|
P5
|
|
Pooled
|
Mezz
|
|
|
5,872
|
|
|
|
826
|
|
|
|
366
|
|
|
|
(460
|
)
|
|
Ca
|
|
|
|
14
|
|
|
|
26.0
|
%
|
|
|
22.0
|
%
|
|
|
|
(2)
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P6
|
|
Pooled
|
Mezz
|
|
|
2,158
|
|
|
|
246
|
|
|
|
349
|
|
|
|
103
|
|
|
Ca
|
|
|
|
12
|
|
|
|
22.8
|
%
|
|
|
17.1
|
%
|
|
|
|
(2)
|
|
|
33.3
|
%
|
|
P7
|
|
Pooled
|
Mezz
|
|
|
5,237
|
|
|
|
1,068
|
|
|
|
1,189
|
|
|
|
121
|
|
|
Ca
|
|
|
|
12
|
|
|
|
25.9
|
%
|
|
|
15.8
|
%
|
|
|
|
(2)
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single issuer trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S1
|
|
Single
|
|
|
|
261
|
|
|
|
235
|
|
|
|
163
|
|
|
|
(72
|
)
|
|
NR
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
S2
|
|
Single
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
1,036
|
|
|
|
36
|
|
|
B2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S3
|
|
Single
|
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
-
|
|
|
NR
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
S4
|
|
Single
|
|
|
|
3,360
|
|
|
|
3,098
|
|
|
|
3,075
|
|
|
|
(23
|
)
|
|
NR
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
S5
|
|
Single
|
|
|
|
3,564
|
|
|
|
3,532
|
|
|
|
3,533
|
|
|
|
1
|
|
|
NR
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
(1)
|
The differences noted consist of unrealized losses recorded at September 30, 2012 and noncredit other-than-temporary impairment losses recorded subsequent to April 1, 2009 that have not been reclassified as credit losses.
|
(2)
|
Performing collateral is defined as total collateral minus all collateral that has been called, is currently deferring, or currently in default. This model for this security assumes that all collateral that is currently deferring will default with a zero recovery rate. The underlying issuers can cure, thus this bond could recover at a higher percentage upon default than zero.
|
(3)
|
Performing collateral is defined as total collateral minus all collateral that has been called, is currently deferring, or currently in default. The model for this security assumes that one of the banks that are currently deferring will cure by June 2013. If additional underlying issuers cure, this bond could recover at a higher percentage.
|
(4)
|
Excess subordination is defined as the additional defaults/deferrals necessary in the next reporting period to deplete the entire credit enhancement (excess interest and over-collateralization) beneath our tranche within each pool to the point that would cause a "break in yield." This amount assumes that all currently performing collateral continues to perform. A break in yield means that our security would not be expected to receive all the contractual cash flows (principal and interest) by maturity. The "percent of current performing collateral" is the ratio of the "excess subordination amount" to current performing collateral—a higher percent means there is more excess subordination to absorb additional defaults/deferrals, and the better our security is protected from loss.
|
(5)
|
Other-than-temporary impairment losses of $11,000 were recognized during the nine months ended September 30, 2012. Other-than-temporary impairment losses of $115,000 were recognized during the year ended December 31, 2011.
|
(6)
|
Other-than-temporary impairment losses of $565,000 were recognized during the nine months ended September 30, 2012. Other-than-temporary impairment losses of $240,000 were recognized during the year ended December 31, 2011.
|
The amortized cost and estimated fair value of debt securities at September 30, 2012, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.
|
|
|
|
|
|
|
(In thousands)
|
|
Cost
|
|
|
Estimated Fair Value
|
|
Securities Available-for-Sale
|
|
|
|
|
|
|
Due in one year or less
|
|
|
7,229
|
|
|
|
7,275
|
|
Due after one year through five years
|
|
|
33,449
|
|
|
|
33,844
|
|
Due after five years through ten years
|
|
|
46,821
|
|
|
|
48,827
|
|
Due after ten years
|
|
|
288,989
|
|
|
|
294,027
|
|
|
|
$
|
376,488
|
|
|
$
|
383,973
|
|
|
|
|
|
|
|
|
|
|
Securities Held-to-Maturity
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
-
|
|
|
|
-
|
|
Due after one year through five years
|
|
|
-
|
|
|
|
-
|
|
Due after five years through ten years
|
|
|
-
|
|
|
|
-
|
|
Due after ten years
|
|
|
13,444
|
|
|
|
13,658
|
|
|
|
$
|
13,444
|
|
|
$
|
13,658
|
|
The Company recognized $0.7 million and $1.5 million in gross gains from investment security transactions during the three and nine months ended September 30, 2012. The Company recognized $0.6 million and $3.8 million in gross gains from investment security transactions during the three and nine months ended September 30, 2011. The specific identification method is used to determine the cost basis of securities sold. The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $218 million and $204 million at September 30, 2012 and December 31, 2011, respectively.
Note E –Loans
The following summarizes the Company’s major classifications for loans:
|
|
|
|
|
|
|
( In thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Residential real estate
|
|
$
|
1,008,305
|
|
|
$
|
929,788
|
|
Home equity – junior liens
|
|
|
143,058
|
|
|
|
141,797
|
|
Commercial and industrial
|
|
|
105,027
|
|
|
|
130,899
|
|
Commercial real estate
|
|
|
787,887
|
|
|
|
732,146
|
|
Consumer
|
|
|
38,285
|
|
|
|
35,845
|
|
DDA overdrafts
|
|
|
2,670
|
|
|
|
2,628
|
|
Gross loans
|
|
|
2,085,232
|
|
|
|
1,973,103
|
|
Allowance for loan losses
|
|
|
(18,986
|
)
|
|
|
(19,409
|
)
|
Net loans
|
|
$
|
2,066,246
|
|
|
$
|
1,953,694
|
|
Construction loans of $12.8 million and $9.3 million are included within residential real estate loans at September 30, 2012 and December 31, 2011, respectively. Construction loans of $17.1 million and $20.2 million are included within commercial real estate loans at September 30, 2012 and December 31, 2011, respectively. The Company’s commercial and residential real estate construction loans are primarily secured by real estate within the Company’s principal markets. These loans were originated under the Company’s loan policy, which is focused on the risk characteristics of the loan portfolio, including construction loans. Adequate consideration has been given to these loans in establishing the Company’s allowance for loan losses.
The composition of loans acquired in the VSB acquisition outstanding at September 30, 2012 is as follows:
|
|
|
|
|
|
September 30, 2012
|
|
Residential real estate
|
|
$
|
22,789
|
|
Home equity – junior liens
|
|
|
6,137
|
|
Commercial and industrial
|
|
|
2,810
|
|
Commercial real estate
|
|
|
34,435
|
|
Consumer
|
|
|
2,934
|
|
Gross loans
|
|
$
|
69,105
|
|
The outstanding loan balances acquired in the VSB acquisition in the above table include $6.5 million of credit-impaired loans, with a contractual principal balance of $10.8 million.
Activity for the accretable yield for the first nine months of 2012 is as follows:
Accretable yield at the beginning of the period
|
|
$
|
-
|
|
Additions
|
|
|
954
|
|
Accretion
|
|
|
(112
|
)
|
Net reclassifications to accretable from non-accretable
|
|
|
-
|
|
Maturities, foreclosures and charge-offs
|
|
|
-
|
|
Accretable yield at the end of period
|
|
$
|
842
|
|
Note F –Allowance For Loan Losses
Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. Management assesses the risk in each loan type based on historical trends, the general economic environment of its local markets, individual loan performance and other relevant factors.
Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these types of loan types is often based more upon specific credit reviews, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for economic conditions and other inherent risk factors.
A loan acquired and accounted for under ASC Topic 310-30 is reported as an accruing loan and a performing asset.
The following summarizes the activity in the allowance for loan loss, by portfolio segment, for the nine months ended September 30, 2012 and 2011. The following also presents the balance in the allowance for loan loss disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans, by portfolio segment, as of September 30, 2012 and December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Commercial and industrial
|
|
|
Commercial real estate
|
|
|
Residential real estate
|
|
|
Home equity
|
|
|
Consumer
|
|
|
DDA overdrafts
|
|
|
Total
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
590
|
|
|
$
|
11,666
|
|
|
$
|
3,591
|
|
|
$
|
2,773
|
|
|
$
|
88
|
|
|
$
|
701
|
|
|
$
|
19,409
|
|
Charge-offs
|
|
|
126
|
|
|
|
2,860
|
|
|
|
746
|
|
|
|
989
|
|
|
|
148
|
|
|
|
1,128
|
|
|
|
5,997
|
|
Recoveries
|
|
|
12
|
|
|
|
100
|
|
|
|
15
|
|
|
|
12
|
|
|
|
90
|
|
|
|
745
|
|
|
|
974
|
|
Provision
|
|
|
45
|
|
|
|
1,684
|
|
|
|
955
|
|
|
|
1,250
|
|
|
|
75
|
|
|
|
591
|
|
|
|
4,600
|
|
Ending balance
|
|
$
|
521
|
|
|
$
|
10,590
|
|
|
$
|
3,815
|
|
|
$
|
3,046
|
|
|
$
|
105
|
|
|
$
|
909
|
|
|
$
|
18,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,864
|
|
|
$
|
8,488
|
|
|
$
|
4,149
|
|
|
$
|
2,640
|
|
|
$
|
95
|
|
|
$
|
988
|
|
|
$
|
18,224
|
|
Charge-offs
|
|
|
275
|
|
|
|
341
|
|
|
|
1,191
|
|
|
|
614
|
|
|
|
133
|
|
|
|
1,318
|
|
|
|
3,872
|
|
Recoveries
|
|
|
8
|
|
|
|
1,982
|
|
|
|
19
|
|
|
|
6
|
|
|
|
107
|
|
|
|
1,002
|
|
|
|
3,124
|
|
Provision
|
|
|
(1,032
|
)
|
|
|
1,942
|
|
|
|
744
|
|
|
|
538
|
|
|
|
23
|
|
|
|
157
|
|
|
|
2,372
|
|
Ending balance
|
|
$
|
565
|
|
|
$
|
12,071
|
|
|
$
|
3,721
|
|
|
$
|
2,570
|
|
|
$
|
92
|
|
|
$
|
829
|
|
|
$
|
19,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Collectively
|
|
|
521
|
|
|
|
10,590
|
|
|
|
3,815
|
|
|
|
3,046
|
|
|
|
105
|
|
|
|
909
|
|
|
|
18,986
|
|
Acquired with deteriorated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credit quality
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
521
|
|
|
$
|
10,590
|
|
|
$
|
3,815
|
|
|
$
|
3,046
|
|
|
$
|
105
|
|
|
$
|
909
|
|
|
$
|
18,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
-
|
|
|
$
|
10,002
|
|
|
$
|
471
|
|
|
$
|
297
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,770
|
|
Collectively
|
|
|
105,027
|
|
|
|
771,716
|
|
|
|
1,007,710
|
|
|
|
142,674
|
|
|
|
38,177
|
|
|
|
2,670
|
|
|
|
2,067,974
|
|
Acquired with deteriorated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credit quality
|
|
|
-
|
|
|
|
6,169
|
|
|
|
124
|
|
|
|
87
|
|
|
|
108
|
|
|
|
-
|
|
|
|
6,488
|
|
Total
|
|
$
|
105,027
|
|
|
$
|
787,887
|
|
|
$
|
1,008,305
|
|
|
$
|
143,058
|
|
|
$
|
38,285
|
|
|
$
|
2,670
|
|
|
$
|
2,085,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
-
|
|
|
$
|
2,666
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,666
|
|
Collectively
|
|
|
590
|
|
|
|
9,000
|
|
|
|
3,591
|
|
|
|
2,773
|
|
|
|
88
|
|
|
|
701
|
|
|
|
16,743
|
|
Total
|
|
$
|
590
|
|
|
$
|
11,666
|
|
|
$
|
3,591
|
|
|
$
|
2,773
|
|
|
$
|
88
|
|
|
$
|
701
|
|
|
$
|
19,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluated for impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
81
|
|
|
$
|
15,311
|
|
|
$
|
476
|
|
|
$
|
298
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,166
|
|
Collectively
|
|
|
130,818
|
|
|
|
716,835
|
|
|
|
929,312
|
|
|
|
141,499
|
|
|
|
35,845
|
|
|
|
2,628
|
|
|
|
1,956,937
|
|
Total
|
|
$
|
130,899
|
|
|
$
|
732,146
|
|
|
$
|
929,788
|
|
|
$
|
141,797
|
|
|
$
|
35,845
|
|
|
$
|
2,628
|
|
|
$
|
1,973,103
|
|
Credit Quality Indicators
All commercial loans within the portfolio are subject to internal risk grading. All non-commercial loans are evaluated based on payment history. The Company’s internal risk ratings for commercial loans are: Exceptional, Good, Acceptable, Pass/Watch, Special Mention, Substandard and Doubtful. Each internal risk rating is defined in the loan policy using the following criteria: balance sheet yields, ratios and leverage, cash flow spread and coverage, prior history, capability of management, market position/industry, potential impact of changing economic, legal, regulatory or environmental conditions, purpose structure, collateral support, and guarantor support. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process. Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.
The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity, overall collateral position along with other economic trends, and historical payment performance. The risk grades for each credit are updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review/credit administration departments, or the loan becomes delinquent or impaired. The risk grades are updated a minimum of annually for loans rated exceptional, good, acceptable, or pass/watch. Loans rated special mention, substandard or doubtful are reviewed at least quarterly. The Company uses the following definitions for its risk ratings:
Risk Rating
|
Description
|
|
|
Exceptional
|
Loans classified as exceptional are secured with liquid collateral conforming to the internal loan policy. Loans rated within this category pose minimal risk of loss to the bank and the risk grade within this pool of loans is generally updated on an annual basis.
|
Good
|
Loans classified as good have similar characteristics that include a strong balance sheet, satisfactory debt service coverage ratios, strong management and/or guarantors, and little exposure to economic cycles. Loans within this category are generally reviewed on an annual basis. Loans in this category generally have a low chance of loss to the bank.
|
Acceptable
|
Loans classified as acceptable have acceptable liquidity levels, adequate debt service coverage ratios, experienced management, and have average exposure to economic cycles. Loans within this category generally have a low risk of loss to the bank.
|
Pass/watch
|
Loans classified as pass/watch have erratic levels of leverage and/or liquidity, cash flow is volatile and the borrower is subject to moderate economic risk. A borrower in this category poses a low to moderate risk of loss to the bank.
|
Special mention
|
Loans classified as special mention have a potential weakness(es) that deserves management’s close attention. The potential weakness could result in deterioration of the loan repayment or the bank’s credit position at some future date. A loan rated in this category poses a moderate loss risk to the bank.
|
Substandard
|
Loans classified as substandard reflect a customer with a well defined weakness that jeopardizes the liquidation of the debt. Loans in this category have the possibility that the bank will sustain some loss if the deficiencies are not corrected and the bank’s collateral value is weakened by the financial deterioration of the borrower.
|
Doubtful
|
Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that make collection of the full contract amount highly improbable. Loans rated in this category are most likely to cause the bank to have a loss due to a collateral shortfall or a negative capital position.
|
The following presents loans by the Company’s credit quality indicators, by class, as of September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Commercial and industrial
|
|
|
Commercial real estate
|
|
|
Residential real estate
|
|
|
Home equity
|
|
|
Consumer
|
|
|
DDA overdrafts
|
|
|
Total
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exceptional
|
|
$
|
3,508
|
|
|
$
|
1,813
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
5,321
|
|
Good
|
|
|
6,466
|
|
|
|
98,231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
104,697
|
|
Acceptable
|
|
|
68,504
|
|
|
|
456,116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
524,620
|
|
Pass/watch
|
|
|
23,320
|
|
|
|
177,974
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
201,294
|
|
Special mention
|
|
|
1,066
|
|
|
|
15,831
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,897
|
|
Substandard
|
|
|
2,163
|
|
|
|
37,922
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,085
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
105,027
|
|
|
$
|
787,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
892,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
|
|
|
|
|
|
|
|
1,005,522
|
|
|
|
141,950
|
|
|
|
38,274
|
|
|
|
2,666
|
|
|
$
|
1,188,412
|
|
Non-performing
|
|
|
|
|
|
|
|
|
|
|
2,783
|
|
|
|
1,108
|
|
|
|
11
|
|
|
|
4
|
|
|
|
3,906
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
1,008,305
|
|
|
$
|
143,058
|
|
|
$
|
38,285
|
|
|
$
|
2,670
|
|
|
$
|
2,085,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exceptional
|
|
$
|
4,220
|
|
|
$
|
42
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
4,262
|
|
Good
|
|
|
6,728
|
|
|
|
107,718
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
114,446
|
|
Acceptable
|
|
|
93,077
|
|
|
|
411,721
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
504,798
|
|
Pass/watch
|
|
|
25,246
|
|
|
|
161,598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
186,844
|
|
Special mention
|
|
|
470
|
|
|
|
16,802
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,272
|
|
Substandard
|
|
|
1,037
|
|
|
|
34,265
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,302
|
|
Doubtful
|
|
|
121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121
|
|
Total
|
|
$
|
130,899
|
|
|
$
|
732,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
863,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
|
|
|
|
|
|
|
|
$
|
928,789
|
|
|
$
|
139,996
|
|
|
$
|
35,845
|
|
|
$
|
2,616
|
|
|
$
|
1,107,246
|
|
Non-performing
|
|
|
|
|
|
|
|
|
|
|
999
|
|
|
|
1,801
|
|
|
|
-
|
|
|
|
12
|
|
|
|
2,812
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
929,788
|
|
|
$
|
141,797
|
|
|
$
|
35,845
|
|
|
$
|
2,628
|
|
|
$
|
1,973,103
|
|
Aging Analysis of Accruing and Non-Accruing Loans
Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods that generally result in level rates of return. Loan origination fees, and certain direct costs, are deferred and amortized as an adjustment to the yield over the term of the loan. The accrual of interest generally is discontinued when a loan becomes 90 days past due as to principal or interest for all loan types. However, any loan may be placed on non-accrual if the Company receives information that indicates a borrower is unable to meet the contractual terms of their respective loan agreement. Other indicators considered for placing a loan on non-accrual status include the borrower’s involvement in bankruptcies, foreclosures, repossessions, litigation and any other situation resulting in doubt as to whether full collection of contractual principal and interest is attainable. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in the process of collection.
Generally for all loan classes, interest income during the period the loan is non-performing is recorded on a cash basis after recovery of principal is reasonably assured. Cash payments received on nonperforming loans are typically applied directly against the outstanding principal balance until the loan is fully repaid. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Generally, all loan types are considered past due when the contractual terms of a loan are not met and the borrower is 30 days or more past due on a payment. Furthermore, residential and home equity loans are generally subject to charge-off when the loan becomes 120 days past due, depending on the estimated fair value of the collateral less cost to dispose, versus the outstanding loan balance. Unsecured commercial loans are generally charged off when the loan becomes 120 days past due. Secured commercial loans are generally charged off when the loan becomes 120 days past due and open-end consumer loans are generally charged off when the loan becomes 180 days past due.
The following presents an aging analysis of the Company’s accruing and non-accruing loans, by class, as of September 30, 2012 and December 31, 2011:
(In thousands)
|
|
Commercial and industrial
|
|
|
Commercial real estate
|
|
|
Residential real estate
|
|
|
Home equity
|
|
|
Consumer
|
|
|
DDA overdrafts
|
|
|
Total
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 – 59 days past due
|
|
$
|
25
|
|
|
$
|
1,168
|
|
|
$
|
4,332
|
|
|
$
|
2,473
|
|
|
$
|
110
|
|
|
$
|
309
|
|
|
$
|
8,417
|
|
60 – 89 days past due
|
|
|
-
|
|
|
|
102
|
|
|
|
231
|
|
|
|
135
|
|
|
|
15
|
|
|
|
6
|
|
|
|
489
|
|
Over 90 days past due
|
|
|
-
|
|
|
|
1
|
|
|
|
346
|
|
|
|
35
|
|
|
|
11
|
|
|
|
4
|
|
|
|
397
|
|
Non-accrual
|
|
|
1,426
|
|
|
|
17,650
|
|
|
|
2,437
|
|
|
|
1,073
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,586
|
|
|
|
|
1,451
|
|
|
|
18,921
|
|
|
|
7,346
|
|
|
|
3,716
|
|
|
|
136
|
|
|
|
319
|
|
|
|
31,889
|
|
Current
|
|
|
103,576
|
|
|
|
768,966
|
|
|
|
1,000,959
|
|
|
|
139,342
|
|
|
|
38,149
|
|
|
|
2,351
|
|
|
|
2,053,343
|
|
Total
|
|
$
|
105,027
|
|
|
$
|
787,887
|
|
|
$
|
1,008,305
|
|
|
$
|
143,058
|
|
|
$
|
38,285
|
|
|
$
|
2,670
|
|
|
$
|
2,085,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 – 59 days past due
|
|
$
|
1,243
|
|
|
$
|
576
|
|
|
$
|
4,912
|
|
|
$
|
1,906
|
|
|
$
|
133
|
|
|
$
|
883
|
|
|
$
|
9,653
|
|
60 – 89 days past due
|
|
|
-
|
|
|
|
2,839
|
|
|
|
408
|
|
|
|
228
|
|
|
|
5
|
|
|
|
14
|
|
|
|
3,494
|
|
Over 90 days past due
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
|
|
112
|
|
|
|
-
|
|
|
|
12
|
|
|
|
166
|
|
Non-accrual
|
|
|
375
|
|
|
|
18,930
|
|
|
|
957
|
|
|
|
1,689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,951
|
|
|
|
|
1,618
|
|
|
|
22,345
|
|
|
|
6,319
|
|
|
|
3,935
|
|
|
|
138
|
|
|
|
909
|
|
|
|
35,264
|
|
Current
|
|
|
129,281
|
|
|
|
709,801
|
|
|
|
923,469
|
|
|
|
137,862
|
|
|
|
35,707
|
|
|
|
1,719
|
|
|
|
1,937,839
|
|
Total
|
|
$
|
130,899
|
|
|
$
|
732,146
|
|
|
$
|
929,788
|
|
|
$
|
141,797
|
|
|
$
|
35,845
|
|
|
$
|
2,628
|
|
|
$
|
1,973,103
|
|
The following presents the Company’s impaired loans, by class, as of September 30, 2012 and December 31, 2011:
(In thousands)
|
|
Commercial and industrial
|
|
|
Commercial real estate
|
|
|
Residential real estate
|
|
|
Home equity
|
|
|
Consumer
|
|
|
DDA overdrafts
|
|
|
Total
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
$
|
1,113
|
|
|
$
|
11,843
|
|
|
$
|
219
|
|
|
$
|
29
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,204
|
|
Unpaid principal balance
|
|
|
1,369
|
|
|
|
17,594
|
|
|
|
219
|
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
$
|
313
|
|
|
$
|
5,808
|
|
|
$
|
2,564
|
|
|
$
|
1,079
|
|
|
$
|
11
|
|
|
$
|
4
|
|
|
$
|
9,779
|
|
Unpaid principal balance
|
|
|
313
|
|
|
|
5,808
|
|
|
|
2,564
|
|
|
|
1,079
|
|
|
|
11
|
|
|
|
4
|
|
|
|
9,779
|
|
Related allowance
|
|
|
41
|
|
|
|
758
|
|
|
|
314
|
|
|
|
86
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
$
|
78
|
|
|
$
|
2,840
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,918
|
|
Unpaid principal balance
|
|
|
78
|
|
|
|
6,036
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
$
|
297
|
|
|
$
|
16,090
|
|
|
$
|
1,000
|
|
|
$
|
1,801
|
|
|
$
|
-
|
|
|
$
|
12
|
|
|
$
|
19,200
|
|
Unpaid principal balance
|
|
|
297
|
|
|
|
16,090
|
|
|
|
1,000
|
|
|
|
1,801
|
|
|
|
-
|
|
|
|
12
|
|
|
|
19,200
|
|
Related allowance
|
|
|
53
|
|
|
|
3,044
|
|
|
|
139
|
|
|
|
240
|
|
|
|
-
|
|
|
|
12
|
|
|
|
3,488
|
|
The following table presents information related to the average recorded investment and interest income recognized on the Company’s impaired loans, by class, for the nine months ended September 30, 2012 and 2011:
(In thousands)
|
|
Commercial and industrial
|
|
|
Commercial real estate
|
|
|
Residential real estate
|
|
|
Home equity
|
|
|
Consumer
|
|
|
DDA overdrafts
|
|
|
Total
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average recorded investment
|
|
$
|
81
|
|
|
$
|
7,472
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,553
|
|
Interest income recognized
|
|
|
4
|
|
|
|
232
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average recorded investment
|
|
$
|
203
|
|
|
$
|
11,197
|
|
|
$
|
1,254
|
|
|
$
|
1,354
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,008
|
|
Interest income recognized
|
|
|
7
|
|
|
|
378
|
|
|
|
36
|
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average recorded investment
|
|
$
|
-
|
|
|
$
|
12,350
|
|
|
$
|
320
|
|
|
$
|
698
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,368
|
|
Interest income recognized
|
|
|
-
|
|
|
|
206
|
|
|
|
15
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average recorded investment
|
|
$
|
248
|
|
|
$
|
14,192
|
|
|
$
|
996
|
|
|
$
|
526
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,962
|
|
Interest income recognized
|
|
|
-
|
|
|
|
157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157
|
|
Approximately $0.7 million and $0.
6
million of interest income would have been recognized during the nine months ended September 30, 2012 and 2011, if such loans had been current in accordance with their original terms. There were no commitments to provide additional funds on non-accrual, impaired or other potential problem loans at September 30, 2012.
Loan Modifications
The Company’s policy on loan modifications typically does not allow for modifications that would be considered a concession from the Company. However, when there is a modification, the Company evaluates each modification to determine if the modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASU 2011-02, whereby a modification of a loan would be considered a TDR when both of the following conditions are met: (1) a borrower is experiencing financial difficulty and (2) the modification constitutes a concession. When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the debtor is currently in payment default on any of its debt or whether it is probable that the debtor would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the debtor has declared or is in the process of declaring bankruptcy, the debtor’s ability to continue as a going concern, or the debtor’s projected cash flow to service its debt (including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification.
As of September 30, 2012, the Company reclassified $21.1 million of loans as TDRs in accordance with recent regulatory guidance. The regulatory guidance requires loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged by the bankruptcy court and the borrower has not reaffirmed the debt. The filing of bankruptcy is deemed to be evidence that the borrower is in financial difficulty and the discharge of the debt by the bankruptcy court is deemed to be a concession granted to the borrower. As of September 30, 2012, less than 5% of these loans were non-accruing loans. There was no material difference between the pre-modification and post-modification balances. The impact on the allowance for loan losses of this reclassification was insignificant.
The following tables set forth the Company’s TDRs at September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
(In thousands)
|
|
Accruing
|
|
|
Non-Accruing
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
227
|
|
|
|
-
|
|
|
|
227
|
|
Residential real estate
|
|
|
14,098
|
|
|
|
185
|
|
|
|
14,283
|
|
Home equity
|
|
|
6,400
|
|
|
|
422
|
|
|
|
6,822
|
|
Consumer
|
|
|
144
|
|
|
|
-
|
|
|
|
144
|
|
|
|
$
|
20,869
|
|
|
$
|
607
|
|
|
$
|
21,476
|
|
During the three month and nine months ended September 30, 2012, no other loans were identified as TDRs.
There were no TDRs that defaulted during the three or nine months ended September 30, 2012.
Note G – Previously Securitized Loans
Between 1997 and 1999, the Company completed six securitization transactions involving approximately $760 million in 125% of fixed rate, junior-lien underlying mortgages. The Company retained a financial interest in each of the securitizations until 2004. Principal amounts owed to investors were evidenced by securities (“Notes”). During 2003 and 2004, the Company exercised its early redemption options on each of those securitizations. Once the Notes were redeemed, the Company became the beneficial owner of the mortgage loans and recorded the loans as assets of the Company within the loan portfolio.
As the Company redeemed the outstanding Notes, no gain or loss was recognized in the Company’s financial statements and the remaining mortgage loans were recorded in the Company’s loan portfolio as “previously securitized loans,” at the lower of carrying value or fair value. Because the carrying value of the mortgage loans incorporated assumptions for expected prepayment and default rates, the carrying value of the loans was generally less than the actual outstanding contractual balance of the loans. As of September 30, 2012, there is no carrying value remaining on these loans, while the actual contractual balances of these loans was $8.4 million. During the three and nine months ended September 30, 2012 and 2011, the Company recognized $0.8 million and $2.4 million and $0.8 million and $2.5 million, respectively, of interest income from its previously securitized loans.
Note H – Long-Term Debt
The components of long-term debt are summarized below:
( In thousands)
|
September 30, 2012
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Junior subordinated debentures owed to City Holding Capital Trust III, due 2038, interest at a rate of 3.89% and 3.85%, respectively
|
|
$
|
16,495
|
|
|
$
|
16,495
|
|
The Company formed a statutory business trust, City Holding Capital Trust III (“Capital Trust III”), under the laws of Delaware. Capital Trust III was created for the exclusive purpose of (i) issuing trust-preferred capital securities (“Capital Securities”), which represent preferred undivided beneficial interests in the assets of the trust, (ii) using the proceeds from the sale of the Capital Securities to acquire junior subordinated debentures (“Debentures”) issued by the Company, and (iii) engaging in only those activities necessary or incidental thereto. The trust is considered a variable interest entity for which the Company is not the primary beneficiary. Accordingly, the accounts of the trusts are not included in the Company’s consolidated financial statements.
Distributions on the Debentures are cumulative and will be payable quarterly at an interest rate of 3.50% over the three month LIBOR rate, reset quarterly. Interest payments are due in March, June, September and December. The Debentures are redeemable prior to maturity at the option of the Company (i) in whole or at any time or in part from time-to-time, at declining redemption prices ranging from 103.525% to 100.000% on June 15, 2013, and thereafter, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of certain pre-defined events.
Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities are guaranteed by the Company. The Company also entered into an agreement as to expenses and liabilities with the trust pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses or liabilities of the trust other than those arising under the trust preferred securities. The obligations of the Company under the junior subordinated debentures, the related indentures, the trust agreement establishing the trust, the guarantees and the agreements as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by the Company of the trust’s obligations under the trust preferred securities. The Capital Securities issued by the statutory business trusts qualify as Tier 1 capital for the Company under current Federal Reserve Board guidelines.
Note I – Derivative Instruments
As of September 30, 2012 and December 31, 2011, the Company has derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies.
The following table summarizes the fair value of these derivative instruments at September 30, 2012 and December 31, 2011:
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
Other Assets
|
|
$
|
14,616
|
|
|
$
|
11,541
|
|
Other Liabilities
|
|
|
14,616
|
|
|
|
11,541
|
|
The following table summarizes the change in fair value of these derivative instruments for the three and nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income - derivative asset
|
|
$
|
543
|
|
|
$
|
7,095
|
|
|
$
|
3,075
|
|
|
$
|
7,943
|
|
Other income - derivative liability
|
|
|
(543
|
)
|
|
|
(7,095
|
)
|
|
|
(3,075
|
)
|
|
|
(7,943
|
)
|
Note J – Employee Benefit Plans
During 2003, shareholders approved the City Holding Company 2003 Incentive Plan (“the Plan”). Employees, directors and individuals who provide service to the Company (collectively, “Plan Participants”) are eligible to participate in the Plan. Pursuant to terms of the Plan, the Compensation Committee of the Board of Directors, or its delegate, may, from time-to-time, grant stock options, stock appreciation rights (“SARs”), or stock awards to Plan Participants. A maximum of 1,000,000 shares of the Company’s common stock may be issued upon the exercise of stock options, SARs and stock awards, but no more than 350,000 shares of common stock may be issued as stock awards. These limitations may be adjusted in the event of a change in the number of outstanding shares of common stock by reason of a stock dividend, stock split or other similar event. Specific terms of options and SARs awarded, including vesting periods, exercise prices (stock price at date of grant) and expiration dates are determined at the date of grant and are evidenced by agreements between the Company and the awardee. The exercise price of the option grants equals the market price of the Company’s stock on the date of grant. All incentive stock options and SARs will be exercisable up to ten years from the date granted and all options and SARs are exercisable for the period specified in the individual agreement.
Each award from the Plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Compensation Committee, or its delegate, determines. The option price for each grant is equal to the fair market value of a share of the Company’s common stock on the date of the grant. Options granted expire at such time as the Compensation Committee, or its delegate, determines at the date of the grant and in no event does the exercise period exceed a maximum of ten years. Upon a change-in-control of the Company, as defined in the Plan, all outstanding options and awards shall immediately vest.
Stock Options
A summary of the Company’s stock option activity and related information is presented below for the nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Options
|
|
|
Weighted-Average Exercise Price
|
|
|
Options
|
|
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1
|
|
|
293,817
|
|
|
$
|
33.95
|
|
|
|
287,393
|
|
|
$
|
33.64
|
|
Granted
|
|
|
16,876
|
|
|
|
35.39
|
|
|
|
16,000
|
|
|
|
35.09
|
|
Exercised
|
|
|
(18,899
|
)
|
|
|
28.78
|
|
|
|
(6,576
|
)
|
|
|
25.54
|
|
Forfeited
|
|
|
(1,500
|
)
|
|
|
34.73
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30
|
|
|
290,294
|
|
|
$
|
34.37
|
|
|
|
296,817
|
|
|
$
|
33.90
|
|
Additional information regarding stock options outstanding and exercisable at September 30, 2012, is provided inthe following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ranges of Exercise Prices
|
|
|
No. of Options Outstanding
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Remaining Contractual Life (Months)
|
|
|
Aggregate Intrinsic Value (in thousands)
|
|
|
No. of Options Currently Exercisable
|
|
|
Weighted-Average Exercise Price of Options Currently Exercisable
|
|
|
Weighted-Average Remaining Contractual Life (Months)
|
|
|
Aggregate Intrinsic Value of Options Currently Exercisable (in thousands)
|
|
$
|
26.62 - $33.90
|
|
|
|
165,918
|
|
|
$
|
31.87
|
|
|
|
43
|
|
|
$
|
659
|
|
|
|
114,584
|
|
|
$
|
32.65
|
|
|
|
26
|
|
|
$
|
366
|
|
$
|
35.09 - $40.88
|
|
|
|
124,376
|
|
|
|
37.70
|
|
|
|
65
|
|
|
|
20
|
|
|
|
69,000
|
|
|
|
38.11
|
|
|
|
46
|
|
|
|
-
|
|
|
|
|
|
|
290,294
|
|
|
|
|
|
|
|
|
|
|
$
|
679
|
|
|
|
183,584
|
|
|
|
|
|
|
|
|
|
|
$
|
366
|
|
Proceeds from stock option exercises were $0.5 million and $0.3 million during the nine months ended September 30, 2012 and 2011, respectively. Shares issued in connection with stock option exercises are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. During the nine months ended September 30, 2012 and 2011 all shares issued in connection with stock option exercises and restricted stock awards were issued from available treasury stock.
The total intrinsic value of stock options exercised was $0.1 million and less than $0.1 million during the nine months ended September 30, 2012 and 2011, respectively.
Stock-based compensation expense was approximately $0.2 million for both the nine months ended September 30, 2012 and 2011. Unrecognized stock-based compensation expense related to stock options approximated $0.5 million at September 30, 2012. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 1.6 years.
The fair value of the options is estimated at the date of grant using a Black-Scholes option-pricing model. The following weighted average assumptions were used to estimate the fair value of options granted during the nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.51
|
%
|
|
|
3.07
|
%
|
Expected dividend yield
|
|
|
3.90
|
%
|
|
|
3.88
|
%
|
Volatility factor
|
|
|
48.40
|
%
|
|
|
41.12
|
%
|
Expected life of option
|
|
5.0 years
|
|
|
8.0 years
|
|
Restricted Shares
The Company records compensation expense with respect to restricted shares in an amount equal to the fair value of the common stock covered by each award on the date of grant. The restricted shares awarded become fully vested after various periods of continued employment from the respective dates of grant. The Company is entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Compensation is being charged to expense over the respective vesting periods.
Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases and any compensation cost previously recognized is reversed in the period of forfeiture. Recipients of restricted shares do not pay any cash consideration to the Company for the shares, have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. Stock-based compensation expense related to restricted shares was approximately $0.5 million and $0.4 million for the nine months ended September 30, 2012 and 2011, respectively. Unrecognized stock-based compensation expense related to non-vested restricted shares was $2.4 million at September 30, 2012. At September 30, 2012, this unrecognized expense is expected to be recognized over 4.6 years based on the weighted average-life of the restricted shares.
A summary of the Company’s restricted shares activity and related information is presented below for the nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Restricted Awards
|
|
|
Average Market Price at Grant
|
|
|
Restricted Awards
|
|
|
Average Market Price at Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1
|
|
|
108,209
|
|
|
|
|
|
|
96,060
|
|
|
|
|
Granted
|
|
|
23,336
|
|
|
$
|
34.94
|
|
|
|
14,050
|
|
|
$
|
35.07
|
|
Forfeited/Vested
|
|
|
(13,234
|
)
|
|
|
|
|
|
|
(1,651
|
)
|
|
|
|
|
Outstanding at September 30
|
|
|
118,311
|
|
|
|
|
|
|
|
108,459
|
|
|
|
|
|
Benefit Plans
The Company provides retirement benefits to its employees through the City Holding Company 401(k) Plan and Trust (“the 401(k) Plan”), which is intended to be compliant with Employee Retirement Income Security Act (ERISA) section 404(c). The Company’s total expense associated with the retirement benefit plan approximated $0.5 million for both the nine months ended September 30, 2012 and 2011.
The Company also maintains a defined benefit pension plan (“the Defined Benefit Plan”). The Defined Benefit Plan was frozen in 1999 subsequent to the Company’s acquisition of the plan sponsor. The Defined Benefit Plan maintains a December 31 year-end for purposes of computing its benefit obligations. The Company made contributions of approximately $0.6 million and $0.3 million to the Defined Benefit Plan during the nine months ended September 30, 2012 and 2011, respectively.
The following table presents the components of the net periodic pension cost of the Defined Benefit Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30
|
|
|
September 30
|
|
(In thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
158
|
|
|
$
|
162
|
|
|
$
|
476
|
|
|
$
|
487
|
|
Expected return on plan assets
|
|
|
(203
|
)
|
|
|
(203
|
)
|
|
|
(607
|
)
|
|
|
(609
|
)
|
Net amortization and deferral
|
|
|
174
|
|
|
|
137
|
|
|
|
522
|
|
|
|
410
|
|
Net Periodic Pension Cost
|
|
$
|
129
|
|
|
$
|
96
|
|
|
$
|
391
|
|
|
$
|
288
|
|
Note K – Commitments and Contingencies
The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The Company has entered into agreements with its customers to extend credit or provide a conditional commitment to provide payment on drafts presented in accordance with the terms of the underlying credit documents. The Company also provides overdraft protection to certain demand deposit customers that represent an unfunded commitment. Overdraft protection commitments, which are included with other commitments below, are uncollateralized and are paid at the Company’s discretion. Conditional commitments generally include standby and commercial letters of credit. Standby letters of credit represent an obligation of the Company to a designated third party contingent upon the failure of a customer of the Company to perform under the terms of the underlying contract between the customer and the third party. Commercial letters of credit are issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, drafts will be drawn when the underlying transaction is consummated, as intended, between the customer and a third party. The funded portion of these financial instruments is reflected in the Company’s balance sheet, while the unfunded portion of these commitments is not reflected in the balance sheet. The table below presents a summary of the contractual obligations of the Company resulting from significant commitments:
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Commitments to extend credit:
|
|
|
|
|
|
|
Home equity lines
|
|
$
|
154,874
|
|
|
$
|
143,856
|
|
Commercial real estate
|
|
|
38,060
|
|
|
|
29,995
|
|
Other commitments
|
|
|
176,732
|
|
|
|
185,602
|
|
Standby letters of credit
|
|
|
16,703
|
|
|
|
20,110
|
|
Commercial letters of credit
|
|
|
525
|
|
|
|
412
|
|
Loan commitments and standby and commercial letters of credit have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company’s standard credit policies. Collateral is obtained based on management’s credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments.
City National Bank is currently in a civil action pending in the Circuit Court of Kanawha County, West Virginia, in a case styled
Thomas Casto v. City National Bank, N.A
(“Casto”)
.
This putative class action asserts that the plaintiffs, and others similarly situated, were wrongfully assessed overdraft fees in connection with City National Bank accounts. The plaintiffs alleged that City National Bank’s policy of posting debit and check transactions from high to low order was in violation of the West Virginia Consumer Credit and Protection Act, constituted a breach of the implied covenant of good faith and fair dealing and created an unjust enrichment to City National Bank. In February 2012, City National Bank and the plaintiffs’ attorneys in the Casto case submitted an Amended Preliminary Motion to Approve Settlement to the Kanawha County Circuit Court. This motion asked the Court to approve a settlement in which City National Bank will pay the eligible members of the class a total of $3.616 million and will forgive and release $3.5 million in account balances of accounts of former customers who are no longer customers of the bank, but left overdrawn accounts. The amounts were increased from the initial Preliminary Motion for Approval due to a systems error in harvesting information regarding City National Bank’s customers. The Court has approved the settlement and the Company anticipates that the case will be closed by the end of 2012. At December 31, 2011, the Company had accrued for this probable loss. During the first quarter of 2012, the Company deposited the funds into a qualified settlement fund.
In addition, the Company is engaged in various legal actions that it deems to be in the ordinary course of business. As these legal actions are resolved, the Company could realize positive and/or negative impact to its financial performance in the period in which these legal actions are ultimately decided. There can be no assurance that current actions will have immaterial results, either positive or negative, or that no material actions may be presented in the future.
Note L – Total Comprehensive Income
The following table sets forth the computation of total comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,607
|
|
|
$
|
11,577
|
|
|
$
|
28,049
|
|
|
$
|
31,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized security gains/(losses) arising during the period
|
|
|
3,847
|
|
|
|
(1,122
|
)
|
|
|
6,637
|
|
|
|
3,550
|
|
Reclassification adjustment for gains included in income
|
|
|
(458
|
)
|
|
|
(272
|
)
|
|
|
(954
|
)
|
|
|
(3,401
|
)
|
|
|
|
3,389
|
|
|
|
(1,394
|
)
|
|
|
5,683
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on interest rate floors
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(477
|
)
|
Other comprehensive income (loss) before income taxes
|
|
|
3,389
|
|
|
|
(1,394
|
)
|
|
|
5,683
|
|
|
|
(328
|
)
|
Tax effect
|
|
|
(1,277
|
)
|
|
|
531
|
|
|
|
(2,141
|
)
|
|
|
124
|
|
Other comprehensive income (loss)
|
|
|
2,112
|
|
|
|
(863
|
)
|
|
|
3,542
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
12,719
|
|
|
$
|
10,714
|
|
|
$
|
31,591
|
|
|
$
|
30,820
|
|
Note M – Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
(In thousands, except per share data)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings allocated to common stock
|
|
$
|
5,150
|
|
|
$
|
5,015
|
|
|
$
|
15,451
|
|
|
$
|
15,045
|
|
Undistributed earnings allocated to common stock
|
|
|
5,373
|
|
|
|
6,479
|
|
|
|
12,375
|
|
|
|
15,756
|
|
Net earnings allocated to common shareholders
|
|
$
|
10,523
|
|
|
$
|
11,494
|
|
|
$
|
27,826
|
|
|
$
|
30,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
|
14,751
|
|
|
|
15,003
|
|
|
|
14,700
|
|
|
|
15,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
83
|
|
|
|
68
|
|
|
|
83
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for diluted earnings per share
|
|
|
14,834
|
|
|
|
15,071
|
|
|
|
14,783
|
|
|
|
15,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.71
|
|
|
$
|
0.77
|
|
|
$
|
1.89
|
|
|
$
|
2.03
|
|
Diluted earnings per share
|
|
$
|
0.71
|
|
|
$
|
0.76
|
|
|
$
|
1.88
|
|
|
$
|
2.02
|
|
Options to purchase approximately 124,000 and 255,000 shares of common stock at an exercise price between $35.09 and $40.88 and between $30.38 and $40.88 per share were outstanding during the third quarter of 2012 and the third quarter of 2011, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares and therefore, the effect would have been anti-dilutive.
Note N –Fair Value Measurements
Fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1
: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2
: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3
: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company bases fair value of assets and liabilities on quoted market prices, prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. If such information is not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amount presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Financial Assets and Liabilities
The Company used the following methods and significant assumptions to estimate fair value for financial assets and liabilities measured on a recurring basis.
Securities Available for Sale
. Securities available for sale are reported at fair value utilizing Level 1, Level 2, and Level 3 inputs. The fair value of securities available for sale is determined by utilizing a market approach by obtaining quoted prices on nationally recognized securities exchanges (other than forced or distressed transactions) that occur in sufficient volume or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. If such measurements are unavailable, the security is classified as Level 3. Significant judgment is required to make this determination.
The Company utilizes a third party pricing service provider to value its Level 1 and Level 2 investment securities. Annually, the Company obtains an independent auditor’s report from its third party pricing service provider regarding its controls over investment securities. Although no control deficiencies were noted, the report did contain caveats and disclaimers regarding the pricing information, such as the Company should review fair values for reasonableness. On a quarterly basis, the Company selects a sample of its debt securities and reprices those securities with a third party that is independent of the primary pricing service provider to verify the reasonableness of the fair values.
The Company has determined that its pooled trust preferred securities should be priced using Level 3 inputs in accordance with ASC Topic 820 and guidance issued by the SEC. The Company has determined that there are few observable transactions and market quotations available for pooled trust preferred securities and they are not reliable for purposes of determining fair value at September 30, 2012. Due to these circumstances, the Company has elected to utilize an income valuation approach produced by a third party pricing source. This third party model utilizes deferral and default probabilities for the underlying issuers, estimated prepayment rates and assumes no future recoveries of any defaults or deferrals. The Company then compares the values provided by the third party model with other external sources. At such time as there are observable transactions or quoted prices that are associated with an orderly and active market for pooled trust preferred securities, the Company will incorporate such market values in its estimate of fair values for these securities.
Derivatives
.
Derivatives are reported at fair value utilizing Level 2 inputs. The Company utilizes a market approach by obtaining dealer quotations to value its customer interest rate swaps. The Company’s derivatives are included within its Other Assets and Other Liabilities in the accompanying consolidated balance sheets.
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis. Financial assets measured at fair value on a nonrecurring basis include impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data for real estate collateral or Level 3 inputs for non-real estate collateral. The following table presents assets and liabilities measured at fair value as of September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Gains (Losses)
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
4,415
|
|
|
$
|
-
|
|
|
$
|
4,415
|
|
|
$
|
-
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
50,133
|
|
|
|
-
|
|
|
|
50,133
|
|
|
|
-
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
|
294,328
|
|
|
|
-
|
|
|
|
294,328
|
|
|
|
-
|
|
|
|
|
Private label
|
|
|
3,626
|
|
|
|
-
|
|
|
|
3,626
|
|
|
|
-
|
|
|
|
|
Trust preferred securities
|
|
|
15,508
|
|
|
|
-
|
|
|
|
13,162
|
|
|
|
2,346
|
|
|
|
|
Corporate securities
|
|
|
15,963
|
|
|
|
-
|
|
|
|
15,963
|
|
|
|
-
|
|
|
|
|
Marketable equity securities
|
|
|
3,921
|
|
|
|
3,921
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Investment funds
|
|
|
1,792
|
|
|
|
1,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Derivative assets
|
|
|
14,616
|
|
|
|
-
|
|
|
|
14,616
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
14,616
|
|
|
|
-
|
|
|
|
14,616
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
22,983
|
|
|
$
|
-
|
|
|
$
|
21,542
|
|
|
$
|
1,441
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
6,041
|
|
|
$
|
-
|
|
|
$
|
6,041
|
|
|
$
|
-
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
56,802
|
|
|
|
-
|
|
|
|
56,802
|
|
|
|
-
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
|
227,613
|
|
|
|
-
|
|
|
|
227,613
|
|
|
|
-
|
|
|
|
|
|
Private label
|
|
|
5,156
|
|
|
|
-
|
|
|
|
5,156
|
|
|
|
-
|
|
|
|
|
|
Trust preferred securities
|
|
|
45,157
|
|
|
|
-
|
|
|
|
43,175
|
|
|
|
1,982
|
|
|
|
|
|
Corporate securities
|
|
|
14,398
|
|
|
|
-
|
|
|
|
14,398
|
|
|
|
-
|
|
|
|
|
|
Marketable equity securities
|
|
|
3,853
|
|
|
|
3,853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Investment funds
|
|
|
1,763
|
|
|
|
1,763
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Derivative assets
|
|
|
11,541
|
|
|
|
-
|
|
|
|
11,541
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
11,541
|
|
|
|
-
|
|
|
|
11,541
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
22,118
|
|
|
$
|
-
|
|
|
$
|
21,743
|
|
|
$
|
375
|
|
|
$
|
2,701
|
|
The table below presents a reconcilement of the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2012 and 2011:
|
|
|
|
|
|
|
|
|
Nine months Ended September 30,
|
|
(In thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,982
|
|
|
$
|
2,504
|
|
Impairment losses on investment securities
|
|
|
(576
|
)
|
|
|
(355
|
)
|
Included in other comprehensive income
|
|
|
940
|
|
|
|
158
|
|
Dispositions
|
|
|
-
|
|
|
|
(375
|
)
|
Transfers into Level 3
|
|
|
-
|
|
|
|
-
|
|
Ending Balance
|
|
$
|
2,346
|
|
|
$
|
1,932
|
|
The Company utilizes a third party model to compute the present value of expected cash flows which considers the structure and term of each of the five respective pooled trust preferred securities and the financial condition of the underlying issuers. Specifically, the third party model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. For issuing banks that have defaulted, management generally assumes no recovery. For issuing banks that have deferred its interest payments, management excludes the collateral balance associated with these banks and assumes no recoveries of such collateral balance in the future. The exclusion of such issuing banks in a current deferral position is based on such bank experiencing a certain level of financial difficulty that raises doubt about its ability to satisfy its contractual debt obligation, and accordingly, the Company excludes the associated collateral balance from its estimate of expected cash flows. Other assumptions used in the estimate of expected cash flows include expected future default rates and prepayments. Specifically, the model assumes annual prepayments of 1.0% with 100% at maturity and assumes 150 basis points of additional annual defaults from banks that are currently not in default or deferral. In addition, the model assumes no recoveries except for one trust preferred security which assumes that one of the banks currently deferring or in default will cure such positions by June 2013.
The table below presents the Company’s Level 2 financial assets and liabilities measured on a nonrecurring basis, which solely relates to impaired loans that were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral during the nine months ended September 30, 2012 and 2011. During the nine months ended September 30, 2012 and 2011, the Company had no Level 3 financial assets and liabilities that were measured on a nonrecurring basis.
|
|
|
|
|
|
|
|
|
Nine months Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
(In thousands)
|
|
Level 2
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
Carrying value of impaired loans before allocations
|
|
$
|
14,933
|
|
|
$
|
18,329
|
|
Specific valuation allowance allocations
|
|
|
(1,955
|
)
|
|
|
(4,532
|
)
|
Fair value
|
|
$
|
12,978
|
|
|
$
|
13,797
|
|
The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. The significant unobservable inputs used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to discounts applied to the customers’ reported amount of collateral. The amount of collateral discount depends upon the marketability of the underlying collateral. During the nine months ended September 30, 2012 and 2011, collateral discounts ranged from 20% to 30%.
Non-Financial Assets and Liabilities
The Company has no non-financial assets or liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include other real estate owned (“OREO”), which is measured at the lower of cost or fair value, and goodwill and other intangible assets, which are measured at fair value for impairment assessments.
The table below presents OREO that was remeasured and reported at fair value during the nine months ended September 30, 2012 and 2011.
|
|
|
|
|
|
|
|
|
Nine months Ended September 30,
|
|
(In thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
OREO remeasured at initial recognition:
|
|
|
|
|
|
|
Carrying value of foreclosed assets prior to remeasurement
|
|
$
|
3,088
|
|
|
$
|
4,411
|
|
Charge-offs recognized in the allowance for loan losses
|
|
|
(845
|
)
|
|
|
(790
|
)
|
Fair value
|
|
$
|
2,243
|
|
|
$
|
3,621
|
|
|
|
|
|
|
|
|
|
|
OREO remeasured subsequent to initial recognition:
|
|
|
|
|
|
|
|
|
Carrying value of foreclosed assets prior to remeasurement
|
|
$
|
2,804
|
|
|
$
|
944
|
|
Write-downs included in other non-interest expense
|
|
|
(877
|
)
|
|
|
(186
|
)
|
Fair value
|
|
$
|
1,927
|
|
|
$
|
758
|
|
ASC Topic 825
“Financial Instruments” as amended, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used in estimating fair value for financial instruments:
Securities Held to Maturity
: The fair value of securities held-to-maturity are generally based on quoted market prices or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.
Net loans
: The fair value of the loan portfolio is estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers for the same remaining maturities. Loans were first segregated by type such as commercial, real estate and consumer, and were then further segmented into fixed, adjustable and variable rate categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.
Time deposits
: The fair values of time deposits were estimated using discounted cash flow analyses. The discount rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.
Long-term debt:
The fair value of long-term borrowings is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements and market conditions of similar debt instruments.
Commitments and letters of credit
: The fair values of commitments are estimated based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standing. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The amounts of fees currently charged on commitments and letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values have not been reflected in the table below.
The following table represents the estimates of fair value of financial instruments as of September 30, 2012 and December 31, 2011. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity
|
|
$
|
13,444
|
|
|
$
|
13,658
|
|
|
$
|
-
|
|
|
$
|
13,658
|
|
|
$
|
-
|
|
Net loans
|
|
|
2,066,246
|
|
|
|
2,107,167
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,107,167
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
929,042
|
|
|
|
943,262
|
|
|
|
-
|
|
|
|
943,262
|
|
|
|
-
|
|
Long-term debt
|
|
|
16,495
|
|
|
|
16,465
|
|
|
|
-
|
|
|
|
16,465
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity
|
|
$
|
23,458
|
|
|
$
|
23,423
|
|
|
$
|
-
|
|
|
$
|
23,423
|
|
|
$
|
-
|
|
Net loans
|
|
|
1,953,694
|
|
|
|
1,991,335
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,991,335
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
885,596
|
|
|
|
898,972
|
|
|
|
-
|
|
|
|
898,972
|
|
|
|
-
|
|
Long-term debt
|
|
|
16,495
|
|
|
|
16,456
|
|
|
|
-
|
|
|
|
16,456
|
|
|
|
-
|
|