XNAS:NWFL Norwood Financial Corp 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
 
(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    For the quarterly period ended March 31, 2012
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    For the transition period from  ________ to ________ 

Commission file number   0-28366

Norwood Financial Corp.
(Exact name of Registrant as specified in its charter)

Pennsylvania
 
23-2828306
(State or other jurisdiction of
Incorporation or organization)
 
(I.R.S. employer identification no.)

717 Main Street, Honesdale, Pennsylvania
 
18431
 
(Address of principal executive offices)
 
(Zip Code)
 

(570) 253-1455
(Registrant’s telephone number, including area code)

NA
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check (x) 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 [x]  No [ ]

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    [ ]  Yes[X]  No

Class
 
Outstanding as of May 1, 2012
 
Common stock, par value $0.10 per share
   3,274,457  




 
1

 



NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2012


   
 
 Page
Number
PART I -
CONSOLIDATED FINANCIAL INFORMATION OF NORWOOD
FINANCIAL CORP.
 
     
Item 1.
Financial Statements
  3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
40
Item 4.
Controls and Procedures
41
PART II -
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
42
Item 1A.
Risk Factors
42
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
Item 3.
Defaults upon Senior Securities
42
Item 4.
Mine Safety Disclosures
42
Item 5.
Other Information
42
Item 6.
Exhibits
42
     
Signatures
 
44


 
2

 

PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements
NORWOOD FINANCIAL CORP.
Consolidated Balance Sheets  (unaudited)
(dollars in thousands, except share and per share data)
    March 31,     December 31,  
   
2012
   
2011
 
ASSETS
           
Cash and due from banks
  $ 14,250     $ 8,974  
Interest bearing deposits with banks
    5,991       12,449  
          Cash and cash equivalents
    20,241       21,423  
                 
Securities available for sale, at fair value
    148,489       150,263  
Securities held to maturity, fair value 2012:
   $175, 2011: $177
    171       171  
Loans receivable (net of unearned income)
    479,082       457,907  
   Less:  Allowance for loan losses
    5,618       5,458  
Net loans receivable
    473,464       452,449  
Investment in Federal Home Loan Bank Stock, at cost
    3,413       3,593  
Bank premises and equipment, net
    7,468       7,479  
Bank owned life insurance
    12,003       11,887  
Accrued interest receivable
    2,690       2,468  
Foreclosed real estate owned
    1,143       2,910  
Goodwill
    9,715       9,715  
Other intangibles
    760       800  
Other assets
    5,972       5,656  
    TOTAL ASSETS
  $ 685,529     $ 668,814  
                 
LIABILITIES
               
  Deposits:
               
      Non-interest bearing demand
  $ 78,339     $ 71,959  
      Interest-bearing
    467,853       453,808  
        Total deposits
    546,192       525,767  
  Short-term borrowings
    15,854       21,794  
  Other borrowings
    27,625       27,670  
  Accrued interest payable
    1,333       1,321  
  Other liabilities
    5,664       4,201  
    TOTAL LIABILITIES
    596,668       580,753  
                 
STOCKHOLDERS’ EQUITY
               
    Common stock, $.10 par value per share, authorized
    10,000,000; shares issued 2012: 3,371,866 shares,
                                                  2011: 3,371,866 shares
      337         337  
    Surplus
    24,686       24,660  
    Retained  earnings
    63,513       62,308  
    Treasury stock at cost: 2012: 97,392 shares,
                                              2011: 87,370 shares
    (2,831 )     (2,559 )
  Accumulated other comprehensive income
    3,156       3,315  
     TOTAL STOCKHOLDERS’ EQUITY
    88,861       88,061  
     TOTAL LIABILITIES AND
     STOCKHOLDERS’ EQUITY
  $ 685,529     $ 668,814  
See accompanying notes to the unaudited consolidated financial statements.
 
 
3

 
 
NORWOOD FINANCIAL CORP.
Consolidated Statements of Income (unaudited)
(dollars in thousands, except per share data)
     Three Months Ended  
    March 31,   
INTEREST INCOME
   2012      2011  
             
  Loans receivable, including fees
  $ 6,373     $ 4,928  
  Securities
    1,026       1,090  
  Other
    4       8  
  Total interest income
    7,403       6,026  
                 
INTEREST EXPENSE
               
  Deposits
    961       885  
  Short-term borrowings
    11       24  
  Other borrowings
    244       336  
  Total interest expense
    1,216       1,245  
NET INTEREST INCOME
    6,187       4,781  
PROVISION FOR LOAN LOSSES
    350       220  
NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES
    5,837       4,561  
                 
OTHER INCOME
               
  Service charges and fees
    554       549  
  Income from fiduciary activities
    98       113  
  Net realized gains on sales of securities
    402       212  
  Net gains on sale of loans
    5       143  
  Other
    232       191  
  Total other income
    1,291       1,208  
                 
OTHER EXPENSES
               
  Salaries and employee benefits
    2,151       1,701  
  Occupancy, furniture & equipment, net
    487       398  
  Data processing related
    232       215  
  Taxes, other than income
    152       129  
  Professional fees
    209       134  
  Merger related expenses
    18       267  
  Federal Deposit Insurance Corporation insurance assessment
    99       120  
  Foreclosed real estate owned
    122       19  
  Other
    677       551  
  Total other expenses
    4,147       3,534  
                 
INCOME BEFORE INCOME TAXES
    2,981       2,235  
INCOME TAX EXPENSE
    795       575  
NET INCOME
  $ 2,186     $ 1,660  
                 
BASIC EARNINGS PER SHARE
  $ .67     $ .60  
                 
DILUTED EARNINGS PER SHARE
  $ .67     $ .60  
                 
See accompanying notes to the unaudited consolidated financial statements.

 
4

 
 
NORWOOD FINANCIAL CORP
Consolidated Statement of Comprehensive Income (unaudited)
(dollars in thousands)

   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2012
   
March 31, 2011
 
Net income
  $ 2,186     $ 1,660  
Other Comprehensive income:
               
   Investment securities available for sale:
               
       Unrealized holding gains
    154       466  
             Tax effect
    (48 )     (158 )
   Reclassification of gains recognized in net income
    (402 )     (212 )
             Tax effect
    137       72  
   Net of tax amount
    (159 )     168  
Comprehensive Income
  $ 2,027     $ 1,828  
                 

See accompanying notes to unaudited consolidated financial statements.

 
5

 

NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
Three Months Ended March 31, 2012
(dollars in thousands, except share and per share data)

    
 
Common Stock
         
 
Retained
   
 
Treasury Stock
   
Accumulated
Other
Comprehensive
       
   
Shares
   
Amount
   
Surplus
   
Earnings
   
Shares
   
Amount
   
Income
   
Total
 
Balance December 31, 2011
    3,371,866     $ 337     $ 24,660     $ 62,308       87,370     $ (2,559 )   $ 3,315     $ 88,061  
Net Income
                            2,186                               2,186  
Other comprehensive income
                                                    (159 )     (159 )
Cash dividends declared $.30
    per share
                            (981 )                             (981 )
Acquisition of  treasury  stock
                                    11,647       (320 )             (320 )
Compensation expense related
    to stock options
                    33                                       33  
Stock options exercised
                    (9 )             (1,625 )     48               39  
Tax benefit on stock options
   
 
     
 
      2      
 
     
 
     
 
     
 
      2  
Balance, March 31, 2012
    3,371,866     $ 337     $ 24,686     $ 63,513       97,392     $ (2,831 )   $ 3,156     $ 88,861  

See accompanying notes to the unaudited consolidated financial statements.


 
6

 
 

NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)  
 
    Three Months Ended
March 31,
 
 
 
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
  $ 2,186     $ 1,660  
Adjustments to reconcile net income to net cash provided by operating  activities:
               
  Provision for loan losses
    350       220  
  Depreciation
    141       110  
  Amortization of intangible assets
    40       13  
  Deferred income taxes
    52       (84 )
  Net amortization of securities premiums and discounts
    296       179  
  Net realized gain on sales of securities
    (402 )     (212 )
  Net increase in value of life insurance
    (132 )     (84 )
  Loss on sale of bank premises and equipment and foreclosed real estate
    32       -  
  Net gain on sale of mortgage loans
    (5 )     (143 )
  Mortgage loans originated for sale
    (123 )     (4,692 )
  Proceeds from sale of mortgage loans originated for sale
    128       4,835  
  Compensation expense related to stock options
    33       41  
  Increase in accrued interest receivable and other assets
    (495 )     (615 )
  Increase  in accrued interest payable and other liabilities
    (456 )     635  
    Net cash provided by operating activities
    1,645       1,863  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
  Securities available for sale:
               
   Proceeds from sales
    10,633       6,187  
   Proceeds from maturities and principal reductions on mortgage-backed securities
    6,738       7,113  
   Purchases
    (13,804 )     (10,302 )
  Redemption of FHLB stock
    180       168  
  Net (increase) decrease in loans
    (21,692 )     6,467  
  Purchase of bank premises and equipment
    (130 )     (4 )
  Proceeds from sale of bank premises and equipment and foreclosed real estate
     2,071       -  
  Net cash (used in) provided by investing activities
    (16,004 )     9,629  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
  Net increase in deposits
    20,425       3,255  
  Net decrease in short-term borrowings
    (5,940 )     (7,844 )
  Repayments of other borrowings
    (45 )     (3,000 )
  Stock options exercised
    39       -  
  Tax benefit of stock options exercised
    2       -  
  Acquisition of treasury stock
    (320 )     (191 )
  Cash dividends paid
    (984 )     (803 )
   Net cash provided by (used in) financing activities
    13,177       (8,583 )
   Increase (decrease) in cash and cash equivalents
    (1,182 )     2,909  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    21,423       16,625  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 20,241     $ 19,534  
See accompanying notes to the unaudited consolidated financial statements.
 
 
7

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
 
    Three Months Ended
March 31,
 
 
 
2012
   
2011
 
Supplemental Disclosures of Cash Flow Information
           
Cash payments for:
           
   Interest paid to depositors
  $ 1,204     $ 1,440  
   Income taxes paid, net of refunds
    197       3  
 Supplemental Schedule of Noncash Investing Activities
               
  Investment purchases
    1,934       -  
  Transfers of loans to foreclosed real estate and repossession of other assets
    336       204  
                 
See accompanying notes to the unaudited consolidated financial statements.


 
8

 


Notes to the Unaudited Consolidated Financial Statements
1.             Basis of Presentation
The unaudited consolidated financial statements include the accounts of Norwood Financial Corp. (Company) and its wholly-owned subsidiary, Wayne Bank (Bank) and the Bank’s wholly-owned subsidiaries, WCB Realty Corp., Norwood Investment Corp., Norwood Settlement Services, LLC,  and WTRO Properties.   All significant intercompany transactions have been eliminated in consolidation.

The accompanying unaudited consolidated  financial statements have been prepared in conformity with generally accepted accounting principles for interim financial statements and with instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ from those estimates.  The financial statements reflect, in the opinion of management, all normal, recurring adjustments necessary to present fairly the financial position and results of operations of the Company.  The operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other future interim period.

These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2011.

2.             Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

 
           The following table sets forth the weighted average shares outstanding used in the computations of basic and diluted earnings per share:

(in thousands)
    Three Months Ended  
    March 31,  
 
 
2012
   
2011
 
Basic EPS weighted average shares outstanding
    3,283       2,767  
Dilutive effect of stock options
    2       3  
Diluted EPS weighted average shares outstanding
    3,285       2,770  
                 
Stock options which had no intrinsic value, because their effect would be anti-dilutive and therefore would not be included in the diluted EPS calculation were 173,775 and 163,150 as of March 31, 2012 and 2011, respectively, based upon the closing price of Norwood common stock of $26.50 and $27.25 per share on March 31, 2012 and 2011, respectively.
 
3.             Stock-Based Compensation
The Company’s shareholders approved the Norwood Financial Corp 2006 Stock Option Plan at the annual meeting on April 25, 2006 and the Company awarded 47,700 options in 2006, 22,000 options in 2007,
 
 
 
9

 
                                                                                                                                                                                                                                                                                                                                  24,000 options in 2008, 27,000 options in 2009, 28,000 options in 2010 and 29,000 in 2011, all of which have a twelve month vesting period. As of March 31, 2012, there was $98,000 of total unrecognized compensation cost related to non-vested options granted in 2011 under the plan, which will be fully amortized by December 31, 2012.

A summary of stock options from all plans, adjusted for stock dividends declared, is shown below.

 
Options
 
Weighted
Average
Exercise
Price
Per Share
Weighted Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
($000)
 
                       
Outstanding at January 1, 2012
209,914
 
$
28.43
 
 6.3
 Yrs.
 
$
113
 
Granted
-
   
-
   
-
   
-
 
Exercised
           (1,625
)  
23.95
 
1.7
 Yrs.
   
-
 
Forfeited
(12,225
)  
29.65
 
5.4
 Yrs.
       
Outstanding at March 31, 2012
196,064
 
$
26.39
 
6.1
 Yrs.
 
$
85
 
                       
Exercisable at March 31, 2012
167,064
 
$
28.55
 
4.6
 Yrs.
 
$
85
 
                       

Intrinsic value represents the amount by which the market price of the stock on the measurement date exceeded the exercise price of the option.  The stock price was $26.50 as of March 31, 2012 and $27.47 as of December 31, 2011.


4.             Off-Balance Sheet Financial Instruments and Guarantees

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

A summary of the Bank’s financial instrument commitments is as follows:
 
(in thousands)
   
March 31,
 
   
2012
   
2011
 
 
Unfunded availability under loan commitments
  $ 42,538     $ 23,466  
Unfunded commitments under lines of credit
    41,865       29,809  
Standby letters of credit
    11,557       3,636  
                 
    $ 95,960     $ 56,911  
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other
 
10

 
 
termination clauses and may require payment of a fee.  Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.  The Bank evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer and generally consists of real estate.

The Bank does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Bank, generally, holds collateral and/or personal guarantees supporting these commitments.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The current amount of the liability as of March 31, 2012 for guarantees under standby letters of credit issued is not material.
 
11

 


5. Securities

The amortized cost and fair value of securities were as follows:

   
March 31, 2012
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In Thousands)
 
Available for Sale:
                       
U.S. Government agencies
  $ 9,000     $ 16     $ -     $ 9,016  
States and political subdivisions
    51,667       2,439       (12 )     54,094  
Corporate obligations
    9,150       234       -       9,384  
Mortgage-backed securities-government sponsored entities
    73,700       2,100       (13 )     75,787  
      143,517       4,789       (25 )     148,281  
Equity securities-financial services
    189       20       (1 )     208  
    $ 143,706     $ 4,809     $ (26 )   $ 148,489  
Held to Maturity:
                               
States and political subdivisions
  $ 171     $ 4     $ -     $ 175  
                                 

   
December 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(In Thousands)
 
Available for Sale:
                       
U.S. Government agencies
  $ 13,268     $ 130     $ -     $ 13,398  
States and political subdivisions
    54,106       2,640       -       56,746  
Corporate obligations
    8,733       130       (54 )     8,809  
Mortgage-backed securities-government sponsored entities
    68,886       2,081       (2 )     70,965  
      144,993       4,981       (56 )     149,918  
Equity securities-financial services
    239       109       (3 )     345  
    $ 145,232     $ 5,090     $ (59 )   $ 150,263  
Held to Maturity:
                               
States and political subdivisions
  $ 171     $ 6     $ -     $ 177  
                                 


 
12

 
 
The following tables show the Company’s investments’ gross unrealized losses and fair value aggregated by length of time that individual securities have been in a continuous unrealized loss position (in thousands):
 
 
   
March 31, 2012
 
     Less than 12 Months    12 Months or More      Total  
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
 
States and political subdivisions
  $ 1,082     $ (12 )   $ -     $ -     $ 1,082     $ (12 )
Mortgage-backed securities-government sponsored agencies
    6,627       (13 )     -       -       6,627       (13 )
Equity securities-financial services
    -       -       15       (1 )     15       (1 )
    $ 7,709     $ (25 )   $ 15     $ (1 )   $ 7,724     $ (26 )
                                                 


   
December 31, 2011
 
    Less than 12 Months      12 Months or More     Total  
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
 
Corporate obligations
  $ 4,152     $ (54 )   $ -     $ -     $ 4,152     $ (54 )
                                                 
Mortgage-backed securities-government sponsored agencies
      2,495       (2 )       -         -         2,495       (2 )
Equity securities-financial services
     34       (2 )      15       (1 )      49       (3 )
    $ 6,681     $ (58 )   $ 15     $ (1 )   $ 6,696     $ (59 )
                                                 

At March 31, 2012, the Company has 6 debt securities in an unrealized loss position in the less than twelve months category and no debt securities in the twelve months or more category.  In Management’s opinion the unrealized losses less than twelve months principally reflect changes in interest rates subsequent to the acquisition of specific securities.  The Company holds a small amount of equity securities in other financial institutions.  The value of these equity securities has been impacted by the overall weakness in the financial sector, one of which has been in a loss position for greater than one year.  Management believes that the other unrealized loss represents temporary impairment of the security as the Company does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis.
 
 
13

 
 
The amortized cost and fair value of debt securities as of March 31, 2012 by contractual maturity are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.

     Available for Sale       Held to Maturity  
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
   
(In Thousands)
 
                         
Due in one year or less
  $ 1,471     $ 1,474     $ -     $ -  
Due after one year through five years
    17,753       18,028       171       175  
Due after five years through ten years
    18,944       19,873       -       -  
Due after ten years
    31,649       33,119       -       -  
                                 
Mortgage-backed securities-government sponsored agencies
    73,700       75,787       -       -  
    $ 143,517     $ 148,281     $ 171     $ 175  


Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands):

   
Three Months
 
   
Ended March 31,
 
   
2012
   
2011
 
Gross realized gains
  $ 402     $ 212  
Gross realized losses
 
___-
   
___-
 
Net realized gain
  $ 402     $ 212  
Proceeds from sales of securities
  $ 10,633     $ 6,187  


6.   Loans Receivable and Allowance for Loan Losses

        Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:
 
Types of loans
(dollars in thousands)
 
    March 31, 2012     December 31, 2011  
                         
Real Estate-Residential
  $ 148,983       31.1 %   $ 148,148       32.3 %
                Commercial
    273,922       57.1       262,476       57.3  
                Construction
    14,562       3.0       11,087       2.4  
Commercial, financial and agricultural
    28,506       5.9       22,684       5.0  
Consumer loans to individuals
    13,669       2.9       13,934       3.0  
  Total loans
    479,642       100.0 %     458,329       100.0 %
                                 
  Deferred fees (net)
    (560 )             (422 )        
 
                               
  Allowance for loan losses
    (5,618 )             (5,458 )        
  Net loans receivable
  $ 473,464             $ 452,449          


 
14

 

        Changes in the accretable yield for purchased credit-impaired loans were as follows for the three months ended March 31, 2012 (in thousands):

Balance at beginning of period
  $ 171  
Accretion
    (24 )
Reclassification and other
    -  
Balance at end of period
  $ 147  
         

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):

   
March 31, 2012
   
December 31, 2011
 
   
Acquired Loans with Specific
Evidence of Deterioration in Credit Quality
   
Acquired Loans with Specific
Evidence of Deterioration in Credit Quality
 
Outstanding Balance
  $ 1,392     $ 1,412  
Carrying Amount
    1,244       1,246  

There were no material increases or decreases in the expected cash flows of these loans between May 31, 2011 (the “acquisition date”) and March 31, 2012.  There has been no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of May 31, 2011 as well as those acquired without specific evidence of deterioration in credit quality as of March 31, 2012.  In addition, there has been no allowance for loan losses reversed.

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans.  Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers.  Specific loan loss allowances are established for identified losses based on a review of such information.  A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probably that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  All loans identified as impaired are evaluated independently.  We do not aggregate such loans for evaluation purposes.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider.  Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk.  TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.
 
 
15

 
 
        The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:

   
Real Estate Loans
     
   
Residential
   
Commercial
   
Construction
      Commercial
Loans
   
Consumer
Loans
    Total  
March 31, 2012
    (In thousands)
                               
                               
  Individually evaluated for impairment
  $ -     $ 12,655     $ -     $ 385     $ -     $ 13,040  
  Loans acquired with deteriorated 
      credit quality
  $ 278     $ 966     $ -     $ -     $ -     $ 1,244  
  Collectively evaluated for impairment
  $ 148,705     $ 260,301     $ 14,562     $ 28,121     $ 13,669     $ 465,358  
Total Loans
  $ 148,983     $ 273,922     $ 14,562     $ 28,506     $ 13,669     $ 479,642  

 
   
Real Estate Loans
     
   
Residential
   
Commercial
   
Construction
      Commercial
Loans
   
Consumer
Loans
   
 Total
 
December 31, 2011
    (In thousands)  
                               
  Individually evaluated for impairment
  $ -     $ 11,786     $ -     $ 598     $ -     $ 12,384  
  Loans acquired with deteriorated
      credit quality
  $ 343     $ 903     $ -     $ -     $ -     $ 1,246  
  Collectively evaluated for impairment
  $ 147,805     $ 249,787     $ 11,087     $ 22,086     $ 13,934     $ 444,699  
Total Loans
  $ 148,148     $ 262,476     $ 11,087     $ 22,684     $ 13,934     $ 458,329  

 
16

 


The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.  Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.

   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Associated
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
March 31, 2012
With no related allowance recorded:
    (In thousands)  
Real Estate Loans
                             
    Residential
  $ 278     $ 306     $ -     $ 296     $ 1  
    Commercial
    6,427       6,546       -       6,353       22  
Commercial Loans
    385       385       -       385       -  
          Total
    7,090       7,237       -       7,034       23  
With an allowance recorded:
                                       
Real Estate Loans
                                       
    Commercial
    7,194       7,194       1,073       6,844       53  
          Total
    7,194       7,194       1,073       6,844       53  
Total:
                                       
Real Estate loans
                                       
    Residential
    278       306       -       296       1  
    Commercial
    13,621       13,740       1,073       13,197       75  
Commercial Loans
    385       385       -       385       -  
          Total Impaired Loans
  $ 14,284     $ 14,431     $ 1,073     $ 13,878     $ 76  


 
17

 


   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Associated
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
December 31, 2011
With no related allowance recorded:
    (In thousands)  
Real Estate Loans
                             
    Residential
  $ 343     $ 385     $ -     $ 245     $ 7  
    Commercial
    5,866       5,995       -       5,372       340  
Commercial Loans
    598       598       -       496       10  
          Total
    6,807       6,978       -       6,113       357  
With an allowance recorded:
                                       
Real Estate Loans
                                       
    Commercial
    6,823       6,823       1,231       9,670       204  
          Total
    6,823       6,823       1,231       9,670       204  
Total:
                                       
Real Estate loans
                                       
    Residential
    343       385       -       245       7  
    Commercial
    12,689       12,818       1,231       15,042       544  
Commercial Loans
    598       598       -       496       10  
          Total Impaired Loans
  $ 13,630     $ 13,801     $ 1,231     $ 15,783     $ 561  

       Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources.  As of March 31, 2012, troubled debt restructured loans totaled $7.2 million and resulted in specific reserves of $1.1 million. There were no defaults on restructured loans during the past twelve months.  During 2012, there were no new loans identified as troubled debt restructurings.  As of December 31, 2011, troubled debt restructured loans totaled $7.2 million and resulted in specific reserves of $1.2 million.

Management uses a seven point internal risk rating system to monitor the credit quality of the overall loan portfolio.  The first three categories are considered not criticized, and are aggregated as “Pass” rated.  The criticized rating categories utilized by management generally follow bank regulatory definitions.  The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard.  Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as non performance, repossession, or death occurs to raise awareness of a possible credit event.  The Bank’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis.  Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration.  Loan Review also annually reviews relationships of $500,000 and over to assign or re-affirm risk ratings.  Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
 
 
 
18

 
 
The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of  March 31, 2012 and December 31, 2011 (in thousands):

   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
March 31, 2012
                                   
 
 
Commercial real estate loans
  $ 248,086     $ 10,960     $ 14,876     $ -     $ -     $ 273,922  
Commercial loans
    27,651       409       446       -       -       28,506  
          Total
  $ 275,737     $ 11,369     $ 15,322     $ -     $ -     $ 302,428  
                                                 
 

   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
December 31, 2011
                                   
 
 
Commercial real estate loans
  $ 237,407     $ 11,009     $ 14,060     $ -     $ -     $ 262,476  
Commercial loans
    21,598       427       659       -       -       22,684  
          Total
  $ 259,005     $ 11,436     $ 14,719     $ -     $ -     $ 285,160  
                                                 
 
 

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits.  The following table presents the recorded investment in the loan classes based on payment activity as of March 31, 2012 and December 31, 2011 (in thousands):

March 31, 2012
 
Performing
   
Nonperforming
   
Total
 
Residential real estate loans
  $ 146,530     $ 2,453     $ 148,983  
Construction
    14,562       -       14,562  
Consumer loans
    13,669       -       13,669  
     Total
  $ 174,761     $ 2,453     $ 177,214  
                         

December 31, 2011
 
Performing
   
Nonperforming
   
Total
 
Residential real estate loans
  $ 145,061     $ 3,087     $ 148,148  
Construction
    11,087       -       11,087  
Consumer loans
    13,934       -       13,934  
     Total
  $ 170,082     $ 3,087     $ 173,169  
                         


 
19

 




Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of March 31, 2012 and December 31, 2011 (in thousands):
 
   
 
 
 
 
Current
   
 
 
31-60 Days
Past Due
   
 
 
61-90 Days
Past Due
   
 
Greater than
90 Days
Past Due and
still accruing
   
 
 
 
Non-Accrual
   
 
Total
Past Due and Non-Accrual
   
 
 
 
Total Loans
 
 
March 31, 2012
                                         
Real Estate loans
                                         
  Residential
  $ 145,821     $ 178     $ 531     $ -     $ 2,453     $ 3,162     $ 148,983  
  Construction
    14,556       6       -       -       -       6       14,562  
  Commercial
    266,660       1,115       -       418       5,729       7,262       273,922  
Commercial  loans
    28,121       -       -       -       385       385       28,506  
Consumer  loans
    13,620       48       1       -       -       49       13,669  
    Total
  $ 468,778     $ 1,347     $ 532     $ 418     $ 8,567     $ 10,864     $ 479,642  
                                                         
   
 
 
 
 
Current
   
 
 
31-60 Days
Past Due
   
 
 
61-90 Days
Past Due
   
 
Greater than
90 Days
Past Due and
still accruing
   
 
 
 
Non-Accrual
   
 
Total
Past Due and Non-Accrual
   
 
 
 
Total Loans
 
 
December 31, 2011
                                                       
Real Estate loans
                                                       
  Residential
  $ 143,550     $ 160     $ 1,351     $ -     $ 3,087     $ 4,598     $ 148,148  
  Construction
    10,532       -       555       -       -       555       11,087  
  Commercial
    255,613       1,015       1,524       -       4,324       6,863       262,476  
Commercial  loans
    22,086       194       -       -       404       598       22,684  
Consumer  loans
    13,835       89       10       -       -       99       13,934  
    Total
  $ 445,616     $ 1,458     $ 3,440     $ -     $ 7,815     $ 12,713     $ 458,329  
                                                         
 
 
    The following table presents the allowance for loan losses by the classes of the loan portfolio:
 
(In thousands)
 
Residential
Real Estate
   
Commercial
Real Estate
   
 
Construction
   
 
 Commercial
   
 
Consumer
   
 
Total
 
Beginning balance, December 31, 2011
  $ 1,257     $ 3,838     $ 72     $ 147     $ 144     $ 5,458  
Charge Offs
    (61 )     (103 )     -               (32 )     (196 )
Recoveries
    1       -       -       -       5       6  
Provision Expense
     2       272       3       44       29       350  
Ending balance,    March 31, 2012
  $ 1,199       4,007       75       191       146       5,618  
Ending balance individually
  evaluated for impairment
  $ -           1,073           -           -           -           1,073  
Ending balance collectively
  evaluated for impairment
  $ 1,199           2,934           75           191           146           4,545  
 
 
20

 
(In thousands)
 
Residential
Real Estate
   
Commercial
Real Estate
   
 
Construction
   
 
 Commercial