Notes to Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Oak Ridge Financial Services, Inc. (“Oak Ridge”) and its wholly-owned subsidiary, Bank of Oak Ridge (the “Bank”) (collectively referred to hereafter as the “Company”). The Bank has one wholly-owned subsidiary, Oak Ridge Financial Corporation, which is currently inactive. All significant inter-company transactions and balances have been eliminated in consolidation.
(B)
|
Basis of Financial Statement Presentation
|
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three-month period ended March 31, 2013, in conformity with GAAP. Actual results could differ significantly from those estimates. Operating results for the three month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013.
The consolidated balance sheet as of December 31, 2012 has been derived from audited financial statements. The unaudited financial statements of the Company have been prepared in accordance with instructions from Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included.
The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “Annual Report”). This quarterly report should be read in conjunction with the Annual Report.
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of the deferred tax asset.
Substantially all of the Company’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse and is influenced by the manufacturing and retail segment of the economy.
While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Company’s allowances for loan losses. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan losses may change materially in the near term.
Oak Ridge is a bank holding company incorporated in North Carolina in April of 2007. The principal activity of Oak Ridge is ownership of the Bank. The Bank provides financial services through its branch network located in Guilford County, North Carolina. The Bank competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Company has no foreign operations, and the Company’s customers are principally located in Guilford County, North Carolina, and adjoining counties.
(D)
|
Critical Accounting Policies
|
The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management’s estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company’s market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.
The AFLL related to loans that are identified for evaluation and deemed impaired is based on discounted cash flows using the loan’s initial effective interest rate, the loan’s observable market price, or the fair value of the collateral for collateral dependent loans. Another component of the AFLL covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is also maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
(E)
|
Net Income Per Common Share
|
The computation of diluted earnings per common share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.
In computing diluted net income per common share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted-average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. As of March 31, 2012 the warrant issued to the U.S. Treasury, covering approximately 164,000 shares, was not included in the computation of diluted net income per share for the period because its exercise price exceeded the average market price of the Company’s stock for the period. As of March 31, 2013 the warrant issued to the U.S. Treasury, covering approximately 164,000 shares, was not included in the computation of diluted net income per share for the period because the Company repurchased the warrant in February of 2013.
At March 31, 2013 and 2012, all exercisable options had an exercise price greater than the average market price for the period and were not included in computing diluted earnings per share.
Certain prior year amounts have been reclassified in the consolidated financial statements to conform with the current year presentation. The reclassifications had no effect on previously reported net income or stockholders’ equity.
(G)
|
Recent Accounting Pronouncements
|
The following is a summary of recent authoritative pronouncements:
The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminated the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and required consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements while the Financial Accounting Standards Board ("FASB") redeliberated the presentation requirements for the reclassification adjustments. In February 2013, the FASB further amended the Comprehensive Income topic clarifying the conclusions from such redeliberations. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments were effective for the Company on a prospective basis for reporting periods beginning after December 15, 2012. Early adoption is permitted. These amendments did not have a material effect on the Company’s financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.
The amortized cost and fair value of securities, with gross unrealized gains and losses, at March 31, 2013 and December 31, 2012 follows (dollars in thousands):
|
|
March 31, 2013
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise securities
|
|
$
|
1,018
|
|
|
$
|
51
|
|
|
$
|
-
|
|
|
$
|
1,069
|
|
FNMA or GNMA mortgage-backed securities
|
|
|
5,689
|
|
|
|
258
|
|
|
|
(28
|
)
|
|
|
5,919
|
|
Private label mortgage-backed securities
|
|
|
8,333
|
|
|
|
276
|
|
|
|
(35
|
)
|
|
|
8,574
|
|
Municipal securities
|
|
|
16,799
|
|
|
|
1,025
|
|
|
|
(116
|
)
|
|
|
17,708
|
|
SBA debentures
|
|
|
9,539
|
|
|
|
736
|
|
|
|
-
|
|
|
|
10,275
|
|
Other domestic debt securities
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
Total securities available-for-sale
|
|
$
|
41,878
|
|
|
$
|
2,346
|
|
|
$
|
(179
|
)
|
|
$
|
44,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label mortgage-backed securities
|
|
$
|
3,719
|
|
|
$
|
280
|
|
|
$
|
-
|
|
|
$
|
3,999
|
|
Total securities held-to-maturity
|
|
$
|
3,719
|
|
|
$
|
280
|
|
|
$
|
-
|
|
|
$
|
3,999
|
|
|
|
December 31, 2012
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprise securities
|
|
$
|
1,021
|
|
|
$
|
58
|
|
|
$
|
-
|
|
|
$
|
1,079
|
|
FNMA or GNMA mortgage-backed securities
|
|
|
8,323
|
|
|
|
347
|
|
|
|
(42
|
)
|
|
|
8,628
|
|
Private label mortgage-backed securities
|
|
|
8,868
|
|
|
|
295
|
|
|
|
(88
|
)
|
|
|
9,075
|
|
Municipal securities
|
|
|
12,868
|
|
|
|
1,158
|
|
|
|
(6
|
)
|
|
|
14,020
|
|
SBA debentures
|
|
|
9,891
|
|
|
|
744
|
|
|
|
-
|
|
|
|
10,635
|
|
Other domestic debt securities
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500
|
|
Total securities available-for-sale
|
|
$
|
41,471
|
|
|
$
|
2,602
|
|
|
$
|
(136
|
)
|
|
$
|
43,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label mortgage-backed securities
|
|
$
|
3,928
|
|
|
$
|
255
|
|
|
$
|
-
|
|
|
$
|
4,183
|
|
Total securities held-to-maturity
|
|
$
|
3,928
|
|
|
$
|
255
|
|
|
$
|
-
|
|
|
$
|
4,183
|
|
Subinvestment grade available-for-sale and held-to-maturity private label mortgage-backed securities are analyzed on a quarterly basis for impairment by utilizing an independent third party that performs an analysis of the estimated principal the Bank is expected to collect in a number of different economic scenarios. The Bank utilizes a model developed by an independent third party that estimates the portion of a loss on a security that is attributable to credit by estimating the expected cash flows of the underlying collateral using a credit and prepayment risk model that incorporate management's best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Assumptions used for the underlying loans that support the Mortgage-Backed Security ("MBS") can vary widely from loan to loan and are influenced by such factors as loan interest rate, geographic location of the borrower, borrower characteristics and collateral type. The result of this analysis determines whether the Bank records an impairment loss on these securities. The Bank did not record impairment charges in the three-month period ending March 31, 2013 and 2012.
The Bank had approximately $411 thousand and $528 thousand at March 31, 2013 and December 2012, respectively, of investments in stock of the Federal Home Loan Bank ("FHLB"), which is carried at cost. The following factors have been considered in determining the carrying amount of FHLB stock; 1) the recoverability of the par value, 2) the Company has sufficient liquidity to meet all operational needs in the foreseeable future and would not need to dispose of the stock below recorded amounts, 3) redemptions and purchases of the stock are at the discretion of the FHLB, 4) the Company feels the FHLB has the ability to absorb economic losses given the expectation that the various FHLBs have a high degree of government support and 5) the unrealized losses related to securities owned by the FHLB are manageable given the capital levels of the organization. The Company estimated that the fair value equaled or exceeded the cost of this investment (that is, the investment was not impaired) on the basis of the redemption provisions of the issuing entity. Investment securities with amortized costs of $3.3 million and $3.8 million at March 31, 2013 and December 2012, respectively, were pledged as collateral on public deposits or for other purposes as required or permitted by law.
2. INVESTMENT SECURITIES, continued
Gross realized gains and losses for the three months ended March 31, 2013 and 2012 follows (dollars in thousands):
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Realized gains
|
|
$
|
54
|
|
|
$
|
—
|
|
Realized losses
|
|
|
-
|
|
|
|
—
|
|
|
|
$
|
54
|
|
|
$
|
—
|
|
The following tables detail unrealized losses and related fair values in the Company’s held-to-maturity and available-for-sale investment securities portfolios at March 31, 2013 and December 31, 2012. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2013 and December 31, 2012 (dollars in thousands).
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA mortgage-backed securities
|
|
$
|
2,560
|
|
|
$
|
(28
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,560
|
|
|
$
|
(28
|
)
|
Private label mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
4,016
|
|
|
|
(35
|
)
|
|
|
4,016
|
|
|
|
(35
|
)
|
Municipal Securities
|
|
|
3,710
|
|
|
|
(116
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,710
|
|
|
|
(116
|
)
|
Total temporarily impaired securities
|
|
$
|
6,270
|
|
|
$
|
(144
|
)
|
|
$
|
4,016
|
|
|
$
|
(31
|
)
|
|
$
|
10,286
|
|
|
$
|
(179
|
)
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA mortgage-backed securities
|
|
$
|
3,290
|
|
|
$
|
(42
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,290
|
|
|
$
|
(42
|
)
|
Private label mortgage-backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
5,900
|
|
|
|
(88
|
)
|
|
|
5,900
|
|
|
|
(88
|
)
|
Municipal Securities
|
|
|
371
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
371
|
|
|
|
(6
|
)
|
Total temporarily impaired securities
|
|
$
|
3,661
|
|
|
$
|
(48
|
)
|
|
$
|
5,900
|
|
|
$
|
(88
|
)
|
|
$
|
9,561
|
|
|
$
|
(136
|
)
|
At March 31, 2013, the unrealized losses in the available-for-sale portfolio relate to three Federal National Mortgage Association (“FNMA”) mortgage-backed-securities, one Government National Mortgage Association (“GNMA”) mortgage-backed-security, three private label mortgage-backed-securities, and seven municipal securities. At December 31, 2012, the unrealized losses in the available-for-sale portfolio relate to four FNMA mortgage-backed-securities, one GNMA mortgage-backed-security, three private label mortgage-backed-securities, and one municipal security.
2. INVESTMENT SECURITIES, continued
Maturities of mortgage-backed securities are presented based on contractual amounts. Actual maturities will vary as the underlying loans prepay. The scheduled maturities of securities at March 31, 2013 were as follows (dollars in thousands):
|
|
Available-for-Sale
|
|
|
Held-to-Maturity
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due after one year through five years
|
|
$
|
1,300
|
|
|
$
|
1,367
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Due after five years through ten years
|
|
|
13,614
|
|
|
|
14,498
|
|
|
|
-
|
|
|
|
-
|
|
Due after ten years
|
|
|
26,964
|
|
|
|
28,180
|
|
|
|
3,719
|
|
|
|
3,999
|
|
|
|
$
|
41,878
|
|
|
$
|
44,045
|
|
|
$
|
3,719
|
|
|
$
|
3,999
|
|
3.
Loans
The major components of loans on the balance sheet at March 31, 2013 and December 31, 2012 are as follows (dollars in thousands):
|
|
December 31,
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Commercial
|
|
$
|
33,542
|
|
|
$
|
37,517
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Real estate construction and development
|
|
|
34,755
|
|
|
|
38,004
|
|
Residential, one-to-four families
|
|
|
89,639
|
|
|
|
89,621
|
|
Residential, 5 or more families
|
|
|
5,209
|
|
|
|
2,085
|
|
Other commercial real estate
|
|
|
92,021
|
|
|
|
88,167
|
|
Agricultural
|
|
|
2,276
|
|
|
|
2,450
|
|
Consumer
|
|
|
1,915
|
|
|
|
2,025
|
|
|
|
|
259,357
|
|
|
|
259,869
|
|
Deferred loan origination fees, net of costs
|
|
|
(42
|
)
|
|
|
(22
|
)
|
Allowance for loan losses
|
|
|
(5,367
|
)
|
|
|
(5,500
|
)
|
|
|
$
|
253,948
|
|
|
$
|
254,347
|
|
Real Estate Loans
. Real estate loans include construction and land development loans, one-to-four and 5 or more family loans, and commercial real estate loans.
Commercial real estate loans totaled $92.0 million and $88.2 million at March 31, 2013 and December 31, 2012, respectively. This lending has involved loans secured by owner-occupied commercial buildings for office, storage and warehouse space, as well as non-owner occupied commercial buildings. The Bank generally requires the personal guaranty of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate may be larger in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties.
Construction and development lending totaled $34.8 million and $38.0 million at March 31, 2013 and December 31, 2012, respectively. The Bank originates one-to-four family residential construction loans for the construction of custom homes (where the home buyer is the borrower) and provides financing to builders and consumers for the construction of pre-sold homes. The Bank generally receives a pre-arranged permanent financing commitment from an outside banking entity prior to financing the construction of pre-sold homes. The Bank also makes commercial real estate construction loans, primarily for owner-occupied properties.
Residential one-to-four family loans amounted to $89.6 million at both March 31, 2013 and December 31, 2012. The Bank’s residential mortgage loans are typically either construction loans that convert into permanent financing and are secured by properties located within the Bank’s market areas, or refinances of existing one-to-four properties or financing of newly purchased one-to-four family properties.
Commercial Loans.
At March 31, 2013 and December 31, 2012, the Bank’s commercial loan portfolio totaled $33.5 million and $37.5 million, respectively. Commercial loans include both secured and unsecured loans for working capital, expansion, and other business purposes.
3. LOANS, continued
Short-term working capital loans are secured by accounts receivable, inventory and/or equipment. The Bank also makes term commercial loans secured by equipment and real estate. Lending decisions are based on an evaluation of the financial strength, cash flow, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, the Bank requires personal guarantees and secondary sources of repayment. Commercial loans generally provide greater yields and reprice more frequently than other types of loans, such as real estate loans.
Loans to Individuals.
Loans to individuals (consumer loans) include automobile loans, boat and recreational vehicle financing, and miscellaneous secured and unsecured personal loans and totaled $1.9 million and $2.0 million at March 31, 2013 and December 31, 2012, respectively. Consumer loans generally can carry significantly greater risks than other loans, even if secured, if the collateral consists of rapidly depreciating assets such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. The Bank manages the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss.
Loans of approximately $31.5 million and $27.8 million are pledged as eligible collateral for FHLB advances at March 31, 2013 and December 31, 2012, respectively.
Loan Approvals
. The Bank’s loan policies and procedures establish the basic guidelines governing its lending operations. The guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan reviews by independent, outside professionals experienced in loan review. Responsibility for loan review and loan underwriting resides with the Chief Credit Officer position. This position is responsible for loan underwriting and approval. On an annual basis, the Board of Directors of the Bank determines officers lending authority. Authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by the Board of Directors.
The Company, through its normal lending activity, originates and maintains loans receivable that are substantially concentrated in Guilford County, North Carolina, and adjoining countries.
Credit Review and Evaluation.
The Bank has a credit review department that reports to the Chief Credit Officer. The focus of the department is on policy compliance and proper grading of higher credit risk loans as well as new and existing loans on a sample basis. Additional reporting for problem/criticized assets has been developed along with an after-the-fact loan review.
The Bank uses a risk grading program to facilitate the evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses for real estate, commercial and consumer loans. In this program, risk grades are initially assigned by loan officers, reviewed by credit officers, and reviewed by internal credit review analysts on a test basis. The Bank strives to maintain the loan portfolio in accordance with conservative loan underwriting policies that result in loans specifically tailored to the needs of the Bank’s market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies.
All loans are risk graded on a scale from 1 (highest quality) to 8 (loss). Acceptable loans at inception are grades 1 through 4, and these grades have underwriting requirements that at least meet the minimum requirements of a secondary market source. If borrowers do not meet credit history requirements, other mitigating criteria such as substantial liquidity and low loan-to-value ratios could be considered and would generally have to be met in order to make the loan. The Bank’s loan policy states that a guarantor may be necessary if reasonable doubt exists as to the borrower’s ability to repay.
The risk grades, normally assigned by the loan officers when the loan is originated and reviewed by the credit officers, are based on several factors including historical data, current economic factors, composition of the portfolio, and evaluations of the total loan portfolio and assessments of credit quality within specific loan types. In some cases the risk grades are assigned by regional executives, depending upon dollar exposure. Because these factors are dynamic, the provision for loan losses can fluctuate. Credit quality reviews are based primarily on an analysis of the borrowers’ cash flows, with asset values considered only as a second source of payment. Credit officers work with lenders in underwriting, structuring and risk grading the Bank’s credits. The credit review department focuses on lending policy compliance, credit risk grading, and credit risk reviews on larger dollar exposures. Management uses the information developed from the procedures above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in determining the appropriate levels of the allowance for loan losses.
3. LOANS, continued
The following is a summary of the credit risk grade definitions for all loan types. These credit risk indicators were last updated in June 2012:
“1” — Highest Quality- These loans represent a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.
“2” — Good Quality- These loans have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher graded borrower. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the highest quality loans.
“3” — Satisfactory- The borrowers are a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant.
“4” — Satisfactory – Merits Attention- These credit facilities have potential developing weaknesses that deserve extra attention from the account manager and other management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the bank’s debt in the future.
“5” — Watch or Special Mention - These loans are typically existing loans, made using the passing grades outlined above, that have deteriorated to the point that cash flow is not consistently adequate to meet debt service or current debt service coverage is based on projections. Secondary sources of repayment may include specialized collateral or real estate that is not readily marketable or undeveloped, making timely collection in doubt.
“6” — Substandard- Loans and other credit extensions bearing this grade are considered inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions jeopardizing repayment of principal and interest as originally intended. Clear loss potential, however, does not have to exist in any individual assets classified as substandard.
“7” — Substandard Impaired (also includes any loans over 90 days past due, excluding sold mortgages )- Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6,” with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is extremely high.
“8” — Loss- Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the bank. Such loans are to be charged-off or charged-down. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.
3. LOANS, continued
The following is a summary of credit quality indicators by class at March 31, 2013 and December 31, 2012:
As of March 31, 2013 (dollars in thousands):
|
|
Pass
(Grades 1-4)
|
|
|
Special
Mention
(Grade 5)
|
|
|
Substandard
and lower
(Grades 6-8)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
30,561
|
|
|
$
|
791
|
|
|
$
|
2,190
|
|
|
$
|
33,542
|
|
Real estate construction and development
|
|
|
27,869
|
|
|
|
3,482
|
|
|
|
3,404
|
|
|
|
34,755
|
|
Residential, one-to-four families
|
|
|
83,523
|
|
|
|
5,023
|
|
|
|
1,093
|
|
|
|
89,639
|
|
Residential, 5 or more families
|
|
|
1,505
|
|
|
|
3,704
|
|
|
|
—
|
|
|
|
5,209
|
|
Other commercial real estate
|
|
|
75,999
|
|
|
|
9,689
|
|
|
|
6,333
|
|
|
|
92,021
|
|
Agricultural
|
|
|
2,276
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,276
|
|
Consumer
|
|
|
1,915
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
223,648
|
|
|
$
|
22,689
|
|
|
$
|
13,020
|
|
|
$
|
259,357
|
|
As of December 31, 2012 (dollars in thousands):
|
|
Pass
(Grades 1-4)
|
|
|
Special
Mention
(Grade 5)
|
|
|
Substandard
and lower
(Grades 6-8)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
34,190
|
|
|
$
|
680
|
|
|
$
|
2,647
|
|
|
$
|
37,517
|
|
Real estate construction and development
|
|
|
30,036
|
|
|
|
3,774
|
|
|
|
4,194
|
|
|
|
38,004
|
|
Residential, one-to-four families
|
|
|
87,036
|
|
|
|
1,465
|
|
|
|
1,120
|
|
|
|
89,621
|
|
Residential, 5 or more families
|
|
|
1,768
|
|
|
|
317
|
|
|
|
—
|
|
|
|
2,085
|
|
Other commercial real estate
|
|
|
69,148
|
|
|
|
12,802
|
|
|
|
6,217
|
|
|
|
88,167
|
|
Agricultural
|
|
|
2,450
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,450
|
|
Consumer
|
|
|
2,022
|
|
|
|
3
|
|
|
|
—
|
|
|
|
2,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
226,650
|
|
|
$
|
19,041
|
|
|
$
|
14,178
|
|
|
$
|
259,869
|
|
The following tables present the Bank’s aged analysis of past due loans (as of March 31, 2013 and December 31, 2012):
As of March 31, 2013 (dollars in thousands):
|
|
30-89
Days
Past Due
|
|
|
Greater than
90 Days Past
Due
(Nonaccrual)
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
loans
|
|
|
Past due
90 days
or more
and still
accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,768
|
|
|
$
|
375
|
|
|
$
|
2,143
|
|
|
$
|
31,399
|
|
|
$
|
33,542
|
|
|
$
|
—
|
|
Real estate construction and development
|
|
|
126
|
|
|
|
2,863
|
|
|
|
2,989
|
|
|
|
31,766
|
|
|
|
34,755
|
|
|
|
—
|
|
Residential, one-to-four families
|
|
|
796
|
|
|
|
1,113
|
|
|
|
1,909
|
|
|
|
87,731
|
|
|
|
89,639
|
|
|
|
183
|
|
Residential, 5 or more families
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,209
|
|
|
|
5,209
|
|
|
|
—
|
|
Other commercial real estate
|
|
|
3,976
|
|
|
|
6,333
|
|
|
|
10,309
|
|
|
|
81,712
|
|
|
|
92,021
|
|
|
|
—
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,276
|
|
|
|
2,276
|
|
|
|
—
|
|
Consumer
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
|
|
1,910
|
|
|
|
1,915
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,670
|
|
|
$
|
10,684
|
|
|
$
|
17,354
|
|
|
$
|
242,003
|
|
|
$
|
259,357
|
|
|
$
|
183
|
|
3. LOANS, continued
As of December 31, 2012 (dollars in thousands):
|
|
30-89
Days
Past Due
|
|
|
Greater than
90 Days Past
Due
(Nonaccrual)
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
loans
|
|
|
Past due
90 days
or more
and still
accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,578
|
|
|
$
|
820
|
|
|
$
|
2,398
|
|
|
$
|
35,119
|
|
|
$
|
37,517
|
|
|
$
|
—
|
|
Real estate construction and development
|
|
|
331
|
|
|
|
3,001
|
|
|
|
3,332
|
|
|
|
34,672
|
|
|
|
38,004
|
|
|
|
—
|
|
Residential, one-to-four families
|
|
|
585
|
|
|
|
1,071
|
|
|
|
1,656
|
|
|
|
87,965
|
|
|
|
89,621
|
|
|
|
216
|
|
Residential, 5 or more families
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,085
|
|
|
|
2,085
|
|
|
|
—
|
|
Other commercial real estate
|
|
|
852
|
|
|
|
6,214
|
|
|
|
7,066
|
|
|
|
81,101
|
|
|
|
88,167
|
|
|
|
—
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,450
|
|
|
|
2,450
|
|
|
|
—
|
|
Consumer
|
|
|
14
|
|
|
|
—
|
|
|
|
14
|
|
|
|
2,011
|
|
|
|
2,025
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,360
|
|
|
$
|
11,106
|
|
|
$
|
14,466
|
|
|
$
|
245,403
|
|
|
$
|
259,869
|
|
|
$
|
216
|
|
Past due loans reported in the following table do not include loans granted forbearance terms since payment terms have been modified or extended, although the loans are past due based on original contract terms. All loans with forbearance terms are included and reported as impaired loans.
Loans are considered past due if the required principal and interest income have not been received as of the date such payments were due.
Nonaccrual loans were $10.7 million and $11.1 million at March 31, 2013 and December 31, 2012, respectively. There were loans totaling $183,000 and $216,000 past due 90 days or more and still accruing at March 31, 2013 and December 31, 2012.
Impaired Loans.
Management considers certain loans graded “substandard impaired” (loans graded 7) or “loss” (loans graded 8) to be individually impaired and may consider “substandard” loans (loans graded 6) individually impaired depending on the borrower’s payment history. The Bank measures impairment based upon probable cash flows or the value of the collateral. Collateral value is assessed based on collateral value trends, liquidation value trends, and other liquidation expenses to determine logical and credible discounts that may be needed. Updated appraisals are required for all impaired loans and typically at renewal or modification of larger loans if the appraisal is more than 12 months old.
Impaired loans for all classes of loans typically include nonaccrual loans, loans over 90 days past due and still accruing, troubled debt restructured ("TDR") loans and other potential problem loans considered impaired based on other underlying factors. TDR loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrower’s weakened financial condition. Interest on TDR loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur and a sustained payment performance period is obtained. Due to the borrowers’ inability to make the payments required under the original loan terms, the Bank modifies the terms by granting a longer amortized repayment structure or reduced interest rates. Potential problem loans are loans which are currently performing and are not included in nonaccrual or restructured loans above, but about which we have concerns as to the borrower’s ability to comply with present repayment terms. These loans are likely to be included later in nonaccrual, past due or TDR loans, so they are considered by management in assessing the adequacy of the allowance for loan losses. Impaired loans are generally placed in nonaccrual status when they are greater than 90 days past due unless they are well secured and in process of collection.
3. LOANS, continued
The following tables present the Bank’s investment in loans considered to be impaired and related information on those impaired loans as of March 31, 2013 and December 31, 2012:
As of March 31, 2013 (dollars in thousands):
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,987
|
|
|
$
|
4,047
|
|
|
$
|
—
|
|
|
$
|
3,079
|
|
|
$
|
23
|
|
Real estate construction and development
|
|
|
3,091
|
|
|
|
3,274
|
|
|
|
—
|
|
|
|
3,277
|
|
|
|
47
|
|
Residential, one-to-four families
|
|
|
649
|
|
|
|
848
|
|
|
|
—
|
|
|
|
754
|
|
|
|
3
|
|
Other commercial real estate
|
|
|
5,939
|
|
|
|
6,460
|
|
|
|
—
|
|
|
|
6,214
|
|
|
|
29
|
|
Total impaired loans with no related allowance recorded
|
|
$
|
11,666
|
|
|
$
|
14,629
|
|
|
$
|
—
|
|
|
$
|
13,324
|
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction and development
|
|
$
|
151
|
|
|
$
|
243
|
|
|
$
|
14
|
|
|
$
|
197
|
|
|
$
|
—
|
|
Commercial
|
|
|
79
|
|
|
|
79
|
|
|
|
30
|
|
|
|
79
|
|
|
|
—
|
|
Other commercial real estate
|
|
|
731
|
|
|
|
1,217
|
|
|
|
16
|
|
|
|
981
|
|
|
|
—
|
|
Total impaired loans with allowance recorded
|
|
$
|
961
|
|
|
$
|
1,539
|
|
|
$
|
60
|
|
|
$
|
1,257
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,066
|
|
|
$
|
4,126
|
|
|
$
|
30
|
|
|
$
|
3,158
|
|
|
$
|
23
|
|
Real estate construction and development
|
|
|
3,242
|
|
|
|
3,517
|
|
|
|
14
|
|
|
|
3,474
|
|
|
|
47
|
|
Residential, one-to-four families
|
|
|
649
|
|
|
|
848
|
|
|
|
—
|
|
|
|
754
|
|
|
|
3
|
|
Other commercial real estate
|
|
|
6,670
|
|
|
|
7,677
|
|
|
|
16
|
|
|
|
7,195
|
|
|
|
29
|
|
Total impaired loans
|
|
$
|
12,627
|
|
|
$
|
16,168
|
|
|
$
|
60
|
|
|
$
|
14,581
|
|
|
$
|
102
|
|
As of December 31, 2012 (dollars in thousands):
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,745
|
|
|
$
|
2,943
|
|
|
$
|
—
|
|
|
$
|
2,409
|
|
|
$
|
92
|
|
Real estate construction and development
|
|
|
4,047
|
|
|
|
4,243
|
|
|
|
—
|
|
|
|
4,485
|
|
|
|
175
|
|
Residential, one-to-four families
|
|
|
672
|
|
|
|
871
|
|
|
|
—
|
|
|
|
1,220
|
|
|
|
14
|
|
Other commercial real estate
|
|
|
5,565
|
|
|
|
6,637
|
|
|
|
—
|
|
|
|
10,114
|
|
|
|
163
|
|
Total impaired loans with no related allowance recorded
|
|
$
|
13,029
|
|
|
$
|
14,694
|
|
|
$
|
—
|
|
|
$
|
18,228
|
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
437
|
|
|
$
|
1,437
|
|
|
$
|
243
|
|
|
$
|
952
|
|
|
$
|
40
|
|
Other commercial real estate
|
|
|
334
|
|
|
|
820
|
|
|
|
334
|
|
|
|
1,125
|
|
|
|
—
|
|
Total impaired loans with allowance recorded
|
|
$
|
771
|
|
|
$
|
2,257
|
|
|
$
|
577
|
|
|
$
|
2,077
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,878
|
|
|
$
|
4,380
|
|
|
$
|
243
|
|
|
$
|
3,361
|
|
|
$
|
132
|
|
Real estate construction and development
|
|
|
4,047
|
|
|
|
4,243
|
|
|
|
—
|
|
|
|
4,485
|
|
|
|
175
|
|
Residential, one-to-four families
|
|
|
672
|
|
|
|
871
|
|
|
|
—
|
|
|
|
1,220
|
|
|
|
14
|
|
Other commercial real estate
|
|
|
7,203
|
|
|
|
7,457
|
|
|
|
334
|
|
|
|
11,239
|
|
|
|
163
|
|
Total impaired loans
|
|
$
|
13,800
|
|
|
$
|
16,951
|
|
|
$
|
577
|
|
|
$
|
20,305
|
|
|
$
|
484
|
|
4. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate for probable losses that have been incurred within the existing portfolio of loans. The primary risks inherent in the Bank’s loan portfolio, including the adequacy of the allowance or reserve for loan losses, are based on management’s assumptions regarding, among other factors, general and local economic conditions, which are difficult to predict and are beyond the Bank’s control. In estimating these risks, and the related loss reserve levels, management also considers the financial conditions of specific borrowers and credit concentrations with specific borrowers, groups of borrowers, and industries.
The allowance for loan losses is adjusted by direct charges to provision expense. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance for loan losses. The provision for loan losses was $366 thousand for the three months ended March 31, 2013 as compared to $564 thousand for the same period in 2012. The provision expense is determined by the Bank’s allowance for loan losses model. The components of the model are specific reserves for impaired loans and a general allocation for unimpaired loans. The general allocation has two components, an estimate based on historical loss experience and an additional estimate based on internal and external environmental factors due to the uncertainty of historical loss experience in predicting current embedded losses in the portfolio that will be realized in the future.
The portion of the general allocation on environmental factors includes estimates of losses related to interest rate trends, unemployment trends, past due and nonaccrual trends, watch list trends, charge-off trends, and monitoring assessments. The market served by the Bank continues to experience softening from the general economy and declines in real estate values.
The following table summarizes the balances by loan category of the allowance for loan losses with changes arising from charge-offs, recoveries and provision expense for the three months ended March 31, 2013 and 2012:
For the three months ended March 31, 2013 (dollars in thousands):
Allowance for Loan Losses
|
|
Commercial
|
|
|
Real estate Construction
and
Development
|
|
|
Residential,
one-to-four
families
|
|
|
Residential,
5
or more
families
|
|
|
Other commercial
real estate
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Total
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,351
|
|
|
$
|
1,361
|
|
|
$
|
1,246
|
|
|
$
|
86
|
|
|
$
|
1,431
|
|
|
$
|
3
|
|
|
$
|
22
|
|
|
$
|
5,500
|
|
Charge-offs
|
|
|
(208
|
)
|
|
|
(180
|
)
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
(100
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(504
|
)
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
|
|
5
|
|
Provision
|
|
|
216
|
|
|
|
107
|
|
|
|
143
|
|
|
|
82
|
|
|
|
(181
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,359
|
|
|
$
|
1,288
|
|
|
$
|
1,375
|
|
|
$
|
168
|
|
|
$
|
1,152
|
|
|
$
|
3
|
|
|
$
|
22
|
|
|
$
|
5,367
|
|
For the three months ended March 31, 2012 (dollars in thousands):
Allowance for Loan Losses
|
|
Commercial
|
|
|
Real estate Construction
and
Development
|
|
|
Residential,
one-to-four
families
|
|
|
Residential,
5
or more
families
|
|
|
Other
commercial
real estate
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Total
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
200
|
|
|
$
|
2,072
|
|
|
$
|
875
|
|
|
$
|
380
|
|
|
$
|
892
|
|
|
$
|
4
|
|
|
$
|
23
|
|
|
$
|
4,446
|
|
Charge-offs
|
|
|
—
|
|
|
|
(273)
|
|
|
|
(259
|
)
|
|
|
—
|
|
|
|
(56
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(592
|
)
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Provision
|
|
|
(22
|
)
|
|
|
4
|
|
|
|
566
|
|
|
|
16
|
|
|
|
(1)
|
|
|
|
—
|
|
|
|
1
|
|
|
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
178
|
|
|
$
|
1,803
|
|
|
$
|
1,182
|
|
|
$
|
396
|
|
|
$
|
835
|
|
|
$
|
4
|
|
|
$
|
21
|
|
|
$
|
4,419
|
|
The following tables summarize the allowance for loan losses and recorded investment in loans (as of March 31, 2013 and December 31, 2012):
March 31, 2013 (dollars in thousands):
|
|
Allowance for Loan Losses
|
|
|
Recorded Investment in Loans
|
|
|
|
Individually
evaluated
for
impairment
|
|
|
Collectively
evaluated
for
impairment
|
|
|
Total
|
|
|
Individually
evaluated for
impairment
|
|
|
Collectively
evaluated
for
impairment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
30
|
|
|
$
|
1,329
|
|
|
$
|
1,359
|
|
|
$
|
2,066
|
|
|
$
|
31,476
|
|
|
$
|
33,542
|
|
Real estate construction and development
|
|
|
14
|
|
|
|
1,274
|
|
|
|
1,288
|
|
|
|
3,242
|
|
|
|
31,513
|
|
|
|
34,755
|
|
Residential, one-to-four families
|
|
|
—
|
|
|
|
1,375
|
|
|
|
1,375
|
|
|
|
649
|
|
|
|
88,990
|
|
|
|
89,639
|
|
Residential, 5 or more families
|
|
|
—
|
|
|
|
168
|
|
|
|
168
|
|
|
|
—
|
|
|
|
5,209
|
|
|
|
5,209
|
|
Other commercial real estate
|
|
|
16
|
|
|
|
1,136
|
|
|
|
1,152
|
|
|
|
6,670
|
|
|
|
85,351
|
|
|
|
92,021
|
|
Agricultural
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
|
|
—
|
|
|
|
2,276
|
|
|
|
2,276
|
|
Consumer
|
|
|
—
|
|
|
|
22
|
|
|
|
22
|
|
|
|
—
|
|
|
|
1,915
|
|
|
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60
|
|
|
$
|
5,307
|
|
|
$
|
5,307
|
|
|
$
|
12,627
|
|
|
$
|
246,730
|
|
|
$
|
259,357
|
|
December 31, 2012 (dollars in thousands):
|
|
Allowance for Loan Losses
|
|
|
Recorded Investment in Loans
|
|
|
|
Individually
evaluated
for
impairment
|
|
|
Collectively
evaluated
for
impairment
|
|
|
Total
|
|
|
Individually
evaluated for
impairment
|
|
|
Collectively
evaluated
for
impairment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
243
|
|
|
$
|
1,108
|
|
|
$
|
1,351
|
|
|
$
|
1,878
|
|
|
$
|
35,639
|
|
|
$
|
37,517
|
|
Real estate construction and development
|
|
|
—
|
|
|
|
1,361
|
|
|
|
1,361
|
|
|
|
4,047
|
|
|
|
33,957
|
|
|
|
38,004
|
|
Residential, one-to-four families
|
|
|
—
|
|
|
|
1,246
|
|
|
|
1,246
|
|
|
|
672
|
|
|
|
88,949
|
|
|
|
89,621
|
|
Residential, 5 or more families
|
|
|
—
|
|
|
|
86
|
|
|
|
86
|
|
|
|
—
|
|
|
|
2,085
|
|
|
|
2,085
|
|
Other commercial real estate
|
|
|
334
|
|
|
|
1,097
|
|
|
|
1,431
|
|
|
|
7,203
|
|
|
|
80,964
|
|
|
|
88,167
|
|
Agricultural
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
|
|
—
|
|
|
|
2,450
|
|
|
|
2,450
|
|
Consumer
|
|
|
—
|
|
|
|
22
|
|
|
|
22
|
|
|
|
—
|
|
|
|
2,025
|
|
|
|
2,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
577
|
|
|
$
|
4,923
|
|
|
$
|
5,500
|
|
|
$
|
13,800
|
|
|
$
|
246,069
|
|
|
$
|
259,869
|
|
5.
TROUBLED DEBT RESTRUCTURINGS
The total amount of TDR loans outstanding as of March 31, 2013 was $4.1 million with no related reserves. Approximately $506 thousand TDR loans were accruing interest as of March 31, 2013, as these loans had sufficient evidence of paying according to the new restructured terms to warrant a return to accrual status. The total amount of TDR loans outstanding as of December 31, 2012 was $4.4 million with no related reserves. Approximately $543 thousand TDR loans were accruing interest as of December 31, 2012, as these loans had sufficient evidence of paying according to the new restructured terms to warrant a return to accrual status.
The following tables include the recorded investment and number of modifications for TDR restructured loans for the three months ended March 31, 2013. There were no modifications for TDR loans for the three months ended March 31, 2012. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to modification.
|
|
Three months ended March 31, 2013 (dollars in thousands)
|
Extended payment terms:
|
|
Number
of
loans
|
|
Pre-Modification
Outstanding Recorded
Investment
|
Post-Modification
Outstanding Recorded
Investment
|
Adjustment to Reserves as a
Result of the Restructuring
|
Residential, one-to-four families
|
|
|
3
|
|
262
|
264
|
—
|
|
|
Three months ended March 31, 2012 (dollars in thousands)
|
Extended payment terms:
|
|
Number
of
loans
|
|
Pre-Modification
Outstanding Recorded
Investment
|
Post-Modification
Outstanding Recorded
Investment
|
Adjustment to Reserves as a
Result of the Restructuring
|
Other commercial real estate
|
|
|
2
|
|
368
|
368
|
—
|
During the three months ended March 31, 2013 there were six loans with an outstanding balance of $4.1 million in default that had been previously restructured. During the three months ended March 31, 2012 there were no loans in default that had been previously restructured. Restructured loans are deemed to be in default if payments in accordance with the modified terms are not received within 90 days of the payment due date.
6. JUNIOR SUBORDINATED DEBENTURES
In 2007, the Company issued $8,248,000 of junior subordinated debentures to Oak Ridge Statutory Trust I (the “Trust”) in exchange for the proceeds of trust preferred securities issued by the Trust. The junior subordinated debentures are included in long-term debt and the Company’s equity interest in the Trust is included in other assets.
The Trust was created by the Company on September 28, 2007, at which time the Trust issued $8.0 million in aggregate liquidation amount of $1 par value preferred capital trust securities which mature September 28, 2037. Distributions are payable on the securities at the floating rate equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 1.60%, and the securities may be prepaid at par by the Trust at any time after September 28, 2012. The principal assets of the Trust are $8.3 million of the Company’s junior subordinated debentures which mature on September 28, 2037, and bear interest at the floating rate equal to the three-month LIBOR plus 1.60%, and which are callable by the Company after September 28, 2012. All $248 thousand in the aggregate liquidation amount of the Trust’s common securities are held by the Company.
7.
STOCK OPTION AND RESTRICTED STOCK PLANS
Defined Contribution Plan
The Company maintains a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). The plan covers substantially all employees. Participants may contribute a percentage of compensation, subject to the maximum allowed under the Code. In addition, the Company may make additional contributions at the discretion of the Board of Directors. The Company paid $39,000 and $45,000 in each of the three-month periods ended March 31, 2013 and 2012, respectively.
Employee Stock Ownership Plan
In 2010, the Company established an Employee Stock Ownership Plan (the “ESOP”) for the employees of the Bank. The ESOP is a qualifying plan under Internal Revenue Service guidelines. It covers all employees who work at least 1,000 hours per year, are at least 21 years of age, and have completed one year of service. During the year ended December 31, 2010, the Company accrued $900,000 to be contributed to the Plan. The Company contributed the amount accrued in 2010 to the Plan in 2011. There were no accruals or contributions in the three-month periods ended March 31, 2013 and 2012.
Flexible Benefits Plan
The Company maintains a Flexible Benefits Plan, which covers substantially all employees. Participants may set aside pre-tax dollars to provide for the future expenses such as insurance, dependent care or health care. Expenses of the plan were $112,000 and $152,000 for the three-month periods ended March 31, 2013 and 2012, respectively.
Cash Value of Life Insurance
The Company is the owner and beneficiary of life insurance policies on certain executive officers. Policy cash values on the balance sheet totaled $5.1 million at both March 31, 2013 and December 31, 2012.
7.
STOCK OPTION AND RESTRICTED STOCK PLANS, continued
Supplemental Executive Retirement Plan
In January of 2006, the Company adopted a supplemental executive retirement plan to provide benefits for certain members of management. Under plan provisions, aggregate fixed annual payments of $252,400 are payable for these members of management for their lifetime, beginning with their normal retirement ages of 65. The liability is calculated by discounting the anticipated future cash flows at 6%. The liability accrued for this obligation was $1.9 million and $1.8 million at March 31, 2013 and December 31, 2012, respectively. Charges to income and expense are based on changes in the cash value of insurance as well as any additional charges required to fund the liability. The Company funded the supplemental executive retirement plan through the purchase of bank-owned life insurance (“BOLI”) during 2003 and 2004 with initial investments of $1.9 million and $1.8 million, respectively. The corresponding cash surrender values of the BOLI policies totaled $5.1 million at both March 31, 2013 and December 31, 2012.
Stock Option Plans
The Company adopted both the
Employee Stock Option Plan
(Incentive Plan) and the
Director Stock Option Plan
(Nonstatutory Plan). Under each plan up to 178,937 shares could have been issued for a total of 357,874 shares. Both of these plans expired on June 29, 2010. Options granted under both plans expire no more than 10 years from date of grant. Option exercise prices under both plans were set by a committee of the Board of Directors at the date of grant, at a price not less than 100% of fair market value at the date of the grant. Options granted under either plan vest according to the terms of each particular grant.
During 2007, the Company adopted the Long-Term Stock Incentive Plan. The Plan provides for the issuance of up to an aggregate of 500,000 shares of common stock in the form of stock options, restricted stock awards and performance unit awards. The Long-Term Incentive Plan expires on April 20, 2017.
Compensation cost charged to income for the three-month periods ended March 31, 2013 and 2012 was approximately $8 thousand and $10 thousand, respectively.
Stock Options
Stock options may be issued as incentive stock options or as nonqualified stock options. The term of the option will be established at the time is it granted but shall not exceed ten years. Vesting will also be established at the time the option is granted. The exercise price may not be less than the fair market value of a share of common stock on the date the option is granted. It is the Company’s policy to issue new shares of stock to satisfy option exercises.
Restricted Stock Awards
Restricted stock awards are subject to restrictions and the risk of forfeiture if conditions stated in the award agreement are not satisfied at the end of a restriction period. During the restriction period, restricted stock covered by the award will be held by the Company. If the conditions stated in the award agreement are satisfied at the end of the restriction period, the restricted stock will become unrestricted and the certificate evidencing the stock will be delivered to the employee.
A summary of the status of stock options as of March 31, 2013 and 2012, and changes during the three-month periods then ended, is presented below:
|
|
2013
|
|
|
2012
|
|
|
|
Number
|
|
|
Weighted
Average
Option
Price
|
|
|
Number
|
|
|
Weighted
Average
Option
Price
|
|
Options outstanding, beginning of year
|
|
|
232,190
|
|
|
$
|
9.68
|
|
|
|
232,190
|
|
|
$
|
9.68
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(13,276)
|
|
|
|
10.61
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of year
|
|
|
218,914
|
|
|
$
|
9.68
|
|
|
|
232,190
|
|
|
$
|
9.68
|
|
Information regarding the stock options outstanding at March 31, 2013 is as follows:
Range of Exercise Prices
|
|
|
Number
Exercisable
and Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
$
|
4.50
|
|
|
|
|
|
23,500
|
|
|
|
7.42
|
|
|
$
|
4.82
|
|
|
$
|
—
|
|
$
|
10.00
|
-
|
$10.39
|
|
|
|
116,481
|
|
|
|
1.42
|
|
|
|
10.00
|
|
|
|
—
|
|
$
|
10.40
|
-
|
$11.20
|
|
|
|
78,933
|
|
|
|
1.10
|
|
|
|
10.65
|
|
|
|
—
|
|
|
|
|
|
|
|
|
218,914
|
|
|
|
1.95
|
|
|
|
9.68
|
|
|
$
|
—
|
|
Information regarding the stock options outstanding and exercisable at March 31, 2013 is as follows (dollars in thousands):
Range of Exercise Prices
|
|
|
Number
Exercisable
and Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
$
|
4.50
|
|
|
|
|
|
18,700
|
|
|
|
7.42
|
|
|
$
|
4.82
|
|
|
$
|
—
|
|
$
|
10.00
|
-
|
$10.39
|
|
|
|
116,481
|
|
|
|
1.42
|
|
|
|
10.00
|
|
|
|
—
|
|
$
|
10.40
|
-
|
$11.20
|
|
|
|
78,933
|
|
|
|
1.10
|
|
|
|
10.65
|
|
|
|
—
|
|
|
|
|
|
|
|
|
214,114
|
|
|
|
1.82
|
|
|
|
9.79
|
|
|
$
|
—
|
|
No options were granted or vested in the three months ended March 31, 2013 and 2012.
Anticipated total unrecognized compensation costs related to outstanding non-vested stock options and restricted stock grants will be recognized over the following periods:
|
|
Stock Options
|
|
|
|
(Dollars in
thousands)
|
|
2013
|
|
$
|
3
|
|
2014
|
|
|
5
|
|
2015
|
|
|
3
|
|
2016
|
|
|
—
|
|
2017
|
|
|
—
|
|
Total
|
|
$
|
11
|
|
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions.
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2013 and December 31, 2012 (dollars in thousands):
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,165
|
|
|
$
|
26,165
|
|
|
$
|
17,043
|
|
|
$
|
17,043
|
|
Securities, available-for-sale
|
|
|
44,045
|
|
|
|
44,045
|
|
|
|
43,937
|
|
|
|
43,937
|
|
Securities, held-to-maturity
|
|
|
3,719
|
|
|
|
3,999
|
|
|
|
3,928
|
|
|
|
4,183
|
|
FHLB Stock
|
|
|
411
|
|
|
|
411
|
|
|
|
528
|
|
|
|
528
|
|
Loans held for sale
|
|
|
228
|
|
|
|
228
|
|
|
|
1,787
|
|
|
|
1,787
|
|
Loans, net of allowance for loan losses
|
|
|
253,948
|
|
|
|
254,658
|
|
|
|
254,347
|
|
|
|
255,058
|
|
Bank owned life insurance
|
|
|
5,112
|
|
|
|
5,112
|
|
|
|
5,078
|
|
|
|
5,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
312,058
|
|
|
|
319,883
|
|
|
|
306,177
|
|
|
|
313,855
|
|
Junior subordinated notes related to trust preferred securities
|
|
|
8,248
|
|
|
|
8,248
|
|
|
|
8,248
|
|
|
|
8,248
|
|
The estimated fair values of net loans and deposits as of the respective periods are based on estimated cash flows discounted at market interest rates. The carrying values of other financial instruments, including various receivables and payables, approximate fair value. The carrying amounts and the fair values of the junior subordinated notes related to trust preferred securities and long-term debt are equal as the rates on the underlying obligations reprice every three months. The fair value of off-balance sheet financial instruments is considered immaterial.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1
|
Valuation is based upon quoted prices for identical instruments traded in active markets.
|
|
|
Level 2
|
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
|
|
|
Level 3
|
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
|
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
There were no changes to the techniques used to measure fair value during the period ended March 31, 2013.
Following is a description of valuation methodologies used for assets recorded at fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. The sensitivity of fair value to unobservable inputs may result in a significantly higher or lower value.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
The following table presents the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2013 and December 31, 2012 (dollars in thousands):
|
|
March 31, 2013
|
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,165
|
|
|
$
|
26,165
|
|
|
$
|
26,165
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities, available-for-sale
|
|
|
44,045
|
|
|
|
44,045
|
|
|
|
—
|
|
|
|
43,545
|
|
|
|
500
|
|
Securities, held-to-maturity
|
|
|
3,719
|
|
|
|
3,999
|
|
|
|
—
|
|
|
|
3,999
|
|
|
|
—
|
|
Federal Home Loan Bank stock
|
|
|
411
|
|
|
|
411
|
|
|
|
411
|
|
|
|
—
|
|
|
|
—
|
|
Loans held for sale
|
|
|
228
|
|
|
|
228
|
|
|
|
228
|
|
|
|
—
|
|
|
|
—
|
|
Loans, net of allowance for loan losses
|
|
|
253,948
|
|
|
|
254,658
|
|
|
|
—
|
|
|
|
—
|
|
|
|
254,658
|
|
Bank owned life insurance
|
|
|
5,112
|
|
|
|
5,112
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,112
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
312,058
|
|
|
|
319,883
|
|
|
|
—
|
|
|
|
319,883
|
|
|
|
—
|
|
Junior subordinated notes related to trust preferred securities
|
|
|
8,248
|
|
|
|
8,248
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,248
|
|
|
|
December 31, 2012
|
|
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,043
|
|
|
$
|
17,043
|
|
|
$
|
17,043
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Securities, available-for-sale
|
|
|
43,937
|
|
|
$
|
43,937
|
|
|
$
|
—
|
|
|
$
|
43,437
|
|
|
$
|
500
|
|
Securities, held-to-maturity
|
|
|
3,928
|
|
|
|
4,183
|
|
|
|
—
|
|
|
|
4,183
|
|
|
|
—
|
|
Federal Home Loan Bank stock
|
|
|
528
|
|
|
|
528
|
|
|
|
528
|
|
|
|
—
|
|
|
|
—
|
|
Loans held for sale
|
|
|
1,787
|
|
|
|
1,787
|
|
|
|
1,787
|
|
|
|
—
|
|
|
|
—
|
|
Loans, net of allowance for loan losses
|
|
|
254,347
|
|
|
|
255,058
|
|
|
|
—
|
|
|
|
—
|
|
|
|
255,058
|
|
Bank owned life insurance
|
|
|
5,078
|
|
|
|
5,078
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,078
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
306,177
|
|
|
|
313,855
|
|
|
|
—
|
|
|
|
313,855
|
|
|
|
—
|
|
Junior subordinated notes related to trust preferred securities
|
|
|
8,248
|
|
|
|
8,248
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,248
|
|
8. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
Assets
and liabilities recorded at fair value on a recurring basis at March 31, 2013 and December 31, 2012
March 31, 2013 (Dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Government-sponsored enterprise securities
|
|
$
|
1,069
|
|
|
$
|
—
|
|
|
$
|
1,069
|
|
|
$
|
—
|
|
FNMA or GNMA mortgage-backed securities
|
|
|
5,919
|
|
|
|
—
|
|
|
|
5,919
|
|
|
|
—
|
|
Private label mortgage-backed securities
|
|
|
8,574
|
|
|
|
—
|
|
|
|
8,574
|
|
|
|
—
|
|
Municipal securities
|
|
|
17,708
|
|
|
|
—
|
|
|
|
17,708
|
|
|
|
—
|
|
SBA debentures
|
|
|
10,275
|
|
|
|
—
|
|
|
|
10,275
|
|
|
|
—
|
|
Other domestic debt securities
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
Investment securities available-for-sale
|
|
$
|
44,045
|
|
|
$
|
—
|
|
|
$
|
43,545
|
|
|
$
|
500
|
|
Total assets at fair value
|
|
$
|
44,045
|
|
|
$
|
—
|
|
|
$
|
43,545
|
|
|
$
|
500
|
|
Total liabilities at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
December 31, 2012 (Dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Government-sponsored enterprise securities
|
|
$
|
1,079
|
|
|
$
|
—
|
|
|
$
|
1,079
|
|
|
$
|
—
|
|
FNMA or GNMA mortgage-backed securities
|
|
|
8,628
|
|
|
|
—
|
|
|
|
8,628
|
|
|
|
—
|
|
Private label mortgage-backed securities
|
|
|
9,075
|
|
|
|
—
|
|
|
|
9,075
|
|
|
|
—
|
|
Municipal securities
|
|
|
14,020
|
|
|
|
—
|
|
|
|
14,020
|
|
|
|
—
|
|
SBA debentures
|
|
|
10,635
|
|
|
|
—
|
|
|
|
10,635
|
|
|
|
—
|
|
Other domestic debt securities
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
Investment securities available-for-sale
|
|
$
|
43,937
|
|
|
$
|
—
|
|
|
$
|
43,437
|
|
|
$
|
500
|
|
Total assets at fair value
|
|
$
|
43,937
|
|
|
$
|
—
|
|
|
$
|
43,437
|
|
|
$
|
500
|
|
Total liabilites at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Assets
and liabilities recorded at fair value on a nonrecurring basis at March 31, 2013 and December 31, 2012
March 31, 2013 (Dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Commercial loans
|
|
$
|
151
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
151
|
|
Real estate construction and development loans
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
Other commercial real estate loans
|
|
|
731
|
|
|
|
—
|
|
|
|
—
|
|
|
|
731
|
|
Impaired loans
|
|
|
961
|
|
|
|
—
|
|
|
|
—
|
|
|
|
961
|
|
Foreclosed assets
|
|
|
1,627
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,627
|
|
Total assets at fair value
|
|
$
|
2,588
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,588
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2012 (Dollars in thousands)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Commercial loans
|
|
$
|
437
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
437
|
|
Other commercial real estate loans
|
|
|
334
|
|
|
|
—
|
|
|
|
—
|
|
|
|
334
|
|
Impaired commercial and commercial real estate loans
|
|
|
771
|
|
|
|
—
|
|
|
|
—
|
|
|
|
771
|
|
Foreclosed assets
|
|
|
2,116
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,116
|
|
Total assets at fair value
|
|
$
|
2,887
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,887
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
8.
FAIR VALUE OF FINANCIAL INSTRUMENTS
, continued
The following table provides Quantitative Information about Level 3 Fair Value Measurements at March 31, 2013
|
|
Fair Value at
March 31,
2013
|
|
Valuation
Technique
|
|
Significant
Unobservable
Inputs
|
|
Significant
Unobservable
Input
Value
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
961
|
|
Appraised Value
|
|
Appraisals and/or sales of comparable properties
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
$
|
1,627
|
|
Appraised Value/Comparable Sales/Other Estimates from Independent Sources
|
|
Appraisals and/or sales of comparable properties/Independent quotes/bids
|
|
|
n/a
|
|
The table below presents reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
for the three-month period ended March 31, 2013 as compared to the same period in 2012
.
(Dollars in thousands)
|
|
Available-for
Sale Securities
|
|
Balance, January 1, 2013
|
|
$
|
500
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
Included in earnings
|
|
|
—
|
|
Included in other comprehensive income
|
|
|
—
|
|
Purchases, issuances, and settlements
|
|
|
—
|
|
Transfers in to/out of Level 3
|
|
|
—
|
|
Balance, March 31, 2013
|
|
$
|
500
|
|
(Dollars in thousands)
|
|
Available-for
Sale Securities
|
|
Balance, January 1, 2012
|
|
$
|
500
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
Included in earnings
|
|
|
—
|
|
Included in other comprehensive income
|
|
|
—
|
|
Purchases, issuances, and settlements
|
|
|
—
|
|
Transfers in to/out of Level 3
|
|
|
—
|
|
Balance, March 31, 2012
|
|
$
|
500
|
|
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At March 31, 2013 and December 31, 2012, pre-approved but unused lines of credit for loans totaled approximately $32.0 million and $30.0 million respectively. In addition, we had $811 thousand and $755 thousand in standby letters of credit at March 31, 2013 and December 31, 2012, respectively. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counter-party. We believe these commitments can be funded through normal operations.
10. REPURCHASE OF WARRANT
On January 30, 2009, the Company entered into an agreement with the United States Department of the Treasury (“Treasury”). The Company issued and sold to the Treasury 7,700 shares of the Company's fixed rate cumulative preferred stock, Series A (“Series A Preferred Stock”) and received $7.7 million in cash. Related to the preferred stock issuance, the Company also issued warrants to purchase 163,830 shares of the Company's common stock. Upon issuance of the preferred stock and warrants, $1.36 million was allocated to the warrants. On October 31, 2012, the U.S. Department of the Treasury ("Treasury") sold all of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "TARP Preferred Stock") that the Company issued to Treasury in 2009, in connection with the Company's participation in the TARP Capital Purchase Program. In February 2013, the Company purchased and cancelled all of the warrants to purchase common stock for $123,000. The discount on the purchase of the warrants has been allocated to common equity. As of March 31, 2013, the remaining discount on preferred stock was $252,000, which will be accreted over the next 10 months.