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 Corporations 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 years 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 Corporations 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 Corporations 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
Corporations amortized cost basis on these securities is 0.3%. In managements opinion, these unrealized losses relate to changes in interest rates. The Corporations 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 Corporations amortized cost basis. In managements opinion, these unrealized losses relate primarily to changes in interest rates. In analyzing the issuers financial
condition, management considers the issuers 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 Corporations amortized cost basis. In managements opinion, these unrealized losses relate primarily to changes in interest rates. In analyzing the issuers financial condition, management considers the issuers
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 Corporations 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 assets or liabilitys 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 Corporations assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons
between the Corporations disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporations 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 Corporations 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 Corporations 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 Corporations 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 entitys 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 Corporations
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 entitys 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