NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of Southern
Michigan Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Southern Michigan Bank & Trust (SMB&T), after elimination of significant inter-company balances and transactions. SMB&T owns FNB Financial Services, which
conducts a brokerage business and is consolidated into SMB&Ts financial statements. During 2004, the Company formed a special purpose trust, Southern Michigan Bancorp Capital Trust I, for the sole purpose of issuing trust preferred
securities. Under accounting principles generally accepted in the United States of America, the trust is not consolidated into the financial statements of the Company.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions for Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading 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 accompanying consolidated
financial statements should be read in conjunction with the consolidated financial statements and related footnotes of the Company for December 31, 2011 included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2011, filed with the Securities and Exchange Commission on March 30, 2012.
Loans:
Loans are reported at the principal balance outstanding, net of unearned interest,
deferred loan fees and costs, and an allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan
repayment is in doubt, typically when payments are past due over 90 days, unless the loan is both well secured and in the process of collection. Past due status is based on the contractual terms of the loan. All interest accrued but not received for
these loans is reversed against interest income. Payments received on such loans are reported as principal reductions until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest contractually due
are brought current and future payments are reasonably assured.
Allowance for Loan Losses:
The allowance for loan losses is a
valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly,
management estimates the allowance balance based on past loan loss experience, nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, information in regulatory
examination reports, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged-off. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
Consumer loans are typically charged-off no later than 120 days past due. Real estate mortgage loans in the process of collection are charged-off on or
before they become 365 days past due. Commercial loans are charged-off promptly upon the determination that all or a portion of any loan balance is uncollectible. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date
if collection of principal or interest is considered doubtful.
8
Impaired Loans:
Loan impairment is reported when full payment under the loan terms
is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loans effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more, or when it is probable that all principal and interest amounts will not be collected according to the contractual terms of the loan. Loans for which the terms have been
modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired. All nonaccrual loans have also been determined by the Company to meet the definition of an
impaired loan.
Reclassifications
Certain 2011 items have been reclassified to conform to the 2012 presentation.
NOTE B NEW ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards:
In May 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-04
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs.
The amendments in ASU 2011-04 generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing
information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The
amendments in ASU 2011-04 are to be applied prospectively. ASU 2011-04 was adopted effective January 1, 2012, but did not have any impact on the Companys financial position or results of operations.
In June 2011, FASB issued ASU No. 2011-05
Amendments to Topic 220, Comprehensive Income.
Under the amendments in ASU 2011-05, an entity has
the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.
Either option requires the entity to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU
2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments in ASU 2011-05 do not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net income.
The Company adopted ASU 2011-05 for
the first quarter of 2012 and elected to present the components of other comprehensive income in a separate statement. The adoption of ASU 2011-05 did not have any impact on the Companys financial condition or results of operations.
In September 2011, FASB issued ASU 2011-08,
Intangibles Goodwill and Other (Topic 350) Testing Goodwill for Impairment
. The
amendments in ASU 2011-08 gives the entity the option of first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after the assessment, the entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is
unnecessary. The amendments in ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will consider the provisions of ASU 2011-08 when performing
annual goodwill and other intangible asset impairment testing later in 2012.
In December 2011, FASB issued ASU 2011-11,
Disclosures about
Offsetting Assets and Liabilities
, amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effects of those arrangements on its
financial position. ASU 2011-11 is effective for annual and interim periods beginning on or after January 1, 2013. The Company has not yet determined what, if any, financial statement impact the adoption of ASU 2011-11 will have.
9
NOTE C EARNINGS PER SHARE
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period.
ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per common share
are restated for all stock splits and stock dividends through the date of issue of the financial statements.
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the three and nine month periods ended September 30, 2012 and 2011 is as follows (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September 30,
2012
|
|
|
Three Months
Ended
September 30,
2011
|
|
|
Nine Months
Ended
September 30,
2012
|
|
|
Nine Months
Ended
September 30,
2011
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,154
|
|
|
$
|
887
|
|
|
$
|
3,183
|
|
|
$
|
2,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
2,375,915
|
|
|
|
2,358,599
|
|
|
|
2,374,484
|
|
|
|
2,347,655
|
|
|
|
|
|
|
Less unallocated ESOP shares
|
|
|
10,581
|
|
|
|
19,692
|
|
|
|
12,942
|
|
|
|
21,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per share
|
|
|
2,365,334
|
|
|
|
2,338,907
|
|
|
|
2,361,542
|
|
|
|
2,325,744
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.49
|
|
|
$
|
0.38
|
|
|
$
|
1.35
|
|
|
$
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,154
|
|
|
$
|
887
|
|
|
$
|
3,183
|
|
|
$
|
2,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per share
|
|
|
2,365,334
|
|
|
|
2,338,907
|
|
|
|
2,361,542
|
|
|
|
2,325,744
|
|
|
|
|
|
|
Add: Dilutive effect of assumed exercise of stock options
|
|
|
6,675
|
|
|
|
4,427
|
|
|
|
5,883
|
|
|
|
4,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and dilutive potential common shares outstanding
|
|
|
2,372,009
|
|
|
|
2,343,334
|
|
|
|
2,367,425
|
|
|
|
2,330,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.49
|
|
|
$
|
0.38
|
|
|
$
|
1.34
|
|
|
$
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option awards that were anti-dilutive, and therefore not included in the computation of diluted earnings per share, were as
follows: 191,166 and 199,961 as of September 30, 2012 and 2011, respectively.
10
NOTE D LOANS AND ALLOWANCE FOR LOAN LOSSES
Credit Risk Elements:
Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis
of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of funds with repayment substantially dependent
on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general
economic conditions and the availability of long-term financing. The Bank typically requires guarantees on these loans. The Banks construction loans are secured primarily by properties located in its primary market area.
The Bank originates 1 4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Banks
manual underwriting standards for 1 4 family loans are generally in accordance with FHLMC and loan policy manual underwriting guidelines. Properties securing 1 4 family real estate loans are appraised by fee appraisers, which
are independent of the loan origination function and have been approved by management. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Bank will lend up to 100% of the lesser of the
appraised value or purchase price for conventional 1 4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicants payment history on
other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed and modified, as needed by management. This activity, coupled with
smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Banks 1 4 family real estate loans are secured primarily by
properties located in its primary market area.
Commercial and agricultural operating loans are underwritten based on the Banks
examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the
borrowers ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally
secures these types of loans. Loan to value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is required for most agricultural borrowers. Loans
are generally guaranteed by the principal(s). The Banks commercial and agricultural operating lending is principally in its primary market area.
Commercial and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans.
These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally
dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan to value is generally 75% of the lower of the cost or value of the assets. Appraisals on properties securing
these loans are generally performed by fee appraisers approved by the Commercial Loan Committee. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Bank typically
requires guarantees on these loans. The Banks commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.
11
In evaluating the allowance for loan losses, loans are analyzed based on the department originating the loan
(commercial, mortgage or consumer), which in some instances may be different than how the loans are categorized for regulatory reporting purposes. Consequently, loan groupings for impaired loans for purposes of calculating the allowance for loan
losses by portfolio segment may differ from impaired loan groupings for regulatory reporting purposes.
The following is an analysis of the allowance for loan losses by portfolio
segment and based on impairment method as of and for the nine month periods ended September 30, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
including
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
Mortgage
1
st
Lien
|
|
|
Real
Estate
Mortgage
Junior
Lien
|
|
|
Total
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
4,039
|
|
|
$
|
68
|
|
|
$
|
1,155
|
|
|
$
|
150
|
|
|
$
|
5,412
|
|
Provision for loan losses
|
|
|
765
|
|
|
|
6
|
|
|
|
253
|
|
|
|
26
|
|
|
|
1,050
|
|
Loans charged off
|
|
|
(946
|
)
|
|
|
(19
|
)
|
|
|
(281
|
)
|
|
|
(29
|
)
|
|
|
(1,275
|
)
|
Recoveries
|
|
|
137
|
|
|
|
18
|
|
|
|
9
|
|
|
|
11
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
3,995
|
|
|
$
|
73
|
|
|
$
|
1,136
|
|
|
$
|
158
|
|
|
$
|
5,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
|
$
|
561
|
|
|
|
|
|
|
$
|
185
|
|
|
|
|
|
|
$
|
746
|
|
|
|
|
|
|
|
Ending balance collectively evaluated for impairment
|
|
|
3,434
|
|
|
|
73
|
|
|
|
951
|
|
|
|
158
|
|
|
|
4,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,995
|
|
|
$
|
73
|
|
|
$
|
1,136
|
|
|
$
|
158
|
|
|
$
|
5,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1
|
|
$
|
4,239
|
|
|
$
|
87
|
|
|
$
|
1,211
|
|
|
$
|
157
|
|
|
$
|
5,694
|
|
Provision for loan losses
|
|
|
379
|
|
|
|
29
|
|
|
|
368
|
|
|
|
99
|
|
|
|
875
|
|
Loans charged off
|
|
|
(699
|
)
|
|
|
(58
|
)
|
|
|
(457
|
)
|
|
|
(105
|
)
|
|
|
(1,319
|
)
|
Recoveries
|
|
|
118
|
|
|
|
17
|
|
|
|
9
|
|
|
|
4
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30
|
|
$
|
4,037
|
|
|
$
|
75
|
|
|
$
|
1,131
|
|
|
$
|
155
|
|
|
$
|
5,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
|
$
|
749
|
|
|
|
|
|
|
$
|
190
|
|
|
|
|
|
|
$
|
939
|
|
|
|
|
|
|
|
Ending balance collectively evaluated for impairment
|
|
$
|
3,288
|
|
|
$
|
75
|
|
|
$
|
941
|
|
|
$
|
155
|
|
|
$
|
4,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,037
|
|
|
$
|
75
|
|
|
$
|
1,131
|
|
|
$
|
155
|
|
|
$
|
5,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans also include demand deposit loan account charge-offs and recoveries amounting to $94,000 and $98,000, respectively,
for the nine months ended September 30, 2012 and $130,000 and $55,000, respectively, for the nine months ended September 30, 2011.
12
The following is a summary of the recorded investment in loans, by
portfolio segment and based on impairment method, as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
including
Commercial
Real Estate
|
|
|
Consumer
|
|
|
Real Estate
Mortgage
1
st
Lien
|
|
|
Real
Estate
Mortgage
Junior
Lien
|
|
|
Total
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
|
$
|
6,606
|
|
|
$
|
35
|
|
|
$
|
2,846
|
|
|
$
|
131
|
|
|
$
|
9,618
|
|
|
|
|
|
|
|
Ending balance collectively evaluated for impairment
|
|
|
255,778
|
|
|
|
8,259
|
|
|
|
64,394
|
|
|
|
12,439
|
|
|
|
340,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
262,384
|
|
|
$
|
8,294
|
|
|
$
|
67,240
|
|
|
$
|
12,570
|
|
|
$
|
350,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance individually evaluated for impairment
|
|
$
|
6,440
|
|
|
$
|
29
|
|
|
$
|
3,326
|
|
|
$
|
86
|
|
|
$
|
9,881
|
|
|
|
|
|
|
|
Ending balance collectively evaluated for impairment
|
|
|
237,263
|
|
|
|
7,800
|
|
|
|
64,927
|
|
|
|
12,933
|
|
|
|
322,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
243,703
|
|
|
$
|
7,829
|
|
|
$
|
68,253
|
|
|
$
|
13,019
|
|
|
$
|
332,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present loans individually evaluated for impairment by class of loans as of
September 30, 2012 and December 31, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Allowance for
Loan Losses
Allocated
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
690
|
|
|
$
|
|
|
Real estate - commercial
|
|
|
2,666
|
|
|
|
|
|
Real estate - construction
|
|
|
82
|
|
|
|
|
|
Consumer
|
|
|
35
|
|
|
|
|
|
Real estate mortgage
|
|
|
1,667
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
435
|
|
|
|
40
|
|
Real estate - commercial
|
|
|
1,561
|
|
|
|
131
|
|
Real estate - construction
|
|
|
189
|
|
|
|
161
|
|
Consumer
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
|
|
2,293
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,618
|
|
|
$
|
746
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Allowance for
Loan Losses
Allocated
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
135
|
|
|
$
|
|
|
Real estate - commercial
|
|
|
2,649
|
|
|
|
|
|
Real estate - construction
|
|
|
232
|
|
|
|
|
|
Consumer
|
|
|
29
|
|
|
|
|
|
Real estate mortgage
|
|
|
2,485
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
744
|
|
|
|
26
|
|
Real estate - commercial
|
|
|
1,403
|
|
|
|
490
|
|
Real estate - construction
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Real estate mortgage
|
|
|
2,204
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,881
|
|
|
$
|
984
|
|
|
|
|
|
|
|
|
|
|
The following table presents the aging of the recorded investment in past due and nonaccrual
loans as of September 30, 2012 and December 31, 2011 by class of loans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Past Due Accruing Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59
Days
|
|
|
60-89
Days
|
|
|
Over
90
Days
|
|
|
Total
|
|
|
Loans
on Non-
Accrual
|
|
|
Loans Not
Past Due
or
Non-
Accrual
|
|
|
Total
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
|
|
|
$
|
|
|
|
$
|
151
|
|
|
$
|
151
|
|
|
$
|
623
|
|
|
$
|
79,488
|
|
|
$
|
80,262
|
|
Real estate - commercial
|
|
|
32
|
|
|
|
508
|
|
|
|
|
|
|
|
540
|
|
|
|
2,145
|
|
|
|
152,831
|
|
|
|
155,516
|
|
Real estate - construction
|
|
|
171
|
|
|
|
|
|
|
|
26
|
|
|
|
197
|
|
|
|
271
|
|
|
|
16,485
|
|
|
|
16,953
|
|
Consumer
|
|
|
22
|
|
|
|
7
|
|
|
|
7
|
|
|
|
36
|
|
|
|
35
|
|
|
|
8,564
|
|
|
|
8,635
|
|
Real estate mortgage
|
|
|
862
|
|
|
|
57
|
|
|
|
12
|
|
|
|
931
|
|
|
|
2,303
|
|
|
|
85,888
|
|
|
|
89,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,087
|
|
|
$
|
572
|
|
|
$
|
196
|
|
|
$
|
1,855
|
|
|
$
|
5,377
|
|
|
$
|
343,256
|
|
|
$
|
350,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
182
|
|
|
$
|
120
|
|
|
$
|
6
|
|
|
$
|
308
|
|
|
$
|
413
|
|
|
$
|
69,335
|
|
|
$
|
70,056
|
|
Real estate - commercial
|
|
|
538
|
|
|
|
144
|
|
|
|
|
|
|
|
682
|
|
|
|
2,982
|
|
|
|
147,165
|
|
|
|
150,829
|
|
Real estate - construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
12,248
|
|
|
|
12,479
|
|
Consumer
|
|
|
22
|
|
|
|
4
|
|
|
|
|
|
|
|
26
|
|
|
|
29
|
|
|
|
8,112
|
|
|
|
8,167
|
|
Real estate mortgage
|
|
|
1,476
|
|
|
|
780
|
|
|
|
|
|
|
|
2,256
|
|
|
|
2,048
|
|
|
|
86,969
|
|
|
|
91,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,218
|
|
|
$
|
1,048
|
|
|
$
|
6
|
|
|
$
|
3,272
|
|
|
$
|
5,703
|
|
|
$
|
323,829
|
|
|
$
|
332,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Modifications:
The Companys loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced
or are expected to experience financial difficulties. These concessions typically result from the Companys loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance
or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrowers sustained repayment performance for a reasonable period, generally six
months.
When the Company modifies a loan, management evaluates any possible concession based on the present value of expected future cash
flows, discounted at the contractual interest rate of the original loan agreement, except when the sole source of repayment for the loan is the liquidation of the collateral. In these cases, management uses the current fair value of the collateral,
less selling costs. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and deferred loan fees or costs), impairment is recognized through an allowance estimate
or a charge-off to the allowance.
The following table summarizes the number and volume of TDRs the Company
has recorded in its loan portfolio as of September 30, 2012 and the amount of specific reserves in the allowance for loan losses relating to the TDRs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Loans
|
|
|
Amount
|
|
|
Specific
Reserves
Allocated
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
6
|
|
|
$
|
776
|
|
|
$
|
40
|
|
Real estate - commercial
|
|
|
6
|
|
|
|
2,107
|
|
|
|
131
|
|
Real estate - construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - mortgage
|
|
|
16
|
|
|
|
1,414
|
|
|
|
101
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28
|
|
|
$
|
4,297
|
|
|
$
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following summarizes the number and volume of loans the Company
classified as TDRs during the first nine months of 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Loans
Added
|
|
|
Amount
|
|
|
Specific
Reserves
Allocated
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
$
|
107
|
|
|
$
|
|
|
Real estate - commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - mortgage
|
|
|
1
|
|
|
|
11
|
|
|
|
1
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
118
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current
financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis
includes all loans from the commercial loan department. This analysis is performed at least annually. The Company uses the following definitions for risk ratings:
Special Mention:
Loans classified as special mention have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the loan or of the Companys credit position at some future date.
15
Substandard:
Loans classified as substandard are inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility
that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful:
Loans classified as doubtful
have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be
pass rated loans.
As of September 30, 2012 and December 31, 2011, based on the most
recent analysis performed, the risk category of loans by class of loans was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Not Risk
Rated
|
|
|
Total
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
71,349
|
|
|
$
|
7,736
|
|
|
$
|
1,177
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
80,262
|
|
Real estate - commercial
|
|
|
135,906
|
|
|
|
11,104
|
|
|
|
6,208
|
|
|
|
|
|
|
|
2,298
|
|
|
|
155,516
|
|
Real estate - construction
|
|
|
9,998
|
|
|
|
2,365
|
|
|
|
361
|
|
|
|
|
|
|
|
4,229
|
|
|
|
16,953
|
|
Real estate - mortgage
|
|
|
8,185
|
|
|
|
2,514
|
|
|
|
2,634
|
|
|
|
|
|
|
|
75,789
|
|
|
|
89,122
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,635
|
|
|
|
8,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
225,438
|
|
|
$
|
23,719
|
|
|
$
|
10,380
|
|
|
$
|
|
|
|
$
|
90,951
|
|
|
$
|
350,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
59,492
|
|
|
$
|
5,855
|
|
|
$
|
4,709
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
70,056
|
|
Real estate - commercial
|
|
|
128,405
|
|
|
|
14,681
|
|
|
|
7,437
|
|
|
|
|
|
|
|
306
|
|
|
|
150,829
|
|
Real estate - construction
|
|
|
5,547
|
|
|
|
2,542
|
|
|
|
520
|
|
|
|
|
|
|
|
3,870
|
|
|
|
12,479
|
|
Real estate - mortgage
|
|
|
7,399
|
|
|
|
3,177
|
|
|
|
2,743
|
|
|
|
|
|
|
|
77,954
|
|
|
|
91,273
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,167
|
|
|
|
8,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
200,843
|
|
|
$
|
26,255
|
|
|
$
|
15,409
|
|
|
$
|
|
|
|
$
|
90,297
|
|
|
$
|
332,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE E STOCK OPTIONS
Shareholders of the Company approved a stock option plan in April 2000 and a stock incentive plan in June 2005. The plans authorized
the Company to issue up to 115,500 and 157,500 shares, respectively. In May 2008, shareholders of the Company ratified amendments to the Stock Incentive Plan of 2005, which among other things increased the authorized shares for issuance from 157,500
to 300,000. On March 20, 2010, the April 2000 stock option plan terminated. As of September 30, 2012, there were 58,342 shares available for future issuance under the 2005 plan.
A summary of stock option activity is as follows for the nine months
ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
Price
|
|
Outstanding at beginning of year
|
|
|
221,026
|
|
|
$
|
21.06
|
|
Granted
|
|
|
7,875
|
|
|
|
11.20
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,820
|
)
|
|
|
12.21
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
227,081
|
|
|
$
|
20.77
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2012
|
|
|
211,731
|
|
|
$
|
21.41
|
|
16
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation
model that uses the weighted average assumptions noted in the following table. The expected volatility and life assumptions are based on historical experience. The interest rate is based on the U.S. Treasury yield curve and the dividend assumption
is based on the Companys history and expected dividend payouts.
Following are the assumptions used in calculating the fair value of the options issued during
the nine months ended September 30, 2012:
|
|
|
|
|
Dividend yield
|
|
|
2.93
|
%
|
Expected life
|
|
|
8 years
|
|
Expected volatility
|
|
|
22.84
|
%
|
Risk-free interest rate
|
|
|
0.26
|
%
|
Weighted average fair value of options granted during 2012
|
|
$
|
1.59
|
|
The Company recorded compensation expense of $24,000 and $46,000, respectively, related to stock options during the nine month periods
ended September 30, 2012 and 2011.
Restricted Stock
Shares of restricted stock may also be granted under the Stock
Incentive Plan of 2005. Compensation expense is recognized over the vesting period of the shares based on the fair value of the shares on the grant date. All shares of restricted stock issued and outstanding vest 20% per year over five years.
Compensation expense related to the award of shares of restricted stock was $116,000 and $72,000, respectively, during the nine months ended September 30, 2012 and 2011. As of September 30, 2012, there was $454,000 of total unrecognized
compensation expense related to non-vested shares of restricted stock granted under the plan, which is expected to be recognized over a weighted average period of 3.4 years.
A summary of restricted stock activity
is as follows for the nine months ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Nonvested at January 1, 2012
|
|
|
41,309
|
|
|
$
|
11.33
|
|
Granted
|
|
|
18,125
|
|
|
|
11.20
|
|
Vested
|
|
|
(11,809
|
)
|
|
|
11.70
|
|
Forfeited
|
|
|
(1,082
|
)
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2012
|
|
|
46,543
|
|
|
$
|
11.18
|
|
|
|
|
|
|
|
|
|
|
NOTE F FAIR VALUE INFORMATION
The following methods and assumptions were used by the Company in estimating fair values for financial instruments:
Cash and cash equivalents and federal funds sold:
The carrying amount reported in the balance sheet approximates fair value.
Securities available for sale:
Fair values for securities available for sale are based on quoted market prices, where
available. For all other securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S.
Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the securities terms and conditions, among other things.
Loans and loans held for sale, net:
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 for other loans are estimated using discounted cash flows analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The
allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns.
17
Accrued interest receivable:
The carrying amount reported in the balance sheet
approximates fair value.
Off-balance-sheet financial instruments:
The estimated fair value of off-balance-sheet
financial instruments is based on current fees or costs that would be charged to enter or terminate the arrangements. The estimated fair value is not considered to be significant for this presentation.
Deposits:
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain
types of 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 on certificates to a schedule of expected monthly maturities on time deposits.
Securities sold under agreements to repurchase and overnight borrowings:
The carrying amount reported in the balance sheet approximates fair value.
Other borrowings:
The fair value of other borrowings is estimated using discounted cash flows analysis based on the current
incremental borrowing rate for similar types of borrowing arrangements.
Subordinated debentures:
The carrying amount
reported in the balance sheet approximates fair value of the variable-rate subordinated debentures.
Accrued interest
payable:
The carrying amount reported in the balance sheet approximates fair value.
While these estimates of fair value are based on
managements judgment of appropriate factors, there is no assurance that if the Company had disposed of such items at September 30, 2012 or December 31, 2011, the estimated fair values would have been realized. Fair values may differ
depending on various circumstances not taken into consideration in this methodology. The estimated fair values at September 30, 2012 and December 31, 2011, should not be considered to apply at subsequent dates.
In addition, other assets and liabilities that are not defined as financial instruments are not included in the following disclosures, such as property
and equipment. Also, non-financial instruments typically not recognized in financial statements may have value but are not included in the following disclosures. These include, among other items, the estimated earnings power of core deposit
accounts, trained work force, customer goodwill and similar items.
The estimated fair values of the Companys financial instruments are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44,085
|
|
|
$
|
44,085
|
|
|
$
|
42,185
|
|
|
$
|
42,185
|
|
Federal funds sold
|
|
|
255
|
|
|
|
255
|
|
|
|
287
|
|
|
|
287
|
|
Securities available for sale
|
|
|
75,594
|
|
|
|
75,594
|
|
|
|
90,344
|
|
|
|
90,344
|
|
Loans held for sale
|
|
|
2,412
|
|
|
|
2,412
|
|
|
|
1,088
|
|
|
|
1,088
|
|
Loans, net of allowance for loan losses
|
|
|
345,126
|
|
|
|
349,479
|
|
|
|
327,392
|
|
|
|
333,283
|
|
Accrued interest receivable
|
|
|
2,527
|
|
|
|
2,527
|
|
|
|
2,148
|
|
|
|
2,148
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
(430,985
|
)
|
|
$
|
(432,374
|
)
|
|
$
|
(420,511
|
)
|
|
$
|
(422,493
|
)
|
Securities sold under agreements to repurchase and overnight borrowings
|
|
|
(16,331
|
)
|
|
|
(16,331
|
)
|
|
|
(18,074
|
)
|
|
|
(18,074
|
)
|
Other borrowings
|
|
|
(2,294
|
)
|
|
|
(2,314
|
)
|
|
|
(7,751
|
)
|
|
|
(7,860
|
)
|
Subordinated debentures
|
|
|
(5,155
|
)
|
|
|
(5,155
|
)
|
|
|
(5,155
|
)
|
|
|
(5,155
|
)
|
Accrued interest payable
|
|
|
(119
|
)
|
|
|
(119
|
)
|
|
|
(131
|
)
|
|
|
(131
|
)
|
The preceding table does not include net cash surrender value of life insurance and dividends payable, which are also considered
financial instruments. The estimated fair value of such items is considered to be their carrying amount.
The Company also has unrecognized
financial instruments, which include commitments to extend credit and standby letters of credit. The estimated fair value of such instruments is considered to be their contract amount.
18
NOTE G FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous
market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure
to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and
sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
Fair value must be determined using valuation techniques that are consistent with the market approach, the income approach, or the cost approach. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a
discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to
the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data
obtained from independent sources, or unobservable, meaning those that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. A fair value hierarchy for valuation inputs has been established that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The fair value hierarchy is as follows:
Level 1 Inputs
- Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs
- Inputs other than
quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived
principally from or corroborated by market data by correlation or other means.
Level 3 Inputs
- Unobservable inputs for
determining the fair values of assets or liabilities that reflect an entitys own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy, follows. These valuation methodologies were applied to all of the Companys financial and nonfinancial assets and liabilities carried at fair value.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as
inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the companys
creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Companys valuation methodologies may produce a fair value calculation that may not be indicative
of net realizable value or reflective of future fair values. While management believes the Companys valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
19
Securities Available for Sale.
Securities classified as available for sale are reported at fair value
utilizing Level 1, Level 2 and Level 3 inputs. Unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date for Level 1 securities. For all other securities, the Company
obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information, and the bonds terms and conditions, among other things. When there are unobservable inputs, such securities are classified as Level 3.
Securities available for sale classified as Level 3 inputs represent non-publicly traded municipal issues with limited trading activity from entities
within the Companys market area. The fair value of these investments is determined using Level 3 valuation techniques, as there is no market available to price these investments. The method used for determining the fair value for these
investments includes a comparison to the fair value of other investment securities valued with Level 2 inputs with similar characteristics (credit, time to maturity, call structure, etc.) and the interest yield curve for comparable debt investments.
Impaired Loans.
The Company does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is
considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Impaired loans measured at fair value typically consist of loans on nonaccrual
status and loans with a portion of the allowance for loan losses allocated specific to the loan. Some loans may be included in both categories whereas other loans may only be included in one category. Collateral values are estimated using Level 2
and 3 inputs, including recent appraisals, based on customized discounting criteria. Due to the significance of the Level 3 inputs, impaired loans have been classified as Level 3.
Other Real Estate Owned (OREO).
The Company values OREO at the fair value of the underlying collateral less expected selling costs. Collateral values are estimated primarily using appraisals and
reflect a market value approach.
The following table summarizes financial and nonfinancial
assets (there were no financial or nonfinancial liabilities) measured at fair value as of September 30, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair
value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total
Fair Value
|
|
September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
24,108
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,108
|
|
U.S. government sponsored entities and agencies
|
|
|
10,914
|
|
|
|
|
|
|
|
|
|
|
|
10,914
|
|
States and political subdivisions
|
|
|
|
|
|
|
32,790
|
|
|
|
1,757
|
|
|
|
34,547
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
5,583
|
|
|
|
|
|
|
|
5,583
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
442
|
|
|
|
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
35,022
|
|
|
$
|
38,815
|
|
|
$
|
1,757
|
|
|
$
|
75,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,872
|
|
|
$
|
8,872
|
|
Other real estate owned
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,493
|
|
|
$
|
1,493
|
|
Impaired loans are reported net of a $746,000 allowance for loan losses.
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total
Fair Value
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal agencies
|
|
$
|
28,435
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,435
|
|
U.S. government sponsored entities and agencies
|
|
|
22,956
|
|
|
|
|
|
|
|
|
|
|
|
22,956
|
|
States and political subdivisions
|
|
|
|
|
|
|
31,213
|
|
|
|
2,232
|
|
|
|
33,445
|
|
Asset-backed securities
|
|
|
2,476
|
|
|
|
|
|
|
|
|
|
|
|
2,476
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
3,032
|
|
|
|
|
|
|
|
3,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
53,867
|
|
|
$
|
34,245
|
|
|
$
|
2,232
|
|
|
$
|
90,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,897
|
|
|
$
|
8,897
|
|
Other real estate owned
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,530
|
|
|
$
|
1,530
|
|
Impaired loans are reported net of a $984,000 allowance for loan losses.
The following is a summary of activity of securities
available for sale which are measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the nine month period ended September 30, 2012 (in thousands):
|
|
|
|
|
Balance at January 1, 2012
|
|
$
|
2,232
|
|
Net maturities and calls
|
|
|
(449
|
)
|
Transfers into Level 3
|
|
|
|
|
Purchases
|
|
|
|
|
Net unrealized losses included in other comprehensive income (loss)
|
|
|
(26
|
)
|
|
|
|
|
|
Balance at September 30, 2012
|
|
$
|
1,757
|
|
|
|
|
|
|
NOTE H SUBSEQUENT EVENTS
Management evaluated subsequent events through the date the financial statements were issued. Events or transactions occurring after
September 30, 2012, but prior to when the financial statements were issued, that provided additional evidence about conditions that existed at September 30, 2012, have been recognized in the financial statements for the nine month period
ended September 30, 2012. Events or transactions that provided evidence about conditions that did not exist at September 30, 2012, but arose before the financial statements were issued, have not been recognized in the financial statements
for the nine month period ended September 30, 2012.
21