UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
S
QUARTERLY REPORT UNDER SECTION 13 OF
15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
September
30, 2012
or
£
TRANSITION REPORT UNDER SECTION 13 OF
15(d) OF THE EXCHANGE ACT
Or the transition period from ________ to
________
Commission File Number 33-58936
Dimeco, Inc.
(Exact name of registrant as specified in
its charter)
Pennsylvania
|
|
23-2250152
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
Incorporation or organization)
|
|
identification No.)
|
820 Church Street
Honesdale, PA 18431
(Address of principal executive officers)
(570) 253-1970
(Issuer’s Telephone Number)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Check
whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Exchange Act during the past 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. Ye
s
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (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. (Check one):
|
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 by Rule 12b-2 of the Exchange Act)
Yes
¨
No
x
As of October 31, 2012 the registrant had outstanding 1,623,806
shares of its common stock, par value $.50 share.
Dimeco, Inc.
INDEX
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Page
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PART I – FINANCIAL INFORMATION
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|
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Item 1.
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Financial Statements
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Consolidated Balance Sheet (unaudited) as of September 30, 2012 and December 31, 2011
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3
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Consolidated Statement of Income (unaudited) for the three and nine months ended September 30, 2012 and 2011
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4
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Consolidated Statement of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2012 and 2011
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5
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Consolidated Statement of Changes in Stockholders' Equity (unaudited) for the nine months ended September 30, 2012
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6
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Consolidated Statement of Cash Flows (unaudited) for the nine months ended September 30, 2012 and 2011
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7
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Notes to Consolidated Financial Statements (unaudited)
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8 - 23
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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24 - 28
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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29 - 31
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Item 4.
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Controls and Procedures
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31
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PART II - OTHER INFORMATION
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Item 1.
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Legal Proceedings
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32
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Item 1a.
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Risk Factors
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32
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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32
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Item 3.
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Defaults Upon Senior Securities
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32
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Item 4.
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Mine Safety Disclosures
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32
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Item 5.
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Other Information
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32
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Item 6.
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Exhibits
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32
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SIGNATURES
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33
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Dimeco, Inc.
CONSOLIDATED BALANCE SHEET (unaudited)
(in thousands)
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September 30, 2012
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December 31, 2011
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Assets
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|
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|
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Cash and due from banks
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$
|
6,809
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|
$
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5,348
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|
Interest-bearing deposits in other banks
|
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|
1,096
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|
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|
4,575
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|
Total cash and cash equivalents
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|
7,905
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|
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9,923
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Mortgage loans held for sale
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569
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|
-
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Investment securities available for sale
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97,684
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95,619
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Loans
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477,131
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447,254
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Less allowance for loan losses
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8,019
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8,316
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Net loans
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469,112
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|
438,938
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Premises and equipment
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9,698
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9,997
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Accrued interest receivable
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2,115
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1,805
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Bank-owned life insurance
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10,334
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10,060
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Other real estate owned
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3,103
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3,467
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Other assets
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13,184
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12,085
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TOTAL ASSETS
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$
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613,704
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$
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581,894
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Liabilities
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Deposits :
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Noninterest-bearing
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$
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58,433
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|
$
|
52,217
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|
Interest-bearing
|
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448,877
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432,067
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Total deposits
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507,310
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484,284
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Short-term borrowings
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21,518
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20,686
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Other borrowed funds
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21,111
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17,618
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Accrued interest payable
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|
498
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542
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Other liabilities
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4,323
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3,664
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TOTAL LIABILITIES
|
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554,760
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526,794
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Stockholders' Equity
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Common stock, $.50 par value; 5,000,000 shares authorized; 1,653,746 shares issued
|
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|
827
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|
827
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Capital surplus
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5,834
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6,451
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|
Retained earnings
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|
51,422
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|
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|
48,193
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|
Accumulated other comprehensive income
|
|
|
2,073
|
|
|
|
1,696
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|
Treasury stock, at cost (29,940 and 54,100 shares)
|
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|
(1,212
|
)
|
|
|
(2,067
|
)
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TOTAL STOCKHOLDERS' EQUITY
|
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|
58,944
|
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|
55,100
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TOTAL LIABILITES AND STOCKHOLDERS' EQUITY
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|
$
|
613,704
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|
|
$
|
581,894
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|
See accompanying notes to the unaudited
consolidated financial statements.
Dimeco, Inc.
CONSOLIDATED STATEMENT OF INCOME (unaudited)
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|
For the three months ended September 30,
|
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|
For the nine months ended September 30,
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(in thousands, except per share)
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|
2012
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2011
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2012
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2011
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Interest Income
|
|
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|
|
|
|
|
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Interest and fees on loans
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$
|
6,103
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$
|
5,721
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$
|
17,665
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|
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$
|
16,681
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Investment securities:
|
|
|
|
|
|
|
|
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|
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|
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Taxable
|
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|
279
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|
|
|
327
|
|
|
|
923
|
|
|
|
937
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Exempt from federal income tax
|
|
|
315
|
|
|
|
305
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|
944
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|
898
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Other
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2
|
|
|
|
1
|
|
|
|
7
|
|
|
|
8
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|
Total interest income
|
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|
6,699
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|
6,354
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|
19,539
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18,524
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Interest Expense
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Deposits
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|
861
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|
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|
1,016
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|
2,698
|
|
|
|
3,221
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|
Short-term borrowings
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|
21
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|
|
|
29
|
|
|
|
71
|
|
|
|
90
|
|
Other borrowed funds
|
|
|
176
|
|
|
|
206
|
|
|
|
542
|
|
|
|
639
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|
Total interest expense
|
|
|
1,058
|
|
|
|
1,251
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|
|
|
3,311
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|
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|
3,950
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net Interest Income
|
|
|
5,641
|
|
|
|
5,103
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|
|
|
16,228
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|
|
|
14,574
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Provision for loan losses
|
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|
650
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|
|
|
1,300
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|
|
2,000
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|
|
2,000
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|
|
|
|
|
|
|
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|
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|
|
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Net Interest Income After Provision for Loan Losses
|
|
|
4,991
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|
|
|
3,803
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|
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|
14,228
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|
12,574
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
218
|
|
|
|
260
|
|
|
|
674
|
|
|
|
788
|
|
Mortgage loans held for sale gains, net
|
|
|
104
|
|
|
|
75
|
|
|
|
428
|
|
|
|
223
|
|
Investment securities gains (losses)
|
|
|
-
|
|
|
|
14
|
|
|
|
109
|
|
|
|
(14
|
)
|
Brokerage commissions
|
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|
220
|
|
|
|
156
|
|
|
|
550
|
|
|
|
494
|
|
Earnings on bank-owned life insurance
|
|
|
110
|
|
|
|
110
|
|
|
|
326
|
|
|
|
323
|
|
Debit card fees
|
|
|
169
|
|
|
|
160
|
|
|
|
479
|
|
|
|
451
|
|
Other income
|
|
|
244
|
|
|
|
157
|
|
|
|
629
|
|
|
|
610
|
|
Total noninterest income
|
|
|
1,065
|
|
|
|
932
|
|
|
|
3,195
|
|
|
|
2,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,942
|
|
|
|
1,752
|
|
|
|
5,768
|
|
|
|
5,372
|
|
Occupancy expense, net
|
|
|
277
|
|
|
|
282
|
|
|
|
854
|
|
|
|
853
|
|
Furniture and equipment expense
|
|
|
101
|
|
|
|
107
|
|
|
|
301
|
|
|
|
325
|
|
Professional fees
|
|
|
181
|
|
|
|
144
|
|
|
|
577
|
|
|
|
637
|
|
Data processing expense
|
|
|
163
|
|
|
|
173
|
|
|
|
489
|
|
|
|
530
|
|
Other expense
|
|
|
1,052
|
|
|
|
839
|
|
|
|
2,879
|
|
|
|
2,539
|
|
Total noninterest expense
|
|
|
3,716
|
|
|
|
3,297
|
|
|
|
10,868
|
|
|
|
10,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,340
|
|
|
|
1,438
|
|
|
|
6,555
|
|
|
|
5,193
|
|
Income taxes
|
|
|
593
|
|
|
|
256
|
|
|
|
1,558
|
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
1,747
|
|
|
$
|
1,182
|
|
|
$
|
4,997
|
|
|
$
|
4,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share - basic
|
|
$
|
1.09
|
|
|
$
|
0.73
|
|
|
$
|
3.12
|
|
|
$
|
2.56
|
|
Earnings per Share - diluted
|
|
$
|
1.09
|
|
|
$
|
0.73
|
|
|
$
|
3.12
|
|
|
$
|
2.56
|
|
Dividends per share
|
|
$
|
0.36
|
|
|
$
|
0.36
|
|
|
$
|
1.08
|
|
|
$
|
1.08
|
|
Average shares outstanding - basic
|
|
|
1,600,248
|
|
|
|
1,623,718
|
|
|
|
1,599,848
|
|
|
|
1,606,811
|
|
Average shares outstanding - diluted
|
|
|
1,609,699
|
|
|
|
1,625,183
|
|
|
|
1,602,137
|
|
|
|
1,608,112
|
|
See accompanying notes
to the unaudited consolidated financial statements.
Dimeco, Inc.
CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME (unaudited)
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
1,747
|
|
|
$
|
1,182
|
|
|
$
|
4,997
|
|
|
$
|
4,118
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on available for sale securities
|
|
|
357
|
|
|
|
742
|
|
|
|
681
|
|
|
|
1,774
|
|
Tax expense
|
|
|
(121
|
)
|
|
|
(252
|
)
|
|
|
(232
|
)
|
|
|
(603
|
)
|
|
|
|
236
|
|
|
|
490
|
|
|
|
449
|
|
|
|
1,171
|
|
Loss (gain) recognized in earnings
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
(109
|
)
|
|
|
14
|
|
Tax (benefit) expense
|
|
|
-
|
|
|
|
5
|
|
|
|
37
|
|
|
|
(5
|
)
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(72
|
)
|
|
|
9
|
|
Other comprehensive income, net of tax
|
|
|
236
|
|
|
|
481
|
|
|
|
377
|
|
|
|
1,180
|
|
Comprehensive income
|
|
$
|
1,983
|
|
|
$
|
1,663
|
|
|
$
|
5,374
|
|
|
$
|
5,298
|
|
See accompanying notes to the unaudited consolidated financial
statements.
Dimeco, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Capital
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders'
|
|
(in thousands)
|
|
Stock
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Income
|
|
|
Stock
|
|
|
Equity
|
|
Balance, December 31, 2011
|
|
$
|
827
|
|
|
$
|
6,451
|
|
|
$
|
48,193
|
|
|
$
|
1,696
|
|
|
$
|
(2,067
|
)
|
|
$
|
55,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
4,997
|
|
|
|
|
|
|
|
|
|
|
|
4,997
|
|
Unrealized gain on available for sale securities, net of tax expense of $194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377
|
|
|
|
|
|
|
|
377
|
|
Stock compensation expense
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of shares for the restricted stock plan
|
|
|
|
|
|
|
(846
|
)
|
|
|
|
|
|
|
|
|
|
|
855
|
|
|
|
9
|
|
Cash dividends ($1.08 per share)
|
|
|
|
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2012
|
|
$
|
827
|
|
|
$
|
5,834
|
|
|
$
|
51,422
|
|
|
$
|
2,073
|
|
|
$
|
(1,212
|
)
|
|
$
|
58,944
|
|
See accompanying notes to the unaudited
consolidated financial statements.
Dimeco, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
|
|
For the nine months ended September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,997
|
|
|
$
|
4,118
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
2,000
|
|
|
|
2,000
|
|
Depreciation and amortization
|
|
|
666
|
|
|
|
669
|
|
Amortization of premium and discount on investment securities, net
|
|
|
664
|
|
|
|
429
|
|
Amortization of net deferred loan origination fees
|
|
|
(165
|
)
|
|
|
(175
|
)
|
Investment securities (gains) losses, net
|
|
|
(109
|
)
|
|
|
14
|
|
Origination of loans held for sale
|
|
|
(15,692
|
)
|
|
|
(9,066
|
)
|
Proceeds from sale of loans
|
|
|
15,551
|
|
|
|
9,289
|
|
Mortgage loans held for sale gains, net
|
|
|
(428
|
)
|
|
|
(223
|
)
|
Impairment of other real estate owned
|
|
|
175
|
|
|
|
-
|
|
Loss on sale of other real estate owned
|
|
|
7
|
|
|
|
1
|
|
Increase in accrued interest receivable
|
|
|
(310
|
)
|
|
|
(90
|
)
|
Decrease in accrued interest payable
|
|
|
(44
|
)
|
|
|
(169
|
)
|
Deferred federal income taxes
|
|
|
(215
|
)
|
|
|
(535
|
)
|
Earnings on bank-owned life insurance
|
|
|
(326
|
)
|
|
|
(323
|
)
|
Decrease in prepaid FDIC insurance
|
|
|
362
|
|
|
|
404
|
|
Stock compensation expense
|
|
|
229
|
|
|
|
26
|
|
Other, net
|
|
|
(965
|
)
|
|
|
(143
|
)
|
Net cash provided by operating activities
|
|
|
6,397
|
|
|
|
6,226
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
Proceeds from sales or mergers
|
|
|
4,218
|
|
|
|
1,098
|
|
Proceeds from maturities or paydowns
|
|
|
78,621
|
|
|
|
85,631
|
|
Purchases
|
|
|
(84,397
|
)
|
|
|
(91,593
|
)
|
Redemption of Federal Home Loan Bank stock
|
|
|
420
|
|
|
|
47
|
|
Purchase of Federal Home Loan Bank stock
|
|
|
(371
|
)
|
|
|
(526
|
)
|
Net increase in loans
|
|
|
(32,699
|
)
|
|
|
(23,254
|
)
|
Investment in limited partnership
|
|
|
(425
|
)
|
|
|
(262
|
)
|
Purchase of bank-owned life insurance
|
|
|
-
|
|
|
|
(141
|
)
|
Proceeds from the sale of other real estate owned
|
|
|
860
|
|
|
|
34
|
|
Purchase of premises and equipment
|
|
|
(231
|
)
|
|
|
(115
|
)
|
Net cash used for investing activities
|
|
|
(34,004
|
)
|
|
|
(29,081
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
23,026
|
|
|
|
13,940
|
|
Increase in short-term borrowings
|
|
|
832
|
|
|
|
11,727
|
|
Proceeds from other borrowed funds
|
|
|
6,500
|
|
|
|
2,500
|
|
Repayment of other borrowed funds
|
|
|
(3,007
|
)
|
|
|
(3,942
|
)
|
Proceeds from exercise of stock options
|
|
|
-
|
|
|
|
49
|
|
Cash dividends paid
|
|
|
(1,762
|
)
|
|
|
(1,726
|
)
|
Net cash provided by financing activities
|
|
|
25,589
|
|
|
|
22,548
|
|
Decrease in cash and cash equivalents
|
|
|
(2,018
|
)
|
|
|
(307
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
9,923
|
|
|
|
10,652
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,905
|
|
|
$
|
10,345
|
|
|
|
|
|
|
|
|
|
|
Amount paid for interest
|
|
$
|
3,355
|
|
|
$
|
4,119
|
|
Amount paid for income taxes
|
|
$
|
2,250
|
|
|
$
|
1,192
|
|
|
|
|
|
|
|
|
|
|
Noncash investing activities:
|
|
|
|
|
|
|
|
|
Transfer of loans to other real estate owned
|
|
$
|
678
|
|
|
$
|
3,267
|
|
Loans to facilitate sale of other real estate owned
|
|
$
|
1,100
|
|
|
$
|
40
|
|
Changes in the unrealized holding gains and losses on available-for-sale securities
|
|
$
|
572
|
|
|
$
|
1,788
|
|
Investment purchases not settled
|
|
$
|
490
|
|
|
$
|
-
|
|
See accompanying notes to the unaudited consolidated financial
statements.
Dimeco, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The consolidated financial statements include
the accounts of Dimeco, Inc. (the "Company") and its wholly-owned subsidiary, The Dime Bank (the "Bank"). The
financial statements of The Dime Bank include the consolidated financial statements of the Bank’s wholly-owned subsidiary,
TDB Insurance Services, LLC. All significant intercompany balances and transactions have been eliminated in the consolidation.
The accompanying unaudited consolidated
financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include
all information that would be included in audited financial statements. The information furnished reflects all adjustments which
are, in the opinion of management, necessary for a fair statement of the results of operations. All such adjustments are of a normal
recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected
for the full year.
Certain comparative amounts for prior periods
have been reclassified to conform to current year presentation. The reclassifications did not affect net income or equity capital.
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04,
Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs.
The amendments in this Update result in common fair value measurement and disclosure requirements in U.S.
GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring
fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively.
For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic
entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities
is not permitted.
The Company has provided the necessary disclosures
in Notes 6 and 7.
In June 2011, the FASB issued ASU 2011-05,
Comprehensive Income (Topic 220):
Presentation of Comprehensive Income.
The amendments in this Update improve the
comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other
comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence
of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’
equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a
single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach,
the first statement should present total net income and its components followed consecutively by a second statement that should
present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.
All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update.
For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December
15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and
annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted.
The Company has provided the necessary disclosure in the Consolidated Statement of Comprehensive
Income.
In December 2011, the FASB issued ASU 2011-10,
Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification.
The amendments
in this Update affect entities that cease to have a controlling financial interest in a subsidiary that is in substance real estate
as a result of default on the subsidiary's nonrecourse debt. Under the amendments in this Update, when a parent (reporting entity)
ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the
subsidiary's nonrecourse debt, the reporting entity should apply the guidance in
Subtopic
360-20
to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not
satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender
and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling
financial interest under
Subtopic 810-10
, the reporting entity would
continue to include the real estate, debt, and the results of the subsidiary's operations in its consolidated financial statements
until legal title to the real estate is transferred to legally satisfy the debt. The amendments in this Update should be applied
on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even
if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities,
the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June
15, 2012. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2013, and interim and
annual periods thereafter. Early adoption is permitted
. This ASU is not expected to have a significant
impact on the Company’s financial statements
.
In December 2011, the FASB issued ASU 2011-12,
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of
Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
. In order to defer only those
changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede
certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive
income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05
are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial
statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years,
and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements
for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.
The
Company has provided the necessary disclosure in Statement of Comprehensive Income.
Stock Options
The Company maintains a stock option plan
for key officers and non-employee directors. There were no options granted in the first nine months of 2012. In September 2011,
the Board of Directors granted 52,900 incentive stock options, 21,600 non-qualified stock options and 24,460 restricted stock grants
to officers and directors.
As of September 30, 2012, the following
was expensed as compensation expense relating to share-based compensation (in thousands):
|
|
Directors
|
|
|
Officers
|
|
|
Total
|
|
Stock options
|
|
$
|
24
|
|
|
$
|
23
|
|
|
$
|
47
|
|
Restricted Stock
|
|
$
|
91
|
|
|
$
|
91
|
|
|
$
|
182
|
|
For the first nine months of 2012, the
Company recognized $229 of compensation expense for stock options and restricted stock awards granted on September 21, 2011. This
expense was $26 for the first nine months of 2011.
As of September 30, 2012, the following
is unrecognized compensation expense (in thousands):
|
|
Directors
|
|
|
Officers
|
|
|
Total
|
|
Stock options
|
|
$
|
29
|
|
|
$
|
118
|
|
|
$
|
147
|
|
Restricted stock
|
|
$
|
112
|
|
|
$
|
470
|
|
|
$
|
582
|
|
A summary of the Company’s stock
award activity for the nine months ended September 30 is as follows:
|
|
For the nine months ended September 30,
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
2012
|
|
|
Price
|
|
|
2011
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
101,414
|
|
|
$
|
35.06
|
|
|
|
28,342
|
|
|
$
|
35.18
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
74,500
|
|
|
|
35.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,428
|
)
|
|
|
34.00
|
|
Forfeited
|
|
|
(850
|
)
|
|
|
35.00
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
100,564
|
|
|
$
|
35.06
|
|
|
|
101,414
|
|
|
$
|
35.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30,
|
|
|
48,124
|
|
|
$
|
35.14
|
|
|
|
26,914
|
|
|
$
|
35.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, beginning of year
|
|
|
24,460
|
|
|
$
|
35.00
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
24,460
|
|
|
$
|
35.00
|
|
Vested
|
|
|
(6,920
|
)
|
|
|
35.00
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(300
|
)
|
|
|
35.00
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, September 30,
|
|
|
17,240
|
|
|
$
|
35.00
|
|
|
|
24,460
|
|
|
$
|
35.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of restricted shares granted
|
|
|
|
|
|
$
|
672,360
|
|
|
|
|
|
|
$
|
831,640
|
|
The following table summarizes characteristics
of stock options outstanding at September 30, 2012:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Price
|
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32.55
|
|
|
|
2,000
|
|
|
|
1.10
|
|
|
$
|
32.55
|
|
|
|
2,000
|
|
|
$
|
32.55
|
|
$
|
34.00
|
|
|
|
6,284
|
|
|
|
3.21
|
|
|
$
|
34.00
|
|
|
|
6,284
|
|
|
$
|
34.00
|
|
$
|
35.00
|
|
|
|
73,650
|
|
|
|
8.98
|
|
|
$
|
35.00
|
|
|
|
21,210
|
|
|
$
|
35.00
|
|
$
|
35.95
|
|
|
|
18,630
|
|
|
|
2.98
|
|
|
$
|
35.95
|
|
|
|
18,630
|
|
|
$
|
35.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
100,564
|
|
|
|
|
|
|
|
Total
|
|
|
|
48,124
|
|
|
|
|
|
NOTE 2 – EARNINGS PER SHARE
There are no convertible securities which
would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated
Statement of Income (unaudited) will be used as the numerator. The following table sets forth the composition of the weighted-average
common shares (denominator) used in the basic and diluted earnings per share computation:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Weighted average common stock outstanding
|
|
|
1,653,746
|
|
|
|
1,653,358
|
|
|
|
1,653,746
|
|
|
|
1,652,668
|
|
Average treasury stock
|
|
|
(51,999
|
)
|
|
|
(54,100
|
)
|
|
|
(53,395
|
)
|
|
|
(54,100
|
)
|
Average unearned nonvested shares
|
|
|
(1,499
|
)
|
|
|
24,460
|
|
|
|
(503
|
)
|
|
|
8,243
|
|
Weighted average common stock and common stock equivalents used to calculate basic earnings per share
|
|
|
1,600,248
|
|
|
|
1,623,718
|
|
|
|
1,599,848
|
|
|
|
1,606,811
|
|
Additional common stock equivalents (nonvested stock) used to calculate diluted earnings per share
|
|
|
836
|
|
|
|
1,194
|
|
|
|
-
|
|
|
|
402
|
|
Additional common stock equivalents (stock options) used to calculate diluted earnings per share
|
|
|
8,614
|
|
|
|
271
|
|
|
|
2,289
|
|
|
|
899
|
|
Weighted average common stock and common stock equivalents used to calculate diluted earnings per share
|
|
|
1,609,698
|
|
|
|
1,625,183
|
|
|
|
1,602,137
|
|
|
|
1,608,112
|
|
Options to purchase 16,928 shares of common stock at a price
greater than the current market value were outstanding at September 30, 2012 but were not included in the computation of diluted
earnings per share because to do so would have been antidilutive. There were options to purchase shares outstanding at September
30, 2011 of 74,500 which would have an antidilutive effect on earnings per share.
NOTE 3 – INVESTMENTS
The amortized cost and estimated fair value of investment securities
are summarized as follows (in thousands):
|
|
September 30, 2012
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
AVAILABLE FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
8,049
|
|
|
$
|
205
|
|
|
$
|
-
|
|
|
$
|
8,254
|
|
Mortgage-backed securities of government - sponsored entities
|
|
|
27,683
|
|
|
|
772
|
|
|
|
(11
|
)
|
|
|
28,444
|
|
Collateralized mortgage obligations of government - sponsored entities
|
|
|
6,951
|
|
|
|
12
|
|
|
|
(59
|
)
|
|
|
6,904
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,436
|
|
|
|
172
|
|
|
|
-
|
|
|
|
1,608
|
|
Tax-exempt
|
|
|
34,497
|
|
|
|
1,606
|
|
|
|
(12
|
)
|
|
|
36,091
|
|
Corporate securities
|
|
|
6,219
|
|
|
|
383
|
|
|
|
(2
|
)
|
|
|
6,600
|
|
Commercial paper
|
|
|
9,246
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,246
|
|
Total debt securities
|
|
|
94,081
|
|
|
|
3,150
|
|
|
|
(84
|
)
|
|
|
97,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities of financial institutions
|
|
|
461
|
|
|
|
107
|
|
|
|
(31
|
)
|
|
|
537
|
|
Total
|
|
$
|
94,542
|
|
|
$
|
3,257
|
|
|
$
|
(115
|
)
|
|
$
|
97,684
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
AVAILABLE FOR SALE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
10,999
|
|
|
$
|
195
|
|
|
$
|
(3
|
)
|
|
$
|
11,191
|
|
Mortgage-backed securities of government - sponsored entities
|
|
|
28,119
|
|
|
|
499
|
|
|
|
(40
|
)
|
|
|
28,578
|
|
Collateralized mortgage obligations of government - sponsored entities
|
|
|
5,233
|
|
|
|
7
|
|
|
|
(65
|
)
|
|
|
5,175
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,440
|
|
|
|
142
|
|
|
|
-
|
|
|
|
1,582
|
|
Tax-exempt
|
|
|
31,085
|
|
|
|
1,425
|
|
|
|
(2
|
)
|
|
|
32,508
|
|
Corporate securities
|
|
|
3,686
|
|
|
|
400
|
|
|
|
(4
|
)
|
|
|
4,082
|
|
Commercial paper
|
|
|
11,998
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,998
|
|
Total debt securities
|
|
|
92,560
|
|
|
|
2,668
|
|
|
|
(114
|
)
|
|
|
95,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities of financial institutions
|
|
|
489
|
|
|
|
62
|
|
|
|
(46
|
)
|
|
|
505
|
|
Total
|
|
$
|
93,049
|
|
|
$
|
2,730
|
|
|
$
|
(160
|
)
|
|
$
|
95,619
|
|
The following table shows the Company’s
fair value and gross unrealized losses, aggregated by investment category and length of time that the individual securities have
been in a continuous unrealized loss position (in thousands):
|
|
September 30, 2012
|
|
|
|
Less than Twelve Months
|
|
|
Twelve Months or Greater
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
Market
|
|
|
Unrealized
|
|
|
Market
|
|
|
Unrealized
|
|
|
Market
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities of government - sponsored entities
|
|
$
|
1,909
|
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,909
|
|
|
$
|
11
|
|
Collateralized mortgage obligations of government - sponsored entities
|
|
|
3,578
|
|
|
|
57
|
|
|
|
719
|
|
|
|
2
|
|
|
|
4,297
|
|
|
|
59
|
|
Obligations of states and political subdivisions
|
|
|
1,933
|
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,933
|
|
|
|
12
|
|
Corporate securities
|
|
|
993
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
993
|
|
|
|
2
|
|
Total debt securities
|
|
|
8,413
|
|
|
|
82
|
|
|
|
719
|
|
|
|
2
|
|
|
|
9,132
|
|
|
|
84
|
|
Equity securities of financial institutions
|
|
|
81
|
|
|
|
4
|
|
|
|
74
|
|
|
|
27
|
|
|
|
155
|
|
|
|
31
|
|
Total
|
|
$
|
8,494
|
|
|
$
|
86
|
|
|
$
|
793
|
|
|
$
|
29
|
|
|
$
|
9,287
|
|
|
$
|
115
|
|
|
|
December 31, 2011
|
|
|
|
Less than Twelve Months
|
|
|
Twelve Months or Greater
|
|
|
Total
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
|
|
Market
|
|
|
Unrealized
|
|
|
Market
|
|
|
Unrealized
|
|
|
Market
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
348
|
|
|
$
|
2
|
|
|
$
|
456
|
|
|
$
|
1
|
|
|
$
|
804
|
|
|
$
|
3
|
|
Mortgage-backed securities of government - sponsored entities
|
|
|
5,678
|
|
|
|
25
|
|
|
|
1,407
|
|
|
|
15
|
|
|
|
7,085
|
|
|
|
40
|
|
Collateralized mortgage obligations of government - sponsored entities
|
|
|
4,685
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,685
|
|
|
|
65
|
|
Obligations of states and political subdivisions
|
|
|
-
|
|
|
|
-
|
|
|
|
300
|
|
|
|
2
|
|
|
|
300
|
|
|
|
2
|
|
Corporate securities
|
|
|
236
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236
|
|
|
|
4
|
|
Total debt securities
|
|
|
10,947
|
|
|
|
96
|
|
|
|
2,163
|
|
|
|
18
|
|
|
|
13,110
|
|
|
|
114
|
|
Equity securities of financial institutions
|
|
|
106
|
|
|
|
12
|
|
|
|
96
|
|
|
|
34
|
|
|
|
202
|
|
|
|
46
|
|
Total
|
|
$
|
11,053
|
|
|
$
|
108
|
|
|
$
|
2,259
|
|
|
$
|
52
|
|
|
$
|
13,312
|
|
|
$
|
160
|
|
The Company reviews its position quarterly
and has asserted that at September 30, 2012, the declines outlined in the above table represent temporary declines and the Company
does not intend to sell and does not believe it will be required to sell these securities before recovery of its cost basis, which
may be at maturity. There were 21 positions that were temporarily impaired at September 30, 2012 and 29 at December 31, 2011. The
Company has concluded that the unrealized losses disclosed above are not other than temporary, but are the result of interest rate
changes, sector credit ratings changes or company-specific ratings changes that are not expected to result in the non-collection
of principal and interest during the period in consideration for debt securities. Determination of other than temporary losses
in the financial services equity portfolio includes consideration of the length of time in a loss position, analysis of the capital
structure of the entity and review of publicly available regulatory actions and published financial reports.
The following table is a summary of proceeds
received, gross gains and gross losses realized on the sale, call or merger of investment securities for the three months ended
September 30 (in thousands):
|
|
2012
|
|
|
2011
|
|
Total proceeds
|
|
$
|
1,170
|
|
|
$
|
1,032
|
|
Total gross gain
|
|
$
|
-
|
|
|
$
|
14
|
|
Total gross losses
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table is a summary of proceeds
received; gross gains and gross losses realized on the sale, call or merger of investment securities for the nine months ended
September 30 (in thousands):
|
|
2012
|
|
|
2011
|
|
Total proceeds
|
|
$
|
4,218
|
|
|
$
|
1,098
|
|
Total gross gain
|
|
$
|
109
|
|
|
$
|
18
|
|
Total gross losses
|
|
$
|
-
|
|
|
$
|
3
|
|
Other than temporarily impaired expense
|
|
$
|
-
|
|
|
$
|
29
|
|
The amortized cost and estimated fair value
of debt securities at September 30, 2012, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities
will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call
or prepay penalties (in thousands):
|
|
Available for Sale
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
Due in one year or less
|
|
$
|
22,845
|
|
|
$
|
23,029
|
|
Due after one year through five years
|
|
|
29,606
|
|
|
|
30,336
|
|
Due after five years through ten years
|
|
|
24,676
|
|
|
|
26,063
|
|
Due after ten years
|
|
|
16,954
|
|
|
|
17,719
|
|
Total debt securities
|
|
$
|
94,081
|
|
|
$
|
97,147
|
|
NOTE 4 – LOANS
Major classifications of loans at September 30, 2012 and December
31, 2011 are as follows (in thousands):
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
17,649
|
|
|
$
|
14,571
|
|
Secured by farmland
|
|
|
3,466
|
|
|
|
3,585
|
|
Secured by 1-4 family residential properties:
|
|
|
|
|
|
|
|
|
Revolving, open-end loans
|
|
|
11,611
|
|
|
|
11,215
|
|
All other 1-4 family
|
|
|
89,039
|
|
|
|
87,088
|
|
Secured by non-farm, non-residential properties
|
|
|
283,776
|
|
|
|
269,248
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial loans
|
|
|
55,330
|
|
|
|
45,312
|
|
|
|
|
|
|
|
|
|
|
Loans to individuals for household, family and other personal
expenditures:
|
|
|
|
|
|
|
|
|
Ready credit loans
|
|
|
510
|
|
|
|
494
|
|
Other consumer loans
|
|
|
8,222
|
|
|
|
9,327
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
|
1,338
|
|
|
|
955
|
|
All other loans
|
|
|
6,190
|
|
|
|
5,459
|
|
Total loans
|
|
|
477,131
|
|
|
|
447,254
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
8,019
|
|
|
|
8,316
|
|
|
|
|
|
|
|
|
|
|
Total Net Loans
|
|
$
|
469,112
|
|
|
$
|
438,938
|
|
NOTE 5 – ALLOWANCE FOR LOAN LOSSES
The total allowance reflects management's
estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan
losses adequate to cover loan losses inherent in the loan portfolio. The following table presents by portfolio segment, the allowance
for loan losses as of September 30, 2012 and September 30, 2011 (in thousands):
|
|
Three months ended Sepetmber 30, 2012
|
|
|
|
|
|
|
Construction &
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
606
|
|
|
$
|
321
|
|
|
$
|
7,169
|
|
|
$
|
136
|
|
|
$
|
913
|
|
|
$
|
9,145
|
|
Charge-offs
|
|
|
(30
|
)
|
|
|
-
|
|
|
|
(1,949
|
)
|
|
|
(74
|
)
|
|
|
(176
|
)
|
|
|
(2,229
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
435
|
|
|
|
15
|
|
|
|
3
|
|
|
|
453
|
|
Provision
|
|
|
66
|
|
|
|
99
|
|
|
|
179
|
|
|
|
62
|
|
|
|
244
|
|
|
|
650
|
|
Ending balance
|
|
$
|
642
|
|
|
$
|
420
|
|
|
$
|
5,834
|
|
|
$
|
139
|
|
|
$
|
984
|
|
|
$
|
8,019
|
|
|
|
Three months ended September 30, 2011
|
|
|
|
|
|
|
Construction &
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
609
|
|
|
$
|
328
|
|
|
$
|
5,112
|
|
|
$
|
206
|
|
|
$
|
1,088
|
|
|
$
|
7,343
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
(104
|
)
|
|
|
(63
|
)
|
|
|
(52
|
)
|
|
|
(219
|
)
|
Recoveries
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
1
|
|
|
|
20
|
|
Provision
|
|
|
(80
|
)
|
|
|
(96
|
)
|
|
|
1,528
|
|
|
|
13
|
|
|
|
(65
|
)
|
|
|
1,300
|
|
Ending balance
|
|
$
|
531
|
|
|
$
|
232
|
|
|
$
|
6,536
|
|
|
$
|
173
|
|
|
$
|
972
|
|
|
$
|
8,444
|
|
|
|
Nine months ended September 30, 2012
|
|
|
|
|
|
|
Construction &
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
474
|
|
|
$
|
283
|
|
|
$
|
6,425
|
|
|
$
|
158
|
|
|
$
|
976
|
|
|
$
|
8,316
|
|
Charge-offs
|
|
|
(97
|
)
|
|
|
-
|
|
|
|
(2,254
|
)
|
|
|
(127
|
)
|
|
|
(298
|
)
|
|
|
(2,776
|
)
|
Recoveries
|
|
|
1
|
|
|
|
-
|
|
|
|
435
|
|
|
|
38
|
|
|
|
5
|
|
|
|
479
|
|
Provision
|
|
|
264
|
|
|
|
137
|
|
|
|
1,228
|
|
|
|
70
|
|
|
|
301
|
|
|
|
2,000
|
|
Ending balance
|
|
$
|
642
|
|
|
$
|
420
|
|
|
$
|
5,834
|
|
|
$
|
139
|
|
|
$
|
984
|
|
|
$
|
8,019
|
|
|
|
Nine months ended September 30, 2011
|
|
|
|
|
|
|
Construction &
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Total
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
634
|
|
|
$
|
223
|
|
|
$
|
5,719
|
|
|
$
|
194
|
|
|
$
|
971
|
|
|
$
|
7,741
|
|
Charge-offs
|
|
|
(262
|
)
|
|
|
-
|
|
|
|
(851
|
)
|
|
|
(181
|
)
|
|
|
(52
|
)
|
|
|
(1,346
|
)
|
Recoveries
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
7
|
|
|
|
49
|
|
Provision
|
|
|
157
|
|
|
|
9
|
|
|
|
1,668
|
|
|
|
120
|
|
|
|
46
|
|
|
|
2,000
|
|
Ending balance
|
|
$
|
531
|
|
|
$
|
232
|
|
|
$
|
6,536
|
|
|
$
|
173
|
|
|
$
|
972
|
|
|
$
|
8,444
|
|
The following tables summarize the allowance
for loan losses on the basis of the Company’s impairment method as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
September 30, 2012
|
|
|
|
|
|
|
Construction &
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Total
|
|
Ending allowance balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,717
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans collectively evaluated for impairment
|
|
|
642
|
|
|
|
420
|
|
|
|
4,117
|
|
|
|
139
|
|
|
|
984
|
|
|
|
6,302
|
|
Total
|
|
$
|
642
|
|
|
$
|
420
|
|
|
$
|
5,834
|
|
|
$
|
139
|
|
|
$
|
984
|
|
|
$
|
8,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending loan balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
375
|
|
|
$
|
-
|
|
|
$
|
14,239
|
|
|
$
|
-
|
|
|
$
|
276
|
|
|
$
|
14,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans collectively evaluated for impairment
|
|
|
62,483
|
|
|
|
17,649
|
|
|
|
273,003
|
|
|
|
8,732
|
|
|
|
100,374
|
|
|
|
462,242
|
|
Total
|
|
$
|
62,858
|
|
|
$
|
17,649
|
|
|
$
|
287,242
|
|
|
$
|
8,732
|
|
|
$
|
100,650
|
|
|
$
|
477,131
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Construction &
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Total
|
|
Ending allowance balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,626
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans collectively evaluated for impairment
|
|
|
474
|
|
|
|
283
|
|
|
|
2,799
|
|
|
|
158
|
|
|
|
976
|
|
|
$
|
4,690
|
|
Total
|
|
$
|
474
|
|
|
$
|
283
|
|
|
$
|
6,425
|
|
|
$
|
158
|
|
|
$
|
976
|
|
|
$
|
8,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending loan balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
1,105
|
|
|
$
|
16,041
|
|
|
$
|
-
|
|
|
$
|
276
|
|
|
$
|
17,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans collectively evaluated for impairment
|
|
|
51,726
|
|
|
|
13,466
|
|
|
|
256,792
|
|
|
|
9,821
|
|
|
|
98,027
|
|
|
|
429,832
|
|
Total
|
|
$
|
51,726
|
|
|
$
|
14,571
|
|
|
$
|
272,833
|
|
|
$
|
9,821
|
|
|
$
|
98,303
|
|
|
$
|
447,254
|
|
Credit Quality Information
The following tables represent credit exposures
by assigned grades as of September 30, 2012 and December 31, 2011. The grading analysis estimates the capability of the borrower
to repay the contractual obligations of the loan agreements as scheduled or at all. The Company's internal credit risk grading
system is based on experiences with similarly graded loans.
The Company's internally assigned grades
are as follows:
Pass – loans which are protected
by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.
Special Mention – loans where a potential
weakness or risk exists, which could cause a more serious problem if not corrected.
Substandard – loans that have a well-defined
weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if
the deficiencies are not corrected.
Doubtful – loans classified as doubtful
have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly
questionable and improbable, based on existing circumstances.
Loss – loans classified as a loss
are considered uncollectable, or of such value that continuance as an asset is not warranted.
Loans are graded by either independent
loan review or internal review. Internally reviewed loans were assigned a risk weighting by the loan officer and approved by the
loan committee, but have not undergone a formal loan review by an independent party. These loans are typically smaller dollar balances
that have not experienced delinquency issues. Balances include gross loan value before unearned income and excluding overdrafts
as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
September 30, 2012
|
|
|
|
|
|
|
Construction &
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Total
|
|
Loans Independently Reviewed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
20,779
|
|
|
$
|
1,481
|
|
|
$
|
152,831
|
|
|
$
|
48
|
|
|
$
|
7,397
|
|
|
$
|
182,536
|
|
Special Mention
|
|
|
414
|
|
|
|
2,395
|
|
|
|
8,787
|
|
|
|
39
|
|
|
|
587
|
|
|
|
12,222
|
|
Substandard
|
|
|
3,341
|
|
|
|
2,426
|
|
|
|
31,536
|
|
|
|
54
|
|
|
|
2,510
|
|
|
|
39,867
|
|
Doubtful
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,551
|
|
|
$
|
6,302
|
|
|
$
|
193,154
|
|
|
$
|
141
|
|
|
$
|
10,494
|
|
|
$
|
234,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Internally Reviewed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
38,000
|
|
|
$
|
11,350
|
|
|
$
|
94,623
|
|
|
$
|
8,584
|
|
|
$
|
90,800
|
|
|
$
|
243,357
|
|
Special Mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
410
|
|
|
|
8
|
|
|
|
92
|
|
|
|
510
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,000
|
|
|
$
|
11,350
|
|
|
$
|
95,033
|
|
|
$
|
8,592
|
|
|
$
|
90,892
|
|
|
$
|
243,867
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Construction &
|
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Development
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
|
|
|
Total
|
|
Loans Independently Reviewed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
20,136
|
|
|
$
|
1,914
|
|
|
$
|
158,723
|
|
|
$
|
57
|
|
|
$
|
8,172
|
|
|
$
|
189,002
|
|
Special Mention
|
|
|
417
|
|
|
|
1,635
|
|
|
|
9,021
|
|
|
|
57
|
|
|
|
618
|
|
|
|
11,749
|
|
Substandard
|
|
|
2,660
|
|
|
|
3,531
|
|
|
|
34,192
|
|
|
|
50
|
|
|
|
2,389
|
|
|
|
42,822
|
|
Doubtful
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,230
|
|
|
$
|
7,080
|
|
|
$
|
201,936
|
|
|
$
|
164
|
|
|
$
|
11,179
|
|
|
$
|
243,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Internally Reviewed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
28,365
|
|
|
$
|
7,502
|
|
|
$
|
71,850
|
|
|
$
|
9,660
|
|
|
$
|
87,318
|
|
|
$
|
204,695
|
|
Special Mention
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Substandard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,365
|
|
|
$
|
7,502
|
|
|
$
|
71,850
|
|
|
$
|
9,660
|
|
|
$
|
87,318
|
|
|
$
|
204,695
|
|
Age Analysis of Past Due Loans by Class
The following is a table which includes
an aging analysis of the recorded investment of past due loans as of September 30, 2012 and December 31, 2011 including loans which
are in nonaccrual status (in thousands):
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment >
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days
|
|
|
Total Past
|
|
|
|
|
|
Total
|
|
|
90 Days and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Or Greater
|
|
|
Due
|
|
|
Current
|
|
|
Loans
|
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
664
|
|
|
$
|
1,096
|
|
|
$
|
171
|
|
|
$
|
1,931
|
|
|
$
|
60,927
|
|
|
$
|
62,858
|
|
|
$
|
-
|
|
Construction and development
|
|
|
-
|
|
|
|
106
|
|
|
|
-
|
|
|
|
106
|
|
|
|
17,543
|
|
|
|
17,649
|
|
|
|
-
|
|
Commercial real estate
|
|
|
5,023
|
|
|
|
1,936
|
|
|
|
4,185
|
|
|
|
11,144
|
|
|
|
276,098
|
|
|
|
287,242
|
|
|
|
190
|
|
Consumer
|
|
|
83
|
|
|
|
41
|
|
|
|
31
|
|
|
|
155
|
|
|
|
8,577
|
|
|
|
8,732
|
|
|
|
-
|
|
Residential real estate
|
|
|
1,446
|
|
|
|
131
|
|
|
|
776
|
|
|
|
2,353
|
|
|
|
98,297
|
|
|
|
100,650
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,216
|
|
|
$
|
3,310
|
|
|
$
|
5,163
|
|
|
$
|
15,689
|
|
|
$
|
461,442
|
|
|
$
|
477,131
|
|
|
$
|
272
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment >
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days
|
|
|
Total Past
|
|
|
|
|
|
Total
|
|
|
90 Days and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Or Greater
|
|
|
Due
|
|
|
Current
|
|
|
Loans
|
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
248
|
|
|
$
|
214
|
|
|
$
|
200
|
|
|
$
|
662
|
|
|
$
|
51,064
|
|
|
$
|
51,726
|
|
|
$
|
163
|
|
Construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,571
|
|
|
|
14,571
|
|
|
|
-
|
|
Commercial real estate
|
|
|
175
|
|
|
|
1,611
|
|
|
|
4,526
|
|
|
|
6,312
|
|
|
|
266,521
|
|
|
|
272,833
|
|
|
|
346
|
|
Consumer
|
|
|
180
|
|
|
|
32
|
|
|
|
35
|
|
|
|
247
|
|
|
|
9,574
|
|
|
|
9,821
|
|
|
|
2
|
|
Residential real estate
|
|
|
790
|
|
|
|
191
|
|
|
|
695
|
|
|
|
1,676
|
|
|
|
96,627
|
|
|
|
98,303
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,393
|
|
|
$
|
2,048
|
|
|
$
|
5,456
|
|
|
$
|
8,897
|
|
|
$
|
438,357
|
|
|
$
|
447,254
|
|
|
$
|
551
|
|
Impaired Loans
Management considers commercial loans and
commercial real estate loans which are 90 days or more past due as impaired, and if warranted, includes the entire customer relationship
in that status. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the
contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded
investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment
is recognized through an allowance estimate or a charge-off to the allowance.
The following tables include the recorded
investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of September
30, 2012 and December 31, 2011 (in thousands):
|
|
September 30, 2012
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
375
|
|
|
$
|
375
|
|
|
$
|
-
|
|
|
$
|
311
|
|
|
$
|
-
|
|
Construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
8,388
|
|
|
|
9,232
|
|
|
|
-
|
|
|
|
7,284
|
|
|
|
135
|
|
Residential real estate
|
|
|
276
|
|
|
|
276
|
|
|
|
-
|
|
|
|
276
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
5,851
|
|
|
|
5,851
|
|
|
|
1,717
|
|
|
|
7,521
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
14,889
|
|
|
$
|
15,733
|
|
|
$
|
1,717
|
|
|
$
|
15,392
|
|
|
$
|
135
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Investment
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Construction and development
|
|
|
1,105
|
|
|
|
1,105
|
|
|
|
-
|
|
|
|
356
|
|
|
|
-
|
|
Commercial real estate
|
|
|
6,364
|
|
|
|
7,314
|
|
|
|
-
|
|
|
|
882
|
|
|
|
-
|
|
Residential real estate
|
|
|
276
|
|
|
|
276
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
9,677
|
|
|
|
9,677
|
|
|
|
3,626
|
|
|
|
7,529
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
17,422
|
|
|
$
|
18,372
|
|
|
$
|
3,626
|
|
|
$
|
8,831
|
|
|
$
|
-
|
|
Nonaccrual Loans
Loans are considered nonaccrual upon reaching 90 days delinquency,
although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. Loans that
are well secured and in the process of collection may not be placed on nonaccrual status based on management’s review of
the specific loan. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest
income.
In the following table are loans, presented by class, on nonaccrual
status as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
181
|
|
|
$
|
38
|
|
Construction and development
|
|
|
-
|
|
|
|
1,105
|
|
Commercial real estate
|
|
|
9,666
|
|
|
|
11,669
|
|
Consumer
|
|
|
54
|
|
|
|
48
|
|
Residential real estate
|
|
|
958
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,859
|
|
|
$
|
13,515
|
|
Troubled Debt Restructurings
Loan modifications that are considered troubled debt restructurings
completed during the year are as follows (dollars in thousands):
|
|
Three months ended September 30, 2012
|
|
|
Nine months ended September 30, 2012
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
Commercial
|
|
|
1
|
|
|
$
|
52
|
|
|
$
|
52
|
|
|
|
2
|
|
|
$
|
440
|
|
|
$
|
440
|
|
Residential real estate
|
|
|
1
|
|
|
|
66
|
|
|
|
66
|
|
|
|
4
|
|
|
|
296
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
118
|
|
|
$
|
118
|
|
|
|
6
|
|
|
$
|
736
|
|
|
$
|
736
|
|
The commercial modification was a consolidation of two loans
at current market rates. There was no principal reduction made. The residential real estate loans were modified by lowering the
stated interest rate on the original loans. No principal reduction was made. Additional interest income of $6 would have been recognized
at the original interest rate compared to the adjusted interest rate on all of the above loans. There were no defaults on any loans
which were restructured since 2011.
|
|
Three months ended September 30, 2011
|
|
|
Nine months ended September 30, 2011
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
Modification
|
|
|
Modification
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
|
Contracts
|
|
|
Investment
|
|
|
Investment
|
|
Commercial
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
3
|
|
|
$
|
4,202
|
|
|
$
|
4,202
|
|
Residential real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
421
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
7
|
|
|
$
|
4,623
|
|
|
$
|
4,623
|
|
The restructuring of the commercial real estate loans was the
result of lowering the payment amount for a period of time and did not include any change in principal balance or interest rate.
The residential real estate loans were modified by lowering the stated interest rate on the original loans. No principal reduction
was made. Additional interest income of $4 would have been recognized for the nine months ended September 30, 2011 at the original
interest rate as compared to the adjusted interest rate on the residential real estate loans.
NOTE 6 – FAIR VALUE MEASUREMENTS
The following disclosures show the hierarchal
disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value.
The three broad levels defined by U.S. generally accepted accounting principles are as follows:
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 quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include 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.
|
This hierarchy
requires the use of observable market data when available.
The following is a description of the valuation methodologies
the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis:
Securities Available for Sale
Securities available for sale consists
of both debt and equity securities. These securities are recorded at fair value on a recurring basis. At September 30, 2012 and
December 31, 2011, all of these securities used valuation methodologies involving market based or market derived information, collectively
Level I and Level II measurements, to measure fair value.
The Company closely monitors market conditions
involving assets that have become less actively traded. If the fair value measurement is based upon recent observable market activity
of such assets or comparable assets (other than forced or distressed transactions) that occur in sufficient volume, and do not
require significant adjustment using unobservable inputs, those assets are classified as Level I or Level II; if not, they are
classified as Level III. Making this assessment requires significant judgment.
The Company uses prices from independent
pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers to measure securities.
The following tables present the assets
reported on the consolidated statements of financial condition at their fair value as of September 30, 2012 and December 31, 2011
by level within the fair value hierarchy. As required by ASC 820, financial assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value measurement (in thousands).
|
|
September 30, 2012
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
$
|
8,254
|
|
|
$
|
-
|
|
|
$
|
8,254
|
|
Mortgage-backed securities of government - sponsored entities
|
|
|
-
|
|
|
|
28,444
|
|
|
|
-
|
|
|
|
28,444
|
|
Collateralized mortgage obligations of government - sponsored entities
|
|
|
-
|
|
|
|
6,904
|
|
|
|
-
|
|
|
|
6,904
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
-
|
|
|
|
1,608
|
|
|
|
-
|
|
|
|
1,608
|
|
Tax-exempt
|
|
|
-
|
|
|
|
36,091
|
|
|
|
-
|
|
|
|
36,091
|
|
Corporate securities
|
|
|
-
|
|
|
|
6,600
|
|
|
|
-
|
|
|
|
6,600
|
|
Commercial paper
|
|
|
9,246
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,246
|
|
Total debt securities
|
|
|
9,246
|
|
|
|
87,901
|
|
|
|
-
|
|
|
|
97,147
|
|
Equity securities of financial institutions
|
|
|
537
|
|
|
|
-
|
|
|
|
-
|
|
|
|
537
|
|
Total
|
|
$
|
9,783
|
|
|
$
|
87,901
|
|
|
$
|
-
|
|
|
$
|
97,684
|
|
|
|
December 31, 2011
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
-
|
|
|
$
|
11,191
|
|
|
$
|
-
|
|
|
$
|
11,191
|
|
Mortgage-backed securities of government - sponsored entities
|
|
|
-
|
|
|
|
28,578
|
|
|
|
-
|
|
|
|
28,578
|
|
Collateralized mortgage obligations of government - sponsored entities
|
|
|
-
|
|
|
|
5,175
|
|
|
|
-
|
|
|
|
5,175
|
|
Obligations of states and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
-
|
|
|
|
1,582
|
|
|
|
-
|
|
|
|
1,582
|
|
Tax-exempt
|
|
|
-
|
|
|
|
32,508
|
|
|
|
-
|
|
|
|
32,508
|
|
Corporate securities
|
|
|
-
|
|
|
|
4,082
|
|
|
|
-
|
|
|
|
4,082
|
|
Commercial paper
|
|
|
11,998
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,998
|
|
Total debt securities
|
|
|
11,998
|
|
|
|
83,116
|
|
|
|
-
|
|
|
|
95,114
|
|
Equity securities of financial institutions
|
|
|
505
|
|
|
|
-
|
|
|
|
-
|
|
|
|
505
|
|
Total
|
|
$
|
12,503
|
|
|
$
|
83,116
|
|
|
$
|
-
|
|
|
$
|
95,619
|
|
The following table presents the assets
measured on a nonrecurring basis on the consolidated statements of financial condition at their fair value as of September 30,
2012 and December 31, 2011, 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. For mortgage servicing rights, 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. 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 (in thousands).
|
|
September 30, 2012
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,172
|
|
|
$
|
13,172
|
|
Other real estate owned
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,103
|
|
|
$
|
3,103
|
|
Mortgage servicing rights
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
526
|
|
|
$
|
526
|
|
|
|
December 31, 2011
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,796
|
|
|
$
|
13,796
|
|
Other real estate owned
|
|
$
|
673
|
|
|
$
|
-
|
|
|
$
|
2,794
|
|
|
$
|
3,467
|
|
Mortgage servicing rights
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
540
|
|
|
$
|
540
|
|
The following table provides information describing the valuation
processes used to determine nonrecurring fair value measurements categorized within Level III of the fair value hierarchy (in thousands):
|
|
|
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
|
Fair Value
|
|
|
Technique
|
|
Input
|
|
Range
|
|
Impaired loans
|
|
$
|
13,172
|
|
|
Propery appraisals
|
|
Management discount for property type and recent market volatality
|
|
|
10% - 30% discount
|
|
|
|
|
|
|
|
Discounted cash flows
|
|
Market Rates
|
|
|
3.75%
|
|
Other real estate owned
|
|
$
|
3,103
|
|
|
Property appraisals
|
|
Management discount for property type and recent market volatality
|
|
|
10% - 30% discount
|
|
Mortgage servicing rights
|
|
$
|
526
|
|
|
Discounted cash flows
|
|
Computer pricing model with estimated prepayment speeds
|
|
|
4.9 - 22.0 CPR
|
|
NOTE 7 – FAIR VALUE DISCLOSURE
The estimated fair values of the Company’s financial instruments
are as follows (in thousands):
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair
|
|
|
|
Carrying Value
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,905
|
|
|
$
|
7,905
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,905
|
|
Investment securities
|
|
|
97,684
|
|
|
|
9,783
|
|
|
|
87,901
|
|
|
|
-
|
|
|
|
97,684
|
|
Fixed annuity
|
|
|
1,616
|
|
|
|
1,616
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,616
|
|
Loans held for sale
|
|
|
569
|
|
|
|
569
|
|
|
|
-
|
|
|
|
-
|
|
|
|
569
|
|
Net loans
|
|
|
477,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
495,620
|
|
|
|
495,620
|
|
Accrued interest receivable
|
|
|
2,115
|
|
|
|
2,115
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,115
|
|
Regulatory stock
|
|
|
2,131
|
|
|
|
2,131
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,131
|
|
Bank-owned life insurance
|
|
|
10,334
|
|
|
|
10,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,334
|
|
Mortgage servicing rights
|
|
|
526
|
|
|
|
-
|
|
|
|
-
|
|
|
|
526
|
|
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
507,310
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
509,886
|
|
|
$
|
509,886
|
|
Short-term borrowings
|
|
|
21,518
|
|
|
|
-
|
|
|
|
21,518
|
|
|
|
-
|
|
|
|
21,518
|
|
Other borrowed funds
|
|
|
21,111
|
|
|
|
-
|
|
|
|
22,592
|
|
|
|
-
|
|
|
|
22,592
|
|
Accrued interest payable
|
|
|
498
|
|
|
|
498
|
|
|
|
-
|
|
|
|
-
|
|
|
|
498
|
|
|
|
December 31, 2011
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,923
|
|
|
$
|
9,923
|
|
Investment securities
|
|
|
95,619
|
|
|
|
95,619
|
|
Fixed annuity
|
|
|
1,581
|
|
|
|
1,581
|
|
Net loans
|
|
|
438,938
|
|
|
|
460,705
|
|
Accrued interest receivable
|
|
|
1,805
|
|
|
|
1,805
|
|
Regulatory stock
|
|
|
2,180
|
|
|
|
2,180
|
|
Bank-owned life insurance
|
|
|
10,060
|
|
|
|
10,060
|
|
Mortgage servicing rights
|
|
|
540
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
484,284
|
|
|
$
|
486,913
|
|
Short-term borrowings
|
|
|
20,686
|
|
|
|
20,685
|
|
Other borrowed funds
|
|
|
17,618
|
|
|
|
19,171
|
|
Accrued interest payable
|
|
|
542
|
|
|
|
542
|
|
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 or 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. As many of these assumptions result from judgments made by management based upon estimates
that 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.
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, Accrued
Interest Receivable, Regulatory Stock, and Accrued Interest Payable
The fair value is equal to the current
carrying value.
Investment
Securities
The fair value of investment securities
available for sale 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.
Fixed Annuity
The fair value is equal to the current
carrying value.
Net Loans and Mortgage Loans Held
for Sale
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 utilized as estimates for fair value.
Mortgage
Servicing Rights
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 utilized as estimates for fair value.
Deposits,
Short Term Borrowings 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 deposit accounts
are valued at the amount payable on demand as of period-end.
Bank-Owned Life Insurance
The fair value is equal to the cash surrender
value of the life insurance policies.
Commitments
to Extend Credit and Standby Letters of 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statement
The Private Securities Litigation Act of
1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words, "believes,"
"anticipates," "contemplated," "expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially
from those projected. Those risks and uncertainties include changes in interest rates, the ability to control costs and expenses,
and general economic conditions. The Company undertakes no obligation to publicly release the results of any revisions to those
forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
Financial Condition
Total assets at September 30, 2012 were
$613,704,000, an increase of $31,810,000 or 5.5% over balances at December 31, 2011.
Total cash and cash equivalents declined
$2,018,000 or 20.3%. Interest-bearing balances due from other banks declined $3,479,000 or 76.0%, primarily due to the transfer
of funds to other higher yielding assets during the first nine months of 2012. We did increase balances at the Federal Reserve
Bank of Philadelphia (the “Fed”) $1,778,000 or 51.6% in order to accommodate the check clearing process.
Investment securities available for sale
increased $2,065,000 or 2.2 % from balances at December 31, 2011. Our philosophy for investments is that we purchase bonds to gain
the most attractive return using not only the interest rate offered but also the projected value of the bond as interest rates
vary over time. Tax-exempt municipal bonds increased $3,583,000 or 11.0% throughout the first nine months of 2012 as we located
bonds to fit our portfolio. Balances of U.S. government agency bonds decreased $2,937,000 or 26.2% from monthly principal payments
on SBA bonds along with the sale of a $1,000,000 bond where we recognized a gain of $41,000, combined with a call of $1,000,000
on a bond in the second quarter. Balances of corporate bonds increased $2,518,000 or 61.7% with purchases of shorter term bonds
that fit our investment needs. Offsetting these increases was a decrease of $2,752,000 or 22.9% in commercial paper. Commercial
paper is included in our portfolio as an alternative to keeping balances in interest-bearing deposits at other banks; these investments
return better interest rates and are also used to pledge for municipal deposits and repurchase agreements as needed and vary in
amount as the need for cash changes.
Total loans increased $29,877,000 or 6.7%
during the first three quarters of 2012. The largest increase was in the balance of commercial real estate loans which grew $14,528,000
or 5.4%. Loans were granted to borrowers in various business segments including chain restaurants, children’s summer camps,
grocery stores, and other hotel/restaurants. Commercial loans increased $10,018,000 or 22.1% with loans granted to customers in
a variety of businesses and included funds for inventory, equipment, and operating capital. Balances of residential real estate
loans increased $1,951,000 or 2.2%. As an employee benefit, the Bank offered a reduced fee product to employees to modify their
residential mortgage, buying back several from the secondary market and then holding the modified loan, accounting for $3,803,000.
Due to historically low interest rates for residential mortgages, mortgage volume continued to be robust during 2012 with the bank
experiencing an increase of $5,693,000 in residential mortgage loan originations during 2012 compared to 2011, with the majority
of these sold in the secondary market. Because of increased refinancing, the Bank also experienced payoffs of customers’
original loans which were included in the portfolio at the beginning of the year. A combination of all these factors was responsible
for the higher dollar balance of residential loans. Construction and development loans increased $3,078,000 or 21.1% primarily
from our involvement in two hotel projects located within the Marcellus Shale region.
The allowance for loan loss with a balance
of $8,019,000 declined $297,000 or 3.6% from balances a year earlier. Affecting this balance are $2,297,000 of net loan charge-offs
and the provision for loan loss expense for the nine months of $2,000,000. The information regarding these elements of the balance
is included in Footnote 5 – Allowance for Loan Losses. In the third quarter of 2012, one of the loans that were charged-off
was a commercial real estate loan in the amount of $1,842,000. The amount of this charge-off was included in the allowance for
loan loss at the time, serving to lower the balance of the allowance while maintaining the appropriate level in the allowance for
loan loss.
Total deposits increased $23,026,000 or
4.8% at September 30, 2012 from balances at the end of 2011. Noninterest-bearing deposits increased $6,216,000 or 11.9% during
the period. This growth was primarily due to temporary seasonal increases for several commercial customers, including local tax
collectors, which will be drawn down as the year progresses. Interest-bearing deposits increased $16,810,000 or 3.9%. The greatest
growth was in interest-bearing checking accounts, showing an increase of $20,812,000 or 38.3% at September 30, 2012 compared to
the end of 2011. The majority of this increase is real estate tax collections which every year are typically moved to certificates
of deposit in October along with temporary growth of deposits for other customers; we expect both to draw down balances by year
end. Savings balances increased $4,293,000 or 9.9%; we are noticing that customers in general have increased their balances with
no one reason for having greater balances. Certificates of deposit decreased $8,983,000 or 3.4% from year end balances. The primary
reason is a net decline of $27,225,000 in school district certificates of deposits that matured during the period, as is consistent
with our experience in previous years. The Bank received a $9,000,000 certificate of deposit balance from another municipal customer
which will be used for construction beginning in 2013. In addition, as an element of our liquidity planning, we have increased
balances of brokered certificates of deposit by $12,349,000 in 2012. There is no other specific general occurrence noted for the
remaining decrease in balances other than customers choosing other products, including other types of deposits, repurchase agreements
or investments.
Short term borrowings increased $832,000
or 4.0% in the first nine months of 2012. Short term borrowings include both securities sold under agreement to repurchase (sweep
accounts) and borrowings from the FHLB. The Bank has added five additional banking customers to the sweep program in 2012 and has
seen total balances increase $4,632,000 or 31.5%. The balance of overnight borrowings from the FHLB decreased $3,800,000 from balances
at year end. We utilize this borrowing for short term cash needs.
Other borrowed funds increased $3,493,000
or 19.8% due to new borrowings of $6,500,000 which were offset by scheduled principal reductions of $3,007,000. The Bank used $4,000,000
of these borrowings to fund one loan, locking in the interest spread. The remaining borrowings totaling $2,500,000 are at favorable
current interest rates, used in planning for the eventual increase in interest rates.
Stockholders’ equity increased $3,844,000
or 7.0% during the first three quarters of 2012. Net income of $4,997,000 was offset by dividends declared of $1,768,000. The expense
of $229,000 related to option and restricted stock grants along with $9,000 associated the difference in market value of the restricted
shares and original cost of treasury stock added to capital surplus during the period. The market value of our investment portfolio
increased $377,000 net of income taxes; serving to increase the balance at September 30, 2012 of accumulated other comprehensive
income. Regulatory capital ratios remain strong with 12.4% total risk-based capital, 11.1% Tier I capital and a Tier I leverage
ratio of 9.5%. The regulatory minimums to be well capitalized for these ratios are 10.0%, 6.0% and 5.0%, respectively.
Results of Operations
Comparison of the three months ended
September 30, 2012 and 2011
The Company reported net income of $1,747,000
for the quarter ended September 30, 2012, representing an increase of $565,000 or 47.8% greater than in the third quarter of 2011.
The majority of the enhanced earnings came from net interest income, which at $5,641,000 for the third quarter of 2012, was an
increase of $538,000 or 10.5% greater than recorded for the third quarter of 2011.
Total interest income increased $345,000
or 5.4% during the third quarter of 2012 compared to the same period in 2011. Interest and fees earned on loans increased $382,000
or 6.7% in 2012 over 2011. The loan portfolio average balance increased by $32,923,000 or 7.5%, while the average interest rate
of the portfolio remained constant at 5.2% during each quarterly period. In addition, we would have earned interest of $120,000
on loans that were classified as nonaccrual at September 30, 2012 and $260,000 for loans in nonaccrual status at September 30,
2011.
Interest earned on taxable investment securities
was slightly lower in the third quarter of 2012 than the same period in 2011. The average balance of these investments increased
$10,569,000 or 20.4% for the third quarter of 2012 compared to a year earlier while the average yield decreased .7% in 2012 as
compared to 2011. The decline in interest rate was because bonds which were purchased in higher market interest rate periods matured
and were replaced with investments at current, lower interest rates. In addition, we increased the average balance of tax exempt
investments by $3,383,000 or 10.6% in the third quarter of 2012 as compared to a year earlier resulting in an increase of $15,000
in income earned on these bonds.
Interest expense declined $193,000 or 15.4%
in the third quarter of 2012 as compared to the same period of 2011. Interest paid on deposits declined $155,000 or 15.3% as the
average balance of total interest-costing liabilities increased $40,870,000 or 10.2% and the average interest rate paid on these
deposits declined .2%. The average balances of time deposits increased $21,230,000 or 9.0% in the third quarter of 2012 as compared
to the same quarter of 2011. Simultaneously, the average interest rate paid on those deposits decreased by .3% over the period.
Management has increased usage of the CDARS program to acquire certificates of deposit without a reciprocal origination of deposits
in our market, resulting in $14,629,000 greater average balances of these funds in the third quarter of 2012 than a year earlier.
The average interest rate paid on CDARS deposits was .51% in the third quarter of 2012 when the average interest rate for all certificates
of deposit was 1.14%. In the third quarter of 2011, the average rate paid for CDARS deposits was .47% compared to the total for
all certificates of deposit of 1.44%. Even though the average interest rate paid for these funds has increased year over year,
in each period the cost was significantly lower than rates paid for other deposits. In addition, we continue to see increases in
the average balance of other interest-costing deposits while lowering the average interest rate paid for these deposits as the
economic stalemate continues.
The provision for loan losses is charged
to operations to bring the total allowance for loan losses to a level that represents management’s best estimates of the
losses inherent in the portfolio, based on:
|
·
|
type of lending conducted by the Bank;
|
|
·
|
the level and status of past due and non-performing loans;
|
|
·
|
the general economic conditions in the Bank’s lending area along with national trends; and
|
|
·
|
other factors affecting the collectability of the loans in its portfolio.
|
Provision for loan losses were $650,000
or 50.0% less in the third quarter of 2012 than the same quarter of 2011, when we added several collateral dependent loans to impaired
status. In the third quarter of 2012 we were able to return some of these loans to performing status. Based on our analysis, we
believe that the balance of the allowance for loan losses is adequate.
Total noninterest income of $1,065,000
was $133,000 or 14.3% greater in the third quarter of 2012 than in the same quarter of 2011. Service charges on deposit accounts
have continued to decline each quarter over the past few years. This income was $42,000 or 16.2% less in the third quarter of 2012
than a year earlier. This decline is due to both regulatory changes that affected our ability to levy service charges on checking
accounts and a general increase in our customer’s diligence in monitoring their balances to avoid service charges on their
accounts. Brokerage commissions were $64,000 or 41.0% greater in the third quarter of 2012 than a year earlier. Asset fee-based
income has risen due to improved market values of investment securities. In addition, our investment agents have worked diligently
to increase their share of our market, and have acquired substantial additional assets to manage. Other noninterest income combines
many other sources of revenue for the Company. This revenue increased $87,000 or 55.4% for the third quarter of 2012 compared to
the same quarter in 2011. We have an investment in a limited partnership in order to receive federal low income housing tax credits.
This partnership records a loss on operations for which we had accrued more than actually incurred for the first nine months of
2012, resulting in an adjustment of $30,000 less in expense in the third quarter of 2012 than in the year before. This adjustment
was made as a result of receiving updated financial statements during the quarter. In the third quarter of 2011 we recorded a decline
in the market value of mortgage servicing rights of $25,000 that was unmatched in 2012.. Our merchant credit card program recorded
$23,000 or 39.8% greater fee income in the third quarter of 2012 than the same period last year. This product is being used by
several new restaurant customers along with increased usage by existing customers. Smaller increases in the other components of
other noninterest income were responsible for the remaining difference in income.
Salaries and employee benefits increased
$190,000 or 10.8% for the third quarter of 2012 as compared to 2011. Wages increased $76,000 or 6.0% in 2012 as compared to 2011
which was primarily due to a combination of the addition of two full time equivalent employees since September 30, 2011 and annual
salary increases for all other employees. Costs associated with health insurance increased $93,000 or 81.5% in the third quarter
of 2012 compared to the same period in 2011due to timing issues for expenses in the Pennsylvania Bankers Association consortium
self-funded health insurance plan. Costs associated with grants in September 2011 of restricted stock and stock options to officers
were $24,000 greater for the third quarter of 2012 than the same period of 2011, where there was only one month of expense. The
remaining difference is due to smaller variances in other employee benefit accounts.
Other expense increased $213,000 or 25.4%
for the third quarter of 2012 compared to the same period in 2011. Costs associated with other real estate owned increased $147,000
or 234.2%. In 2012 we recognized a decline of $129,000 in the value of other real estate owned. There was no similar expense in
2011. In addition, we have incurred $18,000 greater expense in the upkeep of properties that are in other real estate owned status
in the third quarter of 2012 than in 2011. In the third quarter of 2012, we incurred expense of $38,000 in connection with the
September 2011 grants of restricted stock to directors which was unmatched in 2011. In August 2012, we were approved for participation
in the Pennsylvania Educational Improvement Tax Credit Program whereby we receive up to 100% Pennsylvania tax credits for donations
to eligible organizations. In 2012, management applied for and received approval for $31,000 greater donations than the previous
year. Smaller variances in other expense items were responsible for the remaining differences.
Comparison of the nine months ended September
30, 2012 and 2011
Net income increased $879,000 or 21.3%
for the first three quarters of 2012 compared to the same period in 2011. The primary source of additional income was an increase
in net interest income, which was offset by changes in other income statement categories.
Interest income of $19,539,000 was $1,015,000
or 5.5% greater than a year earlier. The primary increase in interest income was from interest and fees on loans, which was $984,000
or 5.9% greater than the third quarter of 2011. The average balance of the loan portfolio increased $33,754,000 or 7.9% in the
first three quarters of 2012 while the average interest yield on those assets was relatively stable, showing a slight decline of
.1% over the same time frame. We have experienced nearly all of the downward interest rate repricing of variable rate loans since
the economy turned in 2008; new loans are booked at current market rates with interest rate floors that generally are the rate
at inception.
Interest expense declined $639,000 or 16.2%
for the first nine months of 2012 as compared to the same period in 2011. Interest rates were lower in each interest-bearing deposit
category with the largest component related to certificates of deposit where the current average interest rate was 1.19%, a decline
of 34 basis points from the same period in 2011. The average balance of certificates of deposit was $18,286,000 or 7.6% greater
than the same period last year, with the growth mainly related to certificates of deposit in brokered deposits, primarily those
generated through CDARS. We have increased usage of this funding source due to their pricing at lower costs than we can obtain
in our markets or through other borrowings. The average balance of interest-bearing checking products increased $14,268,000 or
8.9% in the first nine months of 2012 compared to 2011 as the average interest rate paid on the deposits decreased 10 basis points.
We have continued to expand relationships and attract more customers to these deposit accounts. As principal reductions were made
on FHLB term borrowings, the average balanced declined $1,398,000 or 7.4% and the average interest rate paid decreased 39 basis
points, producing a decline of $97,000 or 15.2% in interest expense on other borrowed funds.
Noninterest income increased $320,000 or
11.1% for the first three quarters of 2012 compared to the same period in 2011. Service charges on deposit accounts were $114,000
or 14.5% lower in the current year due to regulatory changes in the process to assess these fees along with our customers increased
diligence in monitoring their checking accounts thereby utilizing overdraft protection less frequently. We realized $205,000 or
91.9% greater gains on the sale of mortgage loans in 2012 than in 2011 as mortgage activity, primarily refinancing, increased in
this historically low interest rate environment. The sale of investments contributed $109,000 to other income, an increase of $123,000
compared to a net loss of $14,000 in 2011. In 2011 we recognized a charge for other than temporary impairment of $29,000 that was
not matched in 2012.
Noninterest expense increased $612,000
or 6.0% in the first nine months of 2012 compared to the same period in 2011. Salaries and employee benefits, the largest noninterest
expense for the Company, increased $396,000 or 7.4% in 2012 compared to the same period in 2011. The primary reason for the increase
was an increase in wages of$197,000 or 5.3% due to the addition of two full time equivalent employees since September 2011 along
with annual salary increases for the existing employees. We recorded $101,000 greater expense in the first nine months of 2012
than the same period of 2011 due to grants of stock and restricted stock options in September 2011.
Professional fees declined $60,000 or 9.4%
for the first nine months of 2012 compared to the same period in 2011 primarily due to lower costs associated with delinquent loans
and foreclosure actions in the current period than a year earlier. The category of other noninterest expense includes many smaller
dollar amount expenses including advertising, bank supplies, telephone, and travel among others. This expense increased $340,000
or 13.4% for the first nine months of 2012 versus the same period in 2011. The largest increase in these expenses was in relation
to other real estate owned, which accounted for $176,000 of additional expense and was 72.0% greater than in the same period of
2011. As noted previously, we adjusted the market value of a property listed in other real estate owned in the third quarter of
2012, an expense that was unmatched in 2011. The next largest increase in other noninterest expense was $115,000 related to grants
of stock options and restricted stock to outside directors in 2012 which was unmatched in 2011. Offsetting these expenses, the
Bank’s assessment for FDIC insurance was $51,000 or 11.6% less than the same period a year earlier. The calculation of this
assessment was changed in 2012, resulting in the improvement in this line item.
Liquidity and Cash Flows
To ensure that the Company can satisfy
customer credit needs for current and future commitments and deposit withdrawal requirements, we manage the liquidity position
by ensuring that there are adequate short-term funding sources available for those needs. Liquid assets consist of cash and due
from banks, federal funds sold, interest-bearing deposits with other banks, mortgage loans held for sale and investment securities
maturing in one year or less. The following table shows these liquidity sources, minus short-term borrowings, as of September 30,
2012 compared to December 31, 2011:
|
|
September 30
|
|
|
December 31
|
|
|
|
2012
|
|
|
2011
|
|
( in thousands)
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
6,809
|
|
|
$
|
5,348
|
|
Interest-bearing deposits with other banks
|
|
|
1,096
|
|
|
|
4,575
|
|
Mortgage loans held for sale
|
|
|
569
|
|
|
|
-
|
|
Investment securities maturing in one year or less, including scheduled principal reductions
|
|
|
24,176
|
|
|
|
21,884
|
|
|
|
|
32,650
|
|
|
|
31,807
|
|
Less short-term borrowings
|
|
|
21,518
|
|
|
|
20,686
|
|
Net liquidity position
|
|
$
|
11,132
|
|
|
$
|
11,121
|
|
|
|
|
|
|
|
|
|
|
As a percent of total assets
|
|
|
1.8
|
%
|
|
|
1.9
|
%
|
In addition, the Bank
has the ability to borrow from the Federal Home Loan Bank of Pittsburgh with the maximum borrowing capacity at September 30, 2012
of $222 million with an available balance of $192 million. Other sources of liquidity are cash flows from regularly scheduled payments
and prepayments of loans, sales or maturities in the investment portfolio, sales of residential mortgages in the secondary market,
operating income, deposit growth and access to lines of credit with correspondent banks. The Consolidated Statement of Cash Flows
specifically details the current contribution of each source.
Management monitors liquidity on a consistent
basis and feels that liquidity levels are adequate. We are not aware of any known trends, events or uncertainties that will have
or is reasonably likely to have a material effect on the Company's liquidity, capital resources or operations; nor are we aware
of any current recommendations by regulatory authorities, which if implemented, would have such an effect.
Risk Elements
The table below presents information concerning
nonperforming assets including nonaccrual loans and loans 90 days or more past due at September 30, 2012 and December 31, 2011.
A loan is classified as nonaccrual when, in the opinion of management, there are doubts about collectability of interest and principal.
At the time the accrual of interest is discontinued, future income is recognized only the loan meets our criteria for return to
accrual status or management determines, by the customer making a series of on time payments, to account for payments using the
cash basis.
|
|
September 30, 2012
|
|
|
|
Past due 90
|
|
|
|
|
|
|
days or
|
|
|
|
|
|
|
more and
|
|
|
|
|
(in thousands)
|
|
accruing
|
|
|
Nonaccrual
|
|
Real estate-construction loans
|
|
$
|
-
|
|
|
$
|
-
|
|
Real estate-mortgage loans
|
|
|
272
|
|
|
|
10,624
|
|
Commercial and industrial loans
|
|
|
-
|
|
|
|
181
|
|
Installment loans to individuals
|
|
|
-
|
|
|
|
54
|
|
Total
|
|
$
|
272
|
|
|
$
|
10,859
|
|
|
|
December 31, 2011
|
|
|
|
Past due 90
|
|
|
|
|
|
|
days or
|
|
|
|
|
|
|
more and
|
|
|
|
|
(in thousands)
|
|
accruing
|
|
|
Nonaccrual
|
|
Real estate-construction loans
|
|
$
|
-
|
|
|
$
|
1,105
|
|
Real estate-mortgage loans
|
|
|
386
|
|
|
|
12,324
|
|
Commercial and industrial loans
|
|
|
163
|
|
|
|
38
|
|
Installment loans to individuals
|
|
|
2
|
|
|
|
48
|
|
Total
|
|
$
|
551
|
|
|
$
|
13,515
|
|
Interest income of $502,000 in the first
nine months of 2012 and $414,000 in the same period of 2011 would have been recognized on nonaccrual loans if they had been performing
in accordance with their original terms. The Company did not recognize any income on loans in nonaccrual status in 2012 but did
recognize $224,000 of interest income on a relationship that made timely payments enabling recognition of interest income on the
cash basis in 2011.
Management believes the level of the allowance
for loan losses at September 30, 2012 is adequate to cover probable losses inherent in the loan portfolio. The relationship between
the allowance for loan losses and outstanding loans is a function of the credit quality and known risk attributed to the loan portfolio.
The on-going loan review program, along with management analysis, is used to determine the adequacy of the allowance for loan losses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
A key function of management in its role
as the Asset/Liability Committee (“ALCO”) is to evaluate the Company’s exposure to interest rate risk. The primary
business of the Company in the financial services industry is to act as a depository financial intermediary. In this role, an integral
element of risk involves the chance that prevailing interest rates will adversely affect assets, liabilities, capital, income and/or
expense at different times and in different amounts. The ALCO is comprised of all senior officers of the Bank and other key officers.
This committee reports directly to the Board of Directors on at least a quarterly basis.
Two separate reports are used to assist
in measuring interest rate risk. The first is the Statement of Interest Sensitivity Gap report. This report matches all interest-earning
assets and all interest-bearing liabilities by the time frame in which funds can be reinvested or repriced. The second report is
the Interest Rate Shock Analysis discussed in more detail below. In both reports, there are inherent assumptions that must be used
in the evaluation. These assumptions include the maturity or repricing times of deposits, even though all deposits, other than
time deposits, have no stated maturity and the reference that interest rate shifts will be parallel, with the rates of assets and
liabilities shifting in the same amount in the same time frame. In reality, various assets and various liabilities will react differently
to changes in interest rates, with some lagging behind the change and some anticipating the upcoming change and reacting before
any actual change occurs. Each tool also suggests that there is a propensity to replace assets and liabilities with similar assets
and liabilities rather than taking into consideration management’s ability to reallocate the Balance Sheet. In addition,
the models used do not include any elements to determine how an action by management to increase or decrease interest rates charged
on loans or paid on deposits or to increase borrowings at the FHLB will affect the results of the analysis. In spite of these limitations,
these analyses are still very good tools to assist in management of the Company and similar versions of these same reports are
used by all financial institutions.
Statement of Interest Sensitivity Gap
September 30, 2012
|
|
90 days
|
|
|
>90 days
|
|
|
1 - 5
|
|
|
|
|
|
|
|
|
|
or less
|
|
|
but < 1 year
|
|
|
years
|
|
|
>5 years
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits in other banks and federal funds sold
|
|
$
|
1,096
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,096
|
|
Mortgage loans held for sale
|
|
|
569
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
569
|
|
Investment securities available for sale
(5)
|
|
|
22,256
|
|
|
|
8,292
|
|
|
|
27,688
|
|
|
|
39,448
|
|
|
|
97,684
|
|
Fixed annuity investment
|
|
|
-
|
|
|
|
-
|
|
|
|
1,616
|
|
|
|
-
|
|
|
|
1,616
|
|
Loans
(1) (4)
|
|
|
89,533
|
|
|
|
97,199
|
|
|
|
106,258
|
|
|
|
174,076
|
|
|
|
467,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive assets
|
|
$
|
113,454
|
|
|
$
|
105,491
|
|
|
$
|
135,562
|
|
|
$
|
213,524
|
|
|
$
|
568,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
(2)
|
|
$
|
6,014
|
|
|
$
|
18,795
|
|
|
$
|
50,370
|
|
|
$
|
-
|
|
|
$
|
75,179
|
|
Money market
(3)
|
|
|
11,339
|
|
|
|
33,349
|
|
|
|
22,011
|
|
|
|
-
|
|
|
|
66,699
|
|
Savings
(2)
|
|
|
3,819
|
|
|
|
11,933
|
|
|
|
31,980
|
|
|
|
-
|
|
|
|
47,732
|
|
Time deposits
|
|
|
59,011
|
|
|
|
116,122
|
|
|
|
84,134
|
|
|
|
-
|
|
|
|
259,267
|
|
Short-term borrowings
|
|
|
21,518
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,518
|
|
Other borrowings
(6)
|
|
|
514
|
|
|
|
1,576
|
|
|
|
13,681
|
|
|
|
5,340
|
|
|
|
21,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive liabilities
|
|
$
|
102,215
|
|
|
$
|
181,775
|
|
|
$
|
202,176
|
|
|
$
|
5,340
|
|
|
$
|
491,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap
|
|
$
|
11,239
|
|
|
$
|
(76,284
|
)
|
|
$
|
(66,614
|
)
|
|
$
|
208,184
|
|
|
$
|
76,525
|
|
Cumulative gap
|
|
$
|
11,239
|
|
|
$
|
(65,045
|
)
|
|
$
|
(131,659
|
)
|
|
$
|
76,525
|
|
|
|
|
|
Cumulative gap to total assets
|
|
|
1.83
|
%
|
|
|
(10.60
|
)%
|
|
|
(21.45
|
)%
|
|
|
12.47
|
%
|
|
|
|
|
|
(1)
|
Loans are included in the earlier period in which interest rates are next scheduled to adjust or in which they are due. No
adjustment has been made for scheduled repayments or for anticipated prepayments.
|
|
(2)
|
Interest-bearing demand deposits and savings are segmented based on the percentage of decay method. The decay rates used include
"90 days or less" 8%, " >90 days but <1 year" 25% and "1-5 years" 67%.
|
|
(3)
|
Money market deposits are segmented based on the percentage of decay method. The decay rates used include "90 days or
less" 17%, ">90 days but < 1 year" 50% and "1-5 years" 33%.
|
|
(4)
|
Does not include loans in nonaccrual status, deposit overdrafts, unposted items or deferred fees on loans.
|
|
(5)
|
Variable interest rate investments are included in the period in which interest rates are next scheduled to adjust, while fixed
interest rate investments are included in each period according to the contractual repayment schedule.
|
|
(6)
|
Borrowings are included in each period according to the contractual
repayment schedule.
|
As this report shows, the Company was liability sensitive in
the one year period at September 30, 2012
with $65,045,000 of liabilities maturing or repricing
before assets in this timeframe. We expect that interest rates will increase at some point; and as that occurs, the variable interest
rate loans will reprice upward. In the meantime, there will be some level of downward repricing in time deposits as those liabilities
mature and are replaced with certificates of deposit at the current, lower rates. We would also expect liabilities to extend in
maturity as interest rates increase, offering customers a more significant benefit to extend.
The second report used to monitor interest rate risk is the
Analysis of Sensitivity to Changes in Market Interest Rates. This tool attempts to determine the affect on income of various shifts
in the interest rate environment. We have presented this analysis for three different scenarios, a change in rates of 100, 200
or 300 basis points in order to offer a more in-depth analysis. The reports shows that our greatest risk would be if interest rates
increased by 300 basis points. Net interest income would decrease by $1,566,000 or 6.74% while net income would decrease $1,032,000
or 15.67%. This analysis makes the shift automatic and equal for both assets and liabilities and does not take into consideration
management’s ability to change the rates for loans and deposits in a different fashion. We would not expect to make this
parallel shift in interest rates. Even given that this analysis does not actually assimilate the reality of our actions when rates
do increase, the results of a potential shift of 300 basis points in either direction are within internal policy guidelines. If
the results were not tolerable, our policy would determine that management should reallocate the balance sheet in order to maintain
compliance with the policy. If interest rates were to immediately increase by 300 basis points, the economic value of equity (EVE)
would decrease by $16,975,000 or 21.57%, which is within our policy guidelines. The EVE is sometimes referred to as the present
value of equity and is presented as one more statistic to monitor in managing interest rate risk.
(amounts in thousands)
|
|
100 basis points
|
|
|
|
Up
|
|
|
Down
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(584
|
)
|
|
|
-2.51
|
%
|
|
$
|
94
|
|
|
|
0.40
|
%
|
Net income
|
|
$
|
(381
|
)
|
|
|
-5.79
|
%
|
|
$
|
49
|
|
|
|
0.74
|
%
|
EVE
|
|
$
|
(9,193
|
)
|
|
|
-11.68
|
%
|
|
$
|
11,536
|
|
|
|
14.66
|
%
|
|
|
200 basis points
|
|
|
|
Up
|
|
|
Down
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(1,069
|
)
|
|
|
-4.60
|
%
|
|
$
|
(514
|
)
|
|
|
-2.21
|
%
|
Net income
|
|
$
|
(703
|
)
|
|
|
-10.67
|
%
|
|
$
|
(361
|
)
|
|
|
-5.48
|
%
|
EVE
|
|
$
|
(12,618
|
)
|
|
|
-16.03
|
%
|
|
$
|
20,277
|
|
|
|
25.76
|
%
|
|
|
300 basis points
|
|
|
|
Up
|
|
|
Down
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(1,566
|
)
|
|
|
-6.74
|
%
|
|
$
|
(1,155
|
)
|
|
|
-4.97
|
%
|
Net income
|
|
$
|
(1,032
|
)
|
|
|
-15.67
|
%
|
|
$
|
(793
|
)
|
|
|
-12.04
|
%
|
EVE
|
|
$
|
(16,975
|
)
|
|
|
-21.57
|
%
|
|
$
|
25,673
|
|
|
|
32.62
|
%
|
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and
procedures
As of September 30, 2012 an evaluation
was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, on
the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation,
the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures
were effective as of September 30, 2012. There have been no significant changes in the Company’s internal controls over financial
reporting or in other factors that could significantly affect internal controls during the quarter.
Disclosure controls and procedures are
the controls and other procedures that are designed to ensure that the information required to be disclosed by the Company in its
reports filed and submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed,
summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by the Company in its reports filed under the Exchange Act is accumulated and communicated to the Company’s management,
including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes in internal controls
There were no significant changes in the Registrant's internal
controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including
any corrective actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
|
Item 1
|
- Legal Proceedings
|
NONE
There were no material changes to the risk
factors described in Item 1a. of Dimeco’s Annual Report on Form 10-K for the period ended December 31, 2011.
|
Item 2
|
- Unregistered Sales of Equity Securities and Use
of Proceeds
|
NONE
|
Item 3
|
- Defaults upon Senior Securities
|
NONE
|
Item 4
|
- Mine Safety Disclosures
|
NONE
|
Item 5
|
- Other Information
|
NONE
Form 8-K – Report on October 19, 2012 – News Release
of Registrant
Exhibit
Number:
|
31.1
|
Certification Pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003
|
|
31.2
|
Certification Pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003
|
|
32
|
Certification Pursuant to 18 U.S.C. Section 1350
|
|
99
|
Report of Independent Registered Public Accounting Firm
|
The following exhibits are included in this Report
or incorporated herein by reference:
|
3(i)
|
Articles of Incorporation of Dimeco, Inc.*
|
|
3(ii)
|
Amended Bylaws of Dimeco, Inc.****
|
|
10.1
|
2000 Independent Directors Stock Option Plan**
|
|
10.2
|
2000 Stock Incentive Plan***
|
|
10.3
|
Form of Salary Continuation Plan for Executive Officers****
|
|
10.4
|
2010 Equity Incentive Plan *****
|
|
*
|
Incorporated by reference to the Exhibit 3A to the Form S-4 (File No. 333-58936) filed with the Commission on February 26,
1993.
|
|
**
|
Incorporated by reference to Exhibit 99.1 to the Form S-8 (File No. 333-69420) filed with the Commission on September 14, 2002.
|
|
***
|
Incorporated by reference to Exhibit 99.1 to the Form S-8 (File No. 333-69416) filed with the Commission on September 14, 2002.
|
|
****
|
Incorporated by reference to identically numbered exhibit to the Registrant’s Form 8-K filed July 2, 2007.
|
|
*****
|
Incorporated by reference to Exhibit 10.1 to Form S -8 (File No. 333-169454) filed with the Commission on September 17, 2010.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
DIMECO, INC.
|
|
|
|
Date: November 14, 2012
|
By:
|
/s/ Gary C. Beilman
|
|
|
Gary C. Beilman
|
|
|
President and Chief Executive Officer
|
|
|
|
Date: November 14, 2012
|
By:
|
/s/ Maureen H. Beilman
|
|
|
Maureen H. Beilman
|
|
|
Chief Financial Officer
|
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