10-Q 1 d563702d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 June 30, 2013

OR

 

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER 000-22062

 

 

UWHARRIE CAPITAL CORP

(Exact name of registrant as specified in its charter)

 

 

 

NORTH CAROLINA   56-1814206

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

132 NORTH FIRST STREET

ALBEMARLE, NORTH CAROLINA

  28001
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone number, including area code: (704) 983-6181

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (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  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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 7,478,104 shares of common stock outstanding as of August 5, 2013.

 

 

 


Table of Contents

Table of Contents

 

          Page No.  
Part I.   

FINANCIAL INFORMATION

  
Item 1 -   

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets June 30, 2013 and December 31, 2012

     3   
  

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012

     4   
  

Consolidated Statements of Comprehensive Income for the Three And Six Months Ended June 30, 2013 and 2012

     5   
  

Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2013

     6   
  

Consolidated Statements of Cash Flows Six Months Ended June 30, 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

     37   
Item 4 -   

Controls and Procedures

     37   
Part II.   

OTHER INFORMATION

  
Item 1 -   

Legal Proceedings

     38   
Item 1A -   

Risk Factors

     38   
Item 2 -   

Unregistered Sales of Equity Securities and Use of Proceeds

     39   
Item 3 -   

Defaults Upon Senior Securities

     39   
Item 4 -   

Mine Safety Disclosures

     40   
Item 5 -   

Other Information

     40   
Item 6 -   

Exhibits

     40   
  

Exhibit Index

     43   

 

-2-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Balance Sheets

 

Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

 

     June 30,
2013
(Unaudited)
    December 31,
2012*
 
     (dollars in thousands)  

ASSETS

    

Cash and due from banks

   $ 10,294      $ 8,877   

Interest-earning deposits with banks

     36,836        72,851   

Securities available for sale, at fair value

     120,571        91,638   

Loans held for sale

     676        5,373   

Loans:

    

Loans held for investment

     321,793        329,183   

Less allowance for loan losses

     (5,481     (6,801
  

 

 

   

 

 

 

Net loans held for investment

     316,312        322,382   
  

 

 

   

 

 

 

Premises and equipment, net

     14,041        14,952   

Interest receivable

     1,840        1,753   

Restricted stock

     1,824        2,265   

Bank owned life insurance

     6,456        6,394   

Other real estate owned

     9,454        8,713   

Prepaid assets

     1,047        635   

Other assets

     10,307        9,174   
  

 

 

   

 

 

 

Total assets

   $ 529,658      $ 545,007   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand noninterest-bearing

   $ 74,268      $ 70,347   

Interest checking and money market accounts

     222,114        211,066   

Savings deposits

     46,922        43,336   

Time deposits, $100,000 and over

     47,671        53,449   

Other time deposits

     69,992        79,414   
  

 

 

   

 

 

 

Total deposits

     460,967        457,612   
  

 

 

   

 

 

 

Short-term borrowed funds

     9,372        18,690   

Long-term debt

     11,168        12,673   

Interest payable

     232        270   

Other liabilities

     4,810        11,449   
  

 

 

   

 

 

 

Total liabilities

     486,549        500,694   
  

 

 

   

 

 

 

Redeemable common stock held by the Employee Stock Ownership Plan (ESOP)

     1,686        1,584   

Off balance sheet items, commitmentsand contingencies (Note 9)

    

SHAREHOLDERS’ EQUITY

    

Preferred stock, no par value: 10,000,000 shares authorized;

    

2,258 and 10,000 shares of series A issued and outstanding;

     2,258        10,000   

500 shares of series B issued and outstanding

     500        500   

Discount on preferred stock

     (50     (100

Common stock, $1.25 par value: 20,000,000 shares issuedauthorized; shares issued and outstanding 7,478,104 and 7,502,496 shares, respectively

     9,348        9,378   

Additional paid-in capital

     12,034        12,201   

Unearned ESOP compensation

     (861     (875

Undivided profits

     10,614        10,138   

Accumulated other comprehensive income (loss)

     (173     1,487   
  

 

 

   

 

 

 

Total Uwharrie Capital shareholders’ equity

     33,670        42,729   

Noncontrolling interest

     7,753        —     
  

 

 

   

 

 

 

Total shareholders’ equity

     41,423        42,729   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 529,658      $ 545,007   
  

 

 

   

 

 

 

 

(*) Derived from audited consolidated financial statements

See accompanying notes

 

-3-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  
     (in thousands, except share and per share data)  

Interest Income

        

Loans, including fees

   $ 4,449      $ 4,941      $ 8,876      $ 10,148   

Investment securities

        

US Treasury

     100        140        193        287   

US Government agencies and corporations

     202        204        381        393   

State and political subdivisions

     62        89        128        180   

Interest-earning deposits with banks and federal funds sold

     54        40        109        72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,867        5,414        9,687        11,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Interest checking and money market accounts

     112        134        228        285   

Savings deposits

     42        53        84        105   

Time deposits, $100,000 and over

     153        200        327        415   

Other time deposits

     182        256        395        520   

Short-term borrowed funds

     43        81        123        155   

Long-term debt

     166        199        337        441   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     698        923        1,494        1,921   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,169        4,491        8,193        9,159   

Provision for (recovery of) loan losses

     (405     363        (774     703   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision (recovery of) for loan losses

     4,574        4,128        8,967        8,456   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Service charges on deposit accounts

     392        436        797        868   

Other service fees and commissions

     841        861        1,634        1,591   

Gain on sale of securities (includes reclassification of $14 from accumulated other comprehensive income)

     —          16        14        16   

Gain (loss) on fixed assets and other assets

     (22     25        225        296   

Income from mortgage loan sales

     642        667        1,482        1,476   

Other income

     109        118        224        238   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,962        2,123        4,376        4,485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     3,060        3,157        6,152        6,263   

Net occupancy expense

     276        285        550        570   

Equipment expense

     186        183        354        371   

Data processing costs

     192        223        392        434   

Office supplies and printing

     48        81        111        152   

Foreclosed real estate expense

     948        342        1,123        810   

Professional fees and services

     243        127        481        172   

Marketing and donations

     203        152        376        338   

Electronic banking expense

     249        225        471        454   

Software amortization and maintenance

     137        141        281        283   

FDIC insurance

     126        171        297        345   

Other noninterest expense

     618        535        1,327        1,196   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     6,286        5,622        11,915        11,388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     250        629        1,428        1,553   

Income taxes (includes reclassification of $5 from accumulated other comprehensive income)

     94        228        509        452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 156      $ 401      $ 919      $ 1,101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 156        401        919        1,101   

Less: net income attributable to noncontrolling Interest

     (114     —          (217     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Uwharrie Capital Corp

     42        401        702        1,101   

Dividends - preferred stock

     (65     (161     (226     (323
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ (23   $ 240      $ 476      $ 778   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

        

Basic

   $ 0.00      $ 0.03      $ 0.07      $ 0.10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.00      $ 0.03      $ 0.07      $ 0.10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     7,287,662        7,431,969        7,297,048        7,435,053   

Diluted

     7,287,662        7,431,969        7,297,048        7,435,053   

See accompanying notes

 

-4-


Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  
     (in thousands)  

Net Income

   $ 156      $ 401      $ 919      $ 1,101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

        

Unrealized gain (loss) on available for sale securities

     (2,413     366        (2,537     (48

Related tax effect

     844        (122     886        17   

Reclassification of (gain) loss recognized in net income

     —          (16     (14     (16

Related tax effect

     —          6        5        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (1,569     234        (1,660     (41
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (1,413     635        (741     1,060   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     (103     —          (217     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Uwharrie Capital

   $ (1,516   $ 635      $ (958   $ 1,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-5-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

 

     Number
Common
Shares
Issued
    Preferred
Stock
Series A
    Preferred
Stock
Series B
     Discount
on
Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Unearned
ESOP
Compensation
    Undivided
Profits
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
    Total  
(dollars in thousands, except share data)  

Balance, December 31, 2012

     7,502,496      $ 10,000      $ 500       $ (100   $ 9,378      $ 12,201      $ (875   $ 10,138      $ 1,487      $ —        $ 42,729   

Net Income

     —          —          —           —          —          —          —          702        —          217        919   

Repurchase of common stock

     (24,392     —          —           —          (30     (42     —          —          —          —          (72

Other comprehensive loss

     —          —          —           —          —          —          —          —          (1,660     —          (1,660

Release of ESOP shares

     —          —          —           —          —          (23     46        —          —          —          23   

Increase in ESOP notes receivable

     —          —          —           —          —          —          (32     —          —          —          (32

Stock compensation expense

     —          —          —           —          —          —          —          —          —          —          —     

Reclass to mezzanine capital

     —          —          —           —          —          (102     —          —          —          —          (102

Repayment of preferred stock series A

     —          (7,742     —           —          —          —          —          —          —          —          (7,742

Issuance of preferred stock series B (noncontrolling interest)

     —          —          —           —          —          —          —          —          —          7,855        7,855   

Record costs of series B preferred stock (noncontrolling interest)

     —          —          —           —          —          —          —          —          —          (113     (113

Record preferred stock dividend series B (noncontrolling interest)

     —          —          —           —          —          —          —          —          —          (206     (206

Record preferred stock dividend and discount accretion

     —          —          —           50        —          —          —          (226     —          —          (176
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

     7,478,104      $ 2,258      $ 500       $ (50   $ 9,348      $ 12,034      $ (861   $ 10,614      $ (173   $ 7,753      $ 41,423   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

-6-


Table of Contents

Uwharrie Capital Corp and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

     Six Months Ended
June 30,
 
     2013     2012  
     (dollars in thousands)  

Cash flows from operating activities

    

Net income

   $ 919      $ 1,101   

Adjustments to reconcile net income to net cash

    

Provided by (used in) operating activities:

    

Depreciation

     464        480   

Net amortization of security premiums/discounts

     850        537   

Net amortization of mortgage servicing rights

     430        410   

Impairment of foreclosed real estate

     758        527   

Provision for (recovery of) loan losses

     (774     703   

Stock compensation

     —          2   

Net realized (gain) loss on sales / calls available for sales securities

     (14     (16

Income from mortgage loan sales

     (1,482     (1,476

Proceeds from sales of loans held for sale

     51,667        52,776   

Origination of loans held for sale

     (45,488     (50,629

(Gain) loss on sale of premises, equipment and other assets

     (229     (276

Increase in cash surrender value of life insurance

     (62     (129

(Gain) loss on sales of foreclosed real estate

     4        (20

Release of ESOP shares

     23        23   

Net change in interest receivable

     (87     116   

Net change in other assets

     (738     881   

Net change in interest payable

     (38     (29

Net change in other liabilities

     742        27   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     6,945        5,008   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from sales, maturities and calls of securities available for sale

     8,438        15,807   

Purchase of securities available for sale

     (40,758     (26,055

Net decrease in loans

     4,537        22,449   

Proceeds from sales of premises, equipment and other assets

     949        —     

Purchase of premises and equipment

     (273     (402

Proceeds from sales of foreclosed real estate

     804        1,529   

Investment in other assets

     (390     (260

Net decrease in restricted stock

     475        785   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (26,218     13,853   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net increase in deposit accounts

     3,355        10,618   

Net decrease in short-term borrowed funds

     (9,318     (2,040

Net decrease in long-term debt

     (1,505     (10,555

Proceeds from preferred stock series B issued by subsidiaries

     360        —     

Repayment of preferred stock series A

     (7,742     —     

Increase in unearned ESOP compensation

     (32     (82

Repurchase of common stock

     (72     (68

Dividend and discount accretion on preferred stock

     (176     (273

Dividend and cost accretion on noncontrolling interest

     (195     —     
  

 

 

   

 

 

 

Net cash provided (used in) in financing activities

     (15,325     (2,400
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (34,598     16,641   

Cash and cash equivalents, beginning of period

     81,728        28,687   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 47,130      $ 45,148   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Interest paid

   $ 1,532      $ 1,950   

Income taxes paid

     617        57   

Supplemental Schedule of Non-Cash Activities

    

Net change in fair value securities available for sale, net of tax

   $ (1,660   $ (41

Loans transferred to foreclosed real estate

     2,307        858   

Company financed sales of other real estate owned

     —          (188

Net change in ESOP liability

     102        —     

See accompanying notes

 

-7-


Table of Contents

UWHARRIE CAPITAL CORP AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation

The financial statements and accompanying notes are presented on a consolidated basis including Uwharrie Capital Corp (the “Company”) and its subsidiaries, Bank of Stanly (“Stanly”), Anson Bank & Trust Co. (“Anson”), Cabarrus Bank & Trust Company (“Cabarrus”), Strategic Investment Advisors, Inc. (“SIA”), and Uwharrie Mortgage Inc. Stanly consolidates its subsidiaries, the Strategic Alliance Corporation, BOS Agency, Inc. and Gateway Mortgage, Inc., each of which is wholly-owned by Stanly.

The information contained in the consolidated financial statements is unaudited. In the opinion of management, the consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) and material adjustments necessary for a fair presentation of results of interim periods, all of which are of a normal recurring nature, have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for an entire year. Management is not aware of economic events, outside influences or changes in concentrations of business that would require additional clarification or disclosure in the consolidated financial statements.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to consolidated financial statements filed as part of the Company’s 2012 Annual Report on Form 10-K. This Quarterly Report should be read in conjunction with such Annual Report.

Note 2 - Comprehensive Income

The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other accumulated comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of accumulated other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale. The following table presents the changes in accumulated other comprehensive income for the three and six months ending June 30, 2013:

 

     Unrealized holding gains  
     on available-for-sale  Securities (net)  
     Three months
ended

June 30, 2013
    Six months
ended

June 30, 2013
 
     (dollars in thousands)  

Beginning Balance

   $ 1,396      $ 1,487   

Other comprehensive income (loss) before reclassifications, net of $844,000 and $886,000 tax effect, respectively

     (1,569     (1,651

Amounts reclassified from accumulated other Comprehensive income, net of $5,000 tax effect

     —          (9
  

 

 

   

 

 

 

Net current-period other comprehensive loss

     (1,569     (1,660
  

 

 

   

 

 

 

Ending Balance

   $ (173   $ (173
  

 

 

   

 

 

 

 

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Table of Contents

Note 3 - Noncontrolling Interest

During the third quarter of 2012, each of the Company’s subsidiary banks began a campaign to sell Fixed Rate Noncumulative Perpetual Preferred Stock, Series B to be issued by each subsidiary bank. The preferred stock will qualify as Tier 1 capital at each bank and will pay dividends at a rate of 5.30%. The preferred stock has no voting rights. The sale ended on December 31, 2012 with Stanly raising $4.5 million, Anson raising $1.5 million and Cabarrus raising $1.9 million in new capital less total issuance costs of $113,000. These funds were held in an escrow account at December 31, 2012 and the new preferred stock was issued in January 2013. The total net amount is $7.7 million at the subsidiary bank level, consolidates up to the Company and is presented as noncontrolling interest in the consolidated balance sheets. Dividends declared on this preferred stock are presented as earnings allocated to the noncontrolling interest in the consolidated statements of income.

Note 4 - Per Share Data

Basic and diluted net income per common share is computed based on the weighted average number of shares outstanding during each period after retroactively adjusting for stock dividends. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the net income of the Company. For the three and six months ended June 30, 2013, the Company’s 92,491 stock options outstanding did not have a dilutive effect on per share results because the exercise prices exceeded the share values for each period. The Company had 122,341 stock options outstanding for the three and six months ended June 30, 2012, and they did not have a dilutive effect.

Basic and diluted net income per common share have been computed based upon net income available to common shareholders as presented in the accompanying consolidated statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding. The computation of basic and dilutive earnings per share is summarized below:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  

Weighted average number of common shares outstanding

     7,478,104        7,568,978        7,478,104        7,568,978   

Effect of ESOP shares

     (190,442     (137,009     (181,056     (133,925
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted weighted average number of common shares used in computing basic net income per common share

     7,287,662        7,431,969        7,297,048        7,435,053   

Effect of dilutive stock options

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per common share

     7,287,662        7,431,969        7,297,048        7,435,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Note 5 - Investment Securities

Carrying amounts and fair values of securities available for sale are summarized below:

 

June 30, 2013

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (dollars in thousands)  

U.S. Treasury

   $ 23,564       $ 561       $ 227       $ 23,898   

U.S. Government agencies

     46,542         278         1,118         45,702   

GSE - Mortgage-backed securities and CMO’s

     43,358         280         463         43,175   

State and political subdivisions

     7,370         426         —           7,796   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 120,834       $ 1,545       $ 1,808       $ 120,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (dollars in thousands)  

U.S. Treasury

   $ 18,731       $ 846       $ 1       $ 19,576   

U.S. Government agencies

     21,689         485         —           22,174   

GSE - Mortgage-backed securities and CMO’s

     40,766         379         123         41,022   

State and political subdivisions

     8,165         701         —           8,866   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $   89,351       $ 2,411       $     124       $   91,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

At both June 30, 2013 and December 31, 2012, the Company owned Federal Reserve stock reported at cost of $837,000 and $803,000, respectively that is included in other assets. Also at June 30, 2013 and December 31, 2012, the Company owned Federal Home Loan Bank Stock (FHLB) of $837,000 and $1.5 million, respectively. The investments in Federal Reserve stock and FHLB stock are required investments related to the Company’s membership in, and borrowings with, these banks. These investments are carried at cost since there is no ready market and historically redemption has been made at par value. The Company estimated that the fair value approximated cost and that these investments were not impaired at June 30, 2013.

Results from sales of securities available for sale for the three and six month period ended June 30, 2013 and June 30, 2012 are as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013      2012     2013      2012  
     (dollars in thousands)  

Gross proceeds from sales

   $ —         $ 9,003      $ 426       $ 9,003   
  

 

 

    

 

 

   

 

 

    

 

 

 

Realized gains from sales

   $ —         $ 128      $ 14       $ 128   

Realized losses from sales

     —           (112     —           (112
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Realized gains

   $ —         $ 16      $ 14       $ 16   
  

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2013 and December 31, 2012 securities available for sale with a carrying amount of $50.1 million and $48.8 million, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

The following tables show the gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2013 and December 31, 2012. These unrealized losses on investment securities are a result of temporary fluctuations in the market prices due to a rise in interest rates, which will adjust if rates decline, and a volatile market and are in no way a reflection of the quality of the investments. At June 30, 2013, the unrealized losses related to two United States Treasury notes, nine government agency bonds and eleven

 

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Table of Contents

mortgage backed securities. At December 31, 2012, the unrealized losses related to one United States Treasury note and seven mortgage backed securities.

 

     Less than 12 Months      12 Months or More      Total  

June 30, 2013

          Unrealized             Unrealized             Unrealized  
     Fair Value      Losses      Fair Value      Losses      Fair Value      Losses  
     (dollars in thousands)  

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 7,184       $ 227       $ —         $ —         $ 7,184       $ 227   

U.S. Gov’t agencies

     35,396         1,118         —           —           35,396         1,118   

Mortgage-backed securities and CMO’s

     24,763         463         —           —           24,763         463   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 67,343       $ 1,808       $ —         $ —         $ 67,343       $ 1,808   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 Months      12 Months or More      Total  

December 31, 2012

          Unrealized             Unrealized             Unrealized  
     Fair Value      Losses      Fair Value      Losses      Fair Value      Losses  
     (dollars in thousands)  

Securities available for sale temporary impairment

                 

U.S. Treasury

   $ 2,485       $ 1       $ —         $ —         $ 2,485       $ 1   

U.S. Gov’t agencies

     —           —           —           —           —           —     

Mortgage-backed securities and CMO’s

     21,355         123         —           —           21,355         123   

State and political subdivisions

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 23,840       $    124       $ —         $ —         $ 23,840       $    124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Declines in the fair value of the investment portfolio are believed by management to be temporary in nature. When evaluating an investment for other-than-temporary impairment losses, management considers among other things, the length of time and the extent to which the fair value has been in a loss position, the financial condition of the issuer and the intent and the ability the Company has to hold the investment until the loss position is recovered.

Any unrealized losses were largely due to increases in market interest rates over the yields available at the time of purchase. The fair value is expected to recover as the bonds approach their maturity date or market yields for such investments decline. At June 30, 2013, the Company had no intent to sell and not more likely than not to be required to sell the available for sale securities that were in a loss position prior to full recovery

 

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Table of Contents

The aggregate amortized cost and fair value of the available for sale securities portfolio at June 30, 2013 by remaining contractual maturity are as follows:

 

     June 30, 2013  
     Amortized
Cost
     Estimated
Fair Value
 

Securities available for sale

     

U. S. Treasury

     

Due after one but within five years

     16,152         16,714   

Due after five but within ten years

     7,412         7,184   
  

 

 

    

 

 

 
     23,564         23,898   
  

 

 

    

 

 

 

U.S. Government agencies

     

Due within twelve months

     5,003         5,076   

Due after one but within five years

     24,491         24,304   

Due after five but within ten years

     17,048         16,322   
  

 

 

    

 

 

 
     46,542         45,702   
  

 

 

    

 

 

 

Mortgage-backed securities

     

Due after one but within five years

     2,737         2,643   

Due after five but within ten years

     5,559         5,700   

Due after ten years

     35,062         34,832   
  

 

 

    

 

 

 
     43,358         43,175   
  

 

 

    

 

 

 

State and political subdivisions

     

Due within twelve months

     482         492   

Due after one but within five years

     1,131         1,220   

Due after five but within ten years

     4,739         5,011   

Due after ten years

     1,018         1,073   
  

 

 

    

 

 

 
     7,370         7,796   
  

 

 

    

 

 

 

Total Securities available for sale

     

Due within twelve months

     5,485         5,568   

Due after one but within five years

     44,511         44,881   

Due after five but within ten years

     34,758         34,217   

Due after ten years

     36,080         35,905   
  

 

 

    

 

 

 
   $ 120,834       $ 120,571   
  

 

 

    

 

 

 

Note 6 - Loans Held for Investment

The composition of net loans held for investment by class as of June 30, 2013 and December 31, 2012 are as follows:

 

     June 30,
2013
    December 31,
2012
 
     (dollars in thousands)  

Commercial

    

Commercial

   $ 48,335      $ 41,390   

Real estate - commercial

     100,712        103,304   

Other real estate construction loans

     21,022        25,052   

Noncommercial

    

Real estate 1-4 family construction

     3,130        3,080   

Real estate - residential

     90,716        93,927   

Home equity

     47,454        48,517   

Consumer loans

     9,662        12,986   

Other loans

     705        822   
  

 

 

   

 

 

 
     321,736        329,078   

Less:

    

Allowance for loan losses

     (5,481     (6,801

Deferred loan (fees) costs, net

     57        105   
  

 

 

   

 

 

 

Loans held for investment, net

   $ 316,312      $ 322,382   
  

 

 

   

 

 

 

 

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Table of Contents

Note 7 - Allowance for Loan Losses

The following table shows the change in the allowance for loss losses by loan segment for the three and six months periods ended June 30, 2013 and 2012, respectively:

 

Commercial

   Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 2,257      $ 2,823      $ 2,791      $ 2,904   

Provision (recovery) charged to operations

     22        (138     254        52   

Charge-offs

     (124     (42     (395     (354

Recoveries

     34        7        39        48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     (90     (35     (356     (306
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 2,689      $ 2,650      $ 2,689      $ 2,650   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Non-Commercial

   Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in thousands)  

Balance, beginning of period

   $ 3,716      $ 3,951      $ 4,010      $ 3,911   

Provision (recovery) charged to operations

     (927     501        (1,028     651   

Charge-offs

     (41     (49     (265     (171

Recoveries

     44        16        75        28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs)

     3        (33     (190     (143
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 2,792      $ 4,419      $ 2,792      $ 4,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows period-end loans and reserve balances by loan segment both individually and collectively evaluated for impairment at June 30, 2013 and December 31, 2012:

 

June 30, 2013                                          
     Individually Evaluated      Collectively Evaluated      Total  
     Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)  

Commercial

   $ 1,554       $ 11,256       $ 1,135       $ 158,813       $ 2,689       $ 170,069   

Non-Commercial

     1,636         9,964         1,156         141,760         2,792         151,724   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,190       $ 21,220       $ 2,291       $ 300,573       $ 5,481       $ 321,793   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012                                          
     Individually Evaluated      Collectively Evaluated      Total  
     Reserve      Loans      Reserve      Loans      Reserve      Loans  
     (dollars in thousands)  

Commercial

   $ 1,428       $ 14,979       $ 1,363       $ 154,767       $ 2,791       $ 169,746   

Non-Commercial

     1,606         11,128         2,404         148,309         4,010         159,437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,034       $ 26,107       $ 3,767       $ 303,076       $ 6,801       $ 329,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Past due loan information is used by management when assessing the adequacy of the allowance for loan losses. The following table summarizes the past due information of the loan portfolio by class:

June 30, 2013

 

     Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
     (dollars in thousands)  

Commercial

   $ 10       $ 438       $ 448       $ 47,887       $ 48,335       $ —     

Real estate - commercial

     401         3,279         3,680         97,032         100,712         —     

Other real estate construction

     3         1,581         1,584         19,438         21,022         —     

Real estate 1-4 family construction

     111         —           111         3,019         3,130         —     

Real estate - residential

     886         1,634         2,520         88,253         90,773         —     

Home equity

     30         531         561         46,893         47,454         —     

Consumer loans

     101         —           101         9,561         9,662         —     

Other loans

     —           —           —           705         705         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,542       $ 7,463       $ 9,005       $ 312,788       $ 321,793       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

 

     Loans
30-89 Days
Past Due
     Loans
90 Days
or More
Past due
     Total Past
Due Loans
     Current
Loans
     Total
Loans
     Accruing
Loans 90 or
More Days
Past Due
 
     (dollars in thousands)  

Commercial

   $ 98       $ 437       $ 535       $ 40,855       $ 41,390       $ —     

Real estate - commercial

     708         3,032         3,740         99,564         103,304         —     

Other real estate construction

     12         2,945         2,957         22,095         25,052         —     

Real estate construction

     —           —           —           3,080         3,080         —     

Real estate - residential

     1,309         2,507         3,816         90,216         94,032         —     

Home equity

     162         558         720         47,797         48,517         —     

Consumer loan

     218         1         219         12,767         12,986         —     

Other loans

     —           —           —           822         822         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,507       $ 9,480       $ 11,987       $ 317,196       $ 329,183       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Once a loan becomes 90 days past due, the loan is automatically transferred to a nonaccrual status. The exception to this policy is credit card loans that remain in accruing 90 days or more until they are paid current or charged off. Also, mortgage loans that were originated for sale but were not sold and are being held in the loan portfolio remain in an accruing status until they are foreclosed.

The composition of nonaccrual loans by class as of June 30, 2013 and December 31, 2012 is as follows:

 

     June 30,
2013
     December 31,
2012
 
     (dollars in thousands)  

Commercial

   $ 438       $ 437   

Real estate - commercial

     3,279         3,032   

Other real estate construction

     1,581         2,945   

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     1,634         2,507   

Home equity

     531         558   

Consumer loans

     —           1   

Other loans

     —           —     
  

 

 

    

 

 

 
   $ 7,463       $ 9,480   
  

 

 

    

 

 

 

Management uses a risk-grading program to facilitate the evaluation of probable inherent loan losses and to measure the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by the loan officers and reviewed and monitored by the lenders and

 

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Table of Contents

credit administration. The program has eight risk grades summarized in five categories as follows:

Pass: Loans that are pass grade credits include loans that are fundamentally sound and risk factors are reasonable and acceptable. They generally conform to policy with only minor exceptions and any major exceptions are clearly mitigated by other economic factors.

Watch: Loans that are watch credits include loans on management’s watch list where a risk concern may be anticipated in the near future.

Substandard: Loans that are considered substandard are loans that are inadequately protected by current sound net worth, paying capacity of the obligor or the value of the collateral pledged. All nonaccrual loans are graded as substandard.

Doubtful: Loans that are considered to be doubtful have all weaknesses inherent in loans classified substandard, plus the added characteristic that the weaknesses make the collection or liquidation in full on the basis of current existing facts, conditions and values highly questionable and improbable.

Loss: Loans that are considered to be a loss are considered to be uncollectible and of such little value that their continuance as bankable assets is not warranted.

The tables below summarize risk grades of the loan portfolio by class at June 30, 2013 and December 31 2012:

June 30, 2013

 

     Pass      Watch      Sub-
standard
     Doubtful      Total  
     (dollars in thousands)  

Commercial

   $ 47,105       $ 565       $ 665       $ —         $ 48,335   

Real estate - commercial

     84,186         9,136         7,390         —           100,712   

Other real estate construction

     18,053         803         2,166         —           21,022   

Real estate 1 - 4 family construction

     3,130         —           —           —           3,130   

Real estate - residential

     73,095         12,692         4,986         —           90,773   

Home equity

     45,283         1,202         969         —           47,454   

Consumer loans

     9,141         453         68         —           9,662   

Other loans

     705         —           —           —           705   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 280,698       $ 24,851       $ 16,244       $ —         $ 321,793   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

 

     Pass      Watch      Sub-
standard
     Doubtful      Total  
     (dollars in thousands)  

Commercial

   $ 39,800       $ 836       $ 754       $ —         $ 41,390   

Real estate - commercial

     84,748         9,337         9,219         —           103,304   

Other real estate construction

     20,684         577         3,477         314         25,052   

Real estate 1 - 4 family construction

     3,080         —           —           —           3,080   

Real estate - residential

     78,114         9,728         6,189         —           94,031   

Home equity

     46,591         914         1,013         —           48,518   

Consumer loans

     12,360         512         114         —           12,986   

Other loans

     822         —           —           —           822   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 286,199       $ 21,904       $ 20,766       $ 314       $ 329,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans that are in nonaccrual status or 90 days past due and still accruing are considered to be nonperforming. The following tables show the breakdown between performing and nonperforming loans by class at June 30, 2013 and December 31, 2012:

 

-15-


Table of Contents

June 30, 2013

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 47,897       $ 438       $ 48,335   

Real estate - commercial

     97,433         3,279         100,712   

Other real estate construction

     19,441         1,581         21,022   

Real estate 1 - 4 family construction

     3,130         —           3,130   

Real estate - residential

     89,139         1,634         90,773   

Home equity

     46,923         531         47,454   

Consumer loans

     9,662         —           9,662   

Other loans

     705         —           705   
  

 

 

    

 

 

    

 

 

 

Total

   $ 314,330       $ 7,463       $ 321,793   
  

 

 

    

 

 

    

 

 

 

December 31, 2012

 

     Performing      Non-
Performing
     Total  
     (dollars in thousands)  

Commercial

   $ 40,953       $ 437       $ 41,390   

Real estate - commercial

     100,272         3,032         103,304   

Other real estate construction

     22,107         2,945         25,052   

Real estate 1 - 4 family construction

     3,080         —           3,080   

Real estate - residential

     91,524         2,507         94,031   

Home equity

     47,960         558         48,518   

Consumer loans

     12,985         1         12,986   

Other loans

     822         —           822   
  

 

 

    

 

 

    

 

 

 

Total

   $ 319,703       $ 9,480       $ 329,183   
  

 

 

    

 

 

    

 

 

 

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. If a loan is deemed impaired, a specific calculation is performed and a specific reserve is allocated, if necessary. The tables below summarize the loans deemed impaired and the amount of specific reserves allocated by class at June 30, 2013 and December 31, 2012:

June 30, 2013

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Related
Allowance
     Recorded
Investment
Accruing
Loans 90 or
More Days
Past Due
     Recorded
Investment
Loans in
Non-accrual
 
     (dollars in thousands)  

Commercial

   $ 1,442       $ 196       $ 1,127       $ 732       $ —         $ 438   

Real estate - commercial

     9,859         4,472         3,324         477         —           3,279   

Other real estate construction

     2,186         372         1,764         345         —           1,581   

Real estate 1 - 4 family construction

     377         28         349         16         —           —     

Real estate - residential

     8,375         3,661         4,714         1,119         —           1,634   

Home equity

     1,062         319         743         435         —           531   

Consumer loans

     150         20         130         66         —           —     

Other loans

     1         1         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,452       $ 9,069       $ 12,151       $ 3,190       $ —         $ 7,463   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

December 31, 2012

 

     Unpaid
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With
Allowance
     Related
Allowance
     Recorded
Investment
Accruing
Loans 90 or
More Days
Past Due
     Recorded
Investment
Loans in
Non-accrual
 
     (dollars in thousands)  

Commercial

   $ 1,977       $ 388       $ 1,470       $ 616       $ —         $ 437   

Real estate - commercial

     11,299         6,341         2,895         411         —           3,032   

Other real estate construction

     3,935         2,437         1,448         401         —           2,945   

Real estate 1 - 4 family construction

     840         713         127         127         —           —     

Real estate - residential

     8,985         3,994         4,991         1,215         —           2,507   

Home equity

     1,068         521         547         159         —           558   

Consumer loans

     235         39         196         105         —           1   

Other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,339       $ 14,433       $ 11,674       $ 3,034       $ —         $ 9,480   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months ended      Three Months ended  
     June 30, 2013      June 30, 2012  
     Average
Recorded
Investment
     Interest
Income
     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 1,237       $ 4       $ 1,401       $ 13   

Real estate - commercial

     8,516         63         12,575         155   

Other real estate construction

     3,011         7         4,087         73   

Real estate 1 - 4 family construction

     609         6         1,326         10   

Real estate - residential

     8,680         132         12,043         174   

Home equity

     1,065         8         1,163         14   

Consumer loans

     192         1         334         6   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,310       $ 221       $ 32,929       $ 445   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months ended      Six Months ended  
     June 30, 2013      June 30, 2012  
     Average
Recorded
Investment
     Interest
Income
     Average
Recorded
Investment
     Interest
Income
 
     (dollars in thousands)  

Commercial

   $ 1,444       $ 15       $ 1,551       $ 27   

Real estate - commercial

     8,366         138         12,668         340   

Other real estate construction

     2,722         13         4,093         125   

Real estate 1 - 4 family construction

     537         11         1,202         16   

Real estate - residential

     8,662         221         12,270         311   

Home equity

     1,058         13         1,128         24   

Consumer loans

     308         4         299         10   

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,097       $ 415       $ 33,211       $ 853   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 8 - Troubled Debt Restructures

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification involves providing a concession to the existing loan contract. The Company offers various types of concessions when modifying loans to troubled borrowers, however, forgiveness of principal is rarely granted. Concessions offered are term extensions, capitalizing accrued interest, reducing interest rates to below current market rates or a combination of any of these. Combinations from time to time may include allowing a customer to be placed on interest-only payments. The presentations below in the

 

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Table of Contents

“other” category are TDR’s with a combination of concessions. At the time of a TDR, additional collateral or a guarantor may be requested.

Loans modified as a TDR are typically already on nonaccrual status and partial chargeoffs may have in some cases already been taken against the outstanding loan balance. The Company classifies TDR loans as impaired loans and evaluates the need for an allowance for loan loss on a loan-by-loan basis. An allowance is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the underlying collateral less any selling costs, if the loan is deemed to be collateral dependent.

For the three and six months ended June 30, 2013 and 2012 the following tables present a breakdown of the types of concessions made by loan class:

 

     Three months ended June 30, 2013  
     Number
of Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding  Recorded
Investment
 
     (dollars in thousands)  

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     2         403         403   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 403       $ 403   
  

 

 

    

 

 

    

 

 

 

 

     Three months ended June 30, 2012  
     Number
of Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 
     (dollars in thousands)  

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     —           —           —     

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     —         $ —         $ —     
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Six months ended June 30, 2013  
     Number
of Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding  Recorded
Investment
 
     (dollars in thousands)  

Other:

        

Commercial

     —         $ —         $ —     

Real estate - commercial

     —           —           —     

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     4         468         466   

Home equity

     —           —           —     

Consumer loans

     —           —           —     

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     4       $ 468       $ 466   
  

 

 

    

 

 

    

 

 

 

 

     Six months ended June 30, 2012  
     Number
of Contracts
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding Recorded
Investment
 
     (dollars in thousands)  

Other:

        

Commercial

     1       $ 10       $ 9   

Real estate - commercial

     2         619         616   

Other real estate construction

     —           —           —     

Real estate 1 - 4 family construction

     —           —           —     

Real estate - residential

     1         24         24   

Home equity

     —           —           —     

Consumer loans

     1         52         48   

Other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     5       $ 705       $ 697   
  

 

 

    

 

 

    

 

 

 

The following tables’ present loans that were modified as troubled debt restructurings within the previous twelve months ending June 30, 2013 and 2012 for which there was a payment default:

 

     Twelve months ended
June 30, 2013
 
     Number
of Loans
     Recorded
Investment
 
     (dollars in thousands)  

Other:

     

Commercial

     —         $ —     

Real estate - commercial

     —           —     

Other real estate construction

     —           —     

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     —           —     

Home Equity loans

     2         28   

Consumer loans

     —           —     

Other loans

     —           —     
  

 

 

    

 

 

 
     2       $ 28   
  

 

 

    

 

 

 

Total

     2       $ 28   
  

 

 

    

 

 

 

 

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Table of Contents
     Twelve months ended
June 30, 2012
 
     Number
of Loans
     Recorded
Investment
 
     (dollars in thousands)  

Other:

     

Commercial

     1       $ 9   

Real estate - commercial

     3         709   

Other real estate construction

     —           —     

Real estate 1 - 4 family construction

     —           —     

Real estate - residential

     3         367   

Home Equity loans

     —           —     

Consumer loans

     1         4   

Other loans

     —           —     
  

 

 

    

 

 

 
     8       $ 1,089   
  

 

 

    

 

 

 

Total

     8       $ 1,089   
  

 

 

    

 

 

 

A default on a troubled debt restructure is defined as being past due 90 days or being out of compliance with the modification agreement. As mentioned, the Company considers TDRs to be impaired loans and has $614,000 in allowance for loan loss as of June 30, 2013, as a direct result of these TDR’s.

The following tables present the successes and failures of the types of modifications within the previous twelve months ending June 30, 2013 and 2012:

June 30, 2013

 

     Paid In Full      Paying as restructured      Converted to nonaccrual      Foreclosure/ Default  
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
 
     (dollars in thousands)  

Below market interest rate

     —         $ —           —         $ —           —         $ —           —         $ —     

Extended payment terms

     —           —           —           —           —           —           —           —     

Forgiveness of Principal

     —           —           —           —           —           —           —           —     

Other Loans

     —           —           15         1,246         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           15       $ 1,246         —         $ —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2012

 

     Paid In Full      Paying as restructured      Converted to nonaccrual      Foreclosure/ Default  
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
     Number of
Loans
     Recorded
Investments
 
     (dollars in thousands)  

Below market interest rate

     —         $ —           —         $ —           —         $ —           —         $ —     

Other Loans

     —           —           10         968         1         206         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           10       $ 968         1       $ 206         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company has not committed to fund any additional disbursements for TDR’s.

Note 9 - Commitments and Contingencies

The subsidiary banks are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.

 

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Table of Contents

The banks’ risk of loss with the unfunded loans and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The banks use the same credit policies in making commitments under such instruments as they do for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Credit card commitments are unsecured. At June 30, 2013, outstanding financial instruments whose contract amounts represent credit risk were approximately:

 

(dollars in thousands)       

Commitments to extend credit

   $ 64,472   

Credit card commitments

     8,182   

Standby letters of credit

     1,175   
  

 

 

 

Total commitments

   $ 73,829   
  

 

 

 

Note 10 - Fair Value Disclosures

Accounting Standards Codification (ASC) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but clarifies and standardizes some divergent practices that have emerged since prior guidance was issued. ASC 820 creates a three-level hierarchy under which individual fair value estimates are to be ranked based on the relative reliability of the inputs used in the valuation.

ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which those assets or liabilities are sold and considers assumptions that market participants would use when pricing those assets or liabilities. Fair values determined using Level 1 inputs rely on active and observable markets to price identical assets or liabilities. In situations where identical assets and liabilities are not traded in active markets, fair values may be determined based on Level 2 inputs, which exist when observable data exists for similar assets and liabilities. Fair values for assets and liabilities for which identical or similar assets and liabilities are not actively traded in observable markets are based on Level 3 inputs, which are considered to be unobservable.

Among the Company’s assets and liabilities, investment securities available for sale are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including other real estate owned, impaired loans, loans held for sale, which are carried at the lower of cost or market; loan servicing rights, where fair value is determined using similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions; and goodwill, which is periodically tested for impairment. Deposits, short-term borrowings and long-term obligations are not reported at fair value.

Prices for US Treasury securities are readily available in the active markets in which those securities are traded, and the resulting fair values are shown in the ‘Level 1 input’ column. Prices for government agency securities, mortgage-backed securities and for state, county and municipal securities are obtained for similar securities, and the resulting fair values are shown in the ‘Level 2 input’ column. Prices for all other non-marketable investments are determined based on various assumptions that are not observable. The fair values for these investment securities are shown in the ‘Level 3 input’ column. Non-marketable investment securities, which are carried at their purchase price, include those that may only be redeemed by the issuer. The changes in securities between Level 1 and Level 2 were related to the purchase and sale of several securities and not the transfer of securities.

 

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Table of Contents

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment by using one of several methods including collateral value, fair value of similar debt and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the present value of the expected repayments or fair value of collateral exceed the recorded investments in such loans. At June 30, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an internal assessment of fair value based upon market data issued or management determines the fair value of the underlying collateral is further impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3.

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate, based on secondary market prices. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Servicing assets are evaluated for impairment based upon the fair value. Fair value is determined based upon discounted cash flows using market-based assumptions.

The following table provides fair value information for assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012:

 

     June 30, 2013  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 23,898       $ 23,898       $ —         $ —     

US Government Agencies

     45,702         —           45,702         —     

GSE - Mortgage-backed securities and CMO’s

     43,175         —           43,175         —     

State and political subdivisions

     7,796         —           7,796         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 120,571       $ 23,898       $ 96,673       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     December 31, 2012  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Securities available for sale:

           

US Treasury

   $ 19,576       $ 19,576       $ —         $ —     

US Gov’t Agencies

     22,174         —           22,174         —     

GSE - Mortgage-backed securities and CMO’s

     41,022         —           41,022         —     

State and political subdivisions

     8,866         —           8,866         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 91,638       $ 19,576       $ 72,062       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below as of June 30, 2013 and December 31, 2012:

 

     June 30, 2013  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 8,961       $ —         $ —         $ 8,961   

Loans held for sale

     676         —           676         —     

Other real estate owned

     5,626         —           —           5,626   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 15,263       $ —         $ 676       $ 14,587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     (dollars in thousands)  
     Total      Level 1      Level 2      Level 3  

Impaired loans

   $ 8,640       $ —         $ —         $ 8,640   

Loans held for sale

     5,373         —           5,373         —     

Other real estate owned

     5,596         —           —           5,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 19,609       $ —         $ 5,373       $ 14,236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

     Valuation Technique    Unobservable Input    General
Range
 

Nonrecurring measurements:

        

OREO

   Discounted appraisals    Collateral discounts and
Estimated costs to sell
     0 - 10

Impaired loans

   Discounted appraisals    Collateral discounts and
Estimated costs to sell
     0 - 30

 

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Table of Contents

Note 11 - Fair Values of Financial Instruments and Interest Rate Risk

ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The fair value estimates presented at June 30, 2013 and December 31, 2012, are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The estimated fair values disclosed in the following table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of June 30, 2013 and December 31, 2012:

June 30, 2013

 

     Carrying
Value
     Estimated
Fair Value
     Level 1      Level 2      Level 3  
     (dollars in thousands)  

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 47,130       $ 47,130       $ 47,130       $ —         $ —     

Securities available for sale

     120,571         95,960         23,898         96,673         —     

Loans held for investment, net

     316,312         324,185         —           —           324,185   

Loans held for sale

     676         676         —           676         —     

Restricted stock

     1,824         1,824         1,824         —           —     

Bank-owned life insurance

     6,456         6,456         —           —           6,456   

Mortgage servicing rights

     2,489         2,520         —           —           2,520   

Accrued interest receivable

     1,840         1,840         —           —           1,840   

FINANCIAL LIABILITIES

              

Deposits

   $ 460,967       $ 446,203       $ —         $ —         $ 446,203   

Short-term borrowings

     9,372         9,372         —           9,372         —     

Long-term borrowings

     41         41         —           41         —     

Junior subordinated debt

     11,127         11,262         —           —           11,262   

Accrued interest payable

     232         232         —           —           232   

December 31, 2012

 

     Carrying
Value
     Estimated
Fair Value
     Level 1      Level 2      Level 3  
     (dollars in thousands)  

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 81,728       $ 81,728       $ 81,728       $ —         $ —     

Securities available for sale

     91,638         91,638         19,576         72,062         —     

Loans held for investment, net

     322,382         331,386         —           —           331,386   

Loans held for sale

     5,373         5,373         —           5,373         —     

Restricted stock

     2,265         2,265         2,265         —           —     

Bank-owned life insurance

     6,394         6,394         —           —           6,394   

Mortgage servicing rights

     2,394         2,394         —           —           2,394   

Accrued interest receivable

     1,753         1,753         —           —           1,753   

FINANCIAL LIABILITIES

              

Deposits

   $ 457,612       $ 446,669       $ —         $ —         $ 446,669   

Short-term borrowings

     18,690         18,690         —           18,690         —     

Long-term borrowings

     1,546         1,702         —           1,702         —     

Junior subordinated debt

     11,127         11,268         —           —           11,268   

Accrued interest payable

     270         270       &