UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2012

 

¨ Transition report under Section 13 or l5(d) of the Exchange Act

For the transition period from              to             

Commission file number 000-49736

 

 

First Community Financial Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   23-2321079

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2 N. Main St., Mifflintown, PA 17059

(Address of Principal Executive Offices)

(717) 436-2144

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (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).     x   Yes     ¨   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller reporting company. See the 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 in rule 12b-2 of the Exchange Act.)     ¨   Yes     x   No

Indicate the number of shares outstanding of each class of issuer’s classes of common stock, as of the last practicable date:

 

Class

 

Outstanding at October 31, 2012

Common Stock, par value $5.00   1,410,743 Shares

 

 

 


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars In Thousands, Except Share Data)

 

     September 30, 2012     December 31, 2011  
     (unaudited)     (audited)  

ASSETS

    

Cash & due from banks

   $ 10,153      $ 9,129   

Interest bearing deposits with banks

     1,964        218   

Federal funds sold

     3,013        591   
  

 

 

   

 

 

 

Cash & cash equivalents

     15,130        9,938   

Time certificates of deposit

     198        198   

Securities available for sale

     88,388        73,804   

Securities held to maturity, fair value 2012 $ 49,813; 2011 $ 36,639

     47,273        34,972   

Loans

     255,131        251,012   

Less: Allowance for loan losses

     (2,790     (3,085

Less: Deferred loan fees and costs, net

     (201     (224
  

 

 

   

 

 

 

Net loans

     252,140        247,703   

Premises and equipment, net

     8,023        7,461   

Restricted investment in bank stocks

     1,787        2,121   

Investment in life insurance

     7,588        7,399   

Other assets

     4,764        4,287   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 425,291      $ 387,883   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Non-interest bearing

   $ 39,197      $ 35,994   

Interest bearing

     325,606        294,555   
  

 

 

   

 

 

 

Total deposits

     364,803        330,549   

Short-term borrowings

     3,064        2,685   

Long-term borrowings

     15,000        15,000   

Junior subordinated debt

     5,155        5,155   

Other liabilities

     2,902        3,056   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     390,924        356,445   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Preferred stock, without par value; 10,000,000 shares authorized and unissued

     —          —     

Common stock, $ 5.00 par value; 10,000,000 shares authorized Shares issued; 2012 -1,414,399; 2011 – 1,411,526 Shares outstanding; 2012- 1,410,743; 2011 – 1,407,870

     7,072        7,058   

Capital in excess of par value

     622        522   

Retained earnings

     25,280        22,652   

Treasury stock, at cost 2012 – 3,656 shares; 2011– 3,656 shares

     (110     (110

Accumulated other comprehensive income

     1,503        1,316   
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     34,367        31,438   
  

 

 

   

 

 

 

TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

   $ 425,291      $ 387,883   
  

 

 

   

 

 

 

See accompanying notes.

 

2


FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars In Thousands, Except Per Share Data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

INTEREST INCOME

        

Interest & fees on loans

   $ 3,651      $ 3,718      $ 10,938      $ 10,992   

Interest on taxable securities

     484        573        1,492        1,687   

Interest on tax-exempt securities

     403        353        1,144        1,032   

Other interest & dividends

     11        7        30        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL INTEREST INCOME

     4,549        4,651        13,604        13,734   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

        

Interest on deposits

     1,158        1,186        3,529        3,807   

Interest on short term borrowings

     9        10        28        29   

Interest on long term borrowings

     199        197        594        595   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL INTEREST EXPENSE

     1,366        1,393        4,151        4,431   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

     3,183        3,258        9,453        9,303   

Provision for loan losses

     96        303        207        454   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     3,087        2,955        9,246        8,849   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST INCOME

        

Service charges on deposits

     189        202        583        570   

Fiduciary activities

     92        114        389        428   

Earnings on investment in life insurance

     74        88        227        260   

ATM card fees

     145        139        414        404   

Realized gains on sales of securities

     68        —          166        12   

Realized gain (loss) on sale of foreclosed real estate

     (13     —          1        6   

Other income

     233        195        672        475   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OTHER INCOME

     788        738        2,452        2,155   
  

 

 

   

 

 

   

 

 

   

 

 

 

NON-INTEREST EXPENSES

        

Employee compensation & benefits

     1,373        1,270        4,000        3,738   

Net occupancy & equipment

     303        267        903        815   

ATM expense

     37        52        116        146   

Professional fees

     104        113        370        377   

Director & advisory boards compensation

     94        85        267        241   

Supplies & postage

     77        74        250        245   

FDIC and OCC assessments

     92        73        256        279   

Other non-interest expenses

     375        379        1,106        1,130   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL NON-INTEREST EXPENSES

     2,455        2,313        7,268        6,971   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,420        1,380        4,430        4,033   

Income tax expense

     284        290        935        861   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 1,136      $ 1,090      $ 3,495      $ 3,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME:

        

Unrealized gains or losses on investment securities, net of tax of $122 and $156 in 2012 and $(22) and $70 in 2011

     228        (48     297        134   

Reclassification adjustment: (gain) loss on sale of securities, net of tax of $23 and $56 in 2012 and $- and $4 in 2011

     (45     —          (110     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME

     183        (48     187        126   
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME

   $ 1,319      $ 1,042      $ 3,682      $ 3,298   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.81      $ 0.78      $ 2.48      $ 2.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


PART I – FINANCIAL INFORMATION, CONTINUED

Item 1. Financial Statements, continued

 

 

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2012 and 2011

(Unaudited)

(Dollars In Thousands, Except Per Share Data)

 

     Common
Stock
     Capital
In Excess
of
Par Value
     Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income
     Total  

Balance - January 1, 2011

   $ 7,037       $ 415       $ 19,560      $ (110   $ 1,380       $ 28,282   
               

 

 

 

Comprehensive income:

           3,172             3,172   

Net income

               

Change in net unrealized losses on securities available for sale, net of deferred income taxes

               126         126   
               

 

 

 

Total comprehensive income

                  3,298   

Issuance of stock in connection with dividend reinvestment plan 2,787 shares

     14         70                84   

Cash dividends, $0.555 per share

           (780          (780
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2011

   $ 7,051       $ 485       $ 21,952      $ (110   $ 1,506       $ 30,884   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance - January 1, 2012

   $ 7,058       $ 522       $ 22,652      $ (110   $ 1,316       $ 31,438   
               

 

 

 

Comprehensive income:

               

Net income

           3,495             3,495   

Change in net unrealized gains on securities available for sale, net of deferred income taxes and reclassifications

               187         187   
               

 

 

 

Total comprehensive income

                  3,682   

Issuance of stock in connection with dividend reinvestment plan 2,873 shares

     14         100                114   

Cash dividends, $0.615 per share

           (867          (867
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2012

   $ 7,072       $ 622       $ 25,280      $ (110   $ 1,503       $ 34,367   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes.

 

4


PART I – FINANCIAL INFORMATION, CONTINUED

Item 1. Financial Statements, continued

 

 

FIRST COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars In Thousands)

 

     Nine Months Ended
September 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 3,495      $ 3,172   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     207        454   

Depreciation and amortization

     398        322   

Net amortization of securities premium

     246        152   

Net realized gains on sales of securities

     (166     (12

Net gain on sale of other real estate

     (1     (6

Earnings on life insurance

     (227     (260

Increase in other assets

     (710     (140

(Decrease) increase in other liabilities

     (154     1   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,088        3,683   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Securities held to maturity:

    

Maturities, calls and principal repayments

     290        1,335   

Purchases

     (12,331     (2,501

Securities available for sale:

    

Maturities, calls and principal repayments

     15,136        16,023   

Purchases

     (32,446     (14,974

Proceeds from sales

     2,673        213   

Net increase in loans receivable

     (4,669     (6,874

Net decrease in Federal Home Loan Bank stock

     334        322   

Purchases of premises and equipment

     (960     (1,059

Proceeds from sale of foreclosed real estate

     197        —     

Net maturities of interest bearing time deposits

     —          —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (31,776     (7,515
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net increase in non-interest bearing demand and savings deposits

     3,203        1,907   

Net increase (decrease) in time deposits

     31,051        5,884   

Net increase (decrease) in short-term borrowings

     379        (1,180

Repayment of long-term borrowings

     —          (1,000

Proceeds from issuance of common stock

     114        84   

Acquisition of treasury stock

     —          —     

Dividends paid

     (867     (780
  

 

 

   

 

 

 

Net cash provided by (used by) financing activities

     33,880        4,915   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     5,192        1,083   

Cash and cash equivalents:

    

Beginning of year

     9,938        10,554   
  

 

 

   

 

 

 

End of period

   $ 15,130      $ 11,637   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES:

    

Cash payments for interest

   $ 4,155      $ 4,494   
  

 

 

   

 

 

 

Cash payments for income taxes

   $ 841      $ 963   
  

 

 

   

 

 

 

NON CASH INVESTING :

    

Transfer of loans to foreclosed real estate

   $ 25      $ 249   
  

 

 

   

 

 

 

See accompanying notes .

 

5


PART I – FINANCIAL INFORMATION, CONTINUED

Item 1. Financial Statements, continued

 

 

FIRST COMMUNITY FINANCIAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

September 30, 2012

Note A – Basis of Presentation

The consolidated financial statements include the accounts of First Community Financial Corporation (the “Corporation”) and its wholly-owned subsidiaries, The First National Bank of Mifflintown (the “Bank”) and First Community Financial Capital Trust I (the “Trust”). All material inter-company transactions have been eliminated. The Corporation was organized on November 13, 1984 and is subject to regulation by the Board of Governors of the Federal Reserve System.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and are presented in accordance with the instructions to Form 10-Q and Rule 10-01 of the Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The consolidated financial statements presented in this report should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2011, included in the Corporation’s Form 10-K filed with the Securities and Exchange Commission on March 9, 2012.

Certain reclassifications have been made to prior period balances to conform to the current year’s presentation format.

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2012, for items that should potentially be recognized or disclosed in these financial statements. The evaluation was conducted through November 13, 2012, the date these financial statements were issued.

 

6


Note B – Accounting Policies

The accounting policies of the Corporation as applied in the interim financial statements presented are substantially the same as those followed on an annual basis as presented in the Corporation’s Form 10-K.

Note C – Comprehensive Income

The only other comprehensive income item that the Corporation presently has is unrealized gains on securities available for sale. The components of the change in unrealized gains are as follows (in thousands):

 

     Three Months
Ended
September 30,
    Nine Months
Ended
September 30,
 
     2012     2011     2012     2011  
     (Dollars in Thousands)  

Unrealized holding gains (losses) arising during the period

   $ 350      $ (70   $ 453      $ 204   

Reclassification of gains realized in net income

     (68     —          (166     (12
  

 

 

   

 

 

   

 

 

   

 

 

 
     282        (70     287        192   

Income tax effect

     (99     22        (100     (66
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in accumulated other comprehensive income

   $ 183      $ (48   $ 187      $ 126   
  

 

 

   

 

 

   

 

 

   

 

 

 

Note D - Earnings Per Share

The Corporation has a simple capital structure. Basic earnings per share represents net income divided by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding was 1,409,000 for the nine months ended September 30, 2012 and 1,409,889 for the three months ended September 30, 2012. The weighted average number of shares outstanding was 1,404,838 for the nine months ended September 30, 2011 and 1,405,764 for the three months ended September 30, 2011.

Note E - Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit written are conditional commitments issued by

 

7


the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation, generally, holds collateral and/or personal guarantees supporting these commitments. The Corporation had $241,000 of standby letters of credit outstanding as of September 30, 2012. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payment required under the corresponding guarantees. The current amount of the liability as of September 30, 2012 for guarantees under standby letters of credit issued is not material.

Note F - Securities

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities available for sale are those securities that the Corporation intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell an available for sale security would be based on various factors. These securities are stated at fair value. Unrealized gains (losses) are reported as changes in other comprehensive income, a component of shareholders’ equity, net of the related deferred tax effect. Premiums and discounts are recognized as interest income over the estimated lives of the securities, using the interest method. Securities held to maturity are those securities that the Corporation has the intent and ability to hold to maturity. These securities are stated at cost adjusted for amortization of premiums and accretion of discounts, which is recognized as interest income over their estimated lives, using the interest method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 320, Investments – Debt and Equity Securities , clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) for equity securities, the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

8


In instances when a determination is made that an other-than-temporary impairment exists, but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FASB Topic 320 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

 

Amortized cost and fair value at September 30, 2012 and December 31, 2011 were as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (In Thousands)  

S ECURITIES A VAILABLE FOR S ALE :

          

September 30, 2012:

          

U.S. agency securities

   $ 4,451       $ 134       $ —        $ 4,585   

Mortgage-backed securities

     78,987         1,806         (11     80,782   

Corporate securities

     1,990         —           (67     1,923   

Equity securities

     640         458         —          1,098   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 86,068       $ 2,398       $ (78   $ 88,388   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011:

          

U.S. agency securities

   $ 5,496       $ 169       $ —        $ 5,665   

Mortgage-backed securities

     63,647         1,680         (15     65,312   

Corporate securities

     1,989         —           (217     1,772   

Equity securities

     640         415         —          1,055   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 71,772       $ 2,264       $ (232   $ 73,804   
  

 

 

    

 

 

    

 

 

   

 

 

 
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (In Thousands)  

S ECURITIES H ELD TO M ATURITY :

          

September 30, 2012:

          

State and municipal securities

   $ 47,273       $ 2,777       $ (237   $ 49,813   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 47,273       $ 2,777       $ (237   $ 49,813   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011:

          

State and municipal securities

   $ 34,972       $ 2,082       $ (415   $ 36,639   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 34,972       $ 2,082       $ (415   $ 36,639   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

9


The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2012 and December 31, 2011:

 

     Less than 12 Months      12 Months or More      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
    

(In Thousands)

 

September 30, 2012

                 

S ECURITIES A VAILABLE FOR S ALE :

                 

Corporate securities

   $ —         $ —         $ 1,423       $ 67       $ 1,423       $ 67   

Mortgage-backed securities

     3,559         11         —           —           3,559         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,559         11         1,423         67         4,982         78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity:

                 

State and municipal securities

     8,876         110         1,562         127         10,438         237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,435       $ 121       $ 2,985       $ 194       $ 15,420       $ 315   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                        
                        
     Less than 12 Months      12 Months or More      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (In Thousands)  

December 31, 2011

                 

Securities Available for Sale:

                 

Corporate securities

   $ 1,772       $ 217       $ —         $ —         $ 1,772       $ 217   

Mortgage-backed securities

     6,698         15         —           —           6,698         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     8,470         232         —           —           8,470         232   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities Held to Maturity:

                 

State and municipal securities

     1,045         19         3,185         396         4,230         415   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,515       $ 251       $ 3,185       $ 396       $ 12,700       $ 647   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2012, five mortgage-backed securities have unrealized losses. The aggregate depreciation from the Corporation’s amortized cost basis on these securities is 0.3%. In management’s opinion, these unrealized losses relate to changes in interest rates. The Corporation’s mortgage backed security portfolio consists of only government sponsored agencies, and contains no private label securities.

At September 30, 2012, thirty state and municipal securities have unrealized losses with aggregate depreciation of 2.2% from the Corporation’s amortized cost basis. In management’s opinion, these unrealized losses relate primarily to changes in interest rates. In analyzing the issuer’s financial condition, management considers the issuer’s bond rating as well as the financial performance of the respective municipality.

 

10


At September 30, 2012, three corporate securities have unrealized losses with aggregate depreciation of 4.5% from the Corporation’s amortized cost basis. In management’s opinion, these unrealized losses relate primarily to changes in interest rates. In analyzing the issuer’s financial condition, management considers the issuer’s bond rating as well as the financial performance of the respective company.

Gross realized gains and losses for the nine months ending September 30, 2012 and September 30, 2011 were as follows (in thousands):

 

     Gross
Realized
Gains
     Gross
Realized
Losses
     Net Gains
(Losses)
 

September 30, 2012:

        

Mortgage-backed securities

   $ 166       $ —         $ 166   
  

 

 

    

 

 

    

 

 

 
   $ 166       $ —         $ 166   
  

 

 

    

 

 

    

 

 

 

September 30, 2011:

        

Mortgage-backed securities

   $ 4       $ —         $ 4   

Equity Securities

     8         —           8   
  

 

 

    

 

 

    

 

 

 
   $ 12       $ —         $ 12   
  

 

 

    

 

 

    

 

 

 

 

11


Amortized cost and fair value at September 30, 2012 by contractual maturity are shown below. Municipal securities with prerefunded issues are included in the category in which payment is expected to occur. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

 

     Available for Sale      Held to Maturity  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 
     (In Thousands)  

1 year or less

   $ 1,000       $ 1,000       $ 2,326       $ 2,341   

Over 1 year through 5 years

     4,440         4,568         14,247         14,906   

Over 5 years through 10 years

     1,001         940         21,341         22,592   

Over 10 years

     —           —           9,359         9,974   

Mortgage-backed securities

     78,987         80,782         —           —     

Equity securities

     640         1,098         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 86,068       $ 88,388       $ 47,273       $ 49,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note G - Loans

Allowance for loan losses and loans receivable at September 30, 2012 and December 31, 2011 are as follows:

Allowance for Loan Losses:

 

     Commercial      Commercial
Real Estate
    Agricultural      Consumer     Residential
Real
Estate
    Total  
     (in Thousands)  

December 31, 2011 Total Allowance for loan losses

   $ 808       $ 1,082      $ 382       $ 86      $ 727      $ 3,085   

Provision

     101         41        47         16        2        207   

Charge-offs

     —           (530     —           (24     (9     (563

Recoveries

     —           55        —           6        —          61   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

September 30, 2012 Total Allowance for loan losses

   $ 909       $ 648      $ 429       $ 84      $ 720      $ 2,790   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance for loans individually evaluated for impairment

   $ 274       $ 157      $ 25       $ —        $ —        $ 456   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance for loans collectively evaluated for impairment

   $ 635       $ 491      $ 404       $ 84      $ 720      $ 2,334   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

12


Loans Receivable:

 

       Commercial     Commercial
Real Estate
     Agricultural     Consumer     Residential     Total  
     (in Thousands)  

September 30, 2012

             

Individually evaluated for impairment

   $ 274      $ 5,689       $ 433      $ —        $ 508      $ 6,904   

Collectively evaluated for impairment

     51,014        38,255         35,657        5,961        117,340        248,227   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   $ 51,288      $ 43,944       $ 36,090      $ 5,961      $ 117,848      $ 255,131   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Commercial     Commercial
Real Estate
     Agricultural     Consumer     Residential
Real Estate
    Total  
     (in Thousands)  

December 31, 2010 Total Allowance for loan losses

   $ 730      $ 630       $ —        $ 92      $ 702      $ 2,154   

Provision

     96        452         398        (5     41        982   

Charge-offs

     (18     —           (27     (4     (24     (73

Recoveries

     —          —           11        3        8        22   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011 Total Allowance for loan losses

   $ 808      $ 1,082       $ 382      $ 86      $ 727      $ 3,085   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance for loans individually evaluated for impairment

   $ 296      $ 670       $ —        $ —        $ —        $ 966   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance for loans collectively evaluated for impairment

   $ 512      $ 412       $ 382      $ 86      $ 727      $ 2,119   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     Commercial     Commercial
Real Estate
     Agricultural     Consumer     Residential     Total  
     (in Thousands)  

December 31, 2011

             

Individually evaluated for impairment

   $ 296      $ 4,477       $ 469      $ —        $ —        $ 5,242   

Collectively evaluated for impairment

     45,956        39,234         37,191        6,036        117,353        245,770   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   $ 46,252      $ 43,711       $ 37,660      $ 6,036      $ 117,353      $ 251,012   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

13


Analysis of credit quality indicators is as follows:

 

     Commercial     

Commercial

Real Estate

     Agricultural      Consumer      Residential      Total  
     (in Thousands)  

September 30, 2012

                 

Pass

   $ 49,545       $ 42,149       $ 29,776       $ 5,913       $ 115,509       $ 242,892   

Special Mention

     1,015         58         4,484         —           —           5,557   

Substandard

     429         1,737         1,830         48         2,339         6,383   

Doubtful

     299         —           —           —           —           299   

Loss

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,288       $ 43,944       $ 36,090       $ 5,961       $ 117,848       $ 255,131   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial     

Commercial

Real Estate

     Agricultural      Consumer      Residential      Total  
     (in Thousands)  

December 31, 2011

                 

Pass

   $ 45,330       $ 41,008       $ 34,865       $ 6023       $ 115,838       $ 243,064   

Special Mention

     553         780         2,326         11         509         4,179   

Substandard

     73         1,285         469         2         1,006         2,835   

Doubtful

     296         638         —           —           —           934   

Loss

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,252       $ 43,711       $ 37,660       $ 6,036       $ 117,353       $ 251,012   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


The following is a summary of impaired loans:

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (In Thousands)  

September 30, 2012

              

With no specific allowance needed

              

Commercial

   $ —         $ —         $ —         $ —         $ —     

Commercial real estate

     4,442         4,442         —           4,438         197   

Agricultural

     408         408         —           455         24   

Residential

     508         508         —           508         —     

With an allowance recorded

              

Commercial

     274         274         274         286         9   

Commercial real estate

     1,247         1,247         157         1,262         45   

Agricultural

     25         25         25         25         —     

Total

              

Commercial

     274         274         274         286         9   

Commercial real estate

     5,689         5,689         157         5,700         242   

Agricultural

     433         433         25         480         24   

Residential

     508         508         —           508         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,904       $ 6,904       $ 456       $ 6,974       $ 275   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (In Thousands)  

December 31, 2011

              

With no specific allowance needed

              

Commercial

   $ —         $ —         $ —         $ —         $ —     

Commercial real estate

     —           —           —           —           —     

Agricultural

     469         469         —           472         31   

With an allowance recorded

              

Commercial

     296         296         296         267         11   

Commercial real estate

     4,477         4,477         670         4,492         212   

Total

              

Commercial

     296         296         296         267         11   

Commercial real estate

     4,477         4,477         670         4,492         212   

Agricultural

     469         469         —           472         31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,242       $ 5,242       $ 966       $ 5,231       $ 254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Age analysis of past-due loans is as follows:

 

     30 – 59
Days
Past Due
     60 - 89
Days
Past Due
     > 90
Days
Past Due
     Total
Past Due
     Current      Total
Loans
     Allowance
For
Collectively
Impaired
Loans
     >90
Days
And

Still
Accruing
     Nonaccruals  
     (In Thousands)  

September 30, 2012

                          

Commercial

   $ 96       $ —         $ 25       $ 121       $ 51,167       $ 51,288       $  —         $ —         $ 613   

Commercial Real Estate

     —           —           —           —           43,944         43,944         —           —           3,055   

Agricultural

     —           —           11         11         36,079         36,090         —           —           169   

Residential

     416         74         1,021         1,511         116,337         117,848         —           —           1,506   

Consumer

     62         3         57         122         5,839         5,961         —           —           58   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 574       $ 77       $ 1,114       $ 1,765       $ 253,366       $ 255,131       $ —         $ —         $ 5,401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     30 – 59
Days
Past Due
     60 - 89
Days
Past Due
     > 90
Days
Past Due
     Total
Past Due
     Current      Total
Loans
     Allowance
For
Collectively
Impaired
Loans
     >90
Days
And

Still
Accruing
     Nonaccruals  
     (In Thousands)  

December, 31, 2011

                          

Commercial

   $ 121       $ 230       $ 7       $ 358       $ 45,894       $ 46,252       $ —         $ —         $ 7   

Commercial Real Estate

     133         130         34         297         43,414         43,711         —           —           100   

Agricultural

     177         —           —           177         37,483         37,660         —           —           —     

Residential

     831         249         101         1,181         116,172         117,353         —           —           528   

Consumer

     58         7         1         66         5,970         6,036         —           —           9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,320       $ 616       $ 143       $ 2,079       $ 248,933       $ 251,012       $ —         $ —         $ 644   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of Troubled Debt Restructurings:

 

     Three Months Ended September 30, 2012      Nine Months Ended September 30, 2012  
     Number
of
contracts
     Pre-
Modification
Outstanding
Recorded

Investment
     Post-
Modification

Outstanding
Recorded

Investment
     Number
of
contracts
     Pre-
Modification
Outstanding
Recorded

Investment
     Post-
Modification

Outstanding
Recorded

Investment
 

Troubled Debt Restructurings

                 

Commercial - Mortgage

     4       $ 1,528       $ 1,528         8       $ 6,244       $ 6,244   

Troubled Debt Restructurings that Subsequently Defaulted

     0       $ 0       $ 0         0       $ 0       $ 0   

No additional funds are committed to be advanced in connection with any loans whose terms have been modified in troubled debt restructurings.

 

16


N OTE H - F AIR V ALUE OF F INANCIAL I NSTRUMENTS

Management uses its best judgment in estimating the fair value of the Corporation’s consolidated financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Bank could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

ASC Topic 820, Fair Value Measurements and Disclosure , which defines fair value, establishes a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and applies to other accounting pronouncements that require or permit fair value measurements. The Bank adopted Fair Value Measurements effective for its fiscal year beginning January 1, 2008.

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The Topic also includes guidance on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

ASC Topic 820 clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. This Topic provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

 

17


Fair value measurement and disclosure establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 : Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following describes the valuation techniques used by the Corporation to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or transferability, and such adjustments are generally based on available market evidence (Level 3). The value of restricted Federal Reserve Bank stock, FHLB stock and Atlantic Central Bankers Bank stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

 

18


For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2012 and December 31, 2011 are as follows (in thousands):

 

Description

   September 30,
2012
     (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
     (Level 2)
Significant Other
Observable
Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

U. S. agency securities

   $ 4,585       $ —         $ 4,585       $ —     

Mortgage-backed securities

     80,782         —           80,782         —     

Corporate securities

     1,923         —           1,923         —     

Equity securities

     1,098         467         —           631   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities available for sale

   $ 88,388       $ 467       $ 87,290       $ 631   
  

 

 

    

 

 

    

 

 

    

 

 

 

Description

   December 31,
2011
     (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
     (Level 2)
Significant Other
Observable

Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

U. S. agency securities

   $ 5,665       $ —         $ 5,665       $ —     

Mortgage-backed securities

     65,312         —           65,312         —     

Corporate securities

     1,772         —           1,772         —     

Equity securities

     1,055         460         —           595   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities available for sale

   $ 73,804       $ 460       $ 72,749       $ 595   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


The table below presents a reconciliation and income statement of gains and losses for available for sale securities measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the periods ending September 30, 2012 and December 31, 2011 (in thousands).

 

         2012              2011      

Fair Value, beginning of period

   $ 595       $ 589   

Total gains (losses) included in other comprehensive income

     36         6   

Purchases

     0         —     
  

 

 

    

 

 

 

Fair Value, end of period

   $ 631       $ 595   
  

 

 

    

 

 

 

The following describes the valuation techniques used by the Corporation to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Corporation using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Certain assets such as real estate owned are measured at fair value less the cost to sell. Management believes that the fair value component in its valuation follows the provisions of ASC 820.

 

20


Assets measured at fair value on a non-recurring basis at September 30, 2012 and December 31, 2011 are summarized below: (in thousands)

 

Description    September 30,
2012
     (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Impaired loans, net

   $ 6,448       $ —         $ —         $ 6,448   

Foreclosed real estate

     187         —           —           187   
Description    December 31,
2011
     (Level 1)
Quoted Prices in
Active Markets
for Identical
Assets
     (Level 2)
Significant
Other
Observable
Inputs
     (Level 3)
Significant
Unobservable
Inputs
 

Impaired loans, net

   $ 4,276       $ —         $ —         $ 4,276   

Foreclosed real estate

     358         —           —           358   

Total impaired loans had a carrying amount of $6,904,000 and $5,242,000, net of the valuation allowances of $456,000 and $966,000, as of September 30, 2012 and December 31, 2011, respectively. This resulted in additional provision for loan losses of $46,000 for the period ending September 30, 2012 and $803,000 for the period ending December 31, 2011.

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2012.

 

     Quantitative information about Level 3 fair value measurements for September 30, 2012
     Fair Value     

Valuation Techniques

  

Unobservable Input

Securities available for sale

   $ 631       Last sale price    —  

Impaired loans

   $ 6,448      

Discounted cash flow

Discounted appraised value

   Constant prepayment rate, selling cost and discount for lack of marketability

Other real estate owned

   $ 187       Discounted appraised value    Selling cost and discount for lack of marketability

ASC Topic 825, Financial Instruments , requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements.

 

21


The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at September 30, 2012 and December 31, 2011.

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Time certificates of deposit:

The carrying amount of time certificates of deposit approximate their fair value.

Securities:

For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair values are based on quoted market prices for similar securities. For securities which are not traded in active markets or are subject to transfer restrictions, valuations are generally based on available market evidence.

Loans receivable:

For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values of fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Restricted investment in bank stock:

The carrying amount of restricted investment in bank stock approximates fair value.

 

22


Accrued interest receivable and payable:

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

Life insurance:

The carrying amount of life insurance contracts is assumed to be a reasonable fair value. Life insurance contracts are carried on the balance sheet at their redemption value. This redemption value is based on existing market conditions and therefore represents the fair value of the contract.

Deposit liabilities:

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings:

The carrying amounts of short-term borrowings approximate their fair values.

Long-term debt:

Fair values of long-term debt are estimated using discounted cash flow analysis, based on rates currently available to the Corporation for advances from the FHLB with similar terms and remaining maturities.

Junior Subordinated debt:

Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on rates currently offered on such debt, with similar terms and remaining maturities. As the Corporation has the ability to redeem the junior subordinated debt at any time, the fair value approximates its carrying value.

Off-balance sheet financial instruments:

Fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

23


The estimated fair values of the Corporation’s financial instruments were as follows at September 30, 2012 and December 31, 2011.

 

     September 30, 2012  
     Carrying
Amount
     Fair
Value
     Level 1      Level 2      Level 3  
     (In Thousands)  

Financial assets:

              

Cash and cash equivalents

   $ 15,130       $ 15,130       $ 15,130       $ —         $ —     

Time certificates of deposit

     198         198         198         —           —     

Investment securities:

              

Available for sale

     88,388         88,388         467         87,290         631   

Held to maturity

     47,273         49,813         —           49,813         —     

Loans, net

     252,140         253,624         —           —           253,624   

Accrued interest receivable

     1,504         1,504         1,504         —           —     

Investment in life insurance

     7,588         7,588         —           7,588         —     

Restricted investment in bank stocks

     1,787         1,787         —           1,787         —     

Mortgage servicing rights

     503         503         —           503         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 414,511       $ 418,535       $ 17,299       $ 146,981       $ 254,255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

              

Deposits

   $ 364,803       $ 370,467       $ —         $ 370,467       $ —     

Short-term borrowings

     3,064         3,064         —           3,064         —     

Long-term debt

     15,000         16,731         —           16,731         —     

Junior subordinated debt

     5,155         5,155         —           —           5,155   

Accrued interest payable

     294         294         294         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 388,316       $ 395,711       $ 294       $ 390,262       $ 5,155   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-balance sheet financial instruments

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


     December 31, 2011  
     Carrying
Amount
     Fair
Value
 

Financial assets:

     

Cash and cash equivalents

   $ 9,938       $ 9,938   

Time certificates of deposit

     198         198   

Investment securities:

     

Available for sale

     73,804         73,804   

Held to maturity

     34,972         36,639   

Loans, net

     247,703         250,707   

Accrued interest receivable

     1,417         1,417   

Investment in life insurance

     7,399         7,399   

Restricted investment in bank stocks

     2,121         2,121   

Mortgage servicing rights

     355         355   
  

 

 

    

 

 

 

Total financial assets

   $ 377,907       $ 382,578   
  

 

 

    

 

 

 

Financial liabilities:

     

Deposits

   $ 330,549       $ 335,041   

Short-term borrowings

     2,685         2,685   

Long-term debt

     15,000         16,799   

Junior subordinated debt

     5,155         5,155   

Accrued interest payable

     298         298   
  

 

 

    

 

 

 

Total financial liabilities

   $ 353,687       $ 359,978   
  

 

 

    

 

 

 

Off-balance sheet financial instruments

   $ —         $ —     
  

 

 

    

 

 

 

Note H – New and Recently Adopted Accounting Pronouncements

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption was not permitted. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

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.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB)

 

25


to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application was not permitted. The Corporation has included the required disclosures in its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. 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. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. 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 all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption was permitted because compliance with the amendments was already permitted. The amendments do not require transition disclosures. The Corporation has included the required disclosures in its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not

 

26


required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period had not yet been issued. The adoption of the new guidance did not have a material impact on the Corporation’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Corporation does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated 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.” The amendments are being made to allow the Board time to re-deliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, 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. The Corporation has included the required disclosures in its consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment.” The objective of this amendment is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how

 

27


an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived tangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Previous guidance in Subtopic 350-30 required an entity to test indefinite-lived intangible assets for impairment, on at least an annual basis, by comparing the fair value of the asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an entity should recognize an impairment loss in the amount of that excess. In accordance with the amendments in this ASU, an entity will have an option not to calculate annually the fair value of an indefinite-lived intangible asset if the entity determines that it is not more likely than not that an asset is impaired. Permitting an entity to assess qualitative factors when testing indefinite-lived intangible assets for impairment results in guidance that is similar to the goodwill impairment testing guidance in ASU 2011-08. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Corporation does not expect the adoption of ASU 2012-02 to have a material impact on its consolidated financial statements.

In October 2012, the FASB issued ASU 2012-06, “Business Combinations (Topic 805): Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.” The amendments in this ASU clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. In addition, the amendments should resolve current diversity in practice on the subsequent measurement of these types of indemnification assets. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The Corporation does not expect the adoption of ASU 2012-06 to have a material impact on its consolidated financial statements.

 

28


Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Except for historical information, this report may be deemed to contain “forward-looking” statements regarding the Corporation. Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure and other financial terms, (b) statements of plans and objectives of management or the board of directors, and (c) statements of assumptions, such as economic conditions in the Corporation’s market areas. Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.

No assurance can be given that the future results covered by forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could impact the Corporation’s operating results include, but are not limited to, (i) the effects of changing economic conditions in the Corporation’s market areas and nationally, (ii) credit risks of commercial, real estate, consumer and other lending activities, (iii) significant changes in interest rates, (iv) changes in federal and state banking laws and regulations which could impact the Corporation’s operations, (v) funding costs, and (vi) other external developments which could materially affect the Corporation’s business and operations.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the Corporation to make estimates and assumptions (see footnote 1 to the consolidated financial statements included in Form 10-K for the year ended December 31, 2011). The Corporation believes that of its significant accounting estimates, the allowance for loan losses and valuation of its securities may involve a higher degree of judgement and complexity.

 

29


The allowance for loan losses is established through a charge to the provision for loan losses. In determining the balance in the allowance for loan losses, consideration is given to a variety of factors in establishing this estimate. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and managerial strengths, the adequacy of the underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. The use of different estimates or assumptions could produce different provisions for loan losses. Additional information is provided in the discussion below about the provision for loan losses under “Results of Operations”.

Declines in the fair value of securities held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses if the impairment is due to credit concerns; if the impairment is due to other conditions the losses are recognized through other comprehensive income. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. No securities were deemed to be other than temporarily impaired as of September 30, 2012.

Financial Condition

Total assets of the Corporation increased $37,408,000, or 9.6%, during the first nine months of 2012. Net loans increased $4,437,000, or 1.8%, cash and cash equivalents increased $5,192,000, or 52.2%, and securities increased $26,885,000, or 24.7%, from December 31, 2011 to September 30, 2012.

Total deposits increased by $34,254,000, or 10.4%, since year-end 2011. Short-term borrowings increased by $379,000, or 14.1%.

Non-Performing Assets

Non-performing assets include loans on a non-accrual basis, loans past due more than ninety days and still accruing, troubled debt restructurings and foreclosed real estate. These groups of assets represent the asset categories posing the greatest risk of loss to the Corporation. Non-accruing loans are loans no longer accruing interest due to apparent financial difficulties of the borrower. The Corporation generally discontinues accrual of interest when principal or interest becomes doubtful based on prevailing economic conditions and collection efforts. Loans are returned to accrual status only when all factors indicating doubtful collectibility cease to exist. Foreclosed real estate is acquired through foreclosure or in lieu of foreclosure and is recorded at fair value less costs to dispose at the date of foreclosure establishing a new cost basis. Gains on the sale of foreclosed real estate are included in other income, while losses and writedowns resulting from periodic revaluations are included in other expenses.

 

30


The following table sets forth the Corporation’s non-performing assets as of the dates indicated:

Non-Performing Assets

(Dollars in Thousands)

 

      

9/30/2012

    12/31/2011  

Non-accrual loans

   $ 5,401      $ 644   

Accruing loans 90 days past due

     —          —     
  

 

 

   

 

 

 

Total Non-Performing Loans

     5,401        644   

Foreclosed real estate

     187        358   
  

 

 

   

 

 

 

Total Non-Performing Assets

   $ 5,588      $ 1,002   
  

 

 

   

 

 

 

Troubled debt restructurings still accruing

   $ 2,775      $ 4,477   
  

 

 

   

 

 

 

Other impaired loans still accruing

   $ —        $ 765   
  

 

 

   

 

 

 

Ratios:

    

Non-performing loans to total loans

     2.12     0.26

Non-performing assets to total loans and foreclosed real estate

     2.19     0.40

Non-performing loans to allowance for loan losses

     193.58     20.88

Total non-performing assets at September 30, 2012 increased $4,586,000 since December 31, 2011 as a result of the increase in loans in non-accrual status and the decrease in foreclosed real estate. Non-accrual loans increased $4,757,000, primarily due to the addition of three commercial real estate and one residential real estate loan relationship, of which $2,554,000 are guaranteed by a U.S. government agency.

Results of Operations

Net income for the nine months ending September 30, 2012 was $3,495,000, or $2.48 per share, compared to $3,172,000, or $2.26 per share, for the same period in 2011. Annualized return on average equity was 14.22% for the first nine months of 2012 and 14.35% for the same period in 2011. Annualized return on average assets was 1.15% for the first nine months of 2012 and 1.13% for the same period in 2011.

 

31


Net income for the quarter ending September 30, 2012 was $1,136,000, or $0.81 per share, compared to $1,090,000, or $0.78 per share, for the same period in 2011. Annualized return on average equity was 13.39% for the third quarter of 2012 and 14.15% for the same period in 2011. Annualized return on average assets was 1.08% for the third quarter of 2012 and 1.15% for the same period in 2011.

The following tables include average balances for the nine months ended September 30, 2012 and September 30, 2011 and quarters ending September 30, 2012 and September 30, 2011, rates and interest income and expense adjusted to an FTE basis, the interest rate spread, the net interest margin and the cost of funds:

Average Balances, Rates and Interest Income and Expense

(Dollars in Thousands)

(Nine Months ended September 30)

 

     2012     2011  
     Average
Balance
     Interest      Yield/
Rate
    Average
Balance
     Interest      Yield/
Rate
 

A SSETS

                

I NTEREST E ARNING A SSETS

                

Securities:

                

Taxable

   $ 78,166       $ 1,492         2.55   $ 71,268       $ 1,687         3.16

Tax-exempt

     39,803         1,733         5.82     32,578         1,564         6.42
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Securities

     117,969         3,225         3.65     103,846         3,251         4.19
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Other

     8,554         30         0.47     5,357         23         0.57

Loans:

                

Taxable

     234,650         10,487         5.97     227,763         10,629         6.24

Tax-exempt

     15,523         683         5.88     11,696         550         6.29
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Loans

     250,173         11,170         5.96     239,459         11,179         6.24
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Interest Earning Assets

     376,696         14,425         5.12     348,662         14,453         5.54
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Non-interest earnings assets

     29,906              26,368         
  

 

 

         

 

 

       

Total Assets

   $ 406,602            $ 375,030         
  

 

 

         

 

 

       

L IABILITIES AND S HAREHOLDERS ’ E QUITY

  

I NTEREST B EARING L IABILITIES

                

Demand deposits, interest bearing

   $ 33,122       $ 60         0.24   $ 27,562       $ 33         0.16

Savings deposits

     117,911         694         0.79     103,043         687         0.89

Time deposits

     160,494         2,775         2.31     156,669         3,087         2.63
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Interest Bearing Deposits

     311,527         3,529         1.51     287,274         3,807         1.77

Short-term borrowings

     2,869         28         1.30     3,260         29         1.19

Long-term debt

     20,155         594         3.94     20,452         595         3.89
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Interest Bearing Liabilities

     334,551         4,151         1.66     310,986         4,431         1.90
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Demand deposits, non-interest bearing

     36,368              31,671         

Other liabilities

     2,857              2,811         

Shareholders’ equity

     32,826              29,562         
  

 

 

         

 

 

       

Total Liabilities and Shareholders’ Equity

   $ 406,602            $ 375,030         
  

 

 

         

 

 

       

N ET I NTEREST I NCOME

      $ 10,274            $ 10,022      
     

 

 

         

 

 

    

I NTEREST R ATE S PREAD

           3.46           3.64
        

 

 

         

 

 

 

N ET I NTEREST M ARGIN

           3.64           3.84
        

 

 

         

 

 

 

C OST OF F UNDS

           1.48           1.70
        

 

 

         

 

 

 

 

32


Rate / Volume Analysis

Nine Months Ended September 30

2012 versus 2011

 

     Change Due to        
     Rate     Volume     Total  

Interest Earning Assets

      

Securities

      

Taxable

   $ (327   $ 132      $ (195

Tax exempt

     (145     314        169   

Other

     4        3        7   

Total loans

     (485     476        (9
  

 

 

   

 

 

   

 

 

 

Total

     (953     925        (28
  

 

 

   

 

 

   

 

 

 

Interest Bearing Liabilities

      

Demand deposits interest

     17        10        27   

Savings deposits

     (80     87        7   

Time deposits

     (378     66        312   

Short – term borrowings

     3        (4     (1

Long – term debt

     8        (9     (1
  

 

 

   

 

 

   

 

 

 

Total

     (430     150        (280
  

 

 

   

 

 

   

 

 

 

Net Interest Income

   $ (523   $ 775      $ 252   
  

 

 

   

 

 

   

 

 

 

Net interest income for the first nine months of 2012 increased by $ 150,000, or 1.6%, compared to the same period in 2011. The reasons for the increase in net interest income were an increase in interest earning assets partially offset by a decrease in net interest margin. For the first nine months of 2012, the net interest margin on a fully tax equivalent (FTE) basis was 3.64% compared to 3.84% for the same period in 2011. The FTE basis is calculated by grossing up the yield on tax-exempt securities and loans by the federal tax rate of 34%, in order that the yield on tax-exempt assets may be comparable to interest earned on taxable assets. The primary driver of the decrease in the net interest margin was the decrease in the cost of funds of 0.22% from 1.70% during the first nine months of 2011 to 1.48% during the same period in 2012, which was more than offset by a decrease in the yield on earning assets of 0.42% from 5.54% in 2011 to 5.12% in 2012.

 

33


Average Balances, Rates and Interest Income and Expense

(Dollars in Thousands)

(Three Months ended September 30)

 

     2012     2011  
     Average
Balance
     Interest      Yield/
Rate
    Average
Balance
     Interest      Yield/
Rate
 

A SSETS

                

I NTEREST E ARNING A SSETS

                

Securities:

                

Taxable

   $ 83,418       $ 484         2.31   $ 70,971       $ 573         3.20

Tax-exempt

     44,135         610         5.5     33,480         535         6.34
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Securities

     127,553         1,094         3.41     104,451         1,108         4.21
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Other

     10,308         12         0.46     4,420         7         0.63

Loans:

                

Taxable

     235,199         3,499         5.92     228,828         3,585         6.22

Tax-exempt

     15,773         230         5.80     12,764         202         6.28
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Loans

     250,972         3,729         5.91     241,592         3,787         6.22
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Interest Earning Assets

     388,833         4,835         4.95     350,463         4,902         5.55
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Non-interest earnings assets

     30,544              26,997         
  

 

 

         

 

 

       

Total Assets

   $ 419,377            $ 377,460         
  

 

 

         

 

 

       

L IABILITIES AND S HAREHOLDERS ’ E QUITY

                

I NTEREST B EARING L IABILITIES

                

Demand deposits, interest bearing

   $ 39,376       $ 31         0.31   $ 28,199       $ 11         0.15

Savings deposits

     119,725         197         0.65     107,394         241         0.89

Time deposits

     161,911         930         2.29     152,633         934         2.43
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Interest Bearing Deposits

     321,012         1,158         1.44     288,226         1,186         1.63

Short-term borrowings

     2,995         9         1.20     3,065         10         1.29

Long-term debt

     20,155         199         3.93     20,155         197         3.88
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Interest Bearing Liabilities

     344,162         1,366         1.58     311,446         1,393         1.77
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Demand deposits, non-interest bearing

     38,537              32,494         

Other liabilities

     2,936              2,962         

Shareholders’ equity

     33,742              30,558         
  

 

 

         

 

 

       

Total Liabilities and Shareholders’ Equity

   $ 419,377            $ 377,460         
  

 

 

         

 

 

       

N ET I NTEREST I NCOME

      $ 3,469            $ 3,509      
     

 

 

         

 

 

    

I NTEREST R ATE S PREAD

           3.37           3.77
        

 

 

         

 

 

 

N ET I NTEREST M ARGIN

           3.55           3.97
        

 

 

         

 

 

 

C OST OF F UNDS

           1.40           1.58
        

 

 

         

 

 

 

 

34


Rate / Volume Analysis

Three Months ended September 30

2012 versus 2011

 

     Change Due to         
     Rate     Volume      Total  

Interest Earning Assets

       

Securities

       

Taxable

   $ (161   $ 72       $ (89

Tax exempt

     (72     147         75   

Other

     4        1         5   

Total loans

     (197     139         (58
  

 

 

   

 

 

    

 

 

 

Total

     (426     359         (67
  

 

 

   

 

 

    

 

 

 

Interest Bearing Liabilities

       

Demand deposits interest

     12        8         20   

Savings deposits

     (65     21         (44

Time deposits

     (58     54         (4

Short – term borrowings

     (1     —           (1

Long – term debt

     2        —           2   
  

 

 

   

 

 

    

 

 

 

Total

     (110     83         (27
  

 

 

   

 

 

    

 

 

 

Net Interest Income

   $ (316   $ 276       $ (40
  

 

 

   

 

 

    

 

 

 

Net interest income for the quarter ended September 30, 2012 decreased by $75,000 compared to the same period in 2011. Net interest margin for the quarter ended September 30, 2012 was 3.55% compared to 3.97% during the same period in 2011. The decrease in the yield on earning assets from 5.55% for the three months ending September 30, 2011 to 4.95% for the same period in 2012 was offset by the decrease in the cost of funds from 1.58% during 2011 to 1.40% during 2012.

 

35


Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. The Corporation recorded a provision for loan losses of $207,000 for the first nine months of 2012 compared to $454,000 for the same time period in 2011. As a percentage of loans, the allowance for loan losses was 1.09% at September 30, 2012, compared to 1.23% at year-end 2011 and 1.04% at September 30, 2011. Impaired loans were $6,904,000 at September 30, 2012 compared to $5,242,000 at December 31, 2011. The increase in impaired loans is due to the addition of other commercial real estate loans partially offset by the charge-off of $507,000. At this time, no losses in excess of valuation allowance are anticipated. The Corporation’s evaluation of the adequacy of the allowance for loan losses includes a review of all loans on at least a quarterly basis. For residential mortgage loans and consumer loans, the primary factors used to determine the adequacy of the allowance are delinquency, collateral value, general economic conditions and, where applicable, individual borrower information that is known to the Bank. For commercial loans and commercial real estate loans, the review includes financial performance of the borrower, payment history, collateral value, general economic conditions and more specific economic conditions affecting specific industries or business activities of the borrowers within the portfolio agreements. Management believes the allowance is presently adequate to cover the inherent risks associated with the Corporation’s loan portfolio.

Non-interest income in the first nine months of 2012 increased by $297,000 or 13.8% compared to the same period in 2011. Securities gains increased by $154,000 and other income increased by $197,000, primarily due to an increase in mortgage servicing fees. These increases were offset by a decrease in income from fiduciary activities of $39,000, and a decrease in earnings on investment life insurance of $33,000 during the first nine months of 2012 compared to the same period in 2011.

Non-interest income for the quarter ending September 30, 2012 was $788,000 compared to $738,000 in 2011. This increase is primarily related to the increase in securities gains of $68,000 and the increase in other income of $38,000 due to an increase in mortgage servicing fees, partially offset by a decrease in income from fiduciary activities of $22,000.

Total non-interest expense increased in the first nine months of 2012 by $297,000 compared to the first nine months of 2011. Employee compensation and benefits increased $262,000 in the first nine months of 2012 compared to 2011. The increase in salaries and wages is the result of merit increases as well as additional staff positions added decreased $23,000. The decrease in FDIC/OCC expense is due to the change in the to support recent loan and deposit growth. The FDIC/OCC expense assessment base in the second quarter of 2011. Net occupancy expense increased $88,000 primarily because of the opening of

 

36


our Newport office. As the Corporation continues to add new loan and deposit accounts, as well as new services, additional operating costs will be generated. Over time it is anticipated these costs will be offset by the additional income generated through the expansion of services to our customers and community and new business development.

During the quarter ending September 30, 2012, total non-interest expense increased $142,000 compared to the third quarter of 2011. The primary reasons for this increase were the increase in salaries and wages of $103,000 and an increase in net occupancy and equipment of $36,000. These increases were offset by a decrease in professional fees of $9,000 and a decrease in ATM expense of $15,000.

Income tax expense was $935,000 for the nine month time period ending September 30, 2012 compared to $861,000 for the same time period in 2011. Income tax expense as a percentage of income before income taxes was 21.1% for the period compared to 21.3% for 2011. The reason for the decrease in the effective tax rate is tax-exempt income as a percentage of income before taxes was higher in 2012 than 2011. The decrease in the Corporation’s effective tax rate below the statutory rate of 34.0% is a result of tax-exempt income on loans, securities and bank-owned life insurance.

Income tax expense was $284,000 for the three month time period ending September 30, 2012 compared to $290,000 for the same time period in 2011. Income tax expense as a percentage of income before income taxes was 20.0% for the period compared to 21.0% for 2011. The reason for the decrease in the effective tax rate is tax-exempt income as a percentage of income before taxes was higher during the quarter in 2012 than 2011.

Liquidity

Liquidity represents the Corporation’s ability to efficiently manage cash flows to support customers’ loan demand, withdrawals by depositors, the payment of operating expenses, as well as the ability to take advantage of business and investment opportunities as they arise. One of the Corporation’s sources of liquidity is $364,803,000 in deposits at September 30, 2012, which increased $34,254,000 over total deposits of $330,549,000 at year-end 2011. Other sources of liquidity at September 30, 2012 are available from the following: (1) investments in interest-bearing deposits with banks and federal funds sold, which totaled $5,175,000, (2) securities maturing in one year or less, which totaled $3,326,000, and (3) investments in mortgage-backed securities, which supply income and principal cash flow streams on an ongoing basis. In addition, the Corporation has established federal funds lines of credit with Atlantic Central Bankers Bank and with the Federal Home Loan Bank of Pittsburgh, which can be drawn upon if needed as a source of liquidity. Management is of the opinion that the Corporation’s liquidity is sufficient to meet its anticipated needs.

 

37


Capital

Total shareholders’ equity was $34,367,000 as of September 30, 2012, representing a $2,929,000 increase from December 31, 2011. The growth in capital was a result of net earnings retention of $2,628,000, an increase in accumulated other comprehensive income of $187,000 and an increase in common stock and surplus of $114,000 as a result of the Corporation’s dividend reinvestment plan. The increase in other comprehensive income is due to the increase in value of the Corporation’s available for sale securities.

At September 30, 2012, the Bank had a Tier I leverage ratio of 8.88%, a Tier I capital to risk-based assets ratio of 17.99% and a total capital to risk-based assets ratio of 19.24%. These ratios indicate the Bank exceeds the federal regulatory minimum requirements for a “well capitalized bank”. The Corporation’s ratios are not materially different than those of the Bank.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

(Not required of a smaller reporting company)

 

Item 4. Controls and Procedures

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. The Corporation’s President & CEO (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012. Based upon that evaluation, our President & CEO and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting management to information required to be included in our periodic Securities and Exchange Commission filings. There was no significant change in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

38


PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

There are no pending or threatened legal proceedings to which the Corporation or its subsidiaries is a party or to which the property of either the Corporation or its subsidiaries is subject to that, in the opinion of management, may materially impact the financial condition of either the Corporation or its subsidiaries.

 

Item 1A. Risk Factors

(Not required of a smaller reporting company)

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

  (a) On January 8, 2008, the Board of Directors of the Corporation authorized a stock repurchase program pursuant to which the Corporation is authorized to purchase up to 7.1% of its outstanding shares or 100,000 shares. Share repurchases will be made from time to time and may be effected through open market purchases, block trades, or in privately negotiated transactions.

 

  (b) The table below sets forth the information with respect to purchases made by or on behalf of the Corporation or any affiliated purchaser as defined in Rule 240-10b-18(a) (3) under Regulation S-K of common stock during the quarter ended September 30, 2012.

 

    Total
Number

of Shares
Purchased
    Average
Price
Paid

Per Share
    Total Number of
Shares  Purchased as
Part

of a Publicly
Announced Plan or
Program
    Maximum Number of Shares
That  May Yet be Purchased Under
the Plan or Program
 

July 1 through July 31

    0      $ 0.00        0        96,344   

August 1 through August 31

    0      $ 0.00        0        96,344   

September 1 through September 30

    0      $ 0.00        0        96,344   
 

 

 

     

 

 

   

Total for the period

    0          0     
 

 

 

     

 

 

   

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. Mine Safety Disclosures

Not Applicable

 

Item 5. Other Information

None

 

39


Item 6. Exhibits

 

Exhibit

  

Title

    3.1    Articles of Incorporation of the Corporation. (Incorporated by reference to Exhibit 2(a) to the Corporation’s December 31, 2001 Registration Statement on Form 10-SB, as filed with the Securities and Exchange Commission on April 17, 2002.)
    3.2    Bylaws of the Corporation. (Incorporated by reference to Exhibit 2(b) to the Corporation’s Registration Statement on Form 10-SB, as filed with the Securities and Exchange Commission on April 17, 2002.)
    4.1    Certain instruments defining the rights of the holders of long-term debt of the Corporation and certain of its Subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Corporation and its Subsidiaries on a consolidated basis, have not been filed as Exhibits in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Corporation hereby agrees to furnish a copy of any of these instruments to the Commission upon request.
  31.1    Certification of Principal Executive Officer of First Community Financial Corporation Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).
  31.2    Certification of Principal Financial Officer of First Community Financial Corporation Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).
  32.1    Certification of Principal Executive Officer of First Community Financial Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Principal Financial Officer of First Community Financial Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    Interactive Data File - Furnished * herewith.

 

These interactive data files shall not be deemed filed for the purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange act of 1934, as amended, or otherwise subject to liability under these sections.

 

40


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FIRST COMMUNITY FINANCIAL CORPORATION                     
      (Registrant)
Date: November 13, 2012       BY:  

/s/ Scott E. Fritz

        Scott E. Fritz
        President & Chief Executive Officer
        (Principal Executive Officer)
Date: November 13, 2012     BY:  

/s/ Richard R. Leitzel

      Richard R. Leitzel
      Vice President and
      Chief Financial Officer
      (Principal Financial and
      Accounting Officer)

 

41


Exhibit Index

 

Exhibit

  

Title

    3.1    Articles of Incorporation of the Corporation. (Incorporated by reference to Exhibit 2(a) to the Corporation’s December 31, 2001 Registration Statement on Form 10-SB, as filed with the Securities and Exchange Commission on April 17, 2002.)
    3.2    Bylaws of the Corporation. (Incorporated by reference to Exhibit 2(b) to the Corporation’s Registration Statement on Form 10-SB, as filed with the Securities and Exchange Commission on April 17, 2002.)
    4.1    Certain instruments defining the rights of the holders of long-term debt of the Corporation and certain of its Subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Corporation and its Subsidiaries on a consolidated basis, have not been filed as Exhibits in accordance with Item 601(b)(4)(iii) of Regulation S-K. The Corporation hereby agrees to furnish a copy of any of these instruments to the Commission upon request.
  31.1    Certification of Principal Executive Officer of First Community Financial Corporation Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).
  31.2    Certification of Principal Financial Officer of First Community Financial Corporation Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).
  32.1    Certification of Principal Executive Officer of First Community Financial Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Principal Financial Officer of First Community Financial Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    Interactive Data File - Furnished * herewith.

 

These interactive data files shall not be deemed filed for the purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange act of 1934, as amended, or otherwise subject to liability under these sections.

 

42

First Community Financial (PK) (USOTC:FMFP)
Gráfica de Acción Histórica
De Jun 2024 a Jul 2024 Haga Click aquí para más Gráficas First Community Financial (PK).
First Community Financial (PK) (USOTC:FMFP)
Gráfica de Acción Histórica
De Jul 2023 a Jul 2024 Haga Click aquí para más Gráficas First Community Financial (PK).