XNAS:SSFN Stewardship Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:SSFN Fair Value Estimate
Premium
XNAS:SSFN Consider Buying
Premium
XNAS:SSFN Consider Selling
Premium
XNAS:SSFN Fair Value Uncertainty
Premium
XNAS:SSFN Economic Moat
Premium
XNAS:SSFN Stewardship
Premium
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2012

 

  (  ) TRANSITION 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 August 7, 2012 was 5,909,595.

 

 
 

Stewardship Financial Corporation

 

INDEX
   
  PAGE
  NUMBER
PART I  -  FINANCIAL INFORMATION  
   
ITEM 1  -  FINANCIAL STATEMENTS  
   
Consolidated Statements of Financial Condition at June 30, 2012 and December 31, 2011 (Unaudited) 1
   
Consolidated Statements of Income (Loss) for the Three and Six Months ended June 30, 2012 and 2011 (Unaudited) 2
   
Consolidated Statement of Changes in Stockholders’ Equity for the Six Months ended June 30, 2012 and 2011 (Unaudited) 3
   
Consolidated Statements of Comprehensive Income for the Three and Six Months ended June 30, 2012 and 2011 (Unaudited) 4
   
Consolidated Statements of Cash Flows for the Six Months ended June 30, 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 5 -  OTHER 36
   
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)
 

 

   June 30,   December 31, 
   2012   2011 
Assets          
           
Cash and due from banks  $24,616,000   $13,289,000 
Other interest-earning assets   724,000    409,000 
      Cash and cash equivalents   25,340,000    13,698,000 
           
Securities available for sale   172,712,000    170,925,000 
Securities held to maturity; estimated fair value of $35,380,000 (2012) and          
   $40,984,000 (2011)   32,993,000    38,354,000 
FHLB-NY stock, at cost   2,213,000    2,478,000 
Mortgage loans held for sale   3,334,000    4,711,000 
Loans, net of allowance for loan losses of $11,934,000 (2012) and $11,604,000 (2011)   433,378,000    444,803,000 
Premises and equipment, net   5,873,000    6,101,000 
Accrued interest receivable   2,489,000    2,618,000 
Other real estate owned, net   1,991,000    5,288,000 
Bank owned life insurance   10,306,000    10,145,000 
Other assets   9,499,000    9,697,000 
      Total assets  $700,128,000   $708,818,000 
           
Liabilities and shareholders' equity          
           
Liabilities          
Deposits:          
   Noninterest-bearing  $124,017,000   $115,776,000 
   Interest-bearing   469,478,000    477,776,000 
       Total deposits   593,495,000    593,552,000 
           
Federal Home Loan Bank of New York advances   25,000,000    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   644,000    775,000 
Accrued expenses and other liabilities   1,539,000    2,440,000 
       Total liabilities   642,237,000    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 June 30, 2012 and December 31, 2011          
   liquidation preference of $15,000,000   14,960,000    14,955,000 
Common stock, no par value; 10,000,000 shares authorized;          
   5,905,358 and 5,882,504 shares issued and outstanding at June 30, 2012          
   and December 31, 2011, respectively   40,529,000    40,420,000 
Retained earnings   846,000    1,043,000 
Accumulated other comprehensive income, net   1,556,000    1,374,000 
       Total shareholders' equity   57,891,000    57,792,000 
           
       Total liabilities and shareholders' equity  $700,128,000   $708,818,000 

 

See notes to unaudited consolidated financial statements.
 

1

 

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

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2012   2011   2012   2011 
Interest income:                    
Loans  $6,085,000   $6,666,000   $12,344,000   $13,106,000 
Securities held to maturity                    
Taxable   128,000    177,000    280,000    360,000 
Non-taxable   204,000    221,000    413,000    444,000 
Securities available for sale                    
Taxable   798,000    878,000    1,597,000    1,717,000 
Non-taxable   64,000    52,000    125,000    96,000 
FHLB dividends   28,000    30,000    57,000    68,000 
Other interest-earning assets   10,000    9,000    17,000    17,000 
Total interest income   7,317,000    8,033,000    14,833,000    15,808,000 
                     
Interest expense:                    
Deposits   894,000    1,280,000    1,877,000    2,569,000 
Borrowed money   463,000    532,000    945,000    1,069,000 
Total interest expense   1,357,000    1,812,000    2,822,000    3,638,000 
                     
Net interest income before provision for loan losses   5,960,000    6,221,000    12,011,000    12,170,000 
Provision for loan losses   2,900,000    1,915,000    4,665,000    3,590,000 
Net interest income after provision for loan losses   3,060,000    4,306,000    7,346,000    8,580,000 
                     
Noninterest income:                    
Fees and service charges   531,000    538,000    1,046,000    1,049,000 
Bank owned life insurance   81,000    81,000    161,000    161,000 
Gain on calls and sales of securities   12,000    21,000    445,000    21,000 
Gain on sales of mortgage loans   154,000    186,000    565,000    590,000 
Miscellaneous   133,000    117,000    244,000    206,000 
Total noninterest income   911,000    943,000    2,461,000    2,027,000 
                     
Noninterest expenses:                    
Salaries and employee benefits   2,257,000    2,261,000    4,643,000    4,497,000 
Occupancy, net   471,000    475,000    958,000    1,020,000 
Equipment   243,000    238,000    491,000    496,000 
Data processing   316,000    338,000    650,000    675,000 
Advertising   139,000    139,000    278,000    216,000 
FDIC insurance premium   155,000    147,000    303,000    401,000 
Charitable contributions   25,000    75,000    175,000    175,000 
Miscellaneous   848,000    863,000    1,710,000    1,740,000 
Total noninterest expenses   4,454,000    4,536,000    9,208,000    9,220,000 
(Loss) income before income tax (benefit) expense   (483,000)   713,000    599,000    1,387,000 
Income tax (benefit) expense   (159,000)   128,000    147,000    319,000 
Net (loss) income   (324,000)   585,000    452,000    1,068,000 
Dividends on preferred stock and accretion   38,000    138,000    113,000    276,000 
Net (loss) income available to common shareholders  $(362,000)  $447,000   $339,000   $792,000 
                     
Basic (loss) earnings per common share  $(0.06)  $0.08   $0.06   $0.14 
Diluted (loss) earnings per common share  $(0.06)  $0.08   $0.06   $0.14 
                     
Weighted average number of common shares outstanding   5,902,167    5,850,506    5,897,266    5,850,116 
Weighted average number of diluted common                    
    shares outstanding   5,902,167    5,850,506    5,897,266    5,850,116 

 

See notes to unaudited consolidated financial statements.
 

2

 

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

 

   Six Months Ended June 30, 2012 
                       Accumulated     
                       Other     
                       Comprehensive     
   Preferred   Common Stock   Retained   Treasury   Income     
   Stock   Shares   Amount   Earnings   Stock   (Loss), 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               (531,000)           (531,000)
Payment of discount on dividend                                   
   reinvestment plan           (5,000)               (5,000)
Cash dividends accrued on preferred stock               (113,000)           (113,000)
Common stock issued under stock plans       22,854    114,000                114,000 
Amortization of issuance costs   5,000            (5,000)             
Net income               452,000            452,000 
Change in unrealized holding gains on                                   
   securities available for sale arising during                              
   the period (net of taxes of $111,000)                       172,000    172,000 
Change in fair value of interest rate                                   
   swap (net of taxes of $7,000)                       10,000    10,000 
                                    
Balance -- June 30, 2012  $14,960,000    5,905,358   $40,529,000   $846,000   $   $1,556,000   $57,891,000 
                                    

 

   Six Months Ended June 30, 2011 
                       Accumulated     
                       Other     
                       Comprehensive     
   Preferred   Common Stock   Retained   Treasury   Income     
   Stock   Shares   Amount   Earnings   Stock   (Loss), 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               (585,000)           (585,000)
Payment of discount on dividend                                   
   reinvestment plan           (10,000)               (10,000)
Cash dividends accrued on preferred stock               (250,000)           (250,000)
Common stock issued under stock plans       3,631    12,000        13,000        25,000 
Stock option compensation expense           22,000                22,000 
Accretion of discount on preferred stock   26,000            (26,000)             
Amortization of issuance costs   5,000            (5,000)             
Net income               1,068,000            1,068,000 
Change in unrealized holding gains on                                   
   securities available for sale arising during                              
   the period (net of taxes of $811,000)                       1,279,000    1,279,000 
Change in fair value of interest rate                                   
   swap (net of taxes of $23,000)                       (34,000)   (34,000)
                                    
Balance -- June 30, 2011  $9,827,000    5,850,558   $40,540,000   $2,161,000   $   $1,119,000   $53,647,000 

  

See notes to unaudited consolidated financial statements.
 

3

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2012   2011   2012   2011 
                 
Net (loss) income  $(324,000)  $585,000   $452,000   $1,068,000 
                     
Other comprehensive income:                 
Change in unrealized holding gains on securities                    
available for sale arising during the period   668,000    2,221,000    728,000    2,111,000 
Reclassification adjustment for gains in net income   (12,000)   (21,000)   (445,000)   (21,000)
Net unrealized gains    656,000    2,200,000    283,000    2,090,000 
Tax effect   (256,000)   (858,000)   (111,000)   (811,000)
Net unrealized gains, net of tax amount   400,000    1,342,000    172,000    1,279,000 
                     
Change in fair value of interest rate swap   (13,000)   (155,000)   17,000    (57,000)
Tax effect   5,000    62,000    (7,000)   23,000 
Change in fair value of interest rate swap, net of tax amount   (8,000)   (93,000)   10,000    (34,000)
                     
Total other comprehensive income    392,000    1,249,000    182,000    1,245,000 
                     
Total comprehensive income  $68,000   $1,834,000   $634,000   $2,313,000 

 

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

 

   06/30/12   12/31/11 
           
Unrealized gain on securities available for sale  $2,082,000   $1,910,000 
Unrealized loss on fair value of interest rate swap   (526,000)   (536,000)
           
Accumulated other comprehensive income, net  $1,556,000   $1,374,000 

 

See notes to unaudited consolidated financial statements.
 

4

 

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

 

   Six Months Ended 
   June 30, 
   2012   2011 
Cash flows from operating activities:          
Net income  $452,000   $1,068,000 
Adjustments to reconcile net income to          
net cash provided by operating activities:          
Depreciation and amortization of premises and equipment   276,000    300,000 
Amortization of premiums and accretion of discounts, net   791,000    637,000 
Accretion (amortization) of deferred loan fees   25,000    (20,000)
Provision for loan losses   4,665,000    3,590,000 
Originations of mortgage loans held for sale   (39,324,000)   (35,536,000)
Proceeds from sale of mortgage loans   41,266,000    45,944,000 
Gain on sales of mortgage loans   (565,000)   (590,000)
Gain on sales and calls of securities   (445,000)   (21,000)
Gain on sale of other real estate owned   (469,000)    
Deferred income tax benefit   (142,000)   (1,188,000)
Decrease in accrued interest receivable   129,000    3,000 
Decrease in accrued interest payable   (131,000)   (79,000)
Earnings on bank owned life insurance   (161,000)   (161,000)
Stock option expense       22,000 
Decrease in other assets   315,000    1,150,000 
Decrease in other liabilities   (891,000)   (163,000)
Net cash provided by operating activities   5,791,000    14,956,000 
           
Cash flows from investing activities:          
Purchase of securities available for sale   (40,525,000)   (21,306,000)
Proceeds from maturities and principal repayments on securities available for sale   12,783,000    9,602,000 
Proceeds from sales and calls on securities available for sale   25,960,000    6,032,000 
Proceeds from maturities and principal repayments on securities held to maturity   2,188,000    2,851,000 
Proceeds from calls on securities held to maturity   3,105,000    1,000,000 
Sale of FHLB-NY stock   265,000    6,000 
Net decrease (increase) in loans   5,853,000    (17,654,000)
Proceeds from sale of other real estate owned   4,562,000    366,000 
Additions to premises and equipment   (48,000)   (114,000)
Net cash provided by (used in) investing activities   14,143,000    (19,217,000)
           
Cash flows from financing activities:          
Net increase in noninterest-bearing deposits   8,241,000    14,795,000 
Net decrease in interest-bearing deposits   (8,298,000)   (1,980,000)
Net increase in securities sold under agreements to repurchase       1,149,000 
Net decrease in short term borrowings   (4,700,000)    
Repayment of long term borrowings   (3,000,000)   (3,000,000)
Cash dividends paid on common stock   (531,000)   (585,000)
Cash dividends paid on preferred stock   (113,000)   (250,000)
Payment of discount on dividend reinvestment plan   (5,000)   (10,000)
Issuance of common stock   114,000    25,000 
Net cash (used in) provided by financing activities   (8,292,000)   10,144,000 
           
Net increase in cash and cash equivalents   11,642,000    5,883,000 
Cash and cash equivalents - beginning   13,698,000    19,983,000 
Cash and cash equivalents - ending  $25,340,000   $25,866,000 

 

 

5

 

 

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

 

   Six Months Ended
   June 30,
   2012   2011 
Supplemental disclosures of cash flow information:        
Cash paid during the period for interest  $2,953,000   $3,717,000 
Cash paid during the period for income taxes  $1,194,000   $1,215,000 
Transfers from loans to other real estate owned  $882,000   $ 

 

See notes to unaudited consolidated financial statements.
 

6

 

Stewardship Financial Corporation and Subsidiary

Notes to Consolidated Financial Statements

June 30, 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 and six months ended June 30, 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).

 

7

 

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 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:

 

   June 30, 2012 
   Amortized   Gross Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. Treasury  $4,015,000   $12,000   $   $4,027,000 
U.S. government-sponsored agencies   24,353,000    52,000    21,000    24,384,000 
Obligations of state and political                    
 subdivisions   10,514,000    408,000    25,000    10,897,000 
Mortgage-backed securities - residential   125,523,000    2,971,000    33,000    128,461,000 
Asset-backed securities (a)   1,044,000        4,000    1,040,000 
Corporate debt   491,000        1,000    490,000 
                     
Total debt securities   165,940,000    3,443,000    84,000    169,299,000 
Other equity investments   3,358,000    55,000        3,413,000 
   $169,298,000   $3,498,000   $84,000   $172,712,000 

 

   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 
                     
(a) Collateralized by student loans.                    

 

Cash proceeds realized from sales and calls of securities available for sale for the three and six months ended June 30, 2012 were $14,000,000 and $25,960,000, respectively. Cash proceeds realized from sales and calls of securities available for sale for the three and six months ended June 30, 2011 were $5,032,000 and $6,032,000, respectively. Gross gains realized on sales or calls during the three and six months ended June 30, 2012 totaled $5,000 and $438,000, respectively. The tax provision related to these realized gains was $2,000 and $170,000, respectively. There were no gross losses realized on sales or calls during the three and six months ended June 30, 2012. Gross gains realized on sales or calls during the three and six months ended June 30, 2011 totaled $21,000 and $21,000, respectively. The tax provision related to these realized gains was $8,000 and $8,000, respectively. There were no gross losses realized on sales or calls during the three and six months ended June 30, 2011.

 

9

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

 

   June 30, 2012 
   Amortized   Gross Unrecognized   Fair 
   Cost   Gains   Losses   Value 
                 
U.S. government-sponsored agencies  $261,000   $47,000   $   $308,000 
Obligations of state and political                    
 subdivisions   23,388,000    1,547,000        24,935,000 
Mortgage-backed securities - residential   9,344,000    793,000        10,137,000 
   $32,993,000   $2,387,000   $   $35,380,000 

 

   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 three and six months ended June 30, 2012 were $2,500,000 and $3,105,000, respectively. There were no cash proceeds realized from calls of securities held to maturity for the three months ended June 30, 2011. Cash proceeds realized from calls of securities held to maturity for the six months ended June 30, 2011 were $1,000,000. Gross gains realized on calls during the three and six months ended June 30, 2012 totaled $7,000 and $7,000, respectively. The tax provision related to these realized gains was $3,000 and $3,000, respectively. There were no gross losses realized on calls during the three and six months ended June 30, 2012. There were no gross gains and no gross losses realized from calls for the three and six months ended June 30, 2011.

 

The following table presents the amortized cost and fair value of the investment securities portfolio by contractual maturity. As issuers may have the right to call or prepay obligations with or without call or prepayment penalties, the actual maturities may differ from contractual maturities. Securities not due at a single maturity date, such as mortgage-backed securities, are shown separately.

 

   June 30, 2012 
   Amortized   Fair 
   Cost   Value 
         
Maturity          
Available for sale          
Within one year  $5,020,000   $5,043,000 
After one year, but within five years   3,857,000   3,878,000 
After five years, but within ten years   17,295,000    17,562,000 
After ten years   13,201,000    13,315,000 
Mortgage-backed securities - residential   125,523,000    128,461,000 
Asset-backed securities   1,044,000    1,040,000 
Total  $165,940,000   $169,299,000 
           
Held to maturity          
Within one year  $647,000   $651,000 
After one year, but within five years   14,745,000    15,644,000 
After five years, but within ten years   8,079,000    8,759,000 
After ten years   178,000    189,000 
Mortgage-backed securities - residential   9,344,000    10,137,000 
Total  $32,993,000   $35,380,000 

 

10

The following tables summarize the fair value and unrealized losses of those investment securities which reported an unrealized loss at June 30, 2012 and December 31, 2011, and if the unrealized loss was continuous for the twelve months prior to June 30, 2012 and December 31, 2011.

 

Available for Sale
June 30, 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   8,486,000    (21,000)           8,486,000    (21,000)
Obligations of state and                              
 political subdivisions   2,994,000    (25,000)           2,994,000    (25,000)
Mortgage-backed                              
 securities - residential   5,288,000    (33,000)           5,288,000    (33,000)
Asset-backed securities   1,040,000    (4,000)           1,040,000    (4,000)
Corporate debt   490,000    (1,000)           490,000    (1,000)
Other equity investments                        
    Total temporarily                              
         impaired securities  $18,298,000   $(84,000)  $   $   $18,298,000   $(84,000)

   

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 June 30, 2012 or December 31, 2011.

 

Other-Than-Temporary-Impairment

 

At June 30, 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 June 30, 2012.

 

 

11

Note 3. Loans and Nonperforming Loans

 

The following table sets forth the composition of loans:

  

   June 30,   December 31, 
   2012   2011 
         
Commercial:          
      Secured by real estate  $56,999,000   $60,650,000 
      Other   35,464,000    41,850,000 
Commercial real estate   242,858,000    246,549,000 
Construction:          
      Commercial   11,390,000    12,913,000 
      Residential   248,000    252,000 
Residential real estate   63,081,000    54,694,000 
Consumer:          
      Secured by real estate   34,411,000    38,278,000 
      Other   647,000    1,086,000 
Other   169,000    141,000 
       Total gross loans   445,267,000    456,413,000 
           
Less: Deferred loan fees, net   (45,000)   6,000 
      Allowance for loan losses   11,934,000    11,604,000 
    11,889,000    11,610,000 
           
Loans, net  $433,378,000   $444,803,000 

 

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

 

   For the three months ended June 30, 2012 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $6,068,000   $1,994,000   $2,068,000   $29,000   $6,023,000 
Commercial real estate   5,448,000    918,000    1,839,000        4,527,000 
Construction   777,000    (118,000)   145,000        514,000 
Residential real estate   338,000    54,000            392,000 
Consumer   439,000    39,000    41,000        437,000 
Other loans   2,000    1,000        1,000    4,000 
Unallocated   25,000    12,000            37,000 
Total  $13,097,000   $2,900,000   $4,093,000   $30,000   $11,934,000 

 

12

 

   For the six months ended June 30, 2012 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $5,368,000   $2,960,000   $2,356,000   $51,000   $6,023,000 
Commercial real estate   4,943,000    1,423,000    1,839,000        4,527,000 
Construction   480,000    179,000    145,000        514,000 
Residential real estate   303,000    89,000            392,000 
Consumer   498,000    (14,000)   47,000        437,000 
Other loans   2,000    1,000        1,000    4,000 
Unallocated   10,000    27,000            37,000 
Total  $11,604,000   $4,665,000   $4,387,000   $52,000   $11,934,000 

 

   For the three months ended June 30, 2011 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $4,979,000   $850,000   $260,000   $8,000   $5,577,000 
Commercial real estate   3,305,000    1,180,000    288,000        4,197,000 
Construction   752,000    (168,000)   14,000        570,000 
Residential real estate   288,000    131,000            419,000 
Consumer   532,000    (71,000)   1,000        460,000 
Other loans   3,000    6,000    5,000    1,000    5,000 
Unallocated   14,000    (12,000)           2,000 
Total  $9,873,000   $1,916,000   $568,000   $9,000   $11,230,000 

 

   For the six months ended June 30, 2011 
   Balance,   Provision       Recoveries   Balance, 
   beginning   charged   Loans   of loans   end 
   of period   to operations   charged off   charged off   of period 
                     
Commercial  $3,745,000   $2,201,000   $388,000   $19,000   $5,577,000 
Commercial real estate   3,112,000    1,477,000    392,000        4,197,000 
Construction   930,000    (337,000)   23,000        570,000 
Residential real estate   184,000    235,000            419,000 
Consumer   510,000    10,000    60,000        460,000 
Other loans   2,000    9,000    8,000    2,000    5,000 
Unallocated   7,000    (5,000)           2,000 
Total  $8,490,000   $3,590,000   $871,000   $21,000   $11,230,000 

 

13

 

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 June 30, 2012 and December 31, 2011.

 

   June 30, 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  $2,135,000   $67,000   $281,000   $14,000   $   $   $   $2,497,000 
                                         
   Collectively                                        
    evaluated for                                        
    impairment   3,888,000    4,460,000    233,000    378,000    437,000    4,000    37,000    9,437,000 
Total ending                                        
 allowance                                        
 balance  $6,023,000   $4,527,000   $514,000   $392,000   $437,000   $4,000   $37,000   $11,934,000 
                                         
Loans:                                        
   Loans                                        
    individually                                        
    evaluated for                                        
    impairment  $9,941,000   $13,956,000   $7,393,000   $779,000   $1,039,000   $   $   $33,108,000 
                                         
   Loans                                        
    collectively                                        
    evaluated for                                        
    impairment   82,522,000    228,902,000    4,245,000    62,302,000    34,019,000    169,000        412,159,000 
Total ending                                        
 loan balance  $92,463,000   $242,858,000   $11,638,000   $63,081,000   $35,058,000   $169,000   $   $445,267,000 

 

14

 

   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:

 

   June 30,   December 31, 
   2012   2011 
         
Commercial:          
Secured by real estate  $4,872,000   $6,178,000 
Other   3,518,000    2,494,000 
Commercial real estate   12,278,000    9,302,000 
Construction:          
Commercial   6,807,000    7,840,000 
Residential   248,000    252,000 
Residential real estate   779,000    779,000 
Consumer:          
Secured by real estate   1,039,000    891,000 
Other        
Other        
           
   Total nonperfoming loans  $29,541,000   $27,736,000 

 

15

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

 

   At June 30, 2012 
   Unpaid       Allowance for 
   Principal   Recorded   Loan Losses 
   Balance   Investment   Allocated 
             
With no related allowance recorded:               
Commercial:               
Secured by real estate  $3,347,000   $2,863,000      
Other   713,000    255,000      
Commercial real estate   13,299,000    10,979,000      
Construction:               
Commercial   6,534,000    5,706,000      
Residential             
Residential real estate             
Consumer:               
Secured by real estate   1,049,000    1,039,000      
Other             
Other             
                
With an allowance recorded:               
Commercial:               
Secured by real estate   6,306,000    3,081,000   $474,000 
Other   3,748,000    3,742,000    1,661,000 
Commercial real estate   4,414,000    2,977,000    67,000 
Construction:               
Commercial   1,581,000    1,439,000    266,000 
Residential   269,000    248,000    15,000 
Residential real estate   866,000    779,000    14,000 
Consumer:               
Secured by real estate            
Other            
Other            
   $42,126,000   $33,108,000   $2,497,000 

 

 

16

 

   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   For the six months ended 
   June 30, 2012   June 30, 2012 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
                 
Commercial:                
Secured by real estate  $6,219,000   $13,000   $6,619,000   $43,000 
Other   3,535,000    4,000    3,305,000    11,000 
Commercial real estate   13,264,000    67,000    13,219,000    126,000 
Construction:                    
Commercial   7,783,000    8,000    7,989,000    18,000 
Residential   249,000        250,000     
Residential real estate   779,000        779,000     
Consumer:                    
Secured by real estate   1,060,000        1,004,000     
Other                
Other                
                     
   Total nonperfoming loans  $32,889,000   $92,000   $33,165,000   $198,000 

 

   For the three months ended   For the six months ended 
   June 30, 2011   June 30, 2011 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
                 
Commercial:                
Secured by real estate  $6,343,000   $   $6,203,000   $ 
Other   1,844,000    2,000    1,871,000    4,000 
Commercial real estate   13,342,000    10,000    12,408,000    10,000 
Construction:                    
Commercial   2,007,000        2,011,000     
Residential   278,000        279,000     
Residential real estate   1,107,000        1,106,000     
Consumer:                    
Secured by real estate   828,000        828,000     
Other                
Other                
                     
   Total nonperfoming loans  $25,749,000   $12,000   $24,706,000   $14,000 

17

 

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2012 and December 31, 2011. Nonaccrual loans are included in the disclosure by payment status.

 

   June 30, 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  $319,000   $99,000   $3,611,000   $4,029,000   $52,970,000   $56,999,000 
Other   170,000        282,000    452,000    35,012,000    35,464,000 
Commercial real estate:   923,000    3,848,000    7,385,000    12,156,000    230,702,000    242,858,000 
Construction:                              
Commercial       300,000    2,377,000    2,677,000    8,713,000