10-Q 1 mbc_10q-033113.htm FORM 10-Q mbc_10q-033113.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20552
 
FORM 10 - Q
 
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
   OF 1934
 
For the quarterly period ended March 31, 2013
 
Commission File Number 000-32561
 
Middlefield Banc Corp.
(Exact name of registrant as specified in its charter)
 
 Ohio   34 - 1585111
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
 or organization)  
 
  15985 East High Street, Middlefield, Ohio  44062-9263
(Address of principal executive offices)
 
(440) 632-1666
(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 [√]  NO [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  [ ]  Accelerated filer  [ ] Non-accelerated filer [ ] Small reporting company [√]
 
            Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [ ]   NO [√]
 
State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date:
 
      Class:  Common Stock, without par value
      Outstanding at May 9, 2013:  2,016,496
 
 
1

 
 
MIDDLEFIELD BANC CORP.
 
INDEX

 
                 
Page
Number
                   
                   
PART I - FINANCIAL INFORMATION
           
                   
     Item 1.
Financial Statements (unaudited)
     
                   
 
Consolidated Balance Sheet as of March 31, 2013 and December 31, 2012
 
3
                   
 
Consolidated Statement of Income for the Three Months ended March 31, 2013 and 2012
 
4
                   
 
Consolidated Statement of Comprehensive Income for the Three Months ended March 31, 2013 and 2012
 
5
       
 
Consolidated Statement of Changes in Stockholders' Equity for the Three Months ended March 31, 2013
 
6
                   
 
Consolidated Statement of Cash Flows for the Three Months ended March 31, 2013 and 2012
 
7
                   
 
Notes to Consolidated Financial Statements
     
8
                   
     Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
26
                   
     Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
35
                   
     Item 4.
Controls and Procedures
         
36
                   
PART II - OTHER INFORMATION
             
                   
     Item 1.
Legal Proceedings
         
37
                   
     Item 1A.
Risk Factors
             
37
                   
     Item 2.
Unregistered sales of equity securities and use of proceeds
 
37
                   
     Item 3.
Default Upon Senior Securities
       
37
                   
     Item 4.
Mine Safety Disclosures
         
37
                   
     Item 5.
Other Information
           
37
                   
     Item 6.
Exhibits and Reports on Form 8 - K
     
37
                   
SIGNATURES
             
44
                   
Exhibit 31.1
             
45
Exhibit 31.2
             
46
Exhibit 32
             
47
 
 
2

 
 
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands, except share data)
(Unaudited)
 
   
March 31,
2013
   
December 31,
2012
 
             
ASSETS
           
Cash and due from banks
  $ 32,426     $ 33,568  
Federal funds sold
    13,204       11,778  
Cash and cash equivalents
    45,630       45,346  
Investment securities available for sale
    190,687       194,472  
Loans
    407,054       408,433  
Less allowance for loan losses
    7,732       7,779  
Net loans
    399,322       400,654  
Premises and equipment
    8,694       8,670  
Goodwill
    4,559       4,559  
Core deposit intangible
    184       195  
Bank-owned life insurance
    8,604       8,536  
Accrued interest and other assets
    9,294       7,856  
                 
TOTAL ASSETS
  $ 666,974     $ 670,288  
                 
LIABILITIES
               
Deposits:
               
Noninterest-bearing demand
  $ 73,354     $ 75,912  
Interest-bearing demand
    68,060       63,915  
Money market
    80,051       81,349  
Savings
    181,872       175,406  
Time
    188,160       196,753  
Total deposits
    591,497       593,335  
Short-term borrowings
    5,240       6,538  
Other borrowings
    12,779       12,970  
Accrued interest and other liabilities
    1,608       2,008  
TOTAL LIABILITIES
    611,124       614,851  
                 
STOCKHOLDERS' EQUITY
               
Common stock, no par value; 10,000,000 shares authorized, 2,205,814 and 2,181,763 shares issued
    34,697       34,295  
Retained earnings
    23,622       22,485  
Accumulated other comprehensive income
    4,265       5,391  
Treasury stock, at cost; 189,530 shares
    (6,734 )     (6,734 )
TOTAL STOCKHOLDERS' EQUITY
    55,850       55,437  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 666,974     $ 670,288  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
3

 
 
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
March 31,
 
   
2013
   
2012
 
INTEREST INCOME
           
Interest and fees on loans
  $ 5,572     $ 5,537  
Interest-bearing deposits in other institutions
    8       4  
Federal funds sold
    4       3  
Investment securities:
               
Taxable interest
    674       915  
Tax-exempt interest
    733       747  
Dividends on stock
    23       26  
Total interest income
    7,014       7,232  
                 
INTEREST EXPENSE
               
Deposits
    1,297       1,497  
Short term borrowings
    52       59  
Other borrowings
    46       84  
Trust preferred debt
    34       46  
Total interest expense
    1,429       1,686  
                 
NET INTEREST INCOME
    5,585       5,546  
                 
Provision for loan losses
    313       600  
                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    5,272       4,946  
                 
NONINTEREST INCOME
               
Service charges on deposit accounts
    447       431  
Investment securities gains, net
    185       -  
Earnings on bank-owned life insurance
    68       68  
Gain on sale of loans
    -       85  
Other income
    168       210  
Total noninterest income
    868       794  
                 
NONINTEREST EXPENSE
               
Salaries and employee benefits
    1,871       1,750  
Occupancy expense
    274       248  
Equipment expense
    189       170  
Data processing costs
    213       199  
Ohio state franchise tax
    154       129  
Federal deposit insurance expense
    154       243  
Professional fees
    276       214  
Loss on sale of other real estate owned
    8       18  
Advertising expense
    112       20  
Other real estate expense
    106       10  
Other expense
    644       781  
Total noninterest expense
    4,001       3,782  
                 
Income before income taxes
    2,139       1,958  
Income taxes
    482       435  
NET INCOME
  $ 1,657     $ 1,523  
                 
EARNINGS PER SHARE
               
Basic
  $ 0.83     $ 0.86  
Diluted
    0.82       0.86  
                 
DIVIDENDS DECLARED PER SHARE
  $ 0.26     $ 0.26  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
4

 
 
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(Unaudited)
 
   
Three Months Ended
March 31,
 
   
2013
   
2012
 
             
Net income
  $ 1,657     $ 1,523  
                 
Other comprehensive loss:
               
Net unrealized holding loss on available for sale securities
    (1,521 )     (60 )
Tax effect
    517       20  
                 
Reclassification adjustment for gains included in net income
    (185 )     -  
Tax effect
    63       -  
                 
Total other comprehensive loss
    (1,126 )     (40 )
                 
Comprehensive income
  $ 531     $ 1,483  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
5

 
 
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands, except shares and dividend per share amount)
(Unaudited)
 
   
Common
Stock
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income
   
Treasury
Stock
   
Total
Stockholders'
Equity
 
                               
Balance, December 31, 2012
  $ 34,295     $ 22,485     $ 5,391     $ (6,734 )   $ 55,437  
                                         
Net income
            1,657                       1,657  
Comprehensive loss
                    (1,126 )             (1,126 )
Common stock issuance (13,320 shares)
    213                               213  
Dividend reinvestment and purchase plan (10,731 shares)
    300                               300  
Stock options exercised
    (111 )                             (111 )
Cash dividends ($0.26 per share)
            (520 )                     (520 )
                                         
Balance, March 31, 2013
  $ 34,697     $ 23,622     $ 4,265     $ (6,734 )   $ 55,850  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
6

 
 
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 
 
   
Three Months Ended
March 31,
 
   
2013
   
2012
 
OPERATING ACTIVITIES
           
Net income
  $ 1,657     $ 1,523  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    313       600  
Investment securities gains, net
    185       -  
Depreciation and amortization
    222       221  
Amortization of premium and discount on investment securities
    183       224  
Accretion of deferred loan fees, net
    (33 )     (55 )
Origination of loans held for sale
    -       (1,084 )
Proceeds from sale of loans held for sale
    -       1,169  
Gain on sale of loans
    -       (85 )
Earnings on bank-owned life insurance
    (68 )     (68 )
Deferred income taxes
    58       (28 )
Loss on sale of other real estate owned
    8       18  
Increase in accrued interest receivable
    (529 )     (442 )
Decrease in accrued interest payable
    (24 )     (104 )
Decrease in prepaid federal deposit insurance
    9       211  
Other, net
    (507 )     (523 )
Net cash provided by operating activities
    1,474       1,577  
                 
INVESTING ACTIVITIES
               
Investment securities available for sale:
               
Proceeds from repayments and maturities
    6,773       18,533  
Proceeds from sale of securities
    7,438       -  
Purchases
    (12,500 )     (8,611 )
Increase (decrease) in loans, net
    598       (2,643 )
Proceeds from the sale of other real estate owned
    137       210  
Purchase of premises and equipment
    (191 )     (253 )
Net cash provided by investing activities
    2,255       7,236  
                 
FINANCING ACTIVITIES
               
Net (decrease) increase in deposits
    (1,838 )     2,980  
Decrease in short-term borrowings, net
    (1,298 )     (27 )
Repayment of other borrowings
    (191 )     (270 )
Common stock issuance
    213       -  
Stock options exercised
    (111 )     -  
Proceeds from dividend reinvestment & purchase plan
    300       180  
Cash dividends
    (520 )     (457 )
Net cash (used for) provided by financing activities
    (3,445 )     2,406  
                 
Increase in cash and cash equivalents
    284       11,219  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    45,346       34,390  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 45,630     $ 45,609  
                 
SUPPLEMENTAL INFORMATION
               
Cash paid during the year for:
               
Interest on deposits and borrowings
  $ 1,453     $ 1,790  
Income taxes
    555       200  
                 
Non-cash investing transactions:
               
Transfers from loans to other real estate owned
  $ 454     $ 157  
 
See accompanying notes to the unaudited consolidated financial statements.
 
 
7

 
MIDDLEFIELD BANC CORP.
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - BASIS OF PRESENTATION
 
The consolidated financial statements of Middlefield Banc Corp. ("Company") include its two bank subsidiaries The Middlefield Banking Company (“MB”) and Emerald Bank (“EB”) and a non-bank asset resolution subsidiary EMORECO, Inc. All significant inter-company items have been eliminated.

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the instructions for Form 10-Q and Article 10 of Regulation S-X.  In management’s opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows.  The consolidated balance sheet at December 31, 2012, has been derived from the audited financial statements at that date but does not include all of the necessary informational disclosures and footnotes as required by U. S. generally accepted accounting principles.  The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with the Company’s Form 10-K for the year ended December 31, 2012 (File No. 000-32561). The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.
 
Recent Accounting Pronouncements
 
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):  Disclosures about Offsetting Assets and Liabilities.  The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either  Section 210-20-45 or  Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement.  The requirements amend the disclosure requirements on offsetting in Section 210-20-50.  This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update.  An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.  An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.  This ASU did not have a significant impact on the Company’s financial statements.

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.   The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.  An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented.  The effective date is the same as the effective date of Update 2011-11.  This ASU did not have a significant impact on the Company’s financial statements.

 
8

 
 
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220):  Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.   The amendments in this Update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts.  For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted.  The Company has provided the necessary disclosures in Note 5.

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.  The objective of the amendments in this Update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. generally accepted accounting principles (GAAP). Examples of obligations within the scope of this Update include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. U.S. GAAP does not include specific guidance on accounting for such obligations with joint and several liability, which has resulted in diversity in practice. Some entities record the entire amount under the joint and several liability arrangement on the basis of the concept of a liability and the guidance that must be met to extinguish a liability. Other entities record less than the total amount of the obligation, such as an amount allocated, an amount corresponding to the proceeds received, or the portion of the amount the entity agreed to pay among its co-obligors, on the basis of the guidance for contingent liabilities. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter.  This ASU is not expected to have a significant impact on the Company’s financial statements.
 
NOTE 2 - STOCK-BASED COMPENSATION
 
The Company has no unvested stock options outstanding or unrecognized stock-based compensation costs outstanding as of March 31, 2013.  The company had 9,000 unvested stock options outstanding but no unrecognized stock-based compensation costs outstanding as of March 31, 2012.  Those options vested on May 9, 2012.
 
Stock option activity during the three months ended March 31 as follows:
 
   
2013
   
Weighted-
average
Exercise
Price
   
2012
   
Weighted-
average
Exercise
Price
 
                         
Outstanding, January 1
    79,693     $ 27.25       88,774     $ 26.81  
Exercised
    18,561       24.08       -       -  
                                 
Outstanding, March 31
    61,132     $ 28.21       88,774     $ 26.81  
                                 
Exercisable, March 31
    61,132     $ 28.21       88,774     $ 26.81  

 
9

 
 
NOTE 3 - EARNINGS PER SHARE
 
The Company provides dual presentation of basic and diluted earnings per share.  Basic earnings per share is calculated by dividing net income by the average shares outstanding.  Diluted earnings per share adds the dilutive effects of options, warrants, and convertible securities to average shares outstanding.
 
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
 
   
For the Three
Months Ended
March 31,
 
             
   
2013
   
2012
 
Weighted average common shares outstanding
    2,189,175       1,953,512  
                 
Average treasury stock shares
    (189,530 )     (189,530 )
                 
Weighted average common shares and common stock equivalents used to calculate basic earnings per share
    1,999,645       1,763,982  
                 
Additional common stock equivalents (stock options) used to calculate diluted earnings per share
    10,647       603  
                 
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share
    2,010,292       1,764,585  
 
Options to purchase 61,132 shares of common stock, at prices ranging from $17.55 to $40.24, were outstanding during the three months ended March 31, 2013.  Of those options, 59,617 were considered dilutive based on the market price exceeding the strike price.  The remaining 1,515 options had no dilutive effect on earnings per share.
 
Options to purchase 88,774 shares of common stock, at prices ranging from $17.55 to $40.24, were outstanding during the three months ended March 31, 2012.  Of those options, 9,000 were considered dilutive based on the market price exceeding the strike price.  The remaining 79,774 options had no dilutive effect on earnings per share.
 
 
10

 
 
NOTE 4 - FAIR VALUE MEASUREMENTS
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
 
Level I:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
 
Level II:
Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
 
Level III:
Assets and liabilities that have little to no pricing observability as of the reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
 
The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
           March 31, 2013        
                         
(Dollar amounts in thousands)
 
Level I
   
Level II
   
Level III
   
Total
 
                         
Assets measured on a recurring basis:
                       
U.S. government agency securities
  $ -     $ 25,752     $ -     $ 25,752  
Obligations of states and political subdivisions
    -       94,462       -       94,462  
Mortgage-backed securities in government-sponsored entities
    -       65,026       -       65,026  
Private-label mortgage-backed securities
    -       4,697       -       4,697  
Total debt securities
    -       189,937       -       189,937  
Equity securities in financial institutions
    5       745       -       750  
Total
  $ 5     $ 190,682     $ -     $ 190,687  

 
11

 
 
           December 31, 2012        
                         
   
Level I
   
Level II
   
Level III
   
Total
 
                         
Assets measured on a recurring basis:
                       
U.S. government agency securities
  $ -     $ 24,960     $ -     $ 24,960  
Obligations of states and political subdivisions
    -       92,596       -       92,596  
Mortgage-backed securities in government-sponsored entities
    -       71,102       -       71,102  
Private-label mortgage-backed securities
    -       5,064       -       5,064  
Total debt securities
    -       193,722       -       193,722  
Equity securities in financial institutions
    5       745       -       750  
Total
  $ 5     $ 194,467     $ -     $ 194,472  
 
The Company obtains fair values from an independent pricing service which represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2).
 
Financial instruments are considered Level III when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.  Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.  The Company has no securities considered to be Level III as of March 31, 2013.
 
The Company uses prices compiled by third party vendors due to the recent stabilization in the markets along with improvements in third party pricing methodology that have narrowed the variances between third party vendor prices and actual market prices.
 
The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.
 
The Company values other real estate owned at the estimated fair value of the underlying collateral less expected selling costs. Such values are estimated primarily using appraisals and reflect a market value approach. Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level III.
 
 
12

 

       
             March 31, 2013        
                         
(Dollar amounts in thousands)
 
Level I
   
Level II
   
Level III
   
Total
 
                         
Assets measured on a non-recurring basis:
                       
Impaired loans
  $ -     $ -     $ 16,363     $ 16,363  
Other real estate owned
    -       -       2,155       2,155  
 
              December 31, 2012           
                                 
   
Level I
   
Level II
   
Level III
   
Total
 
                                 
Assets measured on a non-recurring basis:
                               
Impaired loans
  $ -     $ -     $ 17,600     $ 17,600  
Other real estate owned
    -       -       1,846       1,846  
 
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:
 
  Quantitative Information about Level III Fair Value Measurements  
(unaudited, in thousands)
 
Estimate
   
Valuation
Techniquest
   
Unobservable Input
 
   
March 31, 2013
   
December 31, 2012
         
Impaired loans
  $ 16,363       17,600  
Appraisal of collateral (1)
 
Appraisal adjustments (2)
 
                     
Liquidation expenses (2)
 
Other real estate owned
  $ 2,155       1,846  
Appraisal of collateral (1), (3)
 
 
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.
 
 
13

 
 
The estimated fair value of the Company’s financial instruments is as follows:
 
   
March 31, 2013
 
   
Carrying
Value
   
Level I
   
Level II
   
Level III
   
Total
Fair Value
 
   
(in thousands)
 
Financial assets:
                             
Cash and cash equivalents
  $ 45,630     $ 45,630     $ -     $ -     $ 45,630  
Investment securities available for sale
    190,687       5       190,682       -       190,687  
Net loans
    399,322       -       -       402,219       402,219  
Bank-owned life insurance
    8,604       8,604       -       -       8,604  
Federal Home Loan Bank stock
    1,627       1,627       -       -       1,627  
Accrued interest receivable
    2,692       2,692       -       -       2,692  
                                         
Financial liabilities:
                                       
Deposits
  $ 591,497     $ 403,337     $ -     $ 190,881     $ 594,218  
Short-term borrowings
    5,240       5,240       -       -       5,240  
Other borrowings
    12,779       -       -       13,092       13,092  
Accrued interest payable
    468       468       -       -       468  
 
   
December 31, 2012
 
   
Carrying
Value
   
Level I
   
Level II
   
Level III
   
Total
Fair Value
 
   
(in thousands)
 
Financial assets:
                                       
Cash and cash equivalents
  $ 45,346     $ 45,346     $ -     $ -     $ 45,346  
Investment securities available for sale
    194,472       5       194,467       -       194,472  
Net loans
    400,654       -       -       390,206       390,206  
Bank-owned life insurance
    8,536       8,536       -       -       8,536  
Federal Home Loan Bank stock
    1,887       1,887       -       -       1,887  
Accrued interest receivable
    2,163       2,163       -       -       2,163  
                                         
Financial liabilities:
                                       
Deposits
  $ 593,335     $ 396,582     $ -     $ 196,122     $ 592,704  
Short-term borrowings
    6,538       6,538       -       -       6,538  
Other borrowings
    12,970       -       -       13,337       13,337  
Accrued interest payable
    492       492       -       -       492  

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
 
Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale.  If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.
 
If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling.  Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument.  In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.
 
 
14

 
 
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
 
The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:
 
Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings
The fair value is equal to the current carrying value.
 
Bank-Owned Life Insurance
The fair value is equal to the cash surrender value of the life insurance policies.
 
Investment Securities Available for Sale
The fair value of investment securities is equal to the available quoted market price.  If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. 
 
Loans
The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality.  Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were used as estimates for fair value.
 
Deposits and Other Borrowed Funds
The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows.  The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.  Demand, savings, and money market deposits are valued at the amount payable on demand as of year-end.
 
Commitments to Extend Credit
These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.
 
NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME
 
The following table presents the changes in accumulated other comprehensive income by component net of tax for the three months ended March 31, 2013:

   
Unrealized gains on
available for sale
securities (a)
 
Balance as of December 31, 2012
  $ 5,391  
Other comprehensive loss before reclassification
    (1,004 )
Amount reclassified from accumulated other comprehensive income
    (122 )
Total other comprehensive loss
    (1,126 )
Balance as of March 31, 2013
  $ 4,265  
 
(a) All amounts are net of tax.  Amounts in parentheses indicate debits.

 
15

 
 
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income for the three months ended March 31, 2013:
 
Details about other comprehensive income
 
Amount Reclassified
from Accumulated
Other
Comprehensive
Income (a)
 
Affected Line Item in
the Statement Where
Net Income is
Presented
         
Unealized gains on available for sale securities
       
    $ 185  
Investment securities gains, net
      (63 )
Income taxes
    $ 122  
Net of tax
 
NOTE 6 - INVESTMENT SECURITIES AVAILABLE FOR SALE
 
The amortized cost and fair values of securities available for sale are as follows:
 
   
March 31, 2013
 
(Dollar amounts in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. government agency securities
  $ 25,277     $ 556     $ (81 )   $ 25,752  
Obligations of states and political subdivisions:
                               
Taxable
    5,892       597       -       6,489  
Tax-exempt
    84,379       3,985       (391 )     87,973  
Mortgage-backed securities in government-sponsored entities
    63,710       1,481       (165 )     65,026  
Private-label mortgage-backed securities
    4,216       481       -       4,697  
Total debt securities
    183,474       7,100       (637 )     189,937  
Equity securities in financial institutions
    750       -       -       750  
Total
  $ 184,224     $ 7,100     $ (637 )   $ 190,687  
 
 
16

 
 
   
December 31, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
                         
U.S. government agency securities
  $ 24,485     $ 566     $ (91 )   $ 24,960  
Obligations of states and political subdivisions:
                               
Taxable
    6,888       738       -       7,626  
Tax-exempt
    80,391       4,683       (104 )     84,970  
Mortgage-backed securities in government-sponsored entities
    69,238       1,929       (65 )     71,102  
Private-label mortgage-backed securities
    4,553       511       -       5,064  
Total debt securities
    185,555       8,427       (260 )     193,722  
Equity securities in financial institutions
    750       -       -       750  
Total
  $ 186,305     $ 8,427     $ (260 )   $ 194,472  
 
The amortized cost and fair value of debt securities at March 31, 2013, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollar amounts in thousands)
 
Amortized
Cost
   
Fair
Value
 
             
Due in one year or less
  $ 2,915     $ 2,985  
Due after one year through five years
    4,543       4,811  
Due after five years through ten years
    21,842       22,805  
Due after ten years
    154,174       159,336  
                 
Total
  $ 183,474     $ 189,937  
 
Proceeds from the sales of securities available-for-sale and the gross realized gains and losses for the three months ended March 31 are as follows:
 
    2013     2012  
Proceeds from sales   $ 7,438       -  
Gross realized gains     204       -  
Gross realized losses     (19 )     -  
 
Investment securities with an approximate carrying value of $66,318,142 and $52,126,000 at March 31, 2013 and 2012, respectively, were pledged to secure deposits and other purposes as required by law.
 
 
17

 
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
 
   
March 31, 2013
 
   
Less than Twelve Months
   
Twelve Months or Greater
   
Total
 
(Dollar amounts in thousands)
 
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
 
                                     
U.S. government agency securities
  $ 11,925     $ (81 )   $ -     $ -     $ 11,925     $ (81 )
Obligations of states and political subdivisions
    14,834       (391 )     -       -       14,834       (391 )
Mortgage-backed securities in government-sponsored entities
    15,768       (165 )     -       -       15,768       (165 )
Total
  $ 42,527     $ (637 )   $ -     $ -     $ 42,527     $ (637 )
 
   
December 31, 2012
 
   
Less than Twelve Months
   
Twelve Months or Greater
   
Total
 
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
 
                                                 
U.S. government agency securities
  $ 9,938     $ (91 )   $ -     $ -     $ 9,938     $ (91 )
Obligations of states and political subdivisions
    9,240       (104 )     -       -       9,240       (104 )
Mortgage-backed securities in government-sponsored entities
    12,353       (65 )     -       -       12,353       (65 )
Total
  $ 31,531     $ (260 )   $ -     $ -     $ 31,531     $ (260 )
 
There were 49 securities considered temporarily impaired at March 31, 2013.
 
On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The Company assesses whether the unrealized loss is other-than-temporary.
 
OTTI losses are recognized in earnings when the Company has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the Company does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.
 
An unrealized loss is generally deemed to be other than temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result the credit loss component of an OTTI is recorded as a component of investment securities gains (losses) in the accompanying Consolidated Statement of Income, while the remaining portion of the impairment loss is recognized in other comprehensive income, provided the Company does not intend to sell the underlying debt security and it is “more likely than not” that the Company will not have to sell the debt security prior to recovery.
 
Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for more than 97% of the total available-for-sale portfolio as of March 31, 2013 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company’s assessment was concentrated mainly on private-label collateralized mortgage obligations of approximately $4.2 million for which the Company evaluates credit losses on a quarterly basis. The gross unrealized gain position related to these private-label collateralized mortgage obligations amounted to $481,000 on March 31, 2013. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
 
 
 
The length of time and the extent to which the fair value has been less than the amortized cost basis.
       
 
 
Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;
 
 
18

 
 
 
 
The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and
 
 
 
Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.
 
For the three months ended March 31, 2013 and 2012, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI.
 
NOTE 7 - LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
 
Major classifications of loans are summarized as follows (in thousands):
 
   
March 31,
2013
   
December 31,
2012
 
             
Commercial and industrial
  $ 55,401     $ 62,188  
Real estate - construction
    22,817       22,522  
Real estate - mortgage:
               
Residential
    199,063       203,872  
Commercial
    125,799       115,734  
Consumer installment
    3,974       4,117  
      407,054       408,433  
Less allowance for loan losses
    7,732       7,779  
                 
Net loans
  $ 399,322     $ 400,654  
 
The Company’s primary business activity is with customers located within its local trade area, eastern Geauga County, and contiguous counties to the north, east, and south.  The Company also serves the central Ohio market with offices in Dublin and Westerville, Ohio.  Commercial, residential, consumer, and agricultural loans are granted.  Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan losses.  Interest income is recognized as income when earned on the accrual method.  The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful.  Interest received on nonaccrual loans is recorded as income or applied against principal according to management’s judgment as to the collectability of such principal.
 
Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield.  Management is amortizing these amounts over the contractual life of the related loans.
 
 
19

 
 
The following tables summarize the primary segments of the loan portfolio and allowance for loan losses (in thousands):
 
               
Real Estate- Mortgage
             
March 31, 2013
 
Commercial and industrial
 
Real estate- construction
 
Residential
   
Commercial
   
Consumer
 installment
 
Total
 
Loans:
                                   
Individually evaluated for impairment
  $ 2,975     $ 3,772     $ 5,794     $ 6,832     $ 18     $ 19,391  
Collectively evaluated for impairment
    52,426       19,045       193,269       118,967       3,956       387,663  
Total loans
  $ 55,401     $ 22,817     $ 199,063     $ 125,799     $ 3,974     $ 407,054  
 
                   
Real estate- Mortgage
                 
December 31, 2012
 
Commercial and industrial
 
Real estate- construction
 
Residential
   
Commercial
   
Consumer
installment
 
Total
 
Loans:
                                               
Individually evaluated for impairment
  $ 4,592     $ 3,993     $ 5,761     $ 6,914     $ 28     $ 21,288  
Collectively evaluated for impairment
    57,596       18,529       198,111       108,820       4,089       387,145  
Total loans
  $ 62,188     $ 22,522     $ 203,872     $ 115,734     $ 4,117     $ 408,433  

               
Real Estate- Mortgage
             
March 31, 2013
 
Commercial and industrial
 
Real estate- construction
 
Residential
   
Commercial
   
Consumer
installment
 
Total
 
Allowance for loan losses:
                                   
Ending allowance balance attributable to loans:                                    
Individually evaluated for impairment
  $ 700     $ 790     $ 703     $ 682     $ 1     $ 2,876  
Collectively evaluated for impairment
    530       258       2,503       1,519       46       4,856  
   Total ending allowance balance
  $ 1,230     $ 1,048     $ 3,206     $ 2,201     $ 47     $ 7,732  
 
                   
Real Estate- Mortgage
                 
December 31, 2012
 
Commercial and industrial
 
Real estate- construction
 
Residential
   
Commercial
   
Consumer
installment
 
Total
 
Allowance for loan losses:
                                               
Ending allowance balance attributable to loans:                                                
Individually evaluated for impairment
  $ 1,189     $ 933     $ 600     $ 960     $ 6     $ 3,688  
Collectively evaluated for impairment
    543       190       2,272       1,031       55       4,091  
   Total ending allowance balance
  $ 1,732     $ 1,123     $ 2,872     $ 1,991     $ 61     $ 7,779  
 
The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance.  The portfolio is segmented into Commercial and Industrial (“C&I”), Real Estate Construction, Real Estate - Mortgage which is further segmented into Residential and Commercial real estate, and Consumer Installment Loans.  The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers.  The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners.  The commercial mortgage loan segment consists of loans made for the purposed of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.
 
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $150,000 and if the loan either is in nonaccrual status, or is risk rated Special Mention or Substandard and is greater than 90 days past due.  Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired.
 
 
20

 
 
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods:  (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs.  The method is selected on a loan-by loan basis, with management primarily utilizing the fair value of collateral method.  The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.  The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
 
The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):
 
March 31, 2013
 
Impaired Loans
 
     
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
With no related allowance recorded:
             
 
Commercial and industrial
  $ 1,271     $ 1,271     $ -  
 
Real estate - construction
    322       322       -  
 
Real estate - mortgage:
                       
 
Residential
    2,617       2,730       -  
 
Commercial
    3,772       3,772       -  
 
Consumer installment
    10       10       -  
 
Total
  $ 7,992     $ 8,105     $ -  
                           
With an allowance recorded:
                       
 
Commercial and industrial
  $ 1,704     $ 1,704     $ 700  
 
Real estate - construction
    3,450       3,450       790  
 
Real estate - mortgage:
            -       -  
 
Residential
    3,025       3,064       703  
 
Commercial
    3,060       3,060       682  
 
Consumer installment
    8       8       1  
 
Total
  $ 11,247     $ 11,286     $ 2,876  
                           
Total:
                       
 
Commercial and industrial
  $ 2,975     $ 2,975     $ 700  
 
Real estate - construction
    3,772       3,772       790  
 
Real estate - mortgage:
                       
 
Residential
    5,642       5,794       703  
 
Commercial
    6,832       6,832       682  
 
Consumer installment
    18       18       1  
 
Total
  $ 19,239     $ 19,391     $ 2,876  
 
 
21

 
 
December 31, 2012
                 
Impaired Loans
 
     
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
With no related allowance recorded:
             
 
Commercial and industrial
  $ 1,230     $ 1,229     $ -  
 
Real estate - construction
    308       308       -  
 
Real estate - mortgage:
                       
 
Residential
    2,716       2,729       -  
 
Commercial
    4,143       4,164       -  
 
Consumer installment
    11       11       -  
 
Total
  $ 8,408     $ 8,441     $ -  
                           
With an allowance recorded:
                       
 
Commercial and industrial
  $ 3,362     $ 3,367     $ 1,189  
 
Real estate - construction
    3,685       3,685       933  
 
Real estate - mortgage:
                       
 
Residential
    3,045       3,054       600  
 
Commercial
    2,771       2,776       960  
 
Consumer installment
    17       17       6  
 
Total
  $ 12,880     $ 12,899     $ 3,688  
                           
Total:
                       
 
Commercial and industrial
  $ 4,592     $ 4,596     $ 1,189  
 
Real estate - construction
    3,993       3,993       933  
 
Real estate - mortgage:
                       
 
Residential
    5,761       5,783       600  
 
Commercial
    6,914       6,940       960  
 
Consumer installment
    28       28       6  
 
Total
  $ 21,288     $ 21,340     $ 3,688  
 
The following table presents interest income by class, recognized on impaired loans:
 
   
As of March 31, 2013
   
As of March 31, 2012
 
                         
    Average
Recorded
Investment
    Interest
Income
Recognized
    Average
Recorded
Investment
    Interest
Income
Recognized
 
Total:
                       
Commercial and industrial
  $ 2,975     $ 55     $ 1,781     $ 12  
Real estate - construction
    3,772       37       471       1  
Real estate - mortgage:
                               
Residential
    5,642       74       2,809       27  
Commercial
    6,832       110       1,884       26  
Consumer installment
    18       -       28       1  

 
22

 
 
Management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories used by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard.   Assets classified as “doubtful” have all the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses make collection of principal in full — on the basis of currently existing facts, conditions, and values — highly questionable and improbable. Any portion of a loan that has been charged off is placed in the Loss category.
 
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event.  The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis.  The Credit Department performs an annual review of all commercial relationships $200,000 or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.  The Company has an experienced Loan Review Department that continually reviews and assesses loans within the portfolio.  The Company engages an external consultant to conduct loan reviews on a semi-annual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and/or criticized relationships greater than $125,000.  Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
 
The primary risk of commercial and industrial loans is the current economic uncertainties. C & I loans are, by nature, secured by less substantial collateral than real estate secured loans. The primary risk of real estate construction loans is potential delays and /or disputes during the completion process.  The primary risk of residential real estate loans is current economic uncertainties along with the slow recovery in the housing market.  The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.
 
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system (in thousands):
 
     
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
Loans
 
March 31, 2013
                             
                                 
 
Commercial and industrial
  $ 51,789     $ 929     $ 2,640     $ 43     $ 55,401  
 
Real estate - construction
    18,105       923       3,790       -       22,817  
 
Real estate - mortgage:
                                       
 
     Residential
    185,856       967       12,240       -       199,063  
 
     Commercial
    117,462       3,149       5,189       -       125,799  
 
Consumer installment
    3,953       -       21       -       3,974  
 
Total
  $ 377,165     $ 5,967     $ 23,880     $ 43     $ 407,054  
 
 
 
23

 
 
December 31, 2012
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
Loans
 
                                 
 
Commercial and industrial
  $ 59,390     $ 678     $ 2,061     $ 59     $ 62,188  
 
Real estate - construction
    17,601       -       4,921       -       22,522  
 
Real estate - mortgage:
                                       
 
Residential
    190,967       758       12,147       -       203,872  
 
Commercial
    106,509       1,928       7,297       -       115,734  
 
Consumer installment
    4,084       -       33       -       4,117  
 
Total
  $ 378,551     $ 3,364     $ 26,459     $ 59     $ 408,433  
 
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.
 
Non-performing assets includes non-accrual loans, troubled debt restructurings (TDRs), loans 90 days or more past due, assets purchased by EMORECO from EB, OREO, and repossessed assets. A loan is classified as non-accrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful.  Payments received on nonaccrual loans are applied against principal according to management’s shadow accounting system.
 
The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans (in thousands):
 
         
Still Accruing
             
   
Current
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days+
Past Due
   
Total
Past Due
   
Non-
Accrual
   
Total
Loans
 
March 31, 2013
                                         
                                           
Commercial and industrial
  $ 53,319     $ 1,545     $ 156     $ -     $ 1,701     $ 381     $ 55,401  
Real estate - construction
    22,669       -       -       -       -       148       22,817  
Real estate - mortgage:
                                                       
Residential
    185,879       3,976       613       361       4,950       8,234       199,063  
Commercial
    123,720       650       115       -       765       1,314       125,799  
Consumer installment
    3,890       66       4       -       70       14       3,974  
Total
  $ 389,477     $ 6,237     $ 888     $ 361     $ 7,486     $ 10,091     $ 407,054  
 
           
Still Accruing
             
     
Current
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Days+
Past Due
   
Total
Past Due
   
Non-
Accrual