XNAS:SSFN Stewardship Financial Corporation Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2012

 

oTRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number 1-33377

 

Stewardship Financial Corporation
(Exact name of registrant as specified in its charter)
   
New Jersey 22-3351447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
630 Godwin Avenue, Midland Park,  NJ 07432
(Address of principal executive offices) (Zip Code)
   
(201)  444-7100
(Registrant’s telephone number, including area code)
   
   
(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company ý

 

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

 

The number of shares outstanding, net of treasury stock, of the Registrant’s Common Stock, no par value, as of May 2, 2012 was 5,985,869.

 

 
 

Stewardship Financial Corporation

 

INDEX

 

  PAGE
  NUMBER
PART I  -  FINANCIAL INFORMATION  
   
ITEM 1  -   FINANCIAL STATEMENTS  
   
Consolidated Statements of Financial Condition at March 31, 2012 and December 31, 2011 (Unaudited) 1
   
Consolidated Statements of Income for the Three Months ended March 31, 2012 and 2011 (Unaudited) 2
   
Consolidated Statement of Changes in Stockholders’ Equity for the Three Months ended March 31, 2012 and 2011 (Unaudited) 3
   
Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2012 and 2011 (Unaudited) 4
   
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2012 and 2011 (Unaudited) 5 - 6
   
Notes to Consolidated Financial Statements (Unaudited) 7 - 26
   
ITEM 2  -   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27 - 34
   
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 35
   
ITEM 4 - CONTROLS AND PROCEDURES 35
   
PART II  -  OTHER INFORMATION  
   
ITEM 2 -  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  
   
ITEM 6 -  EXHIBITS 36
   
SIGNATURES 37
   
EXHIBIT INDEX 38

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Financial Condition
(Unaudited)

 

   March 31,   December 31, 
   2012   2011 
Assets          
           
Cash and due from banks  $23,376,000   $13,289,000 
Other interest-earning assets   805,000    409,000 
      Cash and cash equivalents   24,181,000    13,698,000 
           
Securities available for sale   175,102,000    170,925,000 
Securities held to maturity; estimated fair value of $38,858,000 (2012) and          
   $40,984,000 (2011)   36,353,000    38,354,000 
FHLB-NY stock, at cost   2,266,000    2,478,000 
Mortgage loans held for sale   1,395,000    4,711,000 
Loans, net of allowance for loan losses of $13,097,000 (2012) and $11,604,000 (2011)   440,636,000    444,803,000 
Premises and equipment, net   5,981,000    6,101,000 
Accrued interest receivable   2,507,000    2,618,000 
Other real estate owned, net   3,840,000    5,288,000 
Bank owned life insurance   10,225,000    10,145,000 
Other assets   9,559,000    9,697,000 
      Total assets  $712,045,000   $708,818,000 
           
Liabilities and shareholders' equity          
           
Liabilities          
Deposits:          
   Noninterest-bearing  $118,597,000   $115,776,000 
   Interest-bearing   483,486,000    477,776,000 
       Total deposits   602,083,000    593,552,000 
           
Federal Home Loan Bank of New York advances   28,000,000    32,700,000 
Securities sold under agreements to repurchase   14,342,000    14,342,000 
Subordinated debentures   7,217,000    7,217,000 
Accrued interest payable   673,000    775,000 
Accrued expenses and other liabilities   1,675,000    2,440,000 
       Total liabilities   653,990,000    651,026,000 
           
Commitments and contingencies        
           
Shareholders' equity          
Preferred stock, no par value; 2,500,000 shares authorized; 15,000 shares          
   issued and outstanding at March 31, 2012 and December 31, 2011          
   liquidation preference of $15,000,000   14,957,000    14,955,000 
Common stock, no par value; 10,000,000 shares authorized;          
   5,895,707 and 5,882,504 shares issued and outstanding at March 31, 2012          
   and December 31, 2011, respectively   40,487,000    40,420,000 
Retained earnings   1,447,000    1,043,000 
Accumulated other comprehensive income, net   1,164,000    1,374,000 
       Total shareholders' equity   58,055,000    57,792,000 
           
       Total liabilities and shareholders' equity  $712,045,000   $708,818,000 
           

 

See notes to unaudited consolidated financial statements.
 

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)

 

   Three Months Ended 
   March 31, 
   2012   2011 
Interest income:          
Loans  $6,259,000   $6,440,000 
Securities held to maturity          
Taxable   152,000    183,000 
Non-taxable   209,000    223,000 
Securities available for sale          
Taxable   799,000    839,000 
Non-taxable   61,000    44,000 
FHLB dividends   29,000    38,000 
Other interest-earning assets   7,000    8,000 
Total interest income   7,516,000    7,775,000 
           
Interest expense:          
Deposits   983,000    1,289,000 
Borrowed money   482,000    537,000 
Total interest expense   1,465,000    1,826,000 
           
Net interest income before provision for loan losses   6,051,000    5,949,000 
Provision for loan losses   1,765,000    1,675,000 
Net interest income after provision for loan losses   4,286,000    4,274,000 
           
Noninterest income:          
Fees and service charges   515,000    511,000 
Bank owned life insurance   80,000    80,000 
Gain on calls and sales of securities   433,000     
Gain on sales of mortgage loans   411,000    404,000 
Miscellaneous   111,000    89,000 
Total noninterest income   1,550,000    1,084,000 
           
Noninterest expenses:          
Salaries and employee benefits   2,386,000    2,236,000 
Occupancy, net   487,000    545,000 
Equipment   248,000    258,000 
Data processing   334,000    337,000 
Advertising   139,000    77,000 
FDIC insurance premium   148,000    254,000 
Charitable contributions   150,000    100,000 
Miscellaneous   862,000    877,000 
Total noninterest expenses   4,754,000    4,684,000 
Income before income tax expense   1,082,000    674,000 
Income tax expense   306,000    191,000 
Net income   776,000    483,000 
Dividends on preferred stock and accretion   75,000    138,000 
Net income available to common shareholders  $701,000   $345,000 
           
Basic earnings per common share  $0.12   $0.06 
Diluted earnings per common share  $0.12   $0.06 
           
Weighted average number of common shares outstanding   5,892,366    5,849,723 
Weighted average number of diluted common          
    shares outstanding   5,892,366    5,849,723 

 

See notes to unaudited consolidated financial statements.

2

 

Stewardship Financial Corporation and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)

 

   Three Months Ended March 31, 2012 
                       Accumulated     
                       Other     
                       Comprehensive     
   Preferred   Common Stock   Retained   Treasury   Income (Loss),     
   Stock   Shares   Amount   Earnings   Stock   Net   Total 
                             
Balance -- December 31, 2011  $14,955,000    5,882,504   $40,420,000   $1,043,000   $   $1,374,000   $57,792,000 
Cash dividends paid on common stock               (295,000)           (295,000)
Payment of discount on dividend                                   
   reinvestment plan           (2,000)               (2,000)
Cash dividends accrued on preferred stock               (75,000)           (75,000)
Common stock issued under stock plans       13,203    69,000                69,000 
Amortization of issuance costs   2,000            (2,000)             
Net income               776,000            776,000 
Change in unrealized holding gains on                              
  securities available for sale arising during                              
  the period (net of taxes of $145,000)                       (228,000)   (228,000)
Change in fair value of interest rate                                   
  swap (net of taxes of $12,000)                       18,000    18,000 
                                    
Balance -- March 31, 2012  $14,957,000    5,895,707   $40,487,000   $1,447,000   $   $1,164,000   $58,055,000 
                                    

 

   Three Months Ended March 31, 2011 
                       Accumulated     
                       Other     
                       Comprehensive     
   Preferred   Common Stock   Retained   Treasury   Income (Loss),     
   Stock   Shares   Amount   Earnings   Stock   Net   Total 
                             
Balance -- December 31, 2010  $9,796,000    5,846,927   $40,516,000   $1,959,000   $(13,000)  $(126,000)  $52,132,000 
Cash dividends paid on common stock               (293,000)           (293,000)
Payment of discount on dividend                                   
   reinvestment plan           (5,000)               (5,000)
Cash dividends accrued on preferred stock               (125,000)           (125,000)
Common stock issued under stock plans       3,543    12,000        13,000        25,000 
Stock option compensation expense           13,000                13,000 
Accretion of discount on preferred stock   13,000            (13,000)             
Amortization of issuance costs   2,000            (2,000)             
Net income               483,000            483,000 
Change in unrealized holding gains on                              
  securities available for sale arising during                              
  the period (net of taxes of $47,000)                       (63,000)   (63,000)
Change in fair value of interest rate                                   
  swap (net of taxes of $39,000)                       59,000    59,000 
                                    
Balance -- March 31, 2011  $9,811,000    5,850,470   $40,536,000   $2,009,000   $   $(130,000)  $52,226,000 

 

See notes to unaudited consolidated financial statements.

3

 

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)

 

   Three Months Ended March 31, 
   2012   2011 
         
Net income  $776,000   $483,000 
           
Other comprehensive (loss) income:          
Change in unrealized holding gains (losses) on securities          
available for sale arising during the period   60,000    (110,000)
Reclassification adjustment for gains in net income   (433,000)    
Net unrealized gains (losses)   (373,000)   (110,000)
Tax effect   145,000    47,000 
Net unrealized gains (losses), net of tax amount   (228,000)   (63,000)
           
Change in fair value of interest rate swap   30,000    98,000 
Tax effect   (12,000)   (39,000)
Change in fair value of interest rate swap, net of tax amount   18,000    59,000 
           
Total other comprehensive income (loss)   (210,000)   (4,000)
           
Total comprehensive income  $566,000   $479,000 

 

The following is a summary of the accumulated other comprehensive income balances, net of tax.      

 

   March 31, 2012   December 31, 2011 
         
Unrealized gain on securities available for sale  $1,682,000   $1,910,000 
Unrealized loss on fair value of interest rate swap   (518,000)   (536,000)
           
Accumulated other comprehensive income, net  $1,164,000   $1,374,000 

 

See notes to unaudited consolidated financial statements.

4

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)

 

   Three Months Ended 
   March 31, 
   2012   2011 
Cash flows from operating activities:          
Net income  $776,000   $483,000 
Adjustments to reconcile net income to          
net cash provided by operating activities:          
Depreciation and amortization of premises and equipment   142,000    153,000 
Amortization of premiums and accretion of discounts, net   403,000    333,000 
Accretion (amortization) of deferred loan fees   12,000    (12,000)
Provision for loan losses   1,765,000    1,675,000 
Originations of mortgage loans held for sale   (26,709,000)   (24,113,000)
Proceeds from sale of mortgage loans   30,436,000    33,508,000 
Gain on sales of mortgage loans   (411,000)   (404,000)
Gain on sales and calls of securities   (433,000)    
Gain on sale of other real estate owned   (99,000)    
Deferred income tax benefit   (642,000)   (600,000)
Decrease in accrued interest receivable   110,000    135,000 
Decrease in accrued interest payable   (102,000)   (138,000)
Earnings on bank owned life insurance   (80,000)   (80,000)
Stock option expense       13,000 
Decrease in other assets   969,000    1,172,000 
Increase (decrease) in other liabilities   (746,000)   13,000 
Net cash provided by operating activities   5,391,000    12,138,000 
           
Cash flows from investing activities:          
Purchase of securities available for sale   (22,929,000)   (16,030,000)
Proceeds from maturities and principal repayments on securities available for sale   6,490,000    5,101,000 
Proceeds from sales and calls on securities available for sale   11,960,000    1,000,000 
Proceeds from maturities and principal repayments on securities held to maturity   1,355,000    1,868,000 
Proceeds from calls on securities held to maturity   605,000    1,000,000 
Sale of FHLB-NY stock   212,000    136,000 
Net (increase) decrease in loans   1,639,000    (7,966,000)
Proceeds from sale of other real estate owned   2,254,000     
Additions to premises and equipment   (22,000)   (78,000)
Net cash provided by (used in) investing activities   1,564,000    (14,969,000)
           
Cash flows from financing activities:          
Net increase in noninterest-bearing deposits   2,821,000    13,831,000 
Net increase in interest-bearing deposits   5,710,000    2,075,000 
Net increase in securities sold under agreements to repurchase       1,000 
Net decrease in short term borrowings   (4,700,000)    
Repayment of long term borrowings       (3,000,000)
Cash dividends paid on common stock   (295,000)   (293,000)
Cash dividends paid on preferred stock   (75,000)   (125,000)
Payment of discount on dividend reinvestment plan   (2,000)   (5,000)
Issuance of common stock   69,000    25,000 
Net cash provided by financing activities   3,528,000    12,509,000 
           
Net increase in cash and cash equivalents   10,483,000    9,678,000 
Cash and cash equivalents - beginning   13,698,000    19,983,000 
Cash and cash equivalents - ending  $24,181,000   $29,661,000 

 

5

Stewardship Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows (continued)
(Unaudited)

 

 

   Three Months Ended 
   March 31, 
   2012   2011 
Supplemental disclosures of cash flow information:
Cash paid during the period for interest  $1,567,000   $1,964,000 

 

 

See notes to unaudited consolidated financial statements.

6

 

 

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

March 31, 2012

(Unaudited)

 

 

Note 1. Summary of Significant Accounting Policies

 

Certain information and note disclosures normally included in the unaudited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Stewardship Financial Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC on March 30, 2012 (the “2011 Annual Report”).

 

Principles of consolidation

 

The consolidated financial statements include the accounts of Stewardship Financial Corporation and its wholly-owned subsidiary, Atlantic Stewardship Bank (the “Bank”), together referred to as “the Corporation”. The Bank includes its wholly-owned subsidiaries, Stewardship Investment Corporation, Stewardship Realty LLC, Atlantic Stewardship Insurance Company, LLC and several other subsidiaries formed to hold title to properties acquired through foreclosure or deed in lieu of foreclosure. The Bank’s subsidiaries have an insignificant impact on the Bank’s daily operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. Certain prior period amounts have been reclassified to conform to the current presentation.

 

The consolidated financial statements of the Corporation have been prepared in conformity with GAAP. In preparing the financial statements, management is required to make estimates and assumptions, based on available information, that affect the amounts reported in the financial statements and disclosures provided. Actual results could differ significantly from those estimates. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

 

Material estimates

 

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and fair value of financial instruments. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize probable incurred losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the market area.

 

Basis of presentation

 

The interim unaudited consolidated financial statements included herein have been prepared in accordance with instructions for Form 10-Q and the rules and regulations of the SEC and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with GAAP. However, all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of the interim consolidated financial statements, have been included. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the entire year.

 

Derivatives

 

Derivative financial instruments are recognized as assets or liabilities at fair value. The Corporation’s only derivative consists of an interest rate swap agreement, which is used as part of its asset liability management strategy to help manage interest rate risk related to its subordinated debentures issued in 2003 to Stewardship Statutory Trust I (the “Trust”), a statutory business trust (see Note 9 to the Notes to the Audited Consolidated Financial Statements of the Corporation contained in the 2011 Annual Report). The Corporation does not use derivatives for trading purposes. (See Note 4 below).

 

 

The Corporation designated the interest rate swap as a cash flow hedge, which is a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the change in the fair value on the derivative is reported in other comprehensive income and is reclassified into earnings in

7

the same periods during which the hedged transaction affects earnings. Net cash settlements on this interest rate swap that qualify for hedge accounting are recorded in interest expense. Changes in fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings.

 

The Corporation formally documented the risk-management objective and the strategy for undertaking the hedge transaction at the inception of the hedging relationship. This documentation includes linking the fair value of the cash flow hedge to subordinated debt on the balance sheet. The Corporation formally assessed, both at the hedge’s inception and on an ongoing basis, whether the derivative instrument used is highly effective in offsetting changes in cash flows of the subordinated debt.

 

When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that would be accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.

 

Adoption of New Accounting Standards

 

In June 2011, the Financial Accounting Standards Board (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 represents the converged guidance of the FASB and the International Accounting Standards Board (together, “the Boards”) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments of this ASU are to be applied prospectively. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Corporation’s consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. This ASU provides that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this ASU did not have a significant impact on the Corporation’s consolidated financial statements.

 

 

8

Note 2. Securities – Available for Sale and Held to Maturity

 

The fair value of the available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

   March 31, 2012 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $4,021,000   $17,000   $   $4,038,000 
U.S. government-sponsored agencies   31,341,000    25,000    173,000    31,193,000 
Obligations of state and political                    
   subdivisions   9,432,000    401,000    36,000    9,797,000 
Mortgage-backed securities - residential   124,227,000    2,498,000    29,000    126,696,000 
                     
Total debt securities   169,021,000    2,941,000    238,000    171,724,000 
Other equity investments   3,323,000    55,000        3,378,000 
   $172,344,000   $2,996,000   $238,000   $175,102,000 

 

   December 31, 2011 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $4,027,000   $23,000   $   $4,050,000 
U.S. government-sponsored agencies   20,702,000    46,000    4,000    20,744,000 
Obligations of state and political                    
   subdivisions   8,866,000    461,000    9,000    9,318,000 
Mortgage-backed securities - residential   130,912,000    2,583,000    28,000    133,467,000 
                     
Total debt securities   164,507,000    3,113,000    41,000    167,579,000 
Other equity investments   3,287,000    59,000        3,346,000 
   $167,794,000   $3,172,000   $41,000   $170,925,000 

 

Cash proceeds realized from sales and calls of securities available for sale for the quarter ended March 31, 2012 and 2011 were $11,960,000 and $1,000,000, respectively. There were gross gains totaling $433,000 and no gross losses realized on sales or calls during the quarter ended March 31, 2012. The tax provision related to these realized gains was $168,000. There were no gross gains and no gross losses realized on sales or calls during the quarter ended March 31, 2011.

 

The following is a summary of the held to maturity securities and related unrecognized gains and losses:  

 

   March 31, 2012 
   Amortized   Gross Unrecognized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. government-sponsored agencies  $2,761,000   $59,000       $2,820,000 
Obligations of state and political                    
   subdivisions   23,405,000    1,638,000        25,043,000 
Mortgage-backed securities - residential   10,187,000    808,000        10,995,000 
   $36,353,000   $2,505,000   $   $38,858,000 

 

   December 31, 2011 
   Amortized   Gross Unrecognized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. government-sponsored agencies  $2,770,000   $80,000   $   $2,850,000 
Obligations of state and political                    
   subdivisions   24,575,000    1,705,000        26,280,000 
Mortgage-backed securities - residential   11,009,000    845,000        11,854,000 
   $38,354,000   $2,630,000   $   $40,984,000 
                     

Cash proceeds realized from calls of securities held to maturity for the quarters ended March 31, 2012 and 2011 were $605,000 and $1,000,000, respectively. There were no gross gains and no gross losses realized from calls for the quarter ended March 31, 2012 or 2011.

9

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at March 31, 2012 and December 31, 2011, and if the unrealized loss was continuous for the twelve months prior to March 31, 2012 and December 31, 2011.

 

Available for Sale                        
March 31, 2012  Less than 12 Months    12 Months or Longer    Total 
    Fair     Unrealized   Fair   Unrealized   Fair   Unrealized     
    Value     Losses   Value   Losses   Value   Losses     
U.S. Treasury  $    $    $    $    $    $  
U.S. government-                              
 sponsored agencies   20,168,000    (173,000)           20,168,000    (173,000)
Obligations of state and                              
 political subdivisions   1,888,000    (36,000)           1,888,000    (36,000)
Mortgage-backed                             
 securities - residential   9,404,000    (29,000)           9,404,000    (29,000)
Other equity investments                        
    Total temporarily                              
         impaired securities  $31,460,000   $(238,000)  $   $   $31,460,000   $(238,000)

 

December 31, 2011  Less than 12 Months    12 Months or Longer    Total 
  Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
  Value   Losses   Value   Losses   Value   Losses 
                        
U.S. Treasury  $   $   $   $   $   $ 
U.S. government-                              
 sponsored agencies   1,993,000    (4,000)           1,993,000    (4,000)
Obligations of state and                              
 political subdivisions   1,335,000    (9,000)           1,335,000    (9,000)
Mortgage-backed                             
 securities - residential   10,637,000    (28,000)           10,637,000    (28,000)
Other equity investments                        
    Total temporarily                              
         impaired securities  $13,965,000   $(41,000)  $   $   $13,965,000   $(41,000)

 

There were no unrealized losses on held to maturity securities at either March 31, 2012 or December 31, 2011.

 

Other-Than-Temporary-Impairment

 

At March 31, 2012, there were no securities in a continuous loss position for 12 months or longer. The Corporation’s unrealized losses are primarily due to market conditions. These securities have not been considered other than temporarily impaired as scheduled principal and interest payments have been made and management anticipates collecting the entire principal balance as scheduled. Because the decline in fair value is attributable to changes in market conditions, and not credit quality, and because the Corporation does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at March 31, 2012.

 

10

Note 3. Loans and Nonperforming Loans

 

The following table sets forth the composition of loans:

 

   March 31,   December 31, 
   2012   2011 
         
Commercial:         
 Secured by real estate $61,275,000   $60,650,000 
 Other  36,394,000    41,850,000 
Commercial real estate  245,764,000    246,549,000 
Construction:         
 Commercial  13,437,000    12,913,000 
 Residential  249,000    252,000 
Residential real estate  59,647,000    54,694,000 
Consumer:         
 Secured by real estate  35,724,000    38,278,000 
 Other  1,006,000    1,086,000 
Other   176,000    141,000 
  Total gross loans  453,672,000    456,413,000 
           
Less:  Deferred loan fees, net of costs  (61,000)   6,000 
 Allowance for loan losses  13,097,000    11,604,000 
    13,036,000    11,610,000 
           
Loans, net $440,636,000   $444,803,000 

 

11

Activity in the allowance for loan losses is summarized as follows:

 

   Three Months Ended March 31, 
   2012   2011 
         
Balance, beginning of period  $11,604,000   $8,490,000 
Provision charged to operations          
Commercial:          
Secured by real estate   651,000    1,201,000 
Other   245,000    150,000 
Commercial real estate   575,000    297,000 
Construction:          
Commercial   291,000    (166,000)
Residential   6,000    (3,000)
Residential real estate   35,000    104,000 
Consumer:          
Secured by real estate   (57,000)   82,000 
Other   4,000    (1,000)
Other       3,000 
Unallocated   15,000    8,000 
Total provision charged to operations   1,765,000    1,675,000 
           
Loans charged off          
Commercial:          
Secured by real estate   193,000    91,000 
Other   25,000    37,000 
Commercial real estate   70,000    104,000 
Construction:          
Commercial       9,000 
Residential        
Residential real estate        
Consumer:          
Secured by real estate   1,000    59,000 
Other   5,000     
Other       3,000 
Total loans charged off   294,000    303,000 
           
Recoveries of loans charged off          
Commercial:          
Secured by real estate   22,000    10,000 
Other       1,000 
Commercial real estate        
Construction:          
Commercial        
Residential        
Residential real estate        
Consumer:          
Secured by real estate        
Other        
Other       1,000 
Total recoveries of loans charged off   22,000    12,000 
Balance, end of period  $13,097,000   $9,874,000 

 

12

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2012 and December 31, 2011.

 

   March 31, 2012 
       Commercial       Residential       Other         
   Commercial   Real Estate   Construction   Real Estate   Consumer   Loans   Unallocated   Total 
                                 
Allowance for loan                                   
 losses:                                        
 Ending allowance                                   
   balance attributable                                   
   to loans                                        
                                         
   Individually                                        
    evaluated for                                        
    impairment  $2,371,000   $1,299,000   $505,000   $2,000   $   $   $   $4,177,000 
                                         
   Collectively                                        
    evaluated for                                        
    impairment   3,697,000    4,149,000    272,000    336,000    439,000    2,000    25,000    8,920,000 
Total ending                                        
 allowance                                        
 balance  $6,068,000   $5,448,000   $777,000   $338,000   $439,000   $2,000   $25,000   $13,097,000 
                                         
Loans:                                        
   Loans                                        
    individually                                        
    evaluated for                                        
    impairment  $9,567,000   $12,572,000   $8,670,000   $779,000   $1,082,000   $   $   $32,670,000 
                                         
   Loans                                        
    collectively                                        
    evaluated for                                        
    impairment   88,102,000    233,192,000    5,016,000    58,868,000    35,648,000    176,000        421,002,000 
Total ending                                        
 loan balance  $97,669,000   $245,764,000   $13,686,000   $59,647,000   $36,730,000   $176,000   $   $453,672,000 

 

13

   December 31, 2011 
       Commercial       Residential       Other         
   Commercial   Real Estate   Construction   Real Estate   Consumer   Loans   Unallocated   Total 
                                 
Allowance for loan                                   
 losses:                                        
 Ending allowance                                   
   balance attributable                                   
   to loans                                        
                                         
   Individually                                        
    evaluated for                                        
    impairment  $1,908,000   $947,000   $266,000   $   $   $   $   $3,121,000 
                                         
   Collectively                                        
    evaluated for                                        
    impairment   3,460,000    3,996,000    214,000    303,000    498,000    2,000    10,000    8,483,000 
Total ending                                        
 allowance                                        
 balance  $5,368,000   $4,943,000   $480,000   $303,000   $498,000   $2,000   $10,000   $11,604,000 
                                         
Loans:                                        
   Loans                                        
    individually                                        
    evaluated for                                        
    impairment  $10,265,000   $13,128,000   $8,653,000   $779,000   $891,000   $   $   $33,716,000 
                                         
   Loans                                        
    collectively                                        
    evaluated for                                        
    impairment   92,235,000    233,421,000    4,512,000    53,915,000    38,473,000    141,000        422,697,000 
Total ending                                        
 loan balance  $102,500,000   $246,549,000   $13,165,000   $54,694,000   $39,364,000   $141,000   $   $456,413,000 

 

The following table presents the recorded investment in nonaccrual loans in the periods indicated:

 

   March 31,   December 31, 
   2012   2011 
           
Commercial:          
Secured by real estate  $5,229,000   $6,178,000 
Other   2,432,000    2,494,000 
Commercial real estate   9,190,000    9,302,000 
Construction:          
Commercial   7,862,000    7,840,000 
Residential   249,000    252,000 
Residential real estate   779,000    779,000 
Consumer:          
Secured by real estate   1,082,000    891,000 
Other        
Other        
           
   Total nonperfoming loans  $26,823,000   $27,736,000 

 

14

The following presents loans individually evaluated for impairment by class of loans as of the periods indicated:

 

   At March 31, 2012 
   Unpaid       Allowance for 
   Principal   Recorded   Loan Losses 
   Balance   Investment   Allocated 
             
With no related allowance recorded:               
Commercial:               
Secured by real estate  $3,201,000   $2,780,000      
Other             
Commercial real estate   7,718,000    6,469,000      
Construction:               
Commercial   5,253,000    4,827,000      
Residential             
Residential real estate   415,000    361,000      
Consumer:               
Secured by real estate   1,104,000    1,082,000      
Other             
Other             
                
With an allowance recorded:               
Commercial:               
Secured by real estate   6,553,000    3,713,000   $710,000 
Other   3,238,000    3,074,000    1,661,000 
Commercial real estate   7,255,000    6,103,000    1,299,000 
Construction:               
Commercial   4,389,000    3,594,000    497,000 
Residential   270,000    249,000    8,000 
Residential real estate   451,000    418,000    2,000 
Consumer:               
Secured by real estate            
Other            
Other            
   $39,847,000   $32,670,000   $4,177,000 

 

15

 

   At December 31, 2011 
           Allowance for 
   Unpaid Principal   Recorded   Loan Losses 
   Balance   Investment   Allocated 
             
With no related allowance recorded:               
Commercial:               
Secured by real estate  $3,306,000   $2,831,000      
Other             
Commercial real estate   10,691,000    8,523,000      
Construction:               
Commercial   8,453,000    7,609,000      
Residential             
Residential real estate   866,000    779,000      
Consumer:               
Secured by real estate   911,000    891,000      
Other             
Other             
                
With an allowance recorded:               
Commercial:               
Secured by real estate   7,287,000    4,590,000   $468,000 
Other   2,876,000    2,844,000    1,440,000 
Commercial real estate   4,747,000    4,605,000    947,000 
Construction:               
Commercial   1,085,000    792,000    264,000 
Residential   273,000    252,000    2,000 
Residential real estate            
Consumer:               
Secured by real estate            
Other            
Other            
   $40,495,000   $33,716,000   $3,121,000 

 

   For the three months ended 
   March 31, 2012   March 31, 2011 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
                 
Commercial:                    
Secured by real estate  $6,958,000   $30,000   $6,032,000   $ 
Other   2,959,000    7,000    1,889,000    2,000 
Commercial real estate   12,850,000    59,000    11,226,000     
Construction:                    
Commercial   8,411,000    10,000    2,019,000     
Residential   251,000        281,000     
Residential real estate   779,000        1,107,000     
Consumer:                    
Secured by real estate   987,000        829,000     
Other                
Other                
                     
   Total nonperfoming loans  $33,195,000   $106,000   $23,383,000   $2,000 

 

16

The following table presents the aging of the recorded investment in past due loans by class of loans as of March 31, 2012 and December 31, 2011. Nonaccrual loans are included in the disclosure by payment status.

 

   March 31, 2012 
           Greater than       Loans     
   30-59 Days   60-89 Days   90 Days   Total   Not     
   Past Due   Past Due   Past Due   Past Due   Past Due   Total 
                         
Commercial:                              
Secured by real estate  $1,077,000   $84,000   $3,774,000   $4,935,000   $56,340,000   $61,275,000 
Other   699,000    99,000    2,164,000    2,962,000    33,432,000    36,394,000 
Commercial real estate:   7,058,000        5,860,000    12,918,000    232,846,000    245,764,000 
Construction:                              
Commercial       1,295,000    2,640,000    3,935,000    9,502,000    13,437,000 
Residential           249,000    249,000        249,000 
Residential real estate           779,000    779,000    58,868,000    59,647,000 
Consumer:                              
Secured by real estate   715,000        914,000    1,629,000    34,095,000    35,724,000 
Other                   1,006,000    1,006,000 
Other                   176,000    176,000 
Total  $9,549,000   $1,478,000   $16,380,000   $27,407,000   $426,265,000   $453,672,000 

 

   December 31, 2011 
           Greater than       Loans     
   30-59 Days   60-89 Days   90 Days   Total   Not     
   Past Due   Past Due   Past Due   Past Due   Past Due   Total 
                         
Commercial:                              
Secured by real estate  $875,000   $546,000   $3,977,000   $5,398,000   $55,252,000   $60,650,000 
Other   53,000    260,000    1,752,000    2,065,000    39,785,000    41,850,000 
Commercial real estate:       736,000    5,352,000    6,088,000    240,461,000    246,549,000 
Construction:                              
Commercial       561,000    2,640,000    3,201,000    9,712,000    12,913,000 
Residential           252,000    252,000        252,000 
Residential real estate           779,000    779,000    53,915,000    54,694,000 
Consumer:                              
Secured by real estate   581,000        719,000    1,300,000    36,978,000    38,278,000 
Other   4,000            4,000    1,082,000    1,086,000 
Other                   141,000    141,000 
Total  $1,513,000   $2,103,000   $15,471,000   $19,087,000   $437,326,000   $456,413,000 

 

Troubled Debt Restructurings

 

At March 31, 2012 and December 31, 2011, the Corporation had $15.0 million and $15.1 million, respectively, of loans whose terms have been modified in troubled debt restructurings. Of these loans, $5.8 million and $6.0 million were performing in accordance with their new terms at March 31, 2012 and December 31, 2011, respectively. The remaining troubled debt restructures are reported as nonaccrual loans. Specific reserves of $1.6 million and $1.2 million have been allocated for the troubled debt restructurings at March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, the Corporation has committed $296,000 and $416,000, respectively, of additional funds to a single customer with an outstanding construction loan that is classified as troubled debt restructuring.

 

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There are no troubled debt restructurings that have defaulted since modification in the last 12-month period. During the three months ended March 31, 2012 there were no loans modified as troubled debt restructurings.

 

17

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

 

Credit Quality Indicators

 

The Corporation categorizes certain loans into risk categories based on relevant information about the ability of the 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 Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate and commercial construction loans. This analysis is performed at the time the loan is originated and annually thereafter. The Corporation uses the following definitions for risk ratings.

 

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or the Bank’s credit position at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. While potentially weak, the borrower is currently marginally acceptable and loss of principal or interest is not presently envisioned.

 

Substandard – Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the repayment and liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

Doubtful – A Doubtful loan with all 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 know facts, conditions, and values, highly questionable or improbable. The likelihood of loss is extremely high, but because of certain important and reasonably specific factors, an estimated loss is deferred until a more exact status can be determined.

 

Loss – A loan classified Loss is considered uncollectible and of such little value that its continuance as an asset is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off a basically worthless asset even though partial recovery may be effected in the future.

 

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 March 31, 2012 and December 31, 2011, and based on the most recent analysis performed at those times, the risk category of loans by class is as follows:

 

   March 31, 2012 
       Special                 
   Pass   Mention   Substandard   Doubtful   Loss   Total 
                         
Commercial:                              
Secured by real estate  $53,254,000   $2,899,000   $4,877,000   $245,000   $   $61,275,000 
Other   33,382,000    581,000    583,000    1,848,000        36,394,000 
Commercial real estate:   232,837,000    3,737,000    6,787,000    2,403,000        245,764,000 
Construction:                              
Commercial   5,016,000    1,655,000    6,766,000            13,437,000 
Residential           249,000            249,000 
Total  $324,489,000   $8,872,000   $19,262,000   $4,496,000   $   $357,119,000 

 

18

 

   December 31, 2011 
       Special                 
   Pass   Mention   Substandard   Doubtful   Loss   Total 
                         
Commercial:                              
Secured by real estate  $52,004,000   $3,234,000   $5,248,000   $164,000   $   $60,650,000 
Other   38,790,000    566,000    617,000    1,877,000        41,850,000 
Commercial real estate:   233,295,000    3,512,000    7,333,000    2,409,000        246,549,000 
Construction:                              
Commercial   4,512,000    1,656,000    6,745,000            12,913,000 
Residential           252,000            252,000 
Total  $328,601,000   $8,968,000   $20,195,000   $4,450,000   $   $362,214,000 

 

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loans losses. For residential real estate and consumer loan segments, the Corporation also evaluates credit quality based on payment activity. The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of March 31, 2012 and December 31, 2011. 

 

   March 31, 2012 
       Past Due and     
   Current   Nonaccrual   Total 
             
Residential real estate  $58,868,000   $779,000   $59,647,000 
Consumer:               
Secured by real estate   34,095,000    1,629,000    35,724,000 
Other   1,006,000        1,006,000 
Total  $93,969,000   $2,408,000   $96,377,000 

 

   December 31, 2011 
       Past Due and     
   Current   Nonaccrual   Total 
             
Residential real estate  $53,915,000   $779,000   $54,694,000 
Consumer:               
Secured by real estate   36,978,000    1,300,000    38,278,000 
Other   1,082,000    4,000    1,086,000 
Total  $91,975,000   $2,083,000   $94,058,000 

 

Note 4. Interest Rate Swap

 

The Corporation utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent an amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

 

Interest Rate Swap Designated as Cash Flow Hedge: During the second quarter of 2009, the Corporation entered into a swap with a notional amount of $7 million and an effective date of March 17, 2010. It was designated as a cash flow hedge of the subordinated debentures and was determined to be fully effective during the three months ended March 31, 2012 and 2011. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedge no longer be considered effective. The Corporation expects the hedge to remain fully effective during the remaining term of the swap. As of March 31, 2012, the interest rate swap is secured by investment securities with a fair value of $1,001,000.

 

Summary information as of March 31, 2012 about the interest rate swap designated as a cash flow hedge is as follows:

 

19

  

Notional amount $7,000,000
Pay rate 7.00%
Receive rate 3 month LIBOR plus 2.95%
Maturity March 17, 2016
Unrealized loss ($863,000)

 

The net expense recorded on the swap transaction totaled $62,000 and $66,000 for the three months ended March 31, 2012 and 2011, respectively, and is reported as a component of interest expense – borrowed money.

 

The fair value of the interest rate swap of ($863,000) and ($893,000) at March 31, 2012 and December 31, 2011, respectively, was included in accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

 

The following table presents the after tax net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the periods indicated.

 

   For the three months ended March 31, 2012 
           Amount of gain 
   Amount of gain   Amount of gain   (loss) recognized 
   (loss) recognized   (loss) reclassified   in other 
   in OCI   from OCI   noninterest income 
   (Effective Portion)   to interest income   (Ineffective Portion) 
             
Interest rate contract  $18,000   $   $ 

 

   For the three months ended March 31, 2011 
           Amount of gain 
   Amount of gain   Amount of gain   (loss) recognized 
   (loss) recognized   (loss) reclassified   in other 
   in OCI   from OCI   noninterest income 
   (Effective Portion)   to interest income   (Ineffective Portion) 
             
Interest rate contract  $59,000   $   $ 

 

Note 5. Fair Value of Financial Instruments

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

The interest rate swaps are reported at fair values obtained from brokers who utilize internal models with observable market data inputs to estimate the values of these instruments (Level 2 inputs).

 

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The Corporation measures impairment of collateralized loans based on the estimated fair value of the collateral less estimated costs to sell, incorporating assumptions that experienced parties might use in estimating the value of such collateral (Level 3 inputs). At the time a loan is considered impaired, it is valued at the lower of cost or fair value.  Generally, impaired loans carried at fair value have been partially charged off or receive specific allocations of the allowance for loan losses.  For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports. Collateral is then adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. 

 

Appraisals are generally obtained to support the fair value of collateral.  Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by licensed appraisers whose qualifications and licenses have been reviewed and verified by the Corporation.  Once received, the Lending Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics. 

 

Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties.  In addition, appraisers may make adjustments to the sales price of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property.  Management generally applies a 12% discount to real estate appraised values to not only cover disposition / selling costs but additionally, to reflect the potential price reductions in the market necessary to complete an expedient transaction and to factor in impact of the perception that a transaction being completed by a bank may result in further price reduction pressure.

 

Assets and Liabilities Measured on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

       Fair Value Measurements Using:     
       Quoted Prices in   Significant     
       Active Markets   Other   Significant 
       for Identical   Observable   Unobservable 
   Carrying   Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
   At March 31, 2012 
Assets:                    
Available for sale securities                    
U.S. Treasuries  $4,038,000   $4,038,000   $   $ 
U.S. government -                    
sponsered agencies   31,193,000        31,193,000     
Obligations of state and                    
political subdivisions   9,797,000        9,797,000     
Mortgage-backed                    
securities - residential   126,696,000        126,696,000     
Other equity investments   3,378,000        3,378,000     
Total available for                    
 sale securities  $175,102,000   $4,038,000   $171,064,000   $ 
                     
Liabilities:                    
Interest rate swap  $863,000   $   $863,000   $ 

 

   At December 31, 2011 
Assets:                    
Available for sale securities                    
U.S. Treasuries  $4,050,000   $4,050,000   $   $ 
U.S. government -                    
sponsered agencies   20,744,000        20,744,000     
Obligations of state and                    
political subdivisions   9,318,000        9,318,000     
Mortgage-backed                    
securities - residential   133,467,000        133,467,000     
Other equity investments   3,346,000        3,346,000     
Total available for                    
 sale securities  $170,925,000   $4,050,000   $166,875,000   $ 
                     
Liabilities:                    
Interest rate swap  $893,000   $   $893,000   $ 

 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2012 or 2011.  

 

21

Assets and Liabilities Measured on a Non-Recurring Basis

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

       Fair Value Measurements Using:     
       Quoted Prices   Significant     
       in Active   Other   Significant 
       Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
   At March 31, 2012 
Assets:                    
Impaired loans                    
Commercial:                    
Secured by real estate  $1,225,000   $   $   $1,225,000 
Other   384,000            384,000 
Commercial real estate   2,491,000            2,491,000 
Construction:                    
Commercial   3,096,000            3,096,000 
Residential