10-Q 1 march312013_10q.htm 10 Q 3-31-13 march312013_10q.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2013.

¨
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:  0-12820

AMERICAN NATIONAL BANKSHARES INC.
(Exact name of registrant as specified in its charter)

VIRGINIA
 
54-1284688
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
628 Main Street
   
Danville, Virginia
 
24541
(Address of principal executive offices)
 
(Zip Code)

(434) 792-5111
(Registrant's telephone number, including area code)

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
x
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.
 
 
Yes
x
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  o                                                                Accelerated filer  x                                                      Non-accelerated filer  o
Smaller reporting company o

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

At May 6, 2013, the Company had 7,862,701 shares of Common Stock outstanding, $1 par value.




 
 

 
 
 

AMERICAN NATIONAL BANKSHARES INC.
       
   
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2


Item 1. Financial Statements

 
 American National Bankshares Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 
(Dollars in thousands, except share data)
 
             
   
(Unaudited)
   
(Audited)
 
   
March 31,
   
December 31,
 
 Assets
 
2013
   
2012
 
 Cash and due from banks
  $ 15,365     $ 20,435  
 Interest-bearing deposits in other banks
    42,280       27,007  
                 
 Securities available for sale, at fair value
    341,176       335,246  
 Restricted stock, at cost
    4,876       5,287  
 Loans held for sale
    4,395       13,852  
                 
 Loans, net of unearned income
    792,513       788,705  
 Less allowance for loan losses
    (12,528 )     (12,118 )
 Net loans
    779,985       776,587  
                 
 Premises and equipment, net
    24,297       24,543  
 Other real estate owned, net
    5,822       6,193  
 Goodwill
    39,043       39,043  
 Core deposit intangibles, net
    4,240       4,660  
 Bank owned life insurance
    14,391       14,289  
 Accrued interest receivable and other assets
    18,193       16,545  
 Total assets
  $ 1,294,063     $ 1,283,687  
                 
Liabilities
               
 Liabilities:
               
 Demand deposits -- noninterest bearing
  $ 210,201     $ 217,275  
 Demand deposits -- interest bearing
    154,407       153,578  
 Money market deposits
    173,724       166,111  
 Savings deposits
    83,966       81,135  
 Time deposits
    415,450       409,568  
 Total deposits
    1,037,748       1,027,667  
                 
 Customer repurchase agreements
    46,666       49,942  
 Long-term borrowings
    10,047       10,079  
 Trust preferred capital notes
    27,343       27,317  
 Accrued interest payable and other liabilities
    7,227       5,436  
 Total liabilities
    1,129,031       1,120,441  
                 
 Shareholders' equity
               
 Preferred stock, $5 par, 2,000,000 shares authorized,
               
 none outstanding
    -       -  
 Common stock, $1 par, 20,000,000 shares authorized,
               
 7,862,701 shares outstanding at March 31, 2013 and
               
 7,846,912 shares outstanding at December 31, 2012
    7,863       7,847  
 Capital in excess of par value
    57,341       57,211  
 Retained earnings
    92,933       90,591  
 Accumulated other comprehensive income, net
    6,895       7,597  
 Total shareholders' equity
    165,032       163,246  
 Total liabilities and shareholders' equity
  $ 1,294,063     $ 1,283,687  
                 
The accompanying notes are an integral part of the consolidated financial statements.
         

 
3


 
 Consolidated Statements of Income
 
(Dollars in thousands, except per share data) (Unaudited)
 
   
   
Three Months Ended
 
   
March 31
 
   
2013
   
2012
 
 Interest and Dividend Income:
           
 Interest and fees on loans
  $ 11,395     $ 13,120  
 Interest and dividends on securities:
               
 Taxable
    878       1,079  
 Tax-exempt
    1,052       1,082  
 Dividends
    55       51  
 Other interest income
    29       10  
 Total interest and dividend income
    13,409       15,342  
                 
Interest Expense:
               
 Interest on deposits
    1,436       1,837  
 Interest on short-term borrowings
    21       43  
 Interest on long-term borrowings
    82       84  
 Interest on trust preferred capital notes
    188       206  
 Total interest expense
    1,727       2,170  
                 
 Net Interest Income
    11,682       13,172  
 Provision for Loan Losses
    294       733  
                 
 Net Interest Income After Provision for Loan Losses
    11,388       12,439  
                 
 Noninterest Income:
               
 Trust fees
    588       882  
 Service charges on deposit accounts
    409       488  
 Other fees and commissions
    459       457  
 Mortgage banking income
    718       531  
 Securities gains, net
    198       -  
 Other
    398       876  
 Total noninterest income
    2,770       3,234  
                 
 Noninterest Expense:
               
 Salaries
    3,439       4,111  
 Employee benefits
    899       1,078  
 Occupancy and equipment
    916       965  
 FDIC assessment
    161       233  
 Bank franchise tax
    187       183  
 Core deposit intangible amortization
    420       547  
 Foreclosed real estate, net
    243       (153 )
 Merger related expenses
    -       251  
     Other
    2,053       2,712  
 Total noninterest expense
    8,318       9,927  
 Income Before Income Taxes
    5,840       5,746  
 Income Taxes
    1,689       1,571  
 Net Income
  $ 4,151     $ 4,175  
                 
 Net Income Per Common Share:
               
     Basic
  $ 0.53     $ 0.53  
     Diluted
  $ 0.53     $ 0.53  
 Average Common Shares Outstanding:
               
     Basic
    7,861,991       7,822,228  
     Diluted
    7,871,508       7,833,061  
                 
The accompanying notes are an integral part of the consolidated financial statements.
 

 
4


 American National Bankshares Inc. and Subsidiaries
 
 
Three Months Ended March 31, 2013 and 2012
 
 (Dollars in thousands)  (Unaudited)
 
   
Three Months Ended
 
   
March 31
 
   
2013
   
2012
 
             
 Net income
  $ 4,151     $ 4,175  
                 
 Other comprehensive loss:
               
                 
 Unrealized losses on securities available for sale
    (882 )     (677 )
 Income tax benefit
    309       237  
                 
 Reclassification adjustment for gains on securities
    (198 )     -  
 Income tax expense
    69       -  
                 
 Other comprehensive loss
    (702 )     (440 )
                 
Comprehensive income
  $ 3,449     $ 3,735  
                 
The accompanying notes are an integral part of the consolidated financial statements.
         

 
5


 American National Bankshares Inc. and Subsidiaries
 
 
Three Months Ended March 31, 2013 and 2012
 
 (Dollars in thousands) (Unaudited)
 
                               
                     
Accumulated
       
         
Capital in
         
Other
   
Total
 
   
Common
   
Excess of
   
Retained
   
Comprehensive
   
Shareholders'
 
   
Stock
   
Par Value
   
Earnings
   
Income (Loss)
   
Equity
 
                               
                               
 Balance, December 31, 2011
  $ 7,807     $ 56,395     $ 81,797     $ 6,830     $ 152,829  
                                         
 Net income
    -       -       4,175       -       4,175  
                                         
 Other comprehensive loss
                            (440 )     (440 )
                                         
 Stock options exercised
    3       42       -       -       45  
                                         
 Stock option expense
    -       16       -       -       16  
                                         
 Equity based compensation
    20       180       -       -       200  
                                         
 Cash dividends declared, $0.23 per share
    -       -       (1,801 )     -       (1,801 )
                                         
 Balance, March 31, 2012
  $ 7,830     $ 56,633     $ 84,171     $ 6,390     $ 155,024  
                                         
 Balance, December 31, 2012
  $ 7,847     $ 57,211     $ 90,591     $ 7,597     $ 163,246  
                                         
 Net income
    -       -       4,151       -       4,151  
                                         
 Other comprehensive loss
                            (702 )     (702 )
                                         
 Equity based compensation
    16       130       -       -       146  
                                         
 Cash dividends declared, $0.23 per share
    -       -       (1,809 )     -       (1,809 )
                                         
 Balance, March 31, 2013
  $ 7,863     $ 57,341     $ 92,933     $ 6,895     $ 165,032  
                                         
The accompanying notes are an integral part of the consolidated financial statements.
                 

 
6


 American National Bankshares Inc. and Subsidiaries
 
 
 Three Months Ended March 31, 2013 and 2012
 
 (Dollars in thousands)  (Unaudited)
 
             
   
2013
   
2012
 
 Cash Flows from Operating Activities:
           
 Net income
  $ 4,151     $ 4,175  
 Adjustments to reconcile net income to net
               
 cash provided by operating activities:
               
 Provision for loan losses
    294       733  
 Depreciation
    424       422  
 Net accretion of purchase accounting adjustments
    (1,983 )     (2,754 )
 Core deposit intangible amortization
    420       547  
 Net amortization (accretion) of securities
    788       792  
 Net gain on sale or call of securities
    (198 )     -  
 Gain on sale of loans held for sale
    (650 )     (473 )
 Proceeds from sales of loans held for sale
    33,782       22,532  
 Originations of loans held for sale
    (23,675 )     (19,503 )
 Net gain on foreclosed real estate
    (14 )     (248 )
 Valuation allowance on foreclosed real estate
    70       5  
 Net gain on sale of premises and equipment
    -       (495 )
 Stock-based compensation expense
    -       16  
 Equity based compensation expense
    146       200  
 Deferred income tax benefit
    (43 )     (237 )
 Net change in interest receivable
    175       209  
 Net change in other assets
    (1,504 )     296  
 Net change in interest payable
    (23 )     (38 )
 Net change in other liabilities
    1,813       351  
 Net cash provided by operating activities
    13,973       6,530  
                 
 Cash Flows from Investing Activities:
               
 Proceeds from sales of securities available for sale
    2,627       -  
 Proceeds from maturities, calls and paydowns of securities available for sale
    9,329       16,475  
 Purchases of securities available for sale
    (19,555 )     (21,953 )
 Net change in restricted stock
    411       -  
 Net (increase) decrease in loans
    (2,112 )     9,485  
 Proceeds from sale of premises and equipment
    -       563  
 Purchases of premises and equipment
    (178 )     (649 )
 Proceeds from sales of foreclosed real estate
    645       1,106  
 Net cash (used in) provided byinvesting activities
    (8,833 )     5,027  
                 
 Cash Flows from Financing Activities:
               
 Net change in demand, money market, and savings deposits
    4,199       (4,317 )
 Net change in time deposits
    5,986       20,430  
 Net change in customer repurchase agreements
    (3,276 )     3,076  
 Net change in other short-term borrowings
    -       (3,000 )
 Net change in long-term borrowings
    (37 )     (37 )
 Common stock dividends paid
    (1,809 )     (1,801 )
 Proceeds from exercise of stock options
    -       45  
 Net cash provided by financing activities
    5,063       14,396  
                 
 Net Increase in Cash and Cash Equivalents
    10,203       25,953  
                 
 Cash and Cash Equivalents at Beginning of Period
    47,442       28,893  
                 
 Cash and Cash Equivalents at End of Period
  $ 57,645     $ 54,846  
                 
The accompanying notes are an integral part of the consolidated financial statements.
         

 
7

 


 
Note 1 – Basis of Presentation

The consolidated financial statements include the accounts of American National Bankshares Inc. (the “Company”) and its wholly owned subsidiary, American National Bank and Trust Company (the “Bank”).  The Bank offers a wide variety of retail, commercial, secondary market mortgage lending, and trust and investment services which also include non-deposit products such as mutual funds and insurance policies.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangible assets, pension obligations, other than temporary impairment, the fair value of financial instruments, and the valuation of foreclosed real estate.

In April 2006, AMNB Statutory Trust I, a Delaware statutory trust (the “AMNB Trust”) and a wholly owned subsidiary of the Company, was formed for the purpose of issuing preferred securities (the “Trust Preferred Securities”) in a private placement pursuant to an applicable exemption from registration.  Proceeds from the securities were used to fund the acquisition of Community First Financial Corporation (“Community First”) which occurred in April 2006.

On July 1, 2011, the Company completed its merger with MidCarolina Financial Corporation (“MidCarolina”).  MidCarolina was headquartered in Burlington, North Carolina, and engaged in banking operations through its subsidiary bank, MidCarolina Bank.

In July 2011, and in connection with its acquisition of MidCarolina, the Company assumed the liabilities of the MidCarolina I and MidCarolina Trust II, two separate Delaware statutory trusts (the “MidCarolina Trusts”), which were also formed for the purpose of issuing preferred securities.  Refer to Note 9 for further details concerning these entities.

All significant inter-company transactions and accounts are eliminated in consolidation, with the exception of the AMNB Trust and the MidCarolina Trusts, as detailed in Note 9.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2013; the consolidated statements of income for the three months ended March 31, 2013 and 2012; the consolidated statements of comprehensive income for the three months ended March 31, 2013 and 2012; the consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2013 and 2012; and the consolidated statements of cash flows for the three months ended March 31, 2013 and 2012.  Operating results for the three month period ended March 31, 2013 are not necessarily indicative of the results that may occur for the year ending December 31, 2013.  Certain reclassifications have been made to prior period balances to conform to the current period presentation. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2012.
 
 
Note 2 – Merger with MidCarolina

On July 1, 2011, the Company completed its merger with MidCarolina Financial Corporation pursuant to the Agreement and Plan of Reorganization, dated December 15, 2010, between the Company and MidCarolina (the “merger agreement”).  MidCarolina was headquartered in Burlington, North Carolina, and engaged in banking operations through its subsidiary bank, MidCarolina Bank.  The transaction has significantly expanded the Company’s footprint in North Carolina, adding eight branches in Alamance and Guilford Counties.

Pursuant to the terms of the merger agreement, as a result of the merger, the holders of shares of MidCarolina common stock received 0.33 shares of the Company’s common stock for each share of MidCarolina common stock held immediately prior to the effective date of the merger. Each option to purchase a share of MidCarolina common stock outstanding immediately prior to the effective date of the merger was converted into an option to purchase shares of Company common stock, adjusted for the 0.33 exchange ratio. Additionally, the holders of shares of noncumulative perpetual Series A preferred stock of MidCarolina received one share of a newly authorized noncumulative perpetual Series A preferred stock of the Company for each MidCarolina preferred share held immediately before the merger.  The Company’s Series A preferred stock was issued with terms, preferences, rights and limitations that are identical in all material respects to the MidCarolina Series A preferred stock.

 
8

 
The Company issued 1,626,157 shares of additional common stock in connection with the MidCarolina merger.
MidCarolina Bank was merged with and into the Bank.

The merger with MidCarolina was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the merger date. The excess of consideration paid over the fair value of net assets acquired was originally recorded as goodwill in the amount of approximately $16.5 million, which will not be amortizable and is not deductible for tax purposes.  The Company allocated the total balance of goodwill to its community banking segment. The Company also recorded $6.6 million in core deposit intangibles which will be amortized over nine years using a declining balance method.

In connection with the merger, the consideration paid, and the fair value of identifiable assets acquired and liabilities assumed as of the merger date are summarized in the following table.
 
(dollars in thousands)
     
Consideration Paid:
     
          Common shares issued (1,626,157)
  $ 29,905  
          Cash paid to Shareholders
    12  
          Fair Value of Options
    132  
          Preferred shares issued (5,000)
    5,000  
  Value of consideration
    35,049  
         
Assets acquired:
       
          Cash and cash equivalents
    34,783  
          Investment securities
    51,442  
          Loans held for sale
    113  
          Loans, net of unearned income
    328,123  
          Premises and equipment, net
    5,708  
          Deferred income taxes
    15,310  
          Core deposit intangible
    6,556  
          Other real estate owned
    3,538  
          Other assets
    13,535  
Total assets
    459,108  
         
Liabilities assumed:
       
          Deposits
    420,248  
          FHLB advances
    9,858  
          Other borrowings
    6,546  
          Other liabilities
    3,982  
Total Liabilities
    440,634  
Net assets acquired
    18,474  
Goodwill resulting from merger with MidCarolina
  $ 16,575  
 
      In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was that of acquired loans. The Company acquired the $367.4 million loan portfolio at a fair value discount of $39.9 million. The estimated fair value of the performing portion of the portfolio was $286.5 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310-20 (formerly SFAS 91).

 
9

Certain loans, those for which specific credit-related deterioration since origination was identified, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.

The following table details the acquired loans that are accounted for in accordance with FASB ASC 310-30 (formerly Statement of Position (“SOP”) 03-3) as of July 1, 2011 (in thousands).
 
Contractually required principal and interest at acquisition
  $ 56,681  
Contractual cash flows not expected to be collected (nonaccretable difference)
    17,472  
Expected cash flows at acquisition
    39,209  
Interest component of expected cash flows (accretable discount)
    1,663  
Fair value of acquired impaired loans accounted for under FASB ASC 310-30
  $ 37,546  
 
In accordance with GAAP, there was no carryover of the allowance for loan losses that had been previously recorded by MidCarolina.

In connection with the merger with MidCarolina, the Company acquired an investment portfolio with a fair value of $51.4 million. The fair value of the investment portfolio was determined by taking into account market prices obtained from independent valuation sources.

In connection with the merger with MidCarolina, the Company recorded a deferred income tax asset of $15.3 million related to MidCarolina’s valuation allowance on foreclosed real estate and bad debt expenses, as well as other tax attributes of the acquired company, along with the effects of fair value adjustments resulting from applying the acquisition method of accounting.

In connection with the merger with MidCarolina, the Company acquired other real estate owned with a fair value of $3.5 million. Other real estate owned was measured at fair value less estimated cost to sell.

In connection with the merger with MidCarolina, the Company acquired premises and equipment with a fair value of $5.7 million. Property appraisals for all owned locations were obtained. The fair value adjustment will be amortized as expense over the remaining lives of the properties. The Company also acquired several lease obligations in connection with the merger. The unfavorable lease position will be amortized over the remaining lives of the leases.

The fair value of savings and transaction deposit accounts acquired from MidCarolina was assumed to approximate their carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The portfolio was segregated into pools based on segments: retail, individual retirement accounts brokered, and Certificate of Deposit Account Registry Service (often referred to as “CDARS”). For each segment, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each segment is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. This valuation adjustment will be accreted to reduce interest expense over the remaining maturities of the respective pools.

The fair value of the Federal Home Loan Bank of Atlanta (“FHLB”) advances was determined based on the discounted cash flows of future payments. This adjustment to the face value of the borrowings will be amortized to increase interest expense over the remaining lives of the respective borrowings.

The fair value of junior subordinated debentures (Other Borrowings) was determined based on the fair value of similar debt or equity instruments with reasonably comparable terms. This adjustment to the face value of the borrowings will be amortized to increase interest expense over the remaining lives of the respective borrowings.

Direct costs related to the acquisition were expensed as incurred. During the entire year of 2011, the Company incurred $1,600,000 in merger and acquisition expenses. During 2012, the Company incurred $251,000 in merger related expense. There were no merger related expenses in the three months ended March 31, 2013.
 
 
10

 
Note 3 – Securities

The amortized cost and estimated fair value of investments in debt and equity securities at March 31, 2013 and December 31, 2012 were as follows:
 
 
 
March 31, 2013
 
(in thousands)
 
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Securities available for sale:
                       
Federal agencies and GSEs
  $ 52,365     $ 255     $ 10     $ 52,610  
Mortgage-backed and CMOs
    79,156       1,807       128       80,835  
State and municipal
    188,547       12,003       46       200,504  
Corporate
    7,111       116       -       7,227  
Total securities available for sale
  $ 327,179     $ 14,181     $ 184     $ 341,176  
                                 

 
 
December 31, 2012
 
(in thousands)
 
Amortized
   
Unrealized
   
Unrealized
   
Estimated
 
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Securities available for sale:
                       
Federal agencies and GSE
  $ 42,458     $ 306     $ 5     $ 42,759  
Mortgage-backed and CMOs
    81,585       1,829       106       83,308  
State and municipal
    189,810       12,935       14       202,731  
Corporate
    6,317       131       -       6,448  
Total securities available for sale
  $ 320,170     $ 15,201     $ 125     $ 335,246  
                                 
 
Temporarily Impaired Securities
 
The following table shows estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2013.  The reference point for determining when securities are in an unrealized loss position is month-end.  Therefore, it is possible that a security’s market value exceeded its amortized cost on other days during the past twelve-month period.
 
Available for sale securities that have been in a continuous unrealized loss position are as follows:
 
   
Total
   
Less than 12 Months
   
12 Months or More
 
(in thousands)
 
Estimated
Fair
Value
   
Unrealized
Loss
   
Estimated
Fair
Value
   
Unrealized
Loss
   
Estimated
Fair
Value
   
Unrealized
Loss
 
GSE debt securities
  $ 11,496     $ 10     $ 11,496     $ 10     $ -     $ -  
Mortgage-backed
    17,210       128       12,696       46       4,514       82  
State and municipal
    6,592       46       6,592       46       -       -  
  Total
  $ 35,298     $ 184     $ 30,784     $ 102     $ 4,514     $ 82  
                                                 
                                                 
 
GSE debt securities: The unrealized losses on the Company's investment in five government sponsored entities (“GSE”) were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2013.
 
 
Mortgage-backed securities and CMOs: The unrealized losses on the Company's investment in 13 GSE mortgage-backed securities were caused by interest rate increases. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost basis of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2013.
 
 
11

 
State and municipal securities:  The unrealized losses on seven state and municipal securities were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2013.
 
The Company’s investment in FHLB stock totaled $2,000,000 at March 31, 2013.  FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock, other than the FHLB or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.  The Company does not consider this investment to be other-than-temporarily impaired at March 31, 2013 and no impairment has been recognized.  FHLB stock is shown in restricted stock on the balance sheet and is not a part of the available for sale securities portfolio.

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2012.

   
Total
   
Less than 12 Months
   
12 Months or More
 
(in thousands)
 
Estimated
Fair
Value
   
Unrealized
Loss
   
Estimated
Fair
Value
   
Unrealized
Loss
   
Estimated
Fair
Value
   
Unrealized
Loss
 
GSE debt securities
  $ 5,501     $ 5     $ 5,501     $ 5     $ -     $ -  
Mortgage-backed
    16,353       106       12,941       42       3,412       64  
State and municipal
    4,329       14       4,329       14       -       -  
  Total
  $ 26,183     $ 125     $ 22,771     $ 61     $ 3,412     $ 64  
                                                 

Other-Than-Temporary-Impaired Securities

As of March 31, 2013 and December 31, 2012, there were no securities classified as having other-than-temporary impairment.

 
Note 4 - Loans

Segments

Loans, excluding loans held for sale, were comprised of the following:

   
March 31,
   
December 31,
 
(in thousands)
 
2013
   
2012
 
             
Commercial
  $ 127,028     $ 126,192  
Commercial real estate:
               
Construction and land development
    45,327       48,812  
Commercial real estate
    361,406       355,433  
Residential real estate:
               
Residential
    163,920       161,033  
Home equity
    88,356       91,313  
Consumer
    6,476       5,922  
Total loans
  $ 792,513     $ 788,705  
 
 
12

Acquired Loans

Interest income, including accretion, on loans acquired from MidCarolina for the three months ended March 31, 2013 was approximately $4.9 million. This included $1.9 million in accretion income of which $600 thousand was related to loan pay-offs and renewals. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at March 31, 2013 and December 31, 2012 are as follows:
 
(in thousands)
 
2013
   
2012
 
Oustanding principal balance
  $ 195,609     $ 219,569  
Carrying amount
    182,002       203,981  

The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies ASC 310-30 (formerly SOP 03-3), to account for interest earned, at March 31, 2013 and December 31, 2012 are as follows:
 
(in thousands)
 
2013
   
2012
 
Oustanding principal balance
  $ 23,715     $ 26,349  
Carrying amount
    17,914       20,182  
 
The following table presents changes in the accretable discount on acquired impaired loans, for which the Company applies ASC 310-30 (formerly SOP 03-3), for the three months ended March 31, 2013. The accretion reflected below includes $177,000 related to loan payoffs.


   
Accretable
 
(in thousands)
 
Discount
 
Balance at December 31, 2012
  $ 2,165  
Accretion
    (307 )
Reclassification from nonaccretable difference
    250  
Balance at March 31, 2013
  $ 2,108  
 
Past Due Loans

The following table shows an analysis by portfolio segment of the Company’s past due loans at March 31, 2013.
 
           
90 Days +
                 
           
Past Due
 
Non-
 
Total
         
   
30- 59 Days
 
60-89 Days
 
and Still
 
Accrual
 
Past
     
Total
 
(in thousands)
 
Past Due
 
Past Due
 
Accruing
 
Loans
 
Due
 
Current
 
Loans
 
                               
Commercial
  $ 168   $ -   $ -   $ -   $ 168   $ 126,860   $ 127,028  
Commercial real estate:
                                           
Construction and land development
    -     -     -     1,047     1,047     44,280     45,327  
Commercial real estate
    283     -     -     1,914     2,197     359,209     361,406  
Residential:
                                           
Residential
    1,844     259     -     1,924     4,027     159,893     163,920  
Home equity
    49     47     -     300     396     87,960     88,356  
Consumer
    39     6     -     -     45     6,431     6,476  
Total
  $ 2,383   $ 312   $ -   $ 5,185   $ 7,880   $ 784,633   $ 792,513  
                                             

 
13

 
The following table shows an analysis by portfolio segment of the Company’s past due loans at December 31, 2012.
 
           
90 Days +
                 
           
Past Due
 
Non-
 
Total
         
   
30- 59 Days
 
60-89 Days
 
and Still
 
Accrual
 
Past
     
Total
 
(in thousands)
 
Past Due
 
Past Due
 
Accruing
 
Loans
 
Due
 
Current
 
Loans
 
                               
Commercial
  $ 219   $ -   $ -   $ 52   $ 271   $ 125,921   $ 126,192  
Commercial real estate:
                                           
Construction and land development
    417     -     -     1,208     1,625     47,187     48,812  
Commercial real estate
    1,120     -     -     1,526     2,646     352,787     355,433  
Residential:
                                           
Residential
    672     168     -     2,130     2,970     158,063     161,033  
Home equity
    144     -     -     397     541     90,772     91,313  
Consumer
    33     -     -     3     36     5,886     5,922  
Total
  $ 2,605   $ 168   $ -   $ 5,316   $ 8,089   $ 780,616   $ 788,705  
 
Impaired Loans

The following table presents the Company’s impaired loan balances by portfolio segment, excluding loans acquired with deteriorated credit quality, at March 31, 2013.

         
Unpaid
         
Average
   
Interest
 
(in thousands)
 
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
With no related allowance recorded:
                             
Commercial
  $ -     $ -     $ -     $ -     $ -  
Commercial real estate:
                                       
Construction and land development
    1,044       1,067       -       1,047       -  
Commercial real estate
    338       340       -       341       3  
Residential:
                                       
Residential
    265       539       -       267       -  
Home equity
    11       11       -       11       -  
Consumer
    -       -       -       -       -  
    $ 1,658     $ 1,957     $ -     $ 1,666     $ 3  
With an related allowance recorded:
                                       
Commercial
    10       10       7       10       -  
Commercial real estate:
                                       
Construction and land development
    891       928       82       1,086       -  
Commercial real estate
    959       959       331       959       -  
Residential
                                       
Residential
    90       90       16       90       -  
Home equity
    -       -       -       -       -  
Consumer
    20       20       20       20       -  
    $ 1,970     $ 2,007     $ 456     $ 2,165     $ -  
Total:
                                       
Commercial
  $ 10     $ 10     $ 7     $ 10     $ -  
Commercial real estate:
                                       
Construction and land development
    1,935       1,995       82       2,133       -  
Commercial real estate
    1,297       1,299       331       1,300       3  
Residential:
                                       
Residential
    355       629       16       357       -  
Home equity
    11       11       -       11       -  
Consumer
    20       20       20       20       -  
    $ 3,628     $ 3,964     $ 456     $ 3,831     $ 3  
                                         

 
14

 
The following table presents the Company’s impaired loan balances by portfolio segment, excluding loans acquired with deteriorated credit quality, at December 31, 2012.
 
         
Unpaid
         
Average
   
Interest
 
(in thousands)
 
Recorded
   
Principal
   
Related
   
Recorded
   
Income
 
   
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
 
With no related allowance recorded:
                             
Commercial
  $ 39     $ 39     $ -     $ 276     $ 11  
Commercial real estate:
                                       
Construction and land development
    2,302       2,335       -       1,562       -  
Commercial real estate
    305       306       -       557       8  
Residential:
                                       
Residential
    270       541       -       861       15  
Consumer:
                                       
Consumer
    -       -       -       -       -  
    $ 2,916     $ 3,221     $ -     $ 3,256     $ 34  
With an related allowance recorded:
                                       
Commercial
  $ 110     $ 110     $ 107     $ 35     $ -  
Consumer
    21       21       21       10          
    $ 131     $ 131     $ 128     $ 45     $ -  
Total:
                                       
Commercial
  $ 149     $ 149     $ 107     $ 311     $ 11  
Commercial real estate:
                                       
Construction and land development
    2,302       2,335       -       1,562       -  
Commercial real estate
    305       306       -       557       8  
Residential:
                                       
Residential
    270       541       -       861       15  
Consumer:
                                       
Consumer
    21       21       21       10       -  
    $ 3,047     $ 3,352     $ 128     $ 3,301     $ 34  

There were no loans modified as a TDR for the three months ended March 31, 2013.  The following table shows the detail of loans modified as TDRs during the quarter ended March 31, 2012 included in the impaired loan balances.
 
   
Loans Modified as a TDR for the
 
   
Three Months Ended March 31, 2012
 
         
Pre-Modification
   
Post-Modification
 
   
Number of
   
Outstanding Recorded
   
Oustanding Recorded
 
(dollars in thousands)
 
Contracts
   
Investment
   
Investment
 
                   
    Commercial real estate:
                 
        Construction and land development
    5     $ 777     $ 723  
            Total
    5     $ 777     $ 723  
                         
 
None of the loans modified as a TDR within the previous twelve months have subsequently defaulted during the three month periods ending March 31, 2013 and 2012.


 
15

 
Risk Grades

The following table shows the Company’s commercial loan portfolio broken down by internal risk grading as of March 31, 2013.
 
(in thousands)
                             
Commercial and Consumer Credit Exposure
                         
Credit Risk Profile by Internally Assigned Grade
                         
                               
         
Commercial
   
Commercial
             
         
Real Estate
   
Real Estate
         
Home
 
   
Commercial
   
Construction
   
Other
   
Residential
   
Equity
 
                               
Pass
  $ 125,839     $ 36,850     $ 345,906     $ 150,208     $ 85,736  
Special Mention
    1,082       1,839       8,279       10,646       1,616  
Substandard
    107       6,638       7,221       3,066       1,004  
Doubtful
    -       -       -       -       -  
Total
  $ 127,028     $ 45,327     $ 361,406     $ 163,920     $ 88,356  
                                         
                                         
Consumer Credit Exposure
                                       
Credit Risk Profile Based on Payment Activity
                                 
                                         
   
Consumer