XNAS:NWFL Norwood Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 August 1, 2012
 
Common stock, par value $0.10 per share
   3,277,607  

 
1

 



NORWOOD FINANCIAL CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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
28
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
44
Item 4.
Controls and Procedures
45
PART II -
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
45
Item 1A.
Risk Factors
45
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
45
Item 3.
Defaults upon Senior Securities
45
Item 4.
Mine Safety Disclosures
45
Item 5.
Other Information
45
Item 6.
Exhibits
46
     
Signatures
 
47


 
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)
   
June 30,
2012
   
December 31,
2011
 
ASSETS
           
Cash and due from banks
  $ 9,135     $ 8,974  
Interest bearing deposits with banks
    15,261       12,449  
          Cash and cash equivalents
    24,396       21,423  
                 
Securities available for sale, at fair value
    144,720       150,263  
Securities held to maturity, fair value 2012:
   $177, 2011: $177
    172       171  
Loans receivable (net of unearned income)
    479,421       457,907  
   Less:  Allowance for loan losses
    5,775       5,458  
Net loans receivable
    473,646       452,449  
Investment in Federal Home Loan Bank Stock, at cost
    3,243       3,593  
Bank premises and equipment, net
    7,371       7,479  
Bank owned life insurance
    12,119       11,887  
Accrued interest receivable
    2,416       2,468  
Foreclosed real estate owned
    1,268       2,910  
Goodwill
    9,715       9,715  
Other intangibles
    720       800  
Other assets
    5,081       5,656  
    TOTAL ASSETS
  $ 684,867     $ 668,814  
                 
LIABILITIES
               
  Deposits:
               
      Non-interest bearing demand
  $ 82,525     $ 71,959  
      Interest-bearing
    451,632       453,808  
        Total deposits
    534,157       525,767  
  Short-term borrowings
    27,192       21,794  
  Other borrowings
    27,579       27,670  
  Accrued interest payable
    1,335       1,321  
  Other liabilities
    4,363       4,201  
    TOTAL LIABILITIES
    594,626       580,753  
                 
STOCKHOLDERS’ EQUITY
               
    Common stock, $.10 par value per share, authorized
    10,000,000; shares issued 2012: 3,371,849 shares,
    2011: 3,371,866 shares
      337         337  
    Surplus
    24,696       24,660  
    Retained  earnings
    64,788       62,308  
    Treasury stock at cost: 2012: 94,242 shares,
                                 2011: 87,370 shares
    (2,739 )     (2,559 )
  Accumulated other comprehensive income
    3,159       3,315  
     TOTAL STOCKHOLDERS’ EQUITY
    90,241       88,061  
     TOTAL LIABILITIES AND
     STOCKHOLDERS’ EQUITY
  $ 684,867     $ 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
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  
INTEREST INCOME
                       
  Loans receivable, including fees
  $ 6,431     $ 5,468     $ 12,804     $ 10,396  
  Securities
    1,007       1,135       2,033       2,225  
  Other
    7       16       11       24  
  Total interest income
    7,445       6,619       14,848       12,645  
                                 
INTEREST EXPENSE
                               
  Deposits
    942       932       1,903       1,817  
  Short-term borrowings
    13       27       24       51  
  Other borrowings
    243       342       487       678  
  Total interest expense
    1,198       1,301       2,414       2,546  
NET INTEREST INCOME
    6,247       5,318       12,434       10,099  
PROVISION FOR LOAN LOSSES
    400       430       750       650  
NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES
    5,847       4,888       11,684       9,449  
                                 
OTHER INCOME
                               
  Service charges and fees
    559       592       1,113       1,141  
  Income from fiduciary activities
    80       105       178       218  
  Net realized gains on sales of securities
    285       12       687       224  
  Gains on sale of loans and servicing rights
    66       98       60       241  
  Other
    216       186       459       377  
  Total other income
    1,206       993       2,497       2,201  
                                 
OTHER EXPENSES
                               
  Salaries and employee benefits
    2,047       1,832       4,198       3,533  
  Occupancy, furniture & equipment
    490       408       977       806  
  Data processing related
    216       187       448       402  
  Taxes, other than income
    149       143       301       272  
  Professional fees
    217       126       426       281  
  Merger related expenses
    -       488       18       755  
  Federal Deposit Insurance Corporation insurance assessment
    97       95       196       215  
  Foreclosed real estate owned expense
    85       17       207       36  
  Other
    656       640       1,333       1,170  
  Total other expenses
    3,957       3,936       8,104       7,470  
                                 
INCOME BEFORE INCOME TAXES
    3,096       1,945       6,077       4,180  
INCOME TAX EXPENSE
    838       461       1,633       1,036  
NET INCOME
  $ 2,258     $ 1,484     $ 4,444     $ 3,144  
                                 
BASIC EARNINGS PER SHARE
  $ .69     $ .50     $ 1.35     $ 1.10  
                                 
DILUTED EARNINGS PER SHARE
  $ .69     $ .50     $ 1.35     $ 1.10  
                                 
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
June 30,
 
    2012     2011  
                 
Net income
  $ 2,258     $ 1,484  
Other Comprehensive income:
               
   Investment securities available for sale:
               
       Unrealized holding gains
    291       1,161  
             Tax effect
    (100 )     (395 )
   Reclassification of gains recognized in net income
    (285 )     (12 )
             Tax effect
    97       4  
   Net of tax amount
    3       4  
Comprehensive Income
  $ 2,261     $ 2,242  
                 


    Six Months Ended
June 30,
 
   
2012
   
2011
 
             
Net income
  $ 4,444     $ 3,144  
Other Comprehensive income:
               
   Investment securities available for sale:
               
       Unrealized holding gains
    445       1,627  
             Tax effect
    (148 )     (553 )
   Reclassification of gains recognized in net income
    (687 )     (224 )
             Tax effect
    234       76  
   Net of tax amount
    (156 )     926  
Comprehensive Income
  $ 4,288     $ 4,070  
                 

See accompanying notes to unaudited consolidated financial statements.


 
5

 


 
NORWOOD FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
Six Months Ended June 30, 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
                            4,444                               4,444  
Other comprehensive income
                                                    (156 )     (156 )
Cash dividends declared $.60 
  per share
                            (1,964 )                             (1,964 )
Acquisition of  treasury  stock
                                    11,647       (320 )             (320 )
Compensation expense related to 
  stock
options
                    66                                       66  
Stock options exercised
                    (41 )             (4,775 )     140               99  
Tax benefit on stock options
                    11                                       11  
North Penn exchange adjustment
 
(17)
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Balance, June 30, 2012
    3,371,849     $ 337     $ 24,696     $ 64,788       94,242     $ (2,739 )   $ 3,159     $ 90,241  

See accompanying notes to the unaudited consolidated financial statements.


 
6

 

NORWOOD FINANCIAL CORP.
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands) 
 
    Six Months Ended June 30,   
 
 
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
  $ 4,444     $ 3,144  
Adjustments to reconcile net income to net cash provided by operating  activities:
               
  Provision for loan losses
    750       650  
  Depreciation
    280       226  
  Amortization of intangible assets
    80       27  
  Deferred income taxes
    (259 )     (8 )
  Net amortization of securities premiums and discounts
    580       345  
  Net realized gain on sales of securities
    (687 )     (224 )
  Net increase in value of life insurance
    (263 )     (180 )
  Loss on sale of foreclosed real estate
    27       -  
  Net gain on sale of mortgage loans
    (74 )     (241 )
  Mortgage loans originated for sale
    (2,269 )     (6,530 )
  Proceeds from sale of mortgage loans originated for sale
    2,343       6,771  
  Compensation expense related to stock options
    66       82  
  Decrease (increase) in accrued interest receivable and other assets
    985       (182 )
  (Decrease) increase in accrued interest payable and other liabilities
    (1,441 )     841  
    Net cash provided by operating activities
    4,562       4,721  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
  Securities available for sale:
               
   Proceeds from sales
    18,349       10,344  
   Proceeds from maturities and principal reductions on mortgage-backed securities
    17,259       15,918  
   Purchases
    (28,582 )     (18,769 )
  Redemption of FHLB stock
    350       328  
  Net (increase) decrease in loans
    (22,883 )     8,527  
  Purchase of bank premises and equipment
    (172 )     (63 )
  Proceeds from sale of bank premises and equipment and foreclosed real estate
    2,569       -  
  Acquisition, net of cash acquired
    -       4,544  
  Net cash (used in) provided by investing activities
    (13,110 )     20,829  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
  Net increase in deposits
    8,390       8,990  
  Net increase (decrease) in short-term borrowings
    5,398       (1,128 )
  Repayments of other borrowings
    (91 )     (3,015 )
  Stock options exercised
    99       -  
  Tax benefit of stock options exercised
    11       -  
  Acquisition of treasury stock
    (320 )     (207 )
  Cash dividends paid
    (1,966 )     (1,604 )
   Net cash provided by financing activities
    11,521       3,036  
   Increase (decrease) in cash and cash equivalents
    2,973       28,586  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    21,423       16,625  
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 24,396     $ 45,211  
See accompanying notes to the unaudited consolidated financial statements.
 

 
7

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(dollars in thousands) 
 
    Six Months ENded June 30,   
 
 
2012
   
2011
 
Supplemental Disclosures of Cash Flow Information
           
Cash payments for:
           
   Interest paid to depositors and borrowers
  $ 2,398     $ 2,610  
   Income taxes paid, net of refunds
  $ 1,559     $ 1,407  
 Supplemental Schedule of Noncash Investing Activities
               
  Investment purchases
  $ 1,619       -  
  Transfers of loans to foreclosed real estate and repossession of other assets
  $ 954     $ 1,036  
                 
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 six month period ended June 30, 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
June 30,
   
 Six Months Ended
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
Basic EPS weighted average shares outstanding
    3,276       2,937       3,280       2,852  
Dilutive effect of stock options
    4       2       3       3  
Diluted EPS weighted average shares outstanding
    3,280       2,939       3,283       2,855  
                                 
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 98,275 and 165,150 as of June 30, 2012 and 2011, respectively, based upon the closing price of Norwood common stock of $28.50 and $26.15 per share on June 30, 2012 and 2011, respectively.


 
9

 
3.  Stock-Based Compensation

 As of June 30, 2012, there was $65,000 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
           (4,775)
     
20.72
   
.8
 Yrs.
   
31
 
Forfeited
(12,225)
     
29.65
   
5.2
 Yrs.
   
-
 
Outstanding at June 30, 2012
192,914
     
28.54
   
5.9
 Yrs.
   
170
 
                           
Exercisable at June 30, 2012
164,914
     
28.72
   
5.3
 Yrs.
   
142
 

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 $28.50 as of June 30, 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)
 
June 30,
 
   
2012
   
2011
 
 
Unfunded availability under loan commitments
  $ 50,754     $ 43,395  
Unfunded commitments under lines of credit
    37,462       28,910  
Standby letters of credit
    11,248       5,586  
                 
    $ 99,464     $ 77,891  
 
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 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.

 
10

 

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 June 30, 2012 for guarantees under standby letters of credit issued is not material.
 
5. Securities
 
The amortized cost and fair value of securities were as follows:
    
June 30, 2012
 
   
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Fair
Value
 
   
(In thousands)
 
Available for Sale:
                       
U.S. Government agencies
  $ 2,000     $ 7     $ (2 )   $ 2,005  
States and political subdivisions
    54,163       2,648       (42 )     56,769  
Corporate obligations
    8,635       215       (5 )     8,845  
Mortgage-backed securities-government sponsored entities
    74,944       1,970       (25 )     76,889  
      139,742       4,840       (74 )     144,508  
Equity securities-financial services
    189       23       -       212  
    $ 139,931     $ 4,863     $ (74 )   $ 144,720  
Held to Maturity:
                               
States and political subdivisions
  $ 172     $ 5     $ -     $ 177  
 
   
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  
 
 
11

 

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):
   
June 30, 2012
 
    Less than 12 Months     12 Months or More     Total  
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
U.S. Government Agencies
  $ 998     $ (2 )   $ -     $ -     $ 998     $ (2 )
States and political subdivisions
    3,254       (42 )     -       -       3,254       (42 )
Corporate obligations
    1,457       (5 )     -       -       1,457       (5 )
Mortgage-backed securities-government sponsored agencies
    6,563       (25 )     -       -       6,563       (25 )
    $ 12,272     $ (74 )   $ -     $ -     $ 12,272     $ (74 )
                                                 
 
    
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 June 30, 2012, the Company has 14 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.  As of June 30, 2012, there were no unrealized losses on equity securities.  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.

 
12

 
 
The amortized cost and fair value of debt securities as of June 30, 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
  $ 10,209     $ 10,313     $ -     $ -  
Due after one year through five years
    7,466       7,690       172       177  
Due after five years through ten years
    17,363       18,255       -       -  
Due after ten years
    29,760       31,361       -       -  
                                 
Mortgage-backed securities-government sponsored agencies
    74,944       76,889       -       -  
    $ 139,742     $ 144,508     $ 172     $ 177  
 
Gross realized gains and gross realized losses on sales of securities available for sale were as follows (in thousands):

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Gross realized gains
  $ 285     $ 15     $ 687     $ 228  
Gross realized losses
 
-
   
(3
 
-
   
(4
Net realized gain
  $ 285     $ 12     $ 687     $ 224  
Proceeds from sales of securities
  $ 7,716     $ 4,157     $ 18,349     $ 10,344  


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)                  
                               
      June 30, 2012       December 31, 2011  
Real Estate-Residential
  $ 148,051       30.8 %   $ 148,148       32.3 %
                Commercial
    275,258       57.4       262,476       57.3  
                Construction
    15,881       3.3       11,087       2.4  
Commercial, financial and agricultural
    26,518       5.5       22,684       5.0  
Consumer loans to individuals
    14,244       3.0       13,934       3.0  
  Total loans
    479,952       100.0 %     458,329       100.0 %
                                 
  Deferred fees (net)
    (531 )             (422 )        
 
                               
  Allowance for loan losses
    (5,775 )             (5,458 )        
  Net loans receivable
  $ 473,646             $ 452,449          
 
 
 
13

 
 
Changes in the accretable yield for purchased credit-impaired loans were as follows for the six months ended June 30, 2012 (in thousands):

Balance at beginning of period
  $ 171  
Accretion
    (47 )
Reclassification and other
    -  
Balance at end of period
  $ 124  
         

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

   
June 30, 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
  $ 1,346     $ 1,412  
Carrying Amount
    1,222       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 June 30, 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 June 30, 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 probable 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.
 

 
14

 

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  
June 30, 2012
    (In thousands)  
                                     
  Individually evaluated for impairment
  $ -     $ 12,501     $ -     $ 385     $ -     $ 12,886  
  Loans acquired with deteriorated credit quality
        273           951           -           -           -           1,224  
  Collectively evaluated for impairment
      147,778         261,806         15,881         26,133         14,244         465,842  
    Total loans    $ 148,051     $ 275,258     $ 15,881     $ 26,518     $ 14,244     $ 479,952  
             
    Real Estate Loans        
    Residential     Commercial     Construction     Commerical 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  


 
15

 



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
 
    (In thousands)  
June 30, 2012
With no related allowance recorded:
             
 
             
Real Estate Loans
                             
    Residential
  $ 273     $ 297     $ -     $ 289     $ 2  
    Commercial
    5,420       5,520       -       5,902       40  
Commercial Loans
    385       385       -       385       -  
          Total
    6,078       6,202       -       6,576       42  
With an allowance recorded:
                                       
Real Estate Loans
                                       
    Commercial
    8,031       8,031       1,120       7,379       106  
          Total
    8,031       8,031       1,120       7,379       106  
Total:
                                       
Real Estate loans
                                       
    Residential
    273       297       -       289       2  
    Commercial
    13,451       13,551       1,120       13,281       146  
Commercial Loans
    385       385       -       385       -  
      Total Impaired Loans
  $ 14,109     $ 14,233     $ 1,120     $ 13,955     $ 148  


 
16

 

    
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
 
Associated
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
    (In thousands)  
December 31, 2011
With no related allowance recorded:
       
 
             
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 June 30, 2012, troubled debt restructured loans totaled $7.1 million and resulted in specific reserves of $991,000. There were no defaults on restructured loans during the past twelve months.  During 2012 and 2011, 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
 
 
17

 
 
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.
 
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  June 30, 2012 and December 31, 2011 (in thousands):
 
   
 
Pass
   
Special
Mention
   
 
Substandard
   
 
Doubtful
   
 
Total
 
June 30, 2012
                             
 
 
Commercial real estate loans
  $ 250,726     $ 9,825     $ 14,707     $ -     $ 275,258  
Commercial loans
    25,842       238       438       -       26,518  
          Total
  $ 276,568     $ 10,063     $ 15,145     $ -     $ 301,776  
                                         
 
 
   
 
Pass
   
Special
Mention
   
 
Substandard
   
 
Doubtful
   
 
Total
 
December 31, 2011
                             
 
 
Commercial real estate loans
  $ 237,407     $ 11,009     $ 14,060     $ -     $ 262,476  
Commercial loans
    21,598       427       659       -       22,648  
          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.  Nonperforming loans include loans on nonaccrual status and accruing loans which are past due over ninety days. The following table presents the recorded investment in the loan classes based on payment activity as of June 30, 2012 and December 31, 2011 (in thousands):

June 30, 2012
 
Performing
   
Nonperforming
   
Total
 
Residential real estate loans
  $ 145,530     $ 2,521     $ 148,051  
Construction
    15,881       -       15,881  
Consumer loans
    14,244       -       14,244  
     Total
  $ 175,655     $ 2,521     $ 178,176  
                         
 
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  
                         

 
 
18

 



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 June 30, 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
 
 
June 30, 2012
                                         
Real Estate loans
                                         
  Residential
  $ 145,026     $ 435     $ 69     $ -     $ 2,521     $ 3,025     $ 148,051  
  Commercial
    268,298       986       -       2       5,972       6,960       275,258  
  Construction
    15,816       65       -       -       -       65       15,881  
Commercial  loans
    26,131       2       -       -       385       387       26,518  
Consumer  loans
    14,144       87       12       1       -