UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-31877
Carolina Bank Holdings, Inc.
(Exact name of registrant as specified in its charter)
| | |
North Carolina | | 56-2215437 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| |
101 North Spring Street, Greensboro, North Carolina | | 27401 |
(Address of principal executive offices) | | (Zip Code) |
(336) 288-1898
(Registrant’s telephone number, including area code)
n/a
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
Large accelerated filer | | ¨ | | Accelerated filer | | ¨ |
| | | |
Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | | Smaller reporting company | | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
There were 3,387,045 shares of the Issuer’s common stock, $1.00 par value, outstanding as of May 12, 2011.
CAROLINA BANK HOLDINGS, INC.
INDEX
1
ITEM 1. | Financial Statements |
Carolina Bank Holdings, Inc. and Subsidiary
Consolidated Balance Sheets
| | | | | | | | |
| | March 31, 2011 | | | December 31, 2010* | |
| | (unaudited) | | | | |
| | (in thousands) | |
Assets | | | | | | | | |
Cash and due from banks | | $ | 4,509 | | | $ | 5,116 | |
Interest-bearing deposits with banks | | | 46,169 | | | | 17,710 | |
Securities available-for-sale, at fair value | | | 55,092 | | | | 46,103 | |
Securities held-to-maturity | | | 506 | | | | 563 | |
Loans held for sale | | | 16,123 | | | | 53,961 | |
Loans | | | 501,977 | | | | 514,029 | |
Less allowance for loan losses | | | (12,414 | ) | | | (12,359 | ) |
| | | | | | | | |
Net loans | | | 489,563 | | | | 501,670 | |
Premises and equipment, net | | | 18,541 | | | | 18,622 | |
Other real estate owned | | | 11,177 | | | | 9,848 | |
Bank-owned life insurance | | | 10,097 | | | | 10,003 | |
Other assets | | | 12,353 | | | | 13,105 | |
| | | | | | | | |
Total assets | | $ | 664,130 | | | $ | 676,701 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Deposits | | | | | | | | |
Non-interest bearing demand | | $ | 44,664 | | | $ | 43,564 | |
NOW, money market and savings | | | 305,726 | | | | 303,203 | |
Time | | | 239,005 | | | | 257,800 | |
| | | | | | | | |
Total deposits | | | 589,395 | | | | 604,567 | |
Advances from the Federal Home Loan Bank | | | 3,144 | | | | 3,165 | |
Securities sold under agreements to repurchase | | | 2,225 | | | | 432 | |
Subordinated debentures | | | 19,433 | | | | 19,414 | |
Other liabilities and accrued expenses | | | 5,030 | | | | 4,841 | |
| | | | | | | | |
Total liabilities | | | 619,227 | | | | 632,419 | |
| | | | | | | | |
Commitments | | | | | | | | |
Stockholders’ equity | | | | | | | | |
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding 16,000 shares in 2011 and 2010 | | | 14,900 | | | | 14,811 | |
Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 3,387,045 in 2011 and 2010 | | | 3,387 | | | | 3,387 | |
Common stock warrants | | | 1,841 | | | | 1,841 | |
Additional paid-in capital | | | 15,843 | | | | 15,834 | |
Retained earnings | | | 8,233 | | | | 7,910 | |
Stock in directors’ rabbi trust | | | (760 | ) | | | (718 | ) |
Directors’ deferred fees obligation | | | 760 | | | | 718 | |
Accumulated other comprehensive income | | | 699 | | | | 499 | |
| | | | | | | | |
Total stockholders’ equity | | | 44,903 | | | | 44,282 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 664,130 | | | $ | 676,701 | |
| | | | | | | | |
* | Derived from audited consolidated financial statements. |
See accompanying notes to consolidated financial statements.
2
Carolina Bank Holdings, Inc. and Subsidiary
Consolidated Statements of Operations (unaudited)
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
| | (in thousands, except per share data) | |
Interest income | | | | | | | | |
Loans | | $ | 7,150 | | | $ | 7,476 | |
Investment securities, taxable | | | 401 | | | | 462 | |
Investment securities, non taxable | | | 162 | | | | 162 | |
Interest from deposits in banks | | | 20 | | | | 22 | |
| | | | | | | | |
Total interest income | | | 7,733 | | | | 8,122 | |
| | | | | | | | |
Interest expense | | | | | | | | |
NOW, money market, savings | | | 660 | | | | 990 | |
Time deposits | | | 967 | | | | 1,383 | |
Other borrowed funds | | | 188 | | | | 229 | |
| | | | | | | | |
Total interest expense | | | 1,815 | | | | 2,602 | |
| | | | | | | | |
Net interest income | | | 5,918 | | | | 5,520 | |
Provision for loan losses | | | 1,700 | | | | 1,988 | |
| | | | | | | | |
Net interest income after provision for loan losses | | | 4,218 | | | | 3,532 | |
| | | | | | | | |
Non-interest income | | | | | | | | |
Service charges | | | 231 | | | | 216 | |
Mortgage banking income | | | 1,635 | | | | 1,749 | |
Gains on sale of investment securities | | | 97 | | | | 130 | |
Repossessed asset losses | | | — | | | | (127 | ) |
Other | | | 147 | | | | 165 | |
| | | | | | | | |
Total non-interest income | | | 2,110 | | | | 2,133 | |
| | | | | | | | |
Non-interest expense | | | | | | | | |
Salaries and benefits | | | 2,964 | | | | 2,573 | |
Occupancy and equipment | | | 638 | | | | 608 | |
Professional fees | | | 253 | | | | 260 | |
Outside data processing | | | 219 | | | | 241 | |
FDIC insurance | | | 385 | | | | 257 | |
Advertising and promotion | | | 87 | | | | 153 | |
Stationery, printing and supplies | | | 139 | | | | 114 | |
Impairment of repossessed assets | | | — | | | | 507 | |
Repossessed asset expenses | | | 294 | | | | 163 | |
Other | | | 491 | | | | 402 | |
| | | | | | | | |
Total non-interest expense | | | 5,470 | | | | 5,278 | |
| | | | | | | | |
Income before income taxes | | | 858 | | | | 387 | |
Income tax expense | | | 246 | | | | 88 | |
| | | | | | | | |
Net income | | | 612 | | | | 299 | |
| | | | | | | | |
Dividends and accretion on preferred stock | | | 288 | | | | 285 | |
| | | | | | | | |
Net income available to common stockholders | | $ | 324 | | | $ | 14 | |
| | | | | | | | |
Net income per common share | | | | | | | | |
Basic | | $ | 0.10 | | | $ | — | |
| | | | | | | | |
Diluted | | $ | 0.10 | | | $ | — | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
3
Carolina Bank Holdings, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (unaudited)
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
Net income | | $ | 612 | | | $ | 299 | |
Other comprehensive income: | | | | | | | | |
Investment securiteis available for sale: | | | | | | | | |
Unrealized holding gains | | | 400 | | | | 219 | |
Tax effect | | | (136 | ) | | | (74 | ) |
Reclassification of gains recognized in net income | | | (97 | ) | | | (130 | ) |
Tax effect | | | 33 | | | | 44 | |
| | | | | | | | |
| | | 200 | | | | 59 | |
| | | | | | | | |
Comprehensive income | | $ | 812 | | | $ | 358 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
4
Carolina Bank Holdings, Inc. and Subsidiary
Consolidated Statement of Stockholders’ Equity (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | | Discount on Preferred Stock | | | Common Stock | | | Common Stock Warrants | | | Additional Paid-In Capital | | | Retained Earnings | | | Stock in Directors’ Rabbi Trust | | | Directors’ Deferred Fees Obligation | | | Accumulated Other Comprehensive Income | | | Total | |
| | (in thousands) | | | | |
Balance, December 31, 2010 | | $ | 16,000 | | | $ | (1,189 | ) | | $ | 3,387 | | | $ | 1,841 | | | $ | 15,834 | | | $ | 7,910 | | | $ | (718 | ) | | $ | 718 | | | $ | 499 | | | $ | 44,282 | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 612 | | | | — | | | | — | | | | — | | | | 612 | |
Other comprehensive income - Unrealized gain on securities available for sale, net of tax of $103 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 200 | | | | 200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 812 | |
Directors’ deferred fees paid less deferrals of new fees | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (42 | ) | | | 42 | | | | — | | | | — | |
Stock options expensed | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | — | | | | — | | | | 9 | |
Amortization of preferred stock discount | | | — | | | | 89 | | | | — | | | | — | | | | — | | | | (89 | ) | | | — | | | | — | | | | — | | | | — | |
Preferred stock dividends | | | — | | | | — | | | | — | | | | — | | | | — | | | | (200 | ) | | | — | | | | — | | | | — | | | | (200 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2011 | | $ | 16,000 | | | $ | (1,100 | ) | | $ | 3,387 | | | $ | 1,841 | | | $ | 15,843 | | | $ | 8,233 | | | $ | (760 | ) | | $ | 760 | | | $ | 699 | | | $ | 44,903 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
5
Carolina Bank Holdings, Inc. and Subsidiary
Consolidated Statements of Cash Flows (unaudited)
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
Cash flows from operating activities | | | | |
Net income | | $ | 612 | | | $ | 299 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | |
Provision for loan losses | | | 1,700 | | | | 1,988 | |
Depreciation | | | 226 | | | | 238 | |
Increase in cash surrender value of bank-owned life insurance | | | (94 | ) | | | (95 | ) |
Equity-based compensation | | | 9 | | | | 9 | |
Deferred income tax (benefit) | | | (36 | ) | | | (326 | ) |
Amortization (accretion), net | | | 5 | | | | (21 | ) |
Amortization of subordinated debt discount | | | 19 | | | | (2 | ) |
Loss (gain) on sale of repossessed assets | | | — | | | | 128 | |
Gain on sale of investments | | | (97 | ) | | | (130 | ) |
Impairment of repossessed assets | | | — | | | | 507 | |
(Increase) decrease in loans held for sale, net of sales and gains | | | 37,838 | | | | (1,553 | ) |
(Increase) decrease in other assets | | | 669 | | | | (517 | ) |
Increase (decrease) in accrued expenses and other liabilities | | | (10 | ) | | | 275 | |
| | | | | | | | |
Net cash provided by operating activities | | | 40,841 | | | | 800 | |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Purchases of investment securities available-for-sale | | | (11,846 | ) | | | (1,063 | ) |
Maturities and calls of securities available-for-sale | | | 2,000 | | | | — | |
Repayments from mortgage-backed securities available-for-sale | | | 888 | | | | 1,052 | |
Repayments from mortgage-backed securities held-to-maturity | | | 56 | | | | 52 | |
Reduction (Origination) of loans, net of principal collected | | | 7,844 | | | | (5,351 | ) |
Additions to premises and equipment | | | (145 | ) | | | (46 | ) |
Proceeds from sales of assets | | | 1,614 | | | | 4,159 | |
| | | | | | | | |
Net cash provided by (used for) investing activities | | | 411 | | | | (1,197 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Net increase (decrease) in deposits | | | (15,172 | ) | | | 8,259 | |
Net (decrease) in Federal Home Loan Advances | | | (21 | ) | | | (2,020 | ) |
Increase in securities sold under agreements to repurchase | | | 1,793 | | | | 354 | |
Dividends paid | | | — | | | | (200 | ) |
| | | | | | | | |
Net cash provided by (used for) financing activities | | | (13,400 | ) | | | 6,393 | |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 27,852 | | | | 5,996 | |
Cash and cash equivalents at beginning of period | | | 22,826 | | | | 40,455 | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | 50,678 | | | $ | 46,451 | |
| | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | |
Cash paid during the period for interest | | $ | 1,936 | | | $ | 2,684 | |
| | | | | | | | |
Cash paid during the period for income taxes | | $ | — | | | $ | 450 | |
| | | | | | | | |
Supplemental disclosure of non-cash transactions | | | | | | | | |
Transfer of loans to foreclosed assets | | $ | 2,563 | | | $ | 540 | |
| | | | | | | | |
Dividends declared but not paid | | $ | 200 | | | $ | — | |
| | | | | | | | |
Accretion of preferred stock discount | | $ | 89 | | | $ | 82 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
6
Carolina Bank Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note A – Summary
Carolina Bank Holdings, Inc. (the “Holding Company” or the “Company”) is a North Carolina corporation organized in 2000. Effective October 31, 2000, pursuant to the plan of share exchange approved by the shareholders of Carolina Bank (the “Bank”), all of the outstanding shares of common stock of the Bank were exchanged for shares of common stock of the Holding Company. The Holding Company presently has no employees.
The Bank was incorporated in August 1996, and began banking operations in November 1996. It is engaged in lending and deposit gathering activities in Guilford, Alamance, Randolph and Forsyth Counties, North Carolina and operates under the laws of North Carolina, the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank has eight full-service banking locations, comprised of four in Greensboro and one in each of Asheboro, Burlington, High Point, and Winston-Salem. A mortgage loan production office was opened in Burlington in July 2010. All offices are in the Piedmont Triad region of North Carolina.
The Holding Company files periodic reports with the Securities and Exchange Commission and is also subject to regulation by the Federal Reserve Board.
Note B – Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant inter-company transactions and balances have been eliminated.
Note C – Basis of presentation
In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three months ended March 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2011 and 2010, are not necessarily indicative of the results that may be expected for future periods.
The organization and business of the Company, accounting policies followed, and other information are contained in the notes to the financial statements of the Company as of and for the years ended December 31, 2010 and 2009, filed with the Securities and Exchange Commission as part of the Company’s annual report on Form 10-K. These financial statements should be read in conjunction with the annual financial statements.
Note D – Use of estimates
The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
7
Note E – Stock compensation plans
The Company’s shareholders approved the 2009 Omnibus Stock Ownership and Long Term Incentive Plan (“Omnibus Plan”) in 2009 to replace three expired stock option plans, a nonqualified plan for directors (Director Plan) and two incentive stock option plans for management and employees (Employee Plans). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights to employees and directors. An aggregate of 500,000 shares of the Company’s common stock have been reserved for issuance under the terms of the Omnibus Plan.
There were no stock option grants in 2010 or the first three months of 2011. The fair value of employee plan options granted in December 2007 was $178,000, which is being expensed over a five year vesting period. Total expense related to the 2007 grants was $9,000 in the first three months of 2011 and 2010. At March 31, 2011, there was $59,000 of total unrecognized compensation cost related to unvested share-based compensation which is expected to be recognized over a weighted-average period of 1.7 years.
Note F – Earnings per share
Earnings per share has been determined on a basic basis and a diluted basis which considers potential stock issuances. For the quarters ended March 31, 2011 and 2010, basic earnings per share has been computed based upon the weighted average common shares outstanding of 3,387,045.
The only potential issuances of Company stock are stock options granted to various directors and officers of the Bank and a warrant to purchase common stock executed in conjunction with the issuance of preferred stock to the U.S. Treasury in 2009. The following is a summary of the diluted earnings per share calculation for the three months ended March 31, 2011 and 2010.
| | | | | | | | |
| | Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
| | (in thousands, except per share data) | |
Net income available to common shareholders | | $ | 324 | | | $ | 14 | |
| | | | | | | | |
Weighted average outstanding shares - basic | | | 3,387 | | | | 3,387 | |
Dilutive effect of stock options | | | — | | | | — | |
| | | | | | | | |
Weighted average shares - diluted | | | 3,387 | | | | 3,387 | |
| | | | | | | | |
Diluted earnings per share | | $ | 0.10 | | | $ | 0.00 | |
| | | | | | | | |
For the three months ended March 31, 2011 and 2010, there were 519,102 and 552,781 shares, respectively, of options that were excluded in computing diluted common shares outstanding given that they were anti-dilutive since the exercise price exceeded the average market price for the period.
8
Note G – Preferred stock and common stock warrants
In December 2008, the shareholders of the Company approved an amendment to the Articles of Incorporation authorizing the issuance of up to 1,000,000 shares of preferred stock, no par value. In January 2009, the Company issued 16,000 shares of preferred stock to the U.S. Treasury and received $16 million under the Capital Purchase Program. The Company granted a warrant to purchase 357,675 shares of common stock at a price of $6.71 per share to the U.S. Treasury as part of the preferred stock transaction. In accordance with accounting principles, the preferred stock and common stock warrant were valued independently and their relative fair market values were allocated to the $16 million received. Under the relative value method, $14,159,000 was allocated to the preferred stock and $1,841,000 to the common stock warrant. The discount of $1,841,000 on the preferred stock is accreted over five years using the effective yield method, thereby increasing preferred stock dividends. The accretion of the discount for the first three months of 2011 and 2010 was $89,000 and $82,000, respectively. Dividends at 5% per annum are payable quarterly for the first five years; the dividend increases to 9% per annum after the fifth year.
Note H – Subordinated debentures
In December 2004, the Company issued $10,310,000 of unsecured junior subordinated debentures which accrue and pay interest quarterly at three month LIBOR plus 2% per annum. These debentures were issued to Carolina Capital Trust (“Carolina Trust”), a wholly owned subsidiary of the Company which is not consolidated in these consolidated financial statements pursuant to accounting principles governingConsolidated Variable Interest Entities. Carolina Trust acquired these debentures using the proceeds of its offerings of common securities to the Company and $10 million of Trust Preferred Securities to outside investors. The Trust Preferred Securities currently qualify as Tier 1 capital under Federal Reserve Board guidelines. The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act eliminates trust preferred securities as an element of Tier 1 capital for certain institutions. However, bank holding companies with assets of less than $15 billion as of December 31, 2009, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital. The Company therefore believes the Trust Preferred Securities will continue to qualify as Tier 1 capital. The Company has entered into contractual arrangements which, in the aggregate, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of Carolina Trust under the Trust Preferred Securities. The Trust Preferred Securities are redeemable upon maturity of the debentures on January 7, 2035, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Carolina Trust in whole or in part at any time.
In the third quarter of 2008, Carolina Bank issued $9,300,000 of unsecured junior subordinated notes to outside investors which accrue and pay interest quarterly at three month LIBOR plus 4% per annum. The notes, net of unamortized expenses associated with the offering, equal to $9,123,000 and $9,104,000 at March 31, 2011 and December 31, 2010, respectively and qualify as Tier 2 capital for the Bank. The notes are redeemable upon maturity on September 30, 2018, or earlier at the Bank’s option, in whole or part subject to regulatory approval, beginning September 30, 2013. The expenses of the offering of $373,000 were capitalized at issue and are being amortized over sixty months. The notes are subordinate to the rights of payment to depositors, bankers acceptances, letters of creditors and general creditors.
Note I – Operating segments
The Company is considered to have three principal business segments in 2011 and 2010, the Commercial/Retail Bank, the Mortgage Division, and the Holding Company. The Mortgage Division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. A retail mortgage operation was added to the division in July 2010. Financial performance, reflective of inter-company eliminations, for the three months ended March 31, 2011 and 2010, and selected balance sheet information, reflective of inter-company eliminations, at March 31, 2011 and 2010 for each segment is as follows:
9
| | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2011 | |
| | Commercial/Retail Bank | | | Mortgage Division | | | Holding Company | | | Total | |
| | (in thousands) | |
Interest income | | $ | 7,431 | | | $ | 300 | | | $ | 2 | | | $ | 7,733 | |
Interest expense | | | 1,474 | | | | 284 | | | | 57 | | | | 1,815 | |
| | | | | | | | | | | | | | | | |
Net interest income (loss) | | | 5,957 | | | | 16 | | | | (55 | ) | | | 5,918 | |
Provision for loan losses | | | 1,700 | | | | — | | | | — | | | | 1,700 | |
| | | | | | | | | | | | | | | | |
Net interest income (loss) after provision for loan losses | | | 4,257 | | | | 16 | | | | (55 | ) | | | 4,218 | |
Non-interest income | | | 475 | | | | 1,635 | | | | — | | | | 2,110 | |
Non-interest expense | | | 4,033 | | | | 1,412 | | | | 25 | | | | 5,470 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | 699 | | | | 239 | | | | (80 | ) | | | 858 | |
Income tax (benefit) expense | | | 179 | | | | 94 | | | | (27 | ) | | | 246 | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 520 | | | $ | 145 | | | $ | (53 | ) | | $ | 612 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 647,273 | | | $ | 16,476 | | | $ | 381 | | | $ | 664,130 | |
Net loans | | | 489,563 | | | | 16,123 | | | | — | | | | 505,686 | |
Equity | | | 520 | | | | 145 | | | | 44,238 | | | | 44,903 | |
| |
| | Three months ended March 31, 2010 | |
| | Commercial/Retail Bank | | | Mortgage Division | | | Holding Company | | | Total | |
| | (in thousands) | |
Interest income | | $ | 7,809 | | | $ | 311 | | | $ | 2 | | | $ | 8,122 | |
Interest expense | | | 2,251 | | | | 311 | | | | 40 | | | | 2,602 | |
| | | | | | | | | | | | | | | | |
Net interest income (loss) | | | 5,558 | | | | — | | | | (38 | ) | | | 5,520 | |
Provision for loan losses | | | 1,988 | | | | — | | | | — | | | | 1,988 | |
| | | | | | | | | | | | | | | | |
Net interest income (loss) after provision for loan losses | | | 3,570 | | | | — | | | | (38 | ) | | | 3,532 | |
Non-interest income | | | 438 | | | | 1,695 | | | | — | | | | 2,133 | |
Non-interest expense | | | 4,233 | | | | 1,016 | | | | 29 | | | | 5,278 | |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (225 | ) | | | 679 | | | | (67 | ) | | | 387 | |
Income tax (benefit) expense | | | (153 | ) | | | 264 | | | | (23 | ) | | | 88 | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (72 | ) | | $ | 415 | | | $ | (44 | ) | | $ | 299 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 672,242 | | | $ | 31,487 | | | $ | 356 | | | $ | 704,085 | |
Net loans | | | 523,348 | | | | 30,941 | | | | — | | | | 554,289 | |
Equity | | | (72 | ) | | | 415 | | | | 47,769 | | | | 48,112 | |
The Mortgage Division experienced strong growth in originations and related fee income during the last half of 2010 due to low interest rates and due to the purchase of a retail loan production office in July of 2010. Originations and related fee income declined in the first quarter of 2011 due to higher interest rates and slowing refinancing by borrowers. Interest rate risk has been minimized by obtaining optional loan sales commitments when loan origination commitments are made or by entering into hedging transactions whereby mortgage backed securities are sold for the estimated closing value of loan commitments. Borrower fraud is a risk that has been minimized by more robust underwriting standards and by obtaining indemnification from the originating bank or broker for the risks the Company assumes. Warranty expenses and related warranty liabilities were established in 2009 to provide for potential claims that might arise from borrower fraud or underwriting errors. Warranty expenses were $109,000 and $66,000 for the three months ending March 31, 2011 and 2010, respectively. The warranty liability, which is available to fund future warranty claims, was $537,000 and $428,000 at March 31, 2011 and December 31, 2010, respectively. Three warranty claims totaling $346,000 have been paid since establishment of the mortgage division in 2007.
10
Note J – Securities
A summary of the amortized cost, gross unrealized gains and losses and estimated fair values of securities available-for-sale and held-to-maturity follows:
| | | | | | | | | | | | | | | | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
| | | | | (in thousands) | | | | |
March 31, 2011 | | | | | | | | | | | | | | | | |
Available for sale | | | | | | | | | | | | | | | | |
Municipal securities | | $ | 19,678 | | | $ | 207 | | | $ | 308 | | | $ | 19,577 | |
FNMA, FHLMC, and GNMA mortgage-backed securities | | | 19,254 | | | | 1,075 | | | | — | | | | 20,329 | |
Corporate securities | | | 11,518 | | | | 65 | | | | 38 | | | | 11,545 | |
Restricted stock | | | 3,318 | | | | — | | | | — | | | | 3,318 | |
Unrestricted stock | | | 266 | | | | 57 | | | | — | | | | 323 | |
| | | | | | | | | | | | | | | | |
| | $ | 54,034 | | | $ | 1,404 | | | $ | 346 | | | $ | 55,092 | |
| | | | | | | | | | | | | | | | |
Held to maturity | | | | | | | | | | | | | | | | |
FNMA and GNMA mortgage-backed securities | | | 506 | | | | 30 | | | | — | | | | 536 | |
| | | | | | | | | | | | | | | | |
| | $ | 506 | | | $ | 30 | | | $ | — | | | $ | 536 | |
| | | | | | | | | | | | | | | | |
December 31, 2010 | | | | | | | | | | | | | | | | |
Available for sale | | | | | | | | | | | | | | | | |
U.S. agency obligations | | $ | 1,000 | | | $ | 11 | | | $ | — | | | $ | 1,011 | |
Municipal securities | | | 19,685 | | | | 74 | | | | 488 | | | | 19,271 | |
FNMA, FHLMC, and GNMA mortgage-backed securities | | | 15,275 | | | | 998 | | | | — | | | | 16,273 | |
Corporate securities | | | 5,536 | | | | 20 | | | | 7 | | | | 5,549 | |
Restricted stock | | | 3,318 | | | | — | | | | — | | | | 3,318 | |
Unrestricted stock | �� | | 533 | | | | 148 | | | | — | | | | 681 | |
| | | | | | | | | | | | | | | | |
| | $ | 45,347 | | | $ | 1,251 | | | $ | 495 | | | $ | 46,103 | |
| | | | | | | | | | | | | | | | |
Held to maturity | | | | | | | | | | | | | | | | |
FNMA and GNMA mortgage-backed securities | | | 563 | | | | 33 | | | | — | | | | 596 | |
| | | | | | | | | | | | | | | | |
| | $ | 563 | | | $ | 33 | | | $ | — | | | $ | 596 | |
| | | | | | | | | | | | | | | | |
11
Investments are periodically evaluated for any impairment which would be deemed other than temporary. Based upon these evaluations, the Company did not deem any debt securities to be impaired during 2010 or the first three months of 2011. The deterioration in value is primarily attributable to changes in market interest rates and the Company expects these securities to be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity. The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient for a forecasted recovery or until maturity. Information pertaining to temporarily impaired securities with gross unrealized losses at March 31, 2011 and December 31, 2010, by category and length of time that individual securities have been in a continuous loss position follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | | 12 Months or Greater | | | Total | |
| | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | |
| | (in thousands) | |
March 31, 2011: | | | | | | | | | | | | | | | | | | | | | | | | |
Municipal securities | | $ | 8,964 | | | $ | 308 | | | $ | — | | | $ | — | | | $ | 8,964 | | | $ | 308 | |
Corporate securities | | | 6,055 | | | | 38 | | | | — | | | | — | | | | 6,055 | | | | 38 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 15,019 | | | $ | 346 | | | $ | — | | | $ | — | | | $ | 15,019 | | | $ | 346 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2010: | | | | | | | | | | | | | | | | | | | | | | | | |
Municipal securities | | $ | 14,613 | | | $ | 488 | | | $ | — | | | $ | — | | | $ | 14,613 | | | $ | 488 | |
Corporate securities | | | 1,020 | | | | 7 | | | | — | | | | — | | | | 1,020 | | | | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 15,633 | | | $ | 495 | | | $ | — | | | $ | — | | | $ | 15,633 | | | $ | 495 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
12
Note K – Loans and allowance for loan losses
The activity in the allowance for loan losses for the first three months of 2011 and 2010 and related asset balances at March 31, 2011 and December 31, 2010 is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Construction & | | | Commercial | | | Home Equity | | | Residential | | | Commercial | | | Consumer | | | | | | | |
| | Development | | | Real Estate | | | Lines | | | Real Estate | | | & Industrial | | | & Other | | | Unallocated | | | Total | |
| | (in thousands) | |
Allowance for loan losses: | | | | |
2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of year balance | | $ | 4,478 | | | $ | 3,364 | | | $ | 818 | | | $ | 846 | | | $ | 2,746 | | | $ | 79 | | | $ | 28 | | | $ | 12,359 | |
Provision for loan losses | | | (64 | ) | | | 548 | | | | 339 | | | | 235 | | | | 625 | | | | 45 | | | | (28 | ) | | | 1,700 | |
Charge-offs | | | (1,393 | ) | | | (83 | ) | | | (42 | ) | | | (77 | ) | | | (253 | ) | | | — | | | | — | | | | (1,848 | ) |
Recoveries | | | 162 | | | | 1 | | | | 8 | | | | — | | | | 31 | | | | 1 | | | | — | | | | 203 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, | | $ | 3,183 | | | $ | 3,830 | | | $ | 1,123 | | | $ | 1,004 | | | $ | 3,149 | | | $ | 125 | | | $ | — | | | $ | 12,414 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of year balance | | $ | 2,993 | | | $ | 2,961 | | | $ | 903 | | | $ | 856 | | | $ | 2,025 | | | $ | 333 | | | $ | 10 | | | $ | 10,081 | |
Provision for loan losses | | | 668 | | | | 566 | | | | 118 | | | | (142 | ) | | | 747 | | | | 27 | | | | 4 | | | | 1,988 | |
Charge-offs | | | (143 | ) | | | — | | | | (232 | ) | | | (125 | ) | | | (923 | ) | | | (11 | ) | | | — | | | | (1,434 | ) |
Recoveries | | | 17 | | | | 3 | | | | — | | | | 2 | | | | 40 | | | | — | | | | — | | | | 62 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, | | $ | 3,535 | | | $ | 3,530 | | | $ | 789 | | | $ | 591 | | | $ | 1,889 | | | $ | 349 | | | $ | 14 | | | $ | 10,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at March 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance individually evaluated for impairment | | $ | 955 | | | $ | 1,392 | | | $ | 533 | | | $ | 309 | | | $ | 1,852 | | | $ | 7 | | | $ | — | | | $ | 5,048 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance collectively evaluated for impairment | | $ | 2,228 | | | $ | 2,438 | | | $ | 590 | | | $ | 695 | | | $ | 1,297 | | | $ | 118 | | | $ | — | | | $ | 7,366 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, | | $ | 98,118 | | | $ | 209,987 | | | $ | 60,983 | | | $ | 51,910 | | | $ | 73,671 | | | $ | 7,308 | | | $ | — | | | $ | 501,977 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance individually evaluated for impairment | | $ | 13,277 | | | $ | 25,282 | | | $ | 2,048 | | | $ | 2,243 | | | $ | 7,592 | | | $ | 17 | | | $ | — | | | $ | 50,459 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance collectively evaluated for impairment | | $ | 84,841 | | | $ | 184,705 | | | $ | 58,935 | | | $ | 49,667 | | | $ | 66,079 | | | $ | 7,291 | | | $ | — | | | $ | 451,518 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance individually evaluated for impairment | | $ | 2,122 | | | $ | 648 | | | $ | 106 | | | $ | 134 | | | $ | 1,125 | | | $ | 7 | | | $ | — | | | $ | 4,142 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance collectively evaluated for impairment | | $ | 2,356 | | | $ | 2,716 | | | $ | 712 | | | $ | 712 | | | $ | 1,621 | | | $ | 72 | | | $ | 28 | | | $ | 8,217 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, | | $ | 113,564 | | | $ | 198,985 | | | $ | 63,312 | | | $ | 56,993 | | | $ | 72,956 | | | $ | 8,219 | | | $ | — | | | $ | 514,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance individually evaluated for impairment | | $ | 23,576 | | | $ | 5,187 | | | $ | 833 | | | $ | 1,660 | | | $ | 2,625 | | | $ | 20 | | | $ | — | | | $ | 33,901 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance collectively evaluated for impairment | | $ | 89,988 | | | $ | 193,798 | | | $ | 62,479 | | | $ | 55,333 | | | $ | 70,331 | | | $ | 8,198 | | | $ | — | | | $ | 480,127 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
13
A loan is past due when the borrower has not made a payment by the contractual due date. The following table presents the carrying value of loans that are past due thirty days or more. Loans which are ninety days or more past due are generally on non-accrual status, at which time all accrued interest is removed from interest income, as shown in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Days Past Due | | | | | | | | | | | | Loans Past Due 90 Days | |
| | 30-59 Days | | | 60-89 Days | | | 90 Days or More | | | Total Past Due | | | Current | | | Total Loans | | | or More & Accruing | |
| | (in thousands) | | | | | | | | | | | | | | | | | | | |
At March 31, 2011 | | | | |
Real Estate Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction & development | | $ | 4,061 | | | $ | — | | | $ | 11,381 | | | $ | 15,442 | | | $ | 82,676 | | | $ | 98,118 | | | $ | — | |
Commercial real estate | | | 1,454 | | | | — | | | | 12,160 | | | | 13,614 | | | | 196,373 | | | | 209,987 | | | | — | |
Home equity lines | | | — | | | | — | | | | 908 | | | | 908 | | | | 60,075 | | | | 60,983 | | | | — | |
Residential real estate | | | 364 | | | | 49 | | | | 1,975 | | | | 2,388 | | | | 49,522 | | | | 51,910 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total real estate | | | 5,879 | | | | 49 | | | | 26,424 | | | | 32,352 | | | | 388,646 | | | | 420,998 | | | | — | |
Commercial & industrial | | | 160 | | | | 135 | | | | 2,210 | | | | 2,505 | | | | 71,166 | | | | 73,671 | | | | — | |
Consumer & other | | | 34 | | | | — | | | | 17 | | | | 51 | | | | 7,257 | | | | 7,308 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans | | $ | 6,073 | | | $ | 184 | | | $ | 28,651 | | | $ | 34,908 | | | $ | 467,069 | | | $ | 501,977 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Real Estate Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction & development | | $ | — | | | $ | — | | | $ | 11,983 | | | $ | 11,983 | | | $ | 101,581 | | | $ | 113,564 | | | $ | — | |
Commercial real estate | | | 783 | | | | — | | | | 12,682 | | | | 13,465 | | | | 185,520 | | | | 198,985 | | | | 2,326 | |
Home equity lines | | | 245 | | | | — | | | | 832 | | | | 1,077 | | | | 62,235 | | | | 63,312 | | | | — | |
Residential real estate | | | 1,038 | | | | 290 | | | | 2,060 | | | | 3,388 | | | | 53,605 | | | | 56,993 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total real estate | | | 2,066 | | | | 290 | | | | 27,557 | | | | 29,913 | | | | 402,941 | | | | 432,854 | | | | 2,326 | |
Commercial & industrial | | | 71 | | | | 3 | | | | 2,462 | | | | 2,536 | | | | 70,420 | | | | 72,956 | | | | — | |
Consumer & other | | | — | | | | — | | | | 20 | | | | 20 | | | | 8,199 | | | | 8,219 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans | | $ | 2,137 | | | $ | 293 | | | $ | 30,039 | | | $ | 32,469 | | | $ | 481,560 | | | $ | 514,029 | | | $ | 2,326 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans are determined to be impaired when, based on current information and events, it is probable that all amounts will not be collected when due according to the contractual terms of the original loan agreement. At March 31, 2011 and December 31, 2010, the total recorded investment in impaired loans amounted to approximately $50,459,000 and $33,901,000, respectively. Of these impaired loans, $28,651,000 and $27,713,000 were on non-accrual at March 31, 2011 and December 31, 2010, respectively.
The recorded investment and related information for impaired loans is summarized as follows:
14
| | | | | | | | | | | | | | | | | | | | |
| | Impaired Loans | |
| | At end of period | | | For Period Ended | |
| | Recorded Investment | | | Unpaid Principal Balance | | | Related Loan Loss Allowance | | | Average Recorded Investment | | | Interest Income Recognized | |
| | (in thousands) | |
March 31, 2011 | | | | |
With no related allowance recorded | | | | | | | | | | | | | | | | | | | | |
Real Estate Loans: | | | | | | | | | | | | | | | | | | | | |
Construction & development | | $ | 5,725 | | | $ | 6,480 | | | $ | — | | | $ | 6,179 | | | $ | (14 | ) |
Commercial real estate | | | 6,793 | | | | 7,582 | | | | — | | | | 6,805 | | | | 11 | |
Home equity lines | | | 773 | | | | 785 | | | | — | | | | 775 | | | | 5 | |
Residential real estate | | | 998 | | | | 1,101 | | | | — | | | | 1,000 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | |
Total real estate | | | 14,289 | | | | 15,948 | | | | — | | | | 14,759 | | | | 7 | |
Commercial & industrial | | | 1,047 | | | | 1,048 | | | | — | | | | 1,048 | | | | — | |
Consumer & other | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total loans | | $ | 15,336 | | | $ | 16,996 | | | $ | — | | | $ | 15,807 | | | $ | 7 | |
| | | | | | | | | | | | | | | | | | | | |
With an allowance recorded | | | | | | | | | | | | | | | | | | | | |
Real Estate Loans: | | | | | | | | | | | | | | | | | | | | |
Construction & development | | $ | 7,552 | | | $ | 8,778 | | | $ | 955 | | | $ | 8,063 | | | $ | 28 | |
Commercial real estate | | | 18,489 | | | | 18,689 | | | | 1,392 | | | | 18,592 | | | | 215 | |
Home equity lines | | | 1,275 | | | | 1,277 | | | | 533 | | | | 1,276 | | | | 17 | |
Residential real estate | | | 1,245 | | | | 1,252 | | | | 309 | | | | 1,249 | | | | 16 | |
| | | | | | | | | | | | | | | | | | | | |
Total real estate | | | 28,561 | | | | 29,996 | | | | 3,189 | | | | 29,180 | | | | 276 | |
Commercial & industrial | | | 6,545 | | | | 6,559 | | | | 1,852 | | | | 6,709 | | | | 81 | |
Consumer & other | | | 17 | | | | 19 | | | | 7 | | | | 18 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total loans | | $ | 35,123 | | | $ | 36,574 | | | $ | 5,048 | | | $ | 35,907 | | | $ | 357 | |
| | | | | | | | | | | | | | | | | | | | |
December 31, 2010 | | | | | | | | | | | | | | | | | | | | |
With no related allowance recorded | | | | | | | | | | | | | | | | | | | | |
Real Estate Loans: | | | | | | | | | | | | | | | | | | | | |
Construction & development | | $ | 7,233 | | | $ | 7,474 | | | $ | — | | | $ | 7,712 | | | $ | 207 | |
Commercial real estate | | | 3,141 | | | | 4,032 | | | | — | | | | 3,651 | | | | 83 | |
Home equity lines | | | 692 | | | | 835 | | | | — | | | | 761 | | | | 12 | |
Residential real estate | | | 996 | | | | 1,207 | | | | — | | | | 1,163 | | | | 25 | |
| | | | | | | | | | | | | | | | | | | | |
Total real estate | | | 12,062 | | | | 13,548 | | | | — | | | | 13,287 | | | | 327 | |
Commercial & industrial | | | 1,061 | | | | 1,061 | | | | — | | | | 1,113 | | | | 20 | |
Consumer & other | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total loans | | $ | 13,123 | | | $ | 14,609 | | | $ | — | | | $ | 14,400 | | | $ | 347 | |
| | | | | | | | | | | | | | | | | | | | |
With an allowance recorded | | | | | | | | | | | | | | | | | | | | |
Real Estate Loans: | | | | | | | | | | | | | | | | | | | | |
Construction & development | | $ | 16,343 | | | $ | 19,880 | | | $ | 2,122 | | | $ | 20,166 | | | $ | 398 | |
Commercial real estate | | | 2,046 | | | | 2,060 | | | | 648 | | | | 2,057 | | | | 82 | |
Home equity lines | | | 141 | | | | 180 | | | | 106 | | | | 160 | | | | — | |
Residential real estate | | | 664 | | | | 671 | | | | 134 | | | | 686 | | | | 27 | |
| | | | | | | | | | | | | | | | | | | | |
Total real estate | | | 19,194 | | | | 22,791 | | | | 3,010 | | | | 23,069 | | | | 507 | |
Commercial & industrial | | | 1,564 | | | | 1,719 | | | | 1,125 | | | | 1,771 | | | | 66 | |
Consumer & other | | | 20 | | | | 21 | | | | 7 | | | | 25 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | |
Total loans | | $ | 20,778 | | | $ | 24,531 | | | $ | 4,142 | | | $ | 24,865 | | | $ | 575 | |
| | | | | | | | | | | | | | | | | | | | |
15
Loans that are past due 90 days or more or where there is serious doubt as to collectability are placed on non-accrual status. Non-accrual loans are not returned to accrual status unless principal and interest are current and borrowers have demonstrated the ability to make contractual payments. Accrued interest is reversed through a charge to income when loans are placed on non-accrual and future payments on non-accrual loans are generally applied to principal. The following is a summary of non-accrual loans at March 31, 2011 and December 31, 2010:
| | | | | | | | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
Real Estate Loans: | | | | | | | | |
Construction & development | | $ | 11,381 | | | $ | 11,983 | |
Commercial real estate | | | 12,160 | | | | 10,356 | |
Home equity lines | | | 908 | | | | 832 | |
Residential real estate | | | 1,975 | | | | 2,060 | |
| | | | | | | | |
Total real estate | | | 26,424 | | | | 25,231 | |
Commercial & industrial | | | 2,210 | | | | 2,462 | |
Consumer & other | | | 17 | | | | 20 | |
| | | | | | | | |
Total loans | | $ | 28,651 | | | $ | 27,713 | |
| | | | | | | | |
Loans are graded according to an internal loan rating classification system when originated. Loan grades are periodically re-evaluated during servicing, internal loan reviews, and external loan reviews. The general categories of the internal loan rating classification are:
| • | | Pass - Acceptable loans |
| • | | Special Mention - Loans with potential identified weaknesses in administration or servicing. |
| • | | Criticized - Adversely classified loans with identified weaknesses, and potential or identified losses of principal and/or interest due. |
The following is a breakdown of loans by the general categories of the internal rating system:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Loans at March 31, 2011 and December 31, 2010 | |
| | Construction & Development | | | Commercial Real Estate | | | Home Equity Lines of Credit | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Pass | | $ | 75,276 | | | $ | 83,697 | | | $ | 181,273 | | | $ | 169,845 | | | $ | 58,555 | | | $ | 60,002 | |
Special Mention | | | 5 | | | | — | | | | 6,642 | | | | 3,602 | | | | 581 | | | | 1,683 | |
Criticized | | | 22,837 | | | | 29,867 | | | | 22,072 | | | | 25,538 | | | | 1,847 | | | | 1,627 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL | | $ | 98,118 | | | $ | 113,564 | | | $ | 209,987 | | | $ | 198,985 | | | $ | 60,983 | | | $ | 63,312 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | Residential Real Estate | | | Commercial & Industrial | | | Consumer & Other | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Pass | | $ | 47,183 | | | $ | 52,804 | | | $ | 66,381 | | | $ | 68,077 | | | $ | 7,274 | | | $ | 8,183 | |
Special Mention | | | 186 | | | | 326 | | | | 954 | | | | 251 | | | | 15 | | | | 16 | |
Criticized | | | 4,541 | | | | 3,863 | | | | 6,336 | | | | 4,628 | | | | 19 | | | | 20 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
TOTAL | | $ | 51,910 | | | $ | 56,993 | | | $ | 73,671 | | | $ | 72,956 | | | $ | 7,308 | | | $ | 8,219 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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During 2011 and 2010, the Company restructured certain loans to improve the likelihood that the loans would be repaid in full under the modified terms in accordance with reasonable repayment schedules. Management evaluates each of these loans in accordance with generally accepted accounting principles to determine whether they should be reported as troubled debt restructurings. At March 31, 2011 and December 31, 2010, the Company had troubled debt restructurings of $15,934,000 and $5,328,000, respectively. Of these troubled debt restructurings, $4,024,000 and $356,000 were on non-accrual at March 31, 2011 and December 31, 2010, respectively.
Note L – Fair value measurements
The Company has adopted the accounting standards within FASB Accounting Standards Codification (ASC) 820 “Fair Value Measurements and Disclosures”, which provides a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a 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. The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company has not elected the fair value option to value liabilities. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held sale, impaired loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
When measuring fair value, valuation techniques should be appropriate in the circumstances and consistently applied. A hierarchy is used to prioritize valuation inputs into the following three levels to determine fair value:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – observable inputs other than the quoted prices included in Level 1.
Level 3 – unobservable inputs.
Fair Value on a Recurring Basis. The Company measures certain assets at fair value on a recurring basis and the following is a general description of the methods used to value such assets.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Assets measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010 are summarized below:
| | | | | | | | | | | | | | | | |
| | Assets Measured at | | | | | | | | | | |
| | | Fair Value Measured Using | |
Description | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | (in thousands) | |
At March 31, 2011: | | | | | | | | | | | | | | | | |
Securities available-for-sale | | $ | 55,092 | | | $ | 323 | | | $ | 54,769 | | | $ | — | |
At December 31, 2010: | | | | | | | | | | | | | | | | |
Securities available-for-sale | | $ | 46,103 | | | $ | 681 | | | $ | 45,422 | | | $ | — | |
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Fair Value on a Non-recurring Basis. The Company measures certain assets at fair value on a non-recurring basis and the following is a general description of the methods used to value such assets.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2 valuation.
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Fair values of impaired loans are generally estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011 and December 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as Level 2 valuation. When current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as Level 3 valuation.
Other Real Estate Owned
Fair values of other real estate owned are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as Level 2 valuation. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation.
Securities Held to Maturity
The fair values of securities held to maturity are recorded on a non-recurring basis when an impairment in value that is deemed to be other than temporary occurs. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. At March 31, 2011, there were no fair value adjustments related to $506,000 of securities held to maturity.
Assets measured at fair value on a non-recurring basis at March 31, 2011 and December 31, 2010 are summarized below:
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| | | | | | | | | | | | | | | | |
| | Assets Measured at | | | | | | | | | | |
| | | Fair Value Measured Using | |
Description | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | (in thousands) | |
At March 31, 2011: | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 16,123 | | | $ | — | | | $ | 16,123 | | | $ | — | |
Impaired loans | | | 50,459 | | | | — | | | | — | | | | 50,459 | |
Other real estate owned | | | 11,177 | | | | — | | | | — | | | | 11,177 | |
At December 31, 2010: | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 53,961 | | | $ | — | | | $ | 53,961 | | | $ | — | |
Impaired loans | | | 33,901 | | | | — | | | | — | | | | 33,901 | |
Other real estate owned | | | 9,848 | | | | — | | | | — | | | | 9,848 | |
The following represents the estimated fair values and carrying amounts of financial instruments at March 31, 2011 and December 31, 2010:
| | | | | | | | | | | | | | | | |
| | March 31, 2011 | | | December 31, 2010 | |
| | Carrying Amount | | | Estimated Fair Value | | | Carrying Amount | | | Estimated Fair Value | |
| | (in thousands) | |
Financial Assets: | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 4,509 | | | $ | 4,509 | | | $ | 5,116 | | | $ | 5,116 | |
Interest-bearing deposits with banks | | | 46,169 | | | | 46,169 | | | | 17,710 | | | | 17,710 | |
Securities available for sale | | | 55,092 | | | | 55,092 | | | | 46,103 | | | | 46,103 | |
Securities held to maturity | | | 506 | | | | 536 | | | | 563 | | | | 596 | |
Net loans held for sale | | | 16,123 | | | | 16,123 | | | | 53,961 | | | | 53,961 | |
Net loans held for investment | | | 489,563 | | | | 488,732 | | | | 501,670 | | | | 500,915 | |
Accrued interest receivable | | | 2,010 | | | | 2,010 | | | | 2,063 | | | | 2,063 | |
Financial Liabilities: | | | | | | | | | | | | | | | | |
Demand and savings deposits | | | 350,390 | | | | 350,390 | | | | 346,767 | | | | 346,767 | |
Time deposits | | | 239,005 | | | | 240,481 | | | | 257,800 | | | | 259,510 | |
Federal Home Loan Bank advances | | | 3,144 | | | | 3,144 | | | | 3,165 | | | | 3,165 | |
Securities sold under agreements to repurchase | | | 2,225 | | | | 2,225 | | | | 432 | | | | 432 | |
Subordinated debt | | | 9,123 | | | | 9,123 | | | | 9,104 | | | | 9,104 | |
Trust preferred debt | | | 10,310 | | | | 7,398 | | | | 10,310 | | | | 7,403 | |
Accrued interest payable | | | 515 | | | | 515 | | | | 693 | | | | 693 | |
Note M – Derivatives and financial instruments
A derivative is a financial instrument that derives its cash flows and value by reference to an underlying instrument, index or referenced interest rate. These instruments are designed to hedge exposures to interest rate risk or for speculative purposes.
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Accounting guidance requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.
The Mortgage Division of the Company began hedging its governmental mortgage loans, primarily FHA and VA loans, in October 2010 by selling mortgage backed securities on a forward basis. The forward sale mortgage backed securities are later purchased or closed when mandatory loan sales are consummated for the related mortgages that are originated. The value of the estimated loan commitments and open hedges are marked to market through the income statement.
The table below provides the carrying values of derivative instruments at March 31, 2011 and December 31, 2010:
| | | | | | | | | | | | | | | | |
Derivatives designated as hedging instruments: | | Carrying Value of Assets | | | Carrying Value of Liabilities | | | Gain (Loss) in Income | | | Notional Amount of Derivative | |
| | (in thousands) | |
At March 31, 2011: | | | | | | | | | | | | | | | | |
Mortgage loan rate lock commitments | | $ | 214 | | | $ | — | | | $ | 214 | | | $ | — | |
Mortgage backed securities forward sales | | $ | 36 | | | $ | — | | | $ | 36 | | | $ | 20,000 | |
At December 31, 2010: | | | | | | | | | | | | | | | | |
Mortgage loan rate lock commitments | | $ | 138 | | | $ | — | | | $ | 138 | | | $ | — | |
Mortgage backed securities forward sales | | $ | — | | | $ | 55 | | | $ | (55 | ) | | $ | 12,500 | |
Prior to October 2010, the Company sold mortgage loans on a best efforts basis whereby optional commitments to sell mortgage loans were consummated at approximately the same time that optional commitments were given to borrowers to originate the loans. Conventional loans which represent the majority of mortgage originations by the Mortgage Division are still sold on a best efforts basis.
Note N – Impact of recently adopted accounting standards
ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements”, requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy is required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010. The new accounting guidance did not have an impact on the Company’s statements of operations and financial condition, but did result in more enhanced fair value disclosures in the consolidated financial statements.
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ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 was effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period were effective January 1, 2011 and had no impact on the Company’s financial statements.
ASU No. 2011-01, “Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20” temporarily delayed the effective date of the disclosures regarding troubled debt restructurings in ASU No. 2010-20 for public entities. The effective date is for interim and annual reporting periods ending after June 15, 2011.
ASU No. 2011-02,“Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” provides additional guidance to clarify when a loan modification or restructuring is considered a troubled debt restructuring (TDR) in order to address current diversity in practice and lead to more consistent application of U.S. GAAP for debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. The amendments to Topic 310 clarify the guidance regarding the evaluation of both considerations above. Additionally, the amendments clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a TDR. This amendment is effective for the Company July 1, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, we may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, the Company must apply the amendments prospectively for the period beginning July 1, 2011.
Several other new accounting standards became effective during the periods presented or will be effective subsequent to March 31, 2011. None of these new standards had or is expected to have a significant impact on the Company’s consolidated financial statements.
Note O – Commitments
In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At March 31, 2011 and December 31, 2010, pre-approved but unused lines of credit for loans totaled approximately $113,877,000 and $109,728,000, respectively. In addition, we had $8,126,000 and $9,370,000 in standby letters of credit at March 31, 2011 and December 31, 2010, respectively. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counter-party. We believe these commitments can be funded through normal operations.
We are committed for future lease payments on our Friendly Center office, the land for our Greensboro headquarters, our office in Winston-Salem, a mortgage loan office in Burlington, and an ATM out-parcel in Asheboro. Aggregate minimum lease payments over the next five years are $1,848,000 and $3,076,000 thereafter.
21
Note P – Reclassification
Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation.
22
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is intended to assist in understanding our financial condition and results of operations. Because we have no material operations and conduct no business on our own other than owning our subsidiaries, Carolina Bank and Carolina Capital Trust, and because Carolina Capital Trust has no operations other than the issuance of its trust preferred securities, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of Carolina Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, Carolina Bank Holdings, Inc. and Carolina Bank are collectively referred to herein as “we”, “our” or “us” unless otherwise noted.
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could”, “project”, “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance, or achievements may differ materially from the results expressed or implied by our forward-looking statements.
Impact of Dodd-Frank Act.On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:
| • | | the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and improve cooperation between federal agencies; |
| • | | the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies; |
| • | | the establishment of strengthened capital and prudential standards for banks and bank holding companies; |
| • | | enhanced regulation of financial markets, including derivatives and securitization markets; |
| • | | the elimination of certain trading activities by banks; |
| • | | a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, an extension of unlimited deposit insurance on qualifying noninterest-bearing transaction accounts, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits; |
| • | | amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and |
| • | | new disclosure and other requirements relating to executive compensation and corporate governance. |
The Company is unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact the Company’s business. However, the Company believes that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on the Company’s business, financial
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condition, and results of operations. Additionally, the Company cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect the Company.
Comparison of Financial Condition
Assets. Our total assets decreased by $12.6 million, or 1.9%, from $676.7 million at December 31, 2010, to $664.1 million at March 31, 2011. During the three months ended March 31, 2011, cash and due from banks and interest-bearing deposits with banks increased by $27.9 million, and investment securities increased by $8.9 million. Loans held for sale decreased $37.8 million, or 70.1% during the first three months of 2011 as a result of declining originations by our mortgage loan division and the settlement of loan sales from the fourth quarter of 2010 which had been extended due to record fourth quarter originations. Loans held for investment decreased by $12.1 million or 2.3% during the first three months of 2011 from portfolio reductions of $7.8 million, net loan charge-offs of $1.6 million, and transfers to real estate owned of $2.6 million. We experienced slowing commercial and consumer loan demand in our primary lending markets, Guilford, Randolph, Alamance and Forsyth Counties, North Carolina in the first three months of 2011 in addition to the slow demand experienced in 2010. The slowing demand complimented our planned asset reduction strategy to improve our capital ratios.
Liabilities. Total deposits decreased by $15.2 million, or 2.5%, from $604.6 million at December 31, 2010, to $589.4 million at March 31, 2011. Time deposits decreased $18.8 million, noninterest demand accounts increased by $1.1 million, and interest-bearing transaction accounts increased $2.5 million during the first three months of 2011. Our branching activities are designed to enhance customer convenience and related deposit gathering activities as well as provide new sources for loans. While deposit growth has been an ongoing goal, wholesale sources of funding such as Federal Home Loan Bank (“FHLB’) advances and repurchase borrowings, may be utilized where cost beneficial and when necessary to meet liquidity requirements. Retail repurchase agreements increased $1.8 million and FHLB advances were down slightly during the first quarter of 2011. We had approximately $23.9 million in out-of-market time deposits from other institutions and $39.2 million in brokered deposits at March 31, 2011, a decrease of $2.9 million in these two types of accounts from December 31, 2010.
Stockholders’ Equity. Total stockholders’ equity increased $0.6 million at March 31, 2011 to $44.9 million from $44.3 million at December 31, 2010, primarily due to net income available to common stockholders and an increase in other comprehensive income.
Comparison of Results of Operations for the Three Months Ended March 31, 2011 and 2010
General. Net income was $612,000 and $299,000 for the first quarter of 2011 and 2010, respectively. Net income available to common stockholders was $324,000, or $0.10 per diluted share, for the three months ended March 31, 2011 compared to $14,000, or $0.00 per diluted share, for the three months ended March 31, 2010. Net income available to common stockholders represents net income less preferred stock dividends and related discount accretion. The increase in net income available to common shareholders in 2011 was primarily due to higher net interest income and a lower provision for loan losses. Net income in the first quarters of 2010 and 2011 declined from the same quarters in the previous five years due to deteriorating economic conditions which have negatively impacted our borrowers. The seasonally adjusted unemployment rate in the Piedmont Triad of North Carolina has exceeded 10% for the past nine quarters but it recently declined to approximately 10% in the first quarter of 2011.
Net interest income.Net interest income increased 7.2% to $5,918,000 for the three months ended March 31, 2011, from $5,520,000 for the three months ended March 31, 2010 due to a 34 basis point increase in the net yield on interest earning assets. The net yield on interest earning assets, adjusted to a fully taxable basis, increased to 3.88% in the first quarter of 2011 from 3.54% in the first quarter of 2010. The table below provides an analysis of effective yields and rates on categories of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2011 and 2010.
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Net Interest Income and Average Balance Analysis
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | |
| | 2011 | | | 2010 | |
| | Average Balance (1.) | | | Interest Inc./Exp. | | | Average Yield/Cost | | | Average Balance (1.) | | | Interest Inc./Exp. | | | Average Yield/Cost | |
| | (Dollars in thousands) | |
Interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing deposits | | $ | 41,596 | | | $ | 20 | | | | 0.19 | % | | $ | 32,303 | | | $ | 22 | | | | 0.28 | % |
Non-taxable investments (2.) | | | 16,080 | | | | 241 | | | | 6.08 | % | | | 15,560 | | | | 244 | | | | 6.36 | % |
Taxable investments | | | 35,742 | | | | 401 | | | | 4.55 | % | | | 36,819 | | | | 462 | | | | 5.09 | % |
Loans held for sale | | | 23,353 | | | | 300 | | | | 5.21 | % | | | 24,251 | | | | 311 | | | | 5.20 | % |
Loans (3.) | | | 510,051 | | | | 6,850 | | | | 5.45 | % | | | 532,928 | | | | 7,165 | | | | 5.45 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets | | | 626,822 | | | | 7,812 | | | | | | | | 641,861 | | | | 8,204 | | | | | |
Interest-earning assets | | | | | | | | | | | 5.05 | % | | | | | | | | | | | 5.18 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non interest-earning assets | | | 46,841 | | | | | | | | | | | | 49,545 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 673,663 | | | | | | | | | | | $ | 691,406 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Interest checking | | $ | 31,821 | | | $ | 24 | | | | 0.31 | % | | $ | 30,367 | | | $ | 34 | | | | 0.45 | % |
Money market and savings | | | 274,282 | | | | 636 | | | | 0.94 | % | | | 280,598 | | | | 956 | | | | 1.38 | % |
Time certificates and IRAs | | | 249,278 | | | | 967 | | | | 1.57 | % | | | 266,003 | | | | 1,383 | | | | 2.11 | % |
Other borrowings | | | 24,293 | | | | 188 | | | | 3.14 | % | | | 26,079 | | | | 229 | | | | 3.56 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities | | | 579,674 | | | | 1,815 | | | | | | | | 603,047 | | | | 2,602 | | | | | |
Cost on average | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | 1.27 | % | | | | | | | | | | | 1.75 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | | 44,818 | | | | | | | | | | | | 36,919 | | | | | | | | | |
Other liabilities | | | 4,520 | | | | | | | | | | | | 3,225 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total non-interest-bearing liabilities | | | 49,338 | | | | | | | | | | | | 40,144 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 629,012 | | | | | | | | | | | | 643,191 | | | | | | | | | |
Stockholders’ equity | | | 44,651 | | | | | | | | | | | | 48,215 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and equity | | $ | 673,663 | | | | | | | | | | | $ | 691,406 | | | | | | | | | |
Net interest income | | | | | | $ | 5,997 | | | | | | | | | | | $ | 5,602 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net yield on average interest-earning assets | | | | | | | | | | | 3.88 | % | | | | | | | | | | | 3.54 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate spread | | | | | | | | | | | 3.78 | % | | | | | | | | | | | 3.43 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1.) | Average balances are computed on a daily basis. |
(2.) | Interest income and yields related to certain investment securities exempt from federal income tax are stated on a fully taxable basis using a 34% federal tax rate, reduced by the nondeductible portion of interest expense. |
(3.) | Nonaccrual loans are included in the average loan balance. |
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Provision for loan losses.The provision for loan losses amounted to $1,700,000 and $1,988,000 for the three months ended March 31, 2011 and 2010, respectively. The amount of the provision for loan losses decreased in 2011 primarily because of a decline in loans outstanding and fewer allowances for loan losses on impaired loans. We believe the allowance for loan losses is appropriate based on asset quality indicators and other factors.
Non-interest income.Total non-interest income amounted to $2,110,000 for the three months ended March 31, 2011, as compared to $2,133,000 for the three months ended March 31, 2010. Mortgage banking income of $1,635,000 in the first quarter of 2011 was down approximately 6.5% from 2010. There were no repossessed asset losses in the first quarter of 2011 compared to losses of $127,000 in the first quarter of 2010.
Non-interest expense.Total non-interest expense amounted to $5,470,000 and $5,278,000 for the three months ended March 31, 2011 and 2010, respectively. Impairment charges of real estate owned were $0 and $507,000 in the first quarter of 2011 and 2010, respectively. Salaries and benefits increased $391,000, or 15.2%, in the first quarter of 2011 from 2010, primarily due to an increase in employees in the expanded mortgage division which included a larger retail operation in 2011. Repossessed asset expenses increased $131,000 to $294,000 for the three months ended March 31, 2011 compared to $163,000 for the three months ended March 31, 2010 due to higher maintenance expenses on properties owned in the first quarter of 2011.
Income taxes.Income tax expense was $246,000, or 28.7% of net income before income taxes, for the three month period ended March 31, 2011, as compared to $88,000, or 22.7% of net income before income taxes for the three month period ended March 31, 2010. Non-taxable income represented a larger percentage of net income before taxes in the first quarter of 2010 which resulted in the lower tax rate in the 2010 period.
Asset Quality
Non-performing assets, composed of foreclosed assets, non-accrual loans and non-performing restructured loans, totaled $39,828,000 at March 31, 2011, compared to $37,576,000 at December 31, 2010. Non-performing assets, as a percentage of total assets, was 6.00% at March 31, 2011, compared to 5.55% at December 31, 2010. There were $0 and $2,326,000 loans 90 days or more past due and still accruing interest at March 31, 2011 and December 31, 2010, respectively. Foreclosed assets were $11,177,000 at March 31, 2011 and $9,863,000 at December 31, 2010. The elevated level of non-performing assets at March 31, 2011 is related to the declining economic conditions in our lending markets. The seasonally adjusted unemployment rate in North Carolina decreased to 9.7 % in March 2011 from 9.8% in December 2010 and 10.9% at December 2009. A large portion of our loans are made to businesses and real estate developers and are secured by real estate. Due to the slow economic conditions, it has been difficult for borrowers to sell businesses or real estate properties as needed to pay off their loans.
Our allowance for loan losses is composed of two parts, a specific portion related to non-performing and impaired loans and a general section related to performing loans. We adopted a more conservative loan loss methodology in the second quarter of 2010 which resulted in higher allowances for loan losses in the second and third quarters of 2010. The specific portion of our allowance for loan losses, which relates to impaired loans, increased to $5,048,000 at March 31, 2011 from $4,142,000 at December 31, 2010 and impaired loans increased to $50,459,000 at March 31, 2011 from $32,901,000 at December 31, 2010. Net loan charge-offs amounted to $1,645,000 and $1,372,000 for the three months ending March 31, 2011 and 2010, respectively. The general portion of our allowance for loan losses decreased to $7,366,000 on performing loans of $451,518,000 at March 31, 2011 from $8,217,000 on performing loans of $480,127,000 at December 31, 2010. The general portion of our allowance applies to performing loans and was determined by applying estimated loss ratios inherent in the loan portfolio, ranging from 0.41% on loans secured by multi-family properties to 10.6% on unsecured consumer revolving loans, to categories of performing loans at each period end. The loss ratios in the general portion of the allowance have increased for most of our loan categories over the past year due to an increase in historical loss trends resulting from higher loan charge-offs in 2010 and from shortening the loss trend period to an average of the eight most recent quarters from a modified three year period plus qualitative factors.
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The following table shows the composition of the loan portfolio, non-performing and performing impaired loans, specific loan loss allowances on non-performing and performing impaired loans, and year to date net loan charge-offs, all by loan type, at March 31, 2011:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At March 31, 2011 | | | | |
| | | | | | | | Non-performing | | | Performing Impaired | | | Year to Date | |
| | Loans Outstanding | | | Loans | | | Specific Loan | | | Loans | | | Specific Loan | | | Net Loan | |
| | Outstanding | | | Percent | | | Outstanding | | | Loss Allowances | | | Outstanding | | | Loss Allowances | | | Charge-offs | |
| | (Dollars in thousands) | |
Loans secured by real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction & land development | | $ | 98,118 | | | | 19.55 | % | | $ | 11,381 | | | $ | 848 | | | $ | 1,896 | | | $ | 107 | | | $ | 1,231 | |
Revolving residential lines | | | 60,983 | | | | 12.15 | % | | | 908 | | | | 113 | | | | 1,140 | | | | 420 | | | | 34 | |
Closed-end residential | | | 51,910 | | | | 10.34 | % | | | 1,975 | | | | 148 | | | | 268 | | | | 161 | | | | 77 | |
Commercial real estate | | | 209,987 | | | | 41.83 | % | | | 12,160 | | | | 330 | | | | 13,122 | | | | 1,062 | | | | 82 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans secured by real estate | | | 420,998 | | | | 83.87 | % | | | 26,424 | | | | 1,439 | | | | 16,426 | | | | 1,750 | | | | 1,424 | |
Commercial and industrial | | | 73,671 | | | | 14.68 | % | | | 2,210 | | | | 961 | | | | 5,382 | | | | 891 | | | | 222 | |
Consumer | | | 5,665 | | | | 1.13 | % | | | 17 | | | | 7 | | | | — | | | | — | | | | (1 | ) |
All other loans | | | 1,643 | | | | 0.33 | % | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans held for investment | | $ | 501,977 | | | | 100.00 | % | | $ | 28,651 | | | $ | 2,407 | | | $ | 21,808 | | | $ | 2,641 | | | $ | 1,645 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The allowance for loan losses is increased by direct charges to operating expense, the provision for loan losses. Losses on loans or charge-offs are deducted from the allowance in the period that loans are deemed to become uncollectible or in the period that updated appraisals indicate a loss in value of non-performing real estate loans. Recoveries of previously charged-off loans are added back to the allowance. Net loan charge-offs (charge-offs minus recoveries) totaled $1,645,000 for the three months ended March 31, 2011 compared to $1,372,000 for the same period in 2010.
Liquidity and Capital Resources
The objective of our liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses our ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of internally generated funds are principal and interest payments on loans receivable and cash flows generated from operations. External sources of funds include increases in deposits, repurchase agreements, lines of credit from banks, including the Federal Reserve, and advances from the Federal Home Loan Bank of Atlanta (“FHLB”).
Carolina Bank is required under applicable federal regulations to maintain specified levels of liquid investments in qualifying types of investments. Cash and due from banks, interest-bearing deposits in banks, investment securities available-for-sale, and loans held for sale by our mortgage division are the primary liquid assets of Carolina Bank. We regularly monitor Carolina Bank’s liquidity position to ensure its liquidity is sufficient to meet its needs. During the first three months of 2011, we increased our levels of short-term liquidity due to a decline in our loans, both held for sale and for investment. Short-term liquidity in the form of cash and due from banks and interest-bearing deposits in banks, increased to $50.7 million at March 31, 2011 from $22.8 million at December 31, 2010. We also have substantial secondary sources of liquidity in the form of unused secured lines of credit from the FHLB and the Federal Reserve of approximately $163 million at March 31, 2011.
We are subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly discretionary actions by the regulators
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that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of March 31, 2011 and December 31, 2010, our levels of capital exceeded all applicable published regulatory requirements. Carolina Bank plans to increase Tier 1 capital to average assets to 8% in 2011 through earnings and moderate asset growth in response to regulatory requests in January 2011. Tier 1 capital to average assets for Carolina Bank was 7.91% at March 31, 2011 compared to 7.59% at December 31, 2010. Carolina Bank Holdings, Inc. also agreed to seek regulatory approval to pay dividends on its preferred stock and its trust preferred securities in 2011. Approval was not granted to pay preferred stock dividends in February 2011.
Due to our strong growth in recent years and our anticipation of continued growth, we increased our capital in January 2009 by issuing $16 million in preferred stock to the United States Treasury under the Capital Purchase Program. Carolina Bank also issued approximately $9 million in subordinated debt through a private placement in the third quarter of 2008 to increase capital at the bank level.
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ITEM 4. | Controls and Procedures |
Our Chief Executive Officer and Chief Financial Officer have conducted an evaluation of our disclosure controls and procedures as of March 31, 2011. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the applicable Securities and Exchange Commission Rules and Forms. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation of these controls by our Chief Executive Officer and Chief Financial Officer.
Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) and 15d–15(f) of the Exchange Act) during the first quarter of 2011. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the first quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims and lawsuits in which the Company and the Bank are periodically involved incidental to their business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.
Item 4. (Reserved)
Item 6. Exhibits
| | |
Exhibit No. | | Description of Exhibit |
| |
31.1 | | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
| |
31.2 | | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
| |
32.1 | | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | | | Carolina Bank Holdings, Inc. |
| | | | |
| | Date: May 12, 2011 | | | | By: | | /s/ ROBERT T. BRASWELL |
| | | | | | | | Robert T. Braswell |
| | | | | | | | President and Chief Executive Officer |
| | | | | | | | |
| | | | |
| | | | |
| | Date: May 12, 2011 | | | | By: | | /s/ T. ALLEN LILES |
| | | | | | | | T. Allen Liles |
| | | | | | | | Chief Financial and Principal Accounting Officer |
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Exhibit Index
| | |
Exhibit No. | | Description of Exhibit |
| |
31.1 | | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
| |
31.2 | | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. |
| |
32.1 | | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act. |
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