10-Q 1 form10q-132366_ssfn.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

oTRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission file number 1-33377

 

Stewardship Financial Corporation
(Exact name of registrant as specified in its charter)
   
New Jersey 22-3351447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
630 Godwin Avenue, Midland Park,  NJ 07432
(Address of principal executive offices) (Zip Code)
   
(201)  444-7100
(Registrant’s telephone number, including area code)
   
   
(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. Yes ý       No o

 

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 ý       No o

 

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 o Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company) Smaller reporting company  ý

 

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

 

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of August 7, 2013 was 5,939,451.

 
 

Stewardship Financial Corporation

 

INDEX

 

  PAGE
  NUMBER
PART I  -  FINANCIAL INFORMATION  
   
ITEM 1  -   FINANCIAL STATEMENTS  
   
Consolidated Statements of Financial Condition at June 30, 2013 (Unaudited) and December 31, 2012 1
   
Consolidated Statements of Income (Loss) for the Three and Six Months ended June 30, 2013 and 2012 (Unaudited) 2
   
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months ended June 30, 2013 and 2012 (Unaudited) 3
   
Consolidated Statement of Changes in Shareholders’ Equity for the Six Months ended June 30, 2013 and 2012 (Unaudited) 4
   
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2013 and 2012 (Unaudited) 5 - 6
   
Notes to Consolidated Financial Statements (Unaudited) 7 - 27
   
ITEM 2  -   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28 - 37
   
ITEM 3 -   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38
   
ITEM 4 -    CONTROLS AND PROCEDURES 38
   
PART II  -  OTHER INFORMATION  
   
ITEM 6 -     EXHIBITS 39
   
SIGNATURES 40
   
EXHIBIT INDEX 41

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Financial Condition

 

   June 30,  December 31,
   2013  2012
   (Unaudited)   
Assets          
           
Cash and due from banks  $14,038,000   $19,962,000 
Other interest-earning assets   284,000    1,054,000 
       Cash and cash equivalents   14,322,000    21,016,000 
           
Securities available for sale   181,676,000    174,700,000 
Securities held to maturity; estimated fair value of $29,575,000 (at June 30, 2013) and          
    $31,768,000 (at December 31, 2012)   28,119,000    29,718,000 
FHLB-NY stock, at cost   2,133,000    2,213,000 
Mortgage loans held for sale   2,054,000    784,000 
Loans, net of allowance for loan losses of $10,787,000 (at June 30, 2013) and          
    $10,641,000 (at December 31, 2012)   431,353,000    429,832,000 
Premises and equipment, net   5,538,000    5,645,000 
Accrued interest receivable   2,301,000    2,372,000 
Other real estate owned, net   1,072,000    1,058,000 
Bank owned life insurance   10,105,000    10,470,000 
Other assets   10,159,000    10,580,000 
       Total assets  $688,832,000   $688,388,000 
           
Liabilities and shareholders' equity          
           
Liabilities          
Deposits:          
    Noninterest-bearing  $145,388,000   $124,286,000 
    Interest-bearing   447,311,000    465,968,000 
        Total deposits   592,699,000    590,254,000 
           
Federal Home Loan Bank of New York advances   25,000,000    25,000,000 
Securities sold under agreements to repurchase   7,344,000    7,343,000 
Subordinated debentures   7,217,000    7,217,000 
Accrued interest payable   445,000    560,000 
Accrued expenses and other liabilities   1,835,000    1,668,000 
        Total liabilities   634,540,000    632,042,000 
           
Commitments and contingencies        
           
Shareholders' equity          
Preferred stock, no par value; 2,500,000 shares authorized; 15,000 shares          
    issued and outstanding at June 30, 2013 and December 31, 2012          
    liquidation preference of $15,000,000   14,969,000    14,964,000 
Common stock, no par value; 10,000,000 shares authorized;          
    5,936,054 and 5,924,865 shares issued and outstanding at June 30, 2013          
    and December 31, 2012, respectively   40,652,000    40,606,000 
Retained earnings   1,182,000    316,000 
Accumulated other comprehensive income (loss), net   (2,511,000)   460,000 
        Total shareholders' equity   54,292,000    56,346,000 
           
        Total liabilities and shareholders' equity  $688,832,000   $688,388,000 

See notes to unaudited consolidated financial statements.

1

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Income (Loss)

(Unaudited)

 

   Three Months Ended  Six Months Ended
   June 30,  June 30,
   2013  2012  2013  2012
Interest income:                    
Loans  $5,680,000   $6,085,000   $11,604,000   $12,344,000 
Securities held to maturity                    
Taxable   75,000    128,000    151,000    280,000 
Non-taxable   195,000    204,000    391,000    413,000 
Securities available for sale                    
Taxable   578,000    798,000    1,144,000    1,597,000 
Non-taxable   77,000    64,000    154,000    125,000 
FHLB dividends   23,000    28,000    48,000    57,000 
Other interest-earning assets   8,000    10,000    14,000    17,000 
Total interest income   6,636,000    7,317,000    13,506,000    14,833,000 
                     
Interest expense:                    
Deposits   592,000    894,000    1,233,000    1,877,000 
Borrowed money   366,000    463,000    729,000    945,000 
Total interest expense   958,000    1,357,000    1,962,000    2,822,000 
                     
Net interest income before provision for loan losses   5,678,000    5,960,000    11,544,000    12,011,000 
Provision for loan losses   850,000    2,900,000    2,450,000    4,665,000 
Net interest income after provision for loan losses   4,828,000    3,060,000    9,094,000    7,346,000 
                     
Noninterest income:                    
Fees and service charges   492,000    531,000    948,000    1,046,000 
Bank owned life insurance   77,000    81,000    153,000    161,000 
Gain on calls and sales of securities       12,000    2,000    445,000 
Gain on sales of mortgage loans   298,000    154,000    460,000    565,000 
Gain on sale of other real estate owned       370,000    126,000    469,000 
Gain on life insurance proceeds           537,000     
Other   128,000    133,000    243,000    244,000 
Total noninterest income   995,000    1,281,000    2,469,000    2,930,000 
                     
Noninterest expenses:                    
Salaries and employee benefits   2,711,000    2,257,000    5,407,000    4,643,000 
Occupancy, net   503,000    471,000    1,020,000    958,000 
Equipment   199,000    243,000    383,000    491,000 
Data processing   332,000    316,000    660,000    650,000 
Advertising   140,000    139,000    251,000    278,000 
FDIC insurance premium   276,000    155,000    426,000    303,000 
Charitable contributions   60,000    25,000    120,000    175,000 
Other   910,000    1,218,000    1,796,000    2,179,000 
Total noninterest expenses   5,131,000    4,824,000    10,063,000    9,677,000 
Income (loss) before income tax expense (benefit)   692,000    (483,000)   1,500,000    599,000 
Income tax expense (benefit)   231,000    (159,000)   217,000    147,000 
Net income (loss)   461,000    (324,000)   1,283,000    452,000 
Dividends on preferred stock   127,000    38,000    293,000    113,000 
Net income (loss) available to common shareholders  $334,000   $(362,000)  $990,000   $339,000 
                     
Basic earnings (loss) per common share  $0.06   $(0.06)  $0.17   $0.06 
Diluted earnings (loss) per common share  $0.06   $(0.06)  $0.17   $0.06 
                     
Weighted average number of common shares outstanding   5,934,549    5,902,167    5,932,774    5,897,266 
Weighted average number of diluted common                    
     shares outstanding   5,934,549    5,902,167    5,932,774    5,897,266 

See notes to unaudited consolidated financial statements.

2

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2013   2012   2013   2012 
                 
Net income (loss)  $461,000   $(324,000)  $1,283,000   $452,000 
                     
Other comprehensive (loss) income:                    
Change in unrealized holding gains (losses) on                    
securities available for sale arising during the period   (4,465,000)   668,000    (5,013,000)   728,000 
Reclassification adjustment for gains in net income       (12,000)   (2,000)   (445,000)
Net unrealized gains (losses)   (4,465,000)   656,000    (5,015,000)   283,000 
Tax effect   1,736,000    (256,000)   1,946,000    (111,000)
Net unrealized gains (losses), net of tax amount   (2,729,000)   400,000    (3,069,000)   172,000 
                     
Change in fair value of interest rate swap   99,000    (13,000)   164,000    17,000 
Tax effect   (40,000)   5,000    (66,000)   (7,000)
Change in fair value of interest rate swap,                    
net of tax amount   59,000    (8,000)   98,000    10,000 
                     
Total other comprehensive income (loss)   (2,670,000)   392,000    (2,971,000)   182,000 
                     
Total comprehensive income (loss)  $(2,209,000)  $68,000   $(1,688,000)  $634,000 

 

The following is a summary of the accumulated other comprehensive income balances, net of tax.

 

   6/30/2013   12/31/2012 
         
Unrealized gain (loss) on securities available for sale  $(2,122,000)  $947,000 
Unrealized loss on fair value of interest rate swap   (389,000)   (487,000)
           
Accumulated other comprehensive income (loss), net  $(2,511,000)  $460,000 

See notes to unaudited consolidated financial statements.

3

Stewardship Financial Corporation and Subsidiary

Consolidated Statement of Changes in Stockholders' Equity

(Unaudited)

 

   Six Months Ended June 30, 2013
               Accumulated   
               Other   
               Comprehensive   
   Preferred  Common Stock  Retained  Income (Loss),   
   Stock  Shares  Amount  Earnings  Net  Total
                   
Balance -- December 31, 2012  $14,964,000    5,924,865   $40,606,000   $316,000   $460,000   $56,346,000 
Cash dividends paid on common stock               (119,000)       (119,000)
Payment of discount on dividend                              
    reinvestment plan           (1,000)           (1,000)
Cash dividends accrued on                              
    preferred stock               (293,000)       (293,000)
Common stock issued under stock plans       11,189    47,000            47,000 
Amortization of issuance costs   5,000            (5,000)         
Net income                  1,283,000        1,283,000 
Other comprehensive loss                   (2,971,000)   (2,971,000)
                               
Balance -- June 30, 2013  $14,969,000    5,936,054   $40,652,000   $1,182,000   $(2,511,000)  $54,292,000 

   Six Months Ended June 30, 2012
               Accumulated   
               Other   
               Comprehensive   
   Preferred  Common Stock  Retained  Income (Loss),   
   Stock  Shares  Amount  Earnings  Net  Total
                   
Balance -- December 31, 2011  $14,955,000    5,882,504   $40,420,000   $1,043,000   $1,374,000   $57,792,000 
Cash dividends paid on common stock               (531,000)       (531,000)
Payment of discount on dividend                              
    reinvestment plan           (5,000)           (5,000)
Cash dividends accrued on                              
    preferred stock               (113,000)       (113,000)
Common stock issued under stock plans       22,854    114,000            114,000 
Amortization of issuance costs   5,000            (5,000)         
Net income                  452,000        452,000 
Other comprehensive income                   182,000    182,000 
                               
Balance -- June 30, 2012  $14,960,000    5,905,358   $40,529,000   $846,000   $1,556,000   $57,891,000 

See notes to unaudited consolidated financial statements.

4

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

 

   Six Months Ended 
   June 30, 
   2013   2012 
Cash flows from operating activities:          
Net income  $1,283,000   $452,000 
Adjustments to reconcile net income to          
net cash provided by operating activities:          
Depreciation and amortization of premises and equipment   217,000    276,000 
Amortization of premiums and accretion of discounts, net   700,000    791,000 
Accretion (amortization) of deferred loan fees   22,000    25,000 
Provision for loan losses   2,450,000    4,665,000 
Originations of mortgage loans held for sale   (27,614,000)   (39,324,000)
Proceeds from sale of mortgage loans   26,804,000    41,266,000 
Gain on sales of mortgage loans   (460,000)   (565,000)
Gain on sales and calls of securities   (2,000)   (445,000)
Gain on sale of other real estate owned   (126,000)   (469,000)
Deferred income tax benefit   (63,000)   (142,000)
Decrease in accrued interest receivable   71,000    129,000 
Decrease in accrued interest payable   (115,000)   (131,000)
Earnings on bank owned life insurance   (153,000)   (161,000)
Gain on life insurance proceeds   (537,000)    
Decrease in other assets   2,428,000    315,000 
Increase (decrease) in other liabilities   266,000    (891,000)
Net cash provided by operating activities   5,171,000    5,791,000 
           
Cash flows from investing activities:          
Purchase of securities available for sale   (35,436,000)   (40,525,000)
Proceeds from maturities and principal repayments on securities available for sale   16,297,000    12,783,000 
Proceeds from sales and calls on securities available for sale   6,500,000    25,960,000 
Proceeds from maturities and principal repayments on securities held to maturity   1,300,000    2,188,000 
Proceeds from calls on securities held to maturity   250,000    3,105,000 
Sale of FHLB-NY stock   80,000    265,000 
Net (increase) decrease in loans   (4,342,000)   5,853,000 
Proceeds from sale of other real estate owned   461,000    4,562,000 
Life insurance proceeds   1,055,000     
Additions to premises and equipment   (110,000)   (48,000)
Net cash provided by (used in) investing activities   (13,945,000)   14,143,000 
           
Cash flows from financing activities:          
Net increase in noninterest-bearing deposits   21,102,000    8,241,000 
Net increase (decrease) in interest-bearing deposits   (18,657,000)   (8,298,000)
Net increase in securities sold under agreements to repurchase   1,000     
Net decrease in short term borrowings       (4,700,000)
Repayment of long term borrowings       (3,000,000)
Cash dividends paid on common stock   (119,000)   (531,000)
Cash dividends paid on preferred stock   (293,000)   (113,000)
Payment of discount on dividend reinvestment plan   (1,000)   (5,000)
Issuance of common stock   47,000    114,000 
Net cash provided by (used in) financing activities   2,080,000    (8,292,000)
           
Net increase (decrease) in cash and cash equivalents   (6,694,000)   11,642,000 
Cash and cash equivalents - beginning   21,016,000    13,698,000 
Cash and cash equivalents - ending  $14,322,000   $25,340,000 

See notes to unaudited consolidated financial statements.

5

Stewardship Financial Corporation and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited)

 

   Six Months Ended 
   June 30, 
   2013   2012 
Supplemental disclosures of cash flow information:          
Cash paid during the period for interest  $2,077,000   $2,953,000 
Cash paid during the period for income taxes  $68,000   $1,194,000 
Transfers from loans to other real estate owned  $349,000   $882,000 

 

See notes to unaudited consolidated financial statements.

6

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

June 30, 2013

(Unaudited)

 

Note 1. Summary of Significant Accounting Policies

 

Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 28, 2013 (the “2012 Annual Report”).

 

The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results which may be expected for the entire year.

 

Principles of consolidation

 

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to the current presentation.

 

The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the consolidated financial statements and disclosures provided. Actual results could differ significantly from those estimates.

 

Material estimates

 

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize probable incurred losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area.

 

Adoption of New Accounting Standards

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income – Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statement where net income is presented or in the accompanying notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The standard is effective prospectively for reporting periods, including interim periods, beginning after December 15, 2012. The adoption of the standard did not have a material effect on the Corporation’s consolidated financial statements.

 

7

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): “Disclosures about Offsetting Assets and Liabilities,” This ASU requires an entity to disclose both gross and net information about financial instruments, such as sales and repurchase agreements and reverse sale and repurchase agreements and securities borrowing/lending arrangements, and derivative instruments that are eligible for offset in the statement of financial position and/or subject an enforceable master netting arrangement or similar agreement regardless of whether they are presented net in the financial statements.  The standard is effective for annual and interim periods beginning on January 1, 2013, and it is required to be applied retrospectively. The adoption of the standard did not have a material impact on the Corporation’s consolidated financial statements.

 

Note 2. Securities – Available-for-sale and Held to Maturity

 

The fair value of the available-for-sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

   June 30, 2013 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $   $   $   $ 
U.S. government-sponsored agencies   40,796,000    68,000    1,701,000    39,163,000 
Obligations of state and political                    
  subdivisions   13,655,000    241,000    181,000    13,715,000 
Mortgage-backed securities - residential   114,333,000    523,000    2,151,000    112,705,000 
Asset-backed securities (a)   9,874,000        80,000    9,794,000 
Corporate debt   2,994,000    4,000    92,000    2,906,000 
                     
Total debt securities   181,652,000    836,000    4,205,000    178,283,000 
Other equity investments   3,484,000        91,000    3,393,000 
   $185,136,000   $836,000   $4,296,000   $181,676,000 

 

   December 31, 2012 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $4,003,000   $3,000   $   $4,006,000 
U.S. government-sponsored agencies   37,287,000    35,000    67,000    37,255,000 
Obligations of state and political                    
  subdivisions   13,724,000    468,000    22,000    14,170,000 
Mortgage-backed securities - residential   104,341,000    1,176,000    89,000    105,428,000 
Asset-backed securities (a)   9,874,000    22,000    12,000    9,884,000 
Corporate debt   492,000    3,000        495,000 
                     
Total debt securities   169,721,000    1,707,000    190,000    171,238,000 
Other equity investments   3,425,000    37,000        3,462,000 
   $173,146,000   $1,744,000   $190,000   $174,700,000 

 

(a) Collateralized by student loans

 

Cash proceeds realized from calls and sales of securities available for sale for the three and six months ended June 30, 2013 were $4,000,000 and $6,500,000, respectively. Cash proceeds realized from calls and sales of securities available for sale for the three and six months ended June 30, 2012 were $14,000,000 and $25,960,000, respectively. There were no gross gains realized on calls and sales during the three months ended June 30, 2013. Gross gains realized on calls and sales during the six months ended June 30, 2013 totaled $2,000. There were no gross losses realized on calls and sales during the three and six months ended June 30, 2013. Gross gains realized on calls and sales during the three and six months ended June 30, 2012 totaled $5,000 and $438,000, respectively. There were no gross losses realized on calls and sales during the three and six months ended June 30, 2012.

8

The following is a summary of the held to maturity securities and related unrecognized gains and losses:

 

   June 30, 2013 
   Amortized   Gross Unrecognized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. government-sponsored agencies  $259,000   $34,000       $293,000 
Obligations of state and political                    
  subdivisions   22,221,000    998,000        23,219,000 
Mortgage-backed securities - residential   5,639,000    424,000        6,063,000 
   $28,119,000   $1,456,000   $   $29,575,000 

 

   December 31, 2012 
   Amortized   Gross Unrecognized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. government-sponsored agencies  $260,000   $46,000   $   $306,000 
Obligations of state and political                    
  subdivisions   22,787,000    1,407,000        24,194,000 
Mortgage-backed securities - residential   6,671,000    597,000        7,268,000 
   $29,718,000   $2,050,000   $   $31,768,000 

 

While there were no cash proceeds realized from calls of securities held to maturity for the three months ended June 30, 2013, cash proceeds realized from calls of securities held to maturity for the six months ended June 30, 2013 were $250,000. Cash proceeds realized from calls of securities held to maturity for the three and six months ended June 30, 2012 were $2,500,000 and $3,105,000, respectively. There were no gross gains and no gross losses realized on calls during the three and six months ended June 30, 2013. Gross gains of $7,000 were realized on calls for both the three and six months ended June 30, 2012. There were no gross losses realized on calls during the three and six months ended June 30, 2012.

The following table presents the amortized cost and fair value of the debt securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment premiums, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities and asset-backed securities, are shown separately.

 

   June 30, 2013 
   Amortized   Fair 
   Cost   Value 
         
Available for sale          
Within one year  $   $ 
After one year, but within five years   7,202,000    7,109,000 
After five years, but within ten years   29,600,000    28,769,000 
After ten years   20,643,000    19,906,000 
Mortgage-backed securities - residential   114,333,000    112,705,000 
Asset-backed securities   9,874,000    9,794,000 
Total  $181,652,000   $178,283,000 
           
Held to maturity          
Within one year  $1,888,000   $1,907,000 
After one year, but within five years   15,687,000    16,427,000 
After five years, but within ten years   4,727,000    4,994,000 
After ten years   178,000    184,000 
Mortgage-backed securities - residential   5,639,000    6,063,000 
Total  $28,119,000   $29,575,000 

9

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2013 and December 31, 2012, and if the unrealized loss was continuous for the twelve months prior to June 30, 2013 and December 31, 2012. There were no unrealized losses on held to maturity securities at either June 30, 2013 or December 31, 2012.

 

Available for Sale            
June 30, 2013  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
U.S. Treasury  $   $   $   $   $   $ 
U.S. government-                              
  sponsored agencies   33,890,000    (1,701,000)           33,890,000    (1,701,000)
Obligations of state and                              
  political subdivisions   6,344,000    (181,000)           6,344,000    (181,000)
Mortgage-backed                              
  securities - residential   68,340,000    (2,151,000)           68,340,000    (2,151,000)
Asset-backed securities   9,795,000    (80,000)           9,795,000    (80,000)
Corporate debt   2,407,000    (92,000)           2,407,000    (92,000)
Other equity investments   3,333,000    (91,000)           3,333,000    (91,000)
     Total temporarily                              
          impaired securities  $124,109,000   $(4,296,000)  $   $   $124,109,000   $(4,296,000)

 

December 31, 2012  Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
U.S. Treasury  $   $   $   $   $   $ 
U.S. government-                              
  sponsored agencies   20,716,000    (67,000)           20,716,000    (67,000)
Obligations of state and                              
  political subdivisions   3,257,000    (22,000)           3,257,000    (22,000)
Mortgage-backed                              
  securities - residential   23,715,000    (89,000)           23,715,000    (89,000)
Asset-backed securities   3,047,000    (12,000)             3,047,000    (12,000)
Corporate debt                        
Other equity investments                        
     Total temporarily                              
          impaired securities  $50,735,000   $(190,000)  $   $   $50,735,000   $(190,000)

Other-Than-Temporary-Impairment

 

At June 30, 2013, there were no securities in a continuous loss position for 12 months or longer. The Corporation’s unrealized losses are primarily due to market interest rate conditions. These securities have not been considered other than temporarily impaired as scheduled principal and interest payments have been made and management anticipates collecting the entire principal balance as scheduled. Because the decline in fair value is attributable to changes in market conditions, and not credit quality, and because the Corporation does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at June 30, 2013.

10

Note 3. Loans and Nonperforming Loans

 

At June 30, 2013 and December 31, 2012, respectively, the loan portfolio consisted of the following:

 

   June 30,   December 31, 
   2013   2012 
         
Commercial:          
Secured by real estate  $54,844,000   $58,160,000 
Other   28,132,000    31,254,000 
Commercial real estate   252,219,000    242,763,000 
Commercial construction   5,421,000    9,324,000 
Residential real estate   73,004,000    67,200,000 
Consumer:          
Secured by real estate   27,827,000    30,982,000 
Other   489,000    624,000 
Other   70,000    116,000 
Total gross loans   442,006,000    440,423,000 
           
Less:  Deferred loan fees, net of costs   (134,000)   (50,000)
Allowance for loan losses   10,787,000    10,641,000 
    10,653,000    10,591,000 
           
Loans, net  $431,353,000   $429,832,000 

 

At June 30, 2013 and December 31, 2012, loan participations sold by the Corporation to other lending institutions totaled approximately $15,506,000 and $20,559,000, respectively. These amounts are not included in the totals presented above.

 

Activity in the allowance for loan losses is summarized as follows:

 

   For the three months ended June 30, 2013 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $5,285,000   $(1,082,000)  $261,000   $43,000   $3,985,000 
Commercial real estate   5,549,000    1,452,000    1,403,000        5,598,000 
Construction   20,000    261,000        23,000    304,000 
Residential real estate   334,000    100,000            434,000 
Consumer   290,000    99,000        21,000    410,000 
Other loans   1,000                1,000 
Unallocated   33,000    20,000        2,000    55,000 
Total  $11,512,000   $850,000   $1,664,000   $89,000   $10,787,000 

11

   For the six months ended June 30, 2013 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $4,832,000   $(277,000)  $648,000   $78,000   $3,985,000 
Commercial real estate   4,936,000    2,421,000    1,759,000        5,598,000 
Construction   169,000    133,000    24,000    26,000    304,000 
Residential real estate   308,000    126,000            434,000 
Consumer   352,000    41,000    3,000    20,000    410,000 
Other loans   3,000    (4,000)       2,000    1,000 
Unallocated   41,000    10,000        4,000    55,000 
Total  $10,641,000   $2,450,000   $2,434,000   $130,000   $10,787,000 

 

   For the three months ended June 30, 2012 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $6,068,000   $1,994,000   $2,068,000   $29,000   $6,023,000 
Commercial real estate   5,448,000    918,000    1,839,000        4,527,000 
Construction   777,000    (118,000)   145,000        514,000 
Residential real estate   338,000    54,000            392,000 
Consumer   439,000    39,000    41,000        437,000 
Other loans   2,000    1,000        1,000    4,000 
Unallocated   25,000    12,000            37,000 
Total  $13,097,000   $2,900,000   $4,093,000   $30,000   $11,934,000 

 

   For the six months ended June 30, 2012 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $5,368,000   $2,960,000   $2,356,000   $51,000   $6,023,000 
Commercial real estate   4,943,000    1,423,000    1,839,000        4,527,000 
Construction   480,000    179,000    145,000        514,000 
Residential real estate   303,000    89,000            392,000 
Consumer   498,000    (14,000)   47,000        437,000 
Other loans   2,000    1,000        1,000    4,000 
Unallocated   10,000    27,000            37,000 
Total  $11,604,000   $4,665,000   $4,387,000   $52,000   $11,934,000 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013 and December 31, 2012.

12

   June 30, 2013 
       Commercial   Commercial   Residential       Other         
   Commercial   Real Estate   Construction   Real Estate   Consumer   Loans   Unallocated   Total 
                                 
Allowance for loan                                           
  losses:                                        
  Ending allowance                                           
    balance attributable                                           
    to loans                                        
                                         
    Individually                                        
     evaluated for                                        
     impairment  $181,000   $29,000   $99,000   $67,000   $149,000   $   $   $525,000 
                                         
    Collectively                                        
     evaluated for                                        
     impairment   3,804,000    5,569,000    205,000    367,000    261,000    1,000    55,000    10,262,000 
Total ending                                        
  allowance                                        
  balance  $3,985,000   $5,598,000   $304,000   $434,000   $410,000   $1,000   $55,000   $10,787,000 
                                         
Loans:                                        
    Loans                                        
     individually                                        
     evaluated for                                        
     impairment  $9,219,000   $12,351,000   $1,875,000   $595,000   $911,000   $   $   $24,951,000 
                                         
    Loans                                        
     collectively                                        
     evaluated for                                        
     impairment   73,757,000    239,868,000    3,546,000    72,409,000    27,405,000    70,000        417,055,000 
Total ending                                        
  loan balance  $82,976,000   $252,219,000   $5,421,000   $73,004,000   $28,316,000   $70,000   $   $442,006,000 

13

   December 31, 2012 
       Commercial   Commercial   Residential       Other         
   Commercial   Real Estate   Construction   Real Estate   Consumer   Loans   Unallocated   Total 
                                 
Allowance for loan                                           
  losses:                                        
  Ending allowance                                           
    balance attributable                                           
    to loans                                        
                                         
    Individually                                        
     evaluated for                                        
     impairment  $251,000   $15,000   $   $   $   $   $   $266,000 
                                         
    Collectively                                        
     evaluated for                                        
     impairment   4,581,000    4,921,000    169,000    308,000    352,000    3,000    41,000    10,375,000 
Total ending                                        
  allowance                                        
  balance  $4,832,000   $4,936,000   $169,000   $308,000   $352,000   $3,000   $41,000   $10,641,000 
                                         
Loans:                                        
    Loans                                        
     individually                                        
     evaluated for                                        
     impairment  $8,641,000   $12,803,000   $6,029,000   $413,000   $800,000   $   $   $28,686,000 
                                         
    Loans                                        
     collectively                                        
     evaluated for                                        
     impairment   80,773,000    229,960,000    3,295,000    66,787,000    30,806,000    116,000        411,737,000 
Total ending                                        
  loan balance  $89,414,000   $242,763,000   $9,324,000   $67,200,000   $31,606,000   $116,000   $   $440,423,000 

 

The following table presents the recorded investment in nonaccrual loans in the periods indicated:

 

   June 30,   December 31, 
   2013   2012 
         
Commercial:          
Secured by real estate  $3,446,000   $3,374,000 
Other   109,000    261,000 
Commercial real estate   9,655,000    10,083,000 
Commercial construction       3,080,000 
Residential real estate   595,000    413,000 
Consumer:          
Secured by real estate   911,000    800,000 
           
    Total nonperfoming loans  $14,716,000   $18,011,000 

14

The following presents loans individually evaluated for impairment by class of loans as of the periods indicated:

 

   At June 30, 2013 
   Unpaid       Allowance for   Average   Interest 
   Principal   Recorded   Loan Losses   Recorded   Income 
   Balance   Investment   Allocated   Investment   Recognized 
                     
With no related allowance recorded:                         
Commercial:                         
Secured by real estate  $11,403,000   $7,608,000        $6,504,000   $134,000 
Other   31,000    27,000         103,000    1,000 
Commercial real estate   16,513,000    11,418,000         9,885,000    60,000 
Commercial construction                3,998,000    19,000 
Residential real estate   451,000    413,000         413,000     
Consumer:                         
Secured by real estate   578,000    569,000         739,000     
                          
With an allowance recorded:                         
Commercial:                         
Secured by real estate   625,000    562,000   $146,000    916,000    15,000 
Other   1,078,000    1,022,000    35,000    1,184,000    25,000 
Commercial real estate   1,426,000    933,000    29,000    2,541,000    25,000 
Commercial construction   2,289,000    1,875,000    99,000    625,000    36,000 
Residential real estate   183,000    182,000    67,000    61,000     
Consumer:                         
Secured by real estate   342,000    342,000    149,000    114,000     
   $34,919,000   $24,951,000   $525,000   $27,083,000   $315,000 

15

   At December 31, 2012 
   Unpaid       Allowance for   Average   Interest 
   Principal   Recorded   Loan Losses   Recorded   Income 
   Balance   Investment   Allocated   Investment   Recognized 
                     
With no related allowance recorded:
Commercial:                         
Secured by real estate  $9,689,000   $6,557,000        $4,221,000   $92,000 
Other   424,000    146,000         109,000    5,000 
Commercial real estate   17,211,000    12,149,000         10,054,000    158,000 
Construction:                         
Commercial   7,300,000    6,029,000         6,041,000    53,000 
Residential                     
Residential real estate   451,000    413,000         393,000     
Consumer:                         
Secured by real estate   834,000    800,000         922,000     
                          
With an allowance recorded:                         
Commercial:                         
Secured by real estate   965,000    781,000   $176,000    2,589,000    25,000 
Other   1,163,000    1,157,000    75,000    2,195,000    43,000 
Commercial real estate   923,000    654,000    15,000    2,940,000    18,000 
Construction:                         
Commercial               1,224,000     
Residential               596,000     
Residential real estate               239,000     
   $38,960,000   $28,686,000   $266,000   $31,523,000   $394,000 

16

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2013 and December 31, 2012. Nonaccrual loans are included in the disclosure by payment status.

 

   June 30, 2013 
           Greater than       Loans     
   30-59 Days   60-89 Days   90 Days   Total   Not     
   Past Due   Past Due   Past Due   Past Due   Past Due   Total 
                         
Commercial:                              
Secured by real estate  $   $   $352,000   $352,000   $54,492,000   $54,844,000 
Other   179,000        1,510,000    1,689,000    26,443,000    28,132,000 
Commercial real estate       1,498,000    6,941,000    8,439,000    243,780,000    252,219,000 
Commercial construction                   5,421,000    5,421,000 
Residential real estate           595,000    595,000    72,409,000    73,004,000 
Consumer:                              
Secured by real estate   70,000        674,000    744,000    27,083,000    27,827,000 
Other                   489,000    489,000 
Other                   70,000    70,000 
Total  $249,000   $1,498,000   $10,072,000   $11,819,000   $430,187,000   $442,006,000 

 

   December 31, 2012 
           Greater than       Loans     
   30-59 Days   60-89 Days   90 Days   Total   Not     
   Past Due   Past Due   Past Due   Past Due   Past Due   Total 
                         
Commercial:                              
Secured by real estate  $101,000   $179,000   $2,674,000   $2,954,000   $55,206,000   $58,160,000 
Other   25,000    98,000    52,000    175,000    31,079,000    31,254,000 
Commercial real estate   2,582,000        9,023,000    11,605,000    231,158,000    242,763,000 
Commercial construction       460,000    815,000    1,275,000    8,049,000    9,324,000 
Residential real estate   161,000        413,000    574,000    66,626,000    67,200,000 
Consumer:                              
Secured by real estate   67,000        647,000    714,000    30,268,000    30,982,000 
Other                   624,000    624,000 
Other                   116,000    116,000 
Total  $2,936,000   $737,000   $13,624,000   $17,297,000   $423,126,000   $440,423,000 

 

Troubled Debt Restructurings

 

At June 30, 2013 and December 31, 2012, the Corporation had $11.4 million and $11.7 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $10.2 million and $10.4 million were performing in accordance with their new terms at June 30, 2013 and December 31, 2012, respectively. The remaining troubled debt restructurings are reported as nonaccrual loans. Specific reserves of $301,000 and $246,000 have been allocated for the troubled debt restructurings at June 30, 2013 and December 31, 2012, respectively. As of June 30, 2013 and December 31, 2012, the Corporation has committed $120,000 and $241,000 respectively, of additional funds to a single customer with an outstanding construction loan that is classified as a troubled debt restructuring.

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

 

The following table presents loans, by class, that were modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2013:

17

   For the three months ended June 30, 
   2013   2012 
       Pre-   Post-       Pre-   Post- 
   Number   Modification   Modification   Number   Modification   Modification 
   of   Recorded   Recorded   of   Recorded   Recorded 
   Loans   Investment   Investment   Loans   Investment   Investment 
                         
Commercial:                              
Secured by real estate      $   $    2   $226,000   $226,000 
Other               1    74,000    72,000 
Total troubled debt restructurings      $   $    3   $300,000   $298,000 

 

   For the six months ended June 30, 
   2013   2012 
       Pre-   Post-       Pre-   Post- 
   Number   Modification   Modification   Number   Modification   Modification 
   of   Recorded   Recorded   of   Recorded   Recorded 
   Loans   Investment   Investment   Loans   Investment   Investment 
                         
Commercial:                              
Secured by real estate      $   $    2   $226,000   $226,000 
Other   1    17,000    17,000    1    74,000    72,000 
Total troubled debt restructurings   1   $17,000&nb