NOTE 1. BASIS OF PRESENTATION
We are a financial holding company headquartered in Moorefield, West Virginia. Our primary business is community banking. Our community bank subsidiary, Summit Community Bank (“Summit Community”) provides commercial and retail banking services primarily in the Eastern Panhandle and South Central regions of West Virginia and the Northern region of Virginia. We also operate Summit Insurance Services, LLC in Moorefield, West Virginia and Leesburg, Virginia.
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.
Use of estimates
: We must make estimates and assumptions that affect the reported amounts and disclosures in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.
Principles of consolidation
: The accompanying consolidated financial statements include the accounts of Summit and its subsidiaries. All significant accounts and transactions among these entities have been eliminated.
Variable interest entities:
In accordance with ASC Topic 810,
Consolidation,
business enterprises that represent the primary beneficiary of another entity by retaining a controlling interest in that entity's assets, liabilities and results of operations must consolidate that entity in its financial statements. Prior to the issuance of ASC Topic 810, consolidation generally occurred when an enterprise controlled another entity through voting interests. If applicable, transition rules allow the restatement of financial statements or prospective application with a cumulative effect adjustment. We have determined that the provisions of ASC Topic 810 do not require consolidation of subsidiary trusts which issue guaranteed preferred beneficial interests in subordinated debentures (Trust Preferred Securities). The Trust Preferred Securities continue to qualify as Tier 1 capital for regulatory purposes. The banking regulatory agencies have not issued any guidance which would change the regulatory capital treatment for the Trust Preferred Securities based on the adoption of ASC Topic 810. The adoption of the provisions of ASC Topic 810 has had no material impact on our results of operations, financial condition, or liquidity. See Note 11 of our Notes to Consolidated Financial Statements for a discussion of our subordinated debentures owed to unconsolidated subsidiary trusts.
Cash and cash equivalents:
Cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), and federal funds sold.
Presentation of cash flows
: For purposes of reporting cash flows, cash flows from demand deposits, NOW accounts, savings accounts and short-term borrowings are reported on a net basis, since their original maturities are less than three months. Cash flows from loans and certificates of deposit and other time deposits are reported net.
Advertising:
Advertising costs are expensed as incurred.
Trust services
: Assets held in an agency or fiduciary capacity are not our assets and are not included in the accompanying consolidated balance sheets. Trust services income is recognized on the cash basis in accordance with customary banking practice. Reporting such income on a cash basis rather than the accrual basis does not have a material effect on net income.
Reclassifications
: Certain accounts in the consolidated financial statements for 2012 and 2011, as previously presented, have been reclassified to conform to current year classifications.
Significant accounting policies:
The following table identifies our other significant accounting policies and the Note and page where a detailed description of each policy can be found.
Fair Value Measurements
|
Note 3
|
Page 58
|
Securities
|
Note 4
|
Page 63
|
Loans
|
Note 5
|
Page 68
|
Allowance for Loan Losses
|
Note 6
|
Page 75
|
Property Held for Sale
|
Note 7
|
Page 78
|
Premises and Equipment
|
Note 8
|
Page 78
|
Intangible Assets
|
Note 9
|
Page 78
|
Securities Sold Under Agreements to Repurchase
|
Note 11
|
Page 80
|
Income Taxes
|
Note 12
|
Page 82
|
Stock Based Compensation
|
Note 13
|
Page 83
|
Earnings Per Share
|
Note 18
|
Page 90
|
Derivative Financial Instruments
|
Note 19
|
Page 91
|
NOTE 2. SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE
ASU 2011-04,
Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs
amends Topic 820,
Fair Value Measurements and Disclosures
, to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 was effective January 1, 2012 and did not have a significant impact on our financial statements.
ASU 2011-05,
Comprehensive Income (Topic 220) - Presentation of Comprehensive Income
amends Topic 220,
Comprehensive Income
, to require that all nonowner changes in shareholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity was eliminated. ASU 2011-05 was effective January 1, 2012 and did not have a significant impact on our financial statements.
ASU 2011-08,
Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment,
amends Topic 350,
Intangibles – Goodwill and Other,
permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-than-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. ASU 2011-08 was effective for annual and interim impairment tests beginning after December 15, 2011, and did not have a significant impact on our financial statements.
ASU 2011-12,
Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,
defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to redeliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12. ASU 2011-12 became effective for us on January 1, 2012 and did not have a significant impact on our financial statements.
ASU 2013-02,
Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,
requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, 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 but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments were effective prospectively for reporting periods beginning after December 15, 2012 and did not have a material impact on our consolidated financial statements.
ASU 2013-11,
Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, if a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments were effective for years, and interim periods within those years, beginning after December 15, 2013. The amendments are not expected to have a material impact on our consolidated financial statements.
ASU 2014-01,
Investments (Topic 323) - Accounting for Investments in Affordable Housing Projects
revises the necessary criteria that need to be met in order for an entity to account for investments in affordable housing projects net of the provision for income taxes. It also changes the method of recognition from an effective amortization approach to a proportional amortization approach. Additional disclosures were also set forth in this update. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments are required to be applied retrospectively to all periods presented. Early adoption is permitted. Management is currently evaluating the impact of the guidance on our consolidated financial statements.
ASU 2014-04,
Receivables (Topic 310) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. Management does not believe the amendments will have a material impact on our consolidated financial statements.
NOTE 3. FAIR VALUE MEASUREMENTS
ASC Topic 820,
Fair Value Measurements and Disclosures,
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.
|
Level 1
: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
|
|
Level 2
: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
|
|
Level 3
: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
|
Accordingly, securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, and impaired loans held for investment. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Available-for-Sale Securities
: 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.
Derivative Financial Instruments:
Derivative financial instruments are recorded at fair value on a recurring basis. Fair value measurement is based on pricing models run by a third-party, utilizing observable market-based inputs. All future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. As a result, we classify interest rate swaps as Level 2.
Loans Held for Sale
: Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, we classify loans subject to nonrecurring fair value adjustments as Level 2.
Loans
: We do 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 original contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310,
Accounting by Creditors for Impairment of a Loan
. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value 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 December 31, 2013, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with ASC Topic 310, impaired loans where an allowance is established based on the fair value of collateral requires 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, we record the impaired loan as nonrecurring Level 2. When a current appraised value is not available and there is no observable market price, we record the impaired loan as nonrecurring Level 3.
When a collateral dependent loan is identified as impaired, management immediately begins the process of evaluating the estimated fair value of the underlying collateral to determine if a related specific allowance for loan losses or charge-off is necessary. Current appraisals are ordered once a loan is deemed impaired if the existing appraisal is more than twelve months old, or more frequently if there is known deterioration in value. For recently identified impaired loans, a current appraisal may not be available at the financial statement date. Until the current appraisal is obtained, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the loan’s underlying collateral since the date of the original appraisal. Such discounts are generally estimated based upon management’s knowledge of sales of similar collateral within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends. When a new appraisal is received (which generally are received within 3 months of a loan being identified as impaired), management then re-evaluates the fair value of the collateral and adjusts any specific allocated allowance for loan losses, as appropriate. In addition, management also assigns a discount of 7–10% for the estimated costs to sell the collateral.
Other Real Estate Owned (“OREO”)
: OREO consists of real estate acquired in foreclosure or other settlement of loans. Such assets are carried on the balance sheet at the lower of the investment in the real estate or its fair value less estimated selling costs. The fair value of OREO is determined on a nonrecurring basis generally utilizing current appraisals performed by an independent, licensed appraiser applying an income or market value approach using observable market data (Level 2). Updated appraisals of OREO are generally obtained if the existing appraisal is more than 18 months old, or more frequently if there is a known deterioration in value. However, if a current appraisal is not available, the original appraised value is discounted, as appropriate, to compensate for the estimated depreciation in the value of the real estate since the date of its original appraisal. Such discounts are generally estimated based upon management’s knowledge of sales of similar property within the applicable market area and its knowledge of other real estate market-related data as well as general economic trends (Level 3). Upon foreclosure, any fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and included in noninterest expense in the consolidated statements of income.
A distribution of asset and liability fair values according to the fair value hierarchy at December 31, 2013 and 2012 is provided in the tables below.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the recorded amount of assets measured at fair value on a recurring basis.
|
Balance at
|
|
Fair Value Measurements Using:
|
Dollars in thousands
|
December 31, 2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Available for sale securities
|
|
|
|
|
|
|
|
U.S. Government sponsored agencies
|
$
|
29,657
|
|
$
|
-
|
|
$
|
29,657
|
|
$
|
-
|
Mortgage backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
155,716
|
|
|
-
|
|
|
155,716
|
|
|
-
|
Nongovernment sponsored entities
|
|
11,819
|
|
|
-
|
|
|
11,819
|
|
|
-
|
State and political subdivisions
|
|
15,870
|
|
|
-
|
|
|
15,870
|
|
|
-
|
Corporate debt securities
|
|
3,966
|
|
|
-
|
|
|
3,966
|
|
|
-
|
Other equity securities
|
|
77
|
|
|
-
|
|
|
77
|
|
|
-
|
Tax-exempt state and political subdivisions
|
|
71,675
|
|
|
-
|
|
|
71,675
|
|
|
-
|
Total available for sale securities
|
$
|
288,780
|
|
$
|
-
|
|
$
|
288,780
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
803
|
|
$
|
-
|
|
$
|
803
|
|
|
|
|
Balance at
|
|
Fair Value Measurements Using:
|
Dollars in thousands
|
December 31, 2012
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Available for sale securities
|
|
|
|
|
|
|
|
U.S. Government sponsored agencies
|
$
|
29,020
|
|
$
|
-
|
|
$
|
29,020
|
|
$
|
-
|
Mortgage backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored agencies
|
|
136,570
|
|
|
-
|
|
|
136,570
|
|
|
-
|
Nongovernment sponsored entities
|
|
15,745
|
|
|
-
|
|
|
15,745
|
|
|
-
|
State and political subdivisions
|
|
12,169
|
|
|
-
|
|
|
12,169
|
|
|
-
|
Corporate debt securities
|
|
1,950
|
|
|
-
|
|
|
1,950
|
|
|
-
|
Other equity securities
|
|
77
|
|
|
-
|
|
|
77
|
|
|
-
|
Tax-exempt state and political subdivisions
|
|
83,270
|
|
|
-
|
|
|
83,270
|
|
|
-
|
Tax-exempt mortgage backed securities
|
|
2,738
|
|
|
-
|
|
|
2,738
|
|
|
-
|
Total available for sale securities
|
$
|
281,539
|
|
$
|
-
|
|
$
|
281,539
|
|
$
|
-
|
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the tables below.
|
Total at
|
|
Fair Value Measurements Using:
|
Dollars in thousands
|
December 31, 2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Residential mortgage loans held for sale
|
$
|
321
|
|
$
|
-
|
|
$
|
321
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,616
|
|
|
|
|
$
|
920
|
|
$
|
696
|
Commercial real estate
|
|
17,902
|
|
|
-
|
|
|
4,879
|
|
|
13,023
|
Construction and development
|
|
22,083
|
|
|
-
|
|
|
17,590
|
|
|
4,493
|
Residential real estate
|
|
14,747
|
|
|
-
|
|
|
8,336
|
|
|
6,411
|
Consumer
|
|
34
|
|
|
-
|
|
|
3
|
|
|
31
|
Total impaired loans
|
$
|
56,382
|
|
$
|
-
|
|
$
|
31,728
|
|
$
|
24,654
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Commercial real estate
|
|
9,903
|
|
|
-
|
|
|
9,903
|
|
|
-
|
Construction and development
|
|
31,610
|
|
|
-
|
|
|
29,993
|
|
|
1,617
|
Residential real estate
|
|
11,879
|
|
|
-
|
|
|
11,847
|
|
|
32
|
Consumer
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
Total OREO
|
$
|
53,392
|
|
$
|
-
|
|
$
|
51,743
|
|
$
|
1,649
|
|
Total at
|
|
Fair Value Measurements Using:
|
Dollars in thousands
|
December 31, 2012
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Residential mortgage loans held for sale
|
$
|
226
|
|
$
|
-
|
|
$
|
226
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
10,856
|
|
$
|
-
|
|
$
|
5,013
|
|
$
|
5,843
|
Commercial real estate
|
|
25,435
|
|
|
-
|
|
|
16,331
|
|
|
9,104
|
Construction and development
|
|
27,352
|
|
|
-
|
|
|
24,578
|
|
|
2,774
|
Residential real estate
|
|
24,442
|
|
|
-
|
|
|
21,625
|
|
|
2,817
|
Consumer
|
|
50
|
|
|
-
|
|
|
-
|
|
|
50
|
Total impaired loans
|
$
|
88,135
|
|
$
|
-
|
|
$
|
67,547
|
|
$
|
20,588
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Commercial real estate
|
|
11,835
|
|
|
-
|
|
|
11,047
|
|
|
788
|
Construction and development
|
|
40,671
|
|
|
-
|
|
|
35,978
|
|
|
4,693
|
Residential real estate
|
|
3,666
|
|
|
-
|
|
|
3,666
|
|
|
-
|
Consumer
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
Total OREO
|
$
|
56,172
|
|
$
|
-
|
|
$
|
50,691
|
|
$
|
5,481
|
Our policy with respect to troubled debt restructurings (“TDRs”), included in impaired loans, is to appraise any underlying collateral at the time of restructure, and then only obtain periodic reappraisals if the TDR is not performing in accordance with the terms of the restructure. Substantially all Level 3 fair values of impaired loans in the above tables are performing TDRs.
ASC Topic 825,
Financial Instruments
, requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The following summarizes the methods and significant assumptions we used in estimating our fair value disclosures for financial instruments.
Cash and cash equivalents:
The carrying values of cash and cash equivalents approximate their estimated fair value.
Interest bearing deposits with other banks:
The carrying values of interest bearing deposits with other banks approximate their estimated fair values.
Federal funds sold:
The carrying values of Federal funds sold approximate their estimated fair values.
Securities:
Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities.
Loans held for sale:
The carrying values of loans held for sale approximate their estimated fair values.
Loans:
The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. No prepayments of principal are assumed.
Accrued interest receivable and payable:
The carrying values of accrued interest receivable and payable approximate their estimated fair values.
Deposits:
The estimated fair values of demand deposits (i.e. non-interest bearing checking, NOW, money market and savings accounts) and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed.
Short-term borrowings:
The carrying values of short-term borrowings approximate their estimated fair values.
Long-term borrowings:
The fair values of long-term borrowings are estimated by discounting scheduled future payments of principal and interest at current rates available on borrowings with similar terms.
Subordinated debentures:
The carrying values of subordinated debentures approximate their estimated fair values.
Subordinated debentures owed to unconsolidated subsidiary trusts:
The carrying values of subordinated debentures owed to unconsolidated subsidiary trusts approximate their estimated fair values.
Derivative financial instruments:
The fair value of the interest rate swaps is valued using independent pricing models.
Off-balance sheet instruments:
The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counter parties. The amounts of fees currently charged on commitments and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown below.
The carrying values and estimated fair values of our financial instruments are summarized below:
|
At December 31,
|
|
2013
|
|
|
2012
|
|
Carrying
|
|
Estimated
|
|
|
Carrying
|
|
Estimated
|
Dollars in thousands
|
Value
|
|
Fair Value
|
|
|
Value
|
|
Fair Value
|
Financial assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
11,782
|
|
$
|
11,782
|
|
|
$
|
14,802
|
|
$
|
14,802
|
Securities available for sale
|
|
288,780
|
|
|
288,780
|
|
|
|
281,539
|
|
|
281,539
|
Other investments
|
|
7,815
|
|
|
7,815
|
|
|
|
14,658
|
|
|
14,658
|
Loans held for sale, net
|
|
321
|
|
|
321
|
|
|
|
226
|
|
|
226
|
Loans, net
|
|
937,070
|
|
|
952,592
|
|
|
|
937,168
|
|
|
965,454
|
Accrued interest receivable
|
|
5,669
|
|
|
5,669
|
|
|
|
5,621
|
|
|
5,621
|
Derivative financial assets
|
|
803
|
|
|
803
|
|
|
|
-
|
|
|
-
|
|
$
|
1,252,240
|
|
$
|
1,267,762
|
|
|
$
|
1,254,014
|
|
$
|
1,282,300
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
1,003,812
|
|
$
|
1,029,606
|
|
|
$
|
1,027,125
|
|
$
|
1,064,957
|
Short-term borrowings
|
|
62,769
|
|
|
62,769
|
|
|
|
3,958
|
|
|
3,958
|
Long-term borrowings
|
|
163,516
|
|
|
173,863
|
|
|
|
203,268
|
|
|
220,175
|
Subordinated debentures
|
|
16,800
|
|
|
16,800
|
|
|
|
16,800
|
|
|
16,800
|
Subordinated debentures owed to
|
|
|
|
|
|
|
|
|
|
|
|
|
unconsolidated subsidiary trusts
|
|
19,589
|
|
|
19,589
|
|
|
|
19,589
|
|
|
19,589
|
Accrued interest payable
|
|
1,433
|
|
|
1,433
|
|
|
|
1,877
|
|
|
1,877
|
|
$
|
1,267,919
|
|
$
|
1,304,060
|
|
|
$
|
1,272,617
|
|
$
|
1,327,356
|
NOTE 4. SECURITIES
We classify debt and equity securities as “held to maturity”, “available for sale” or “trading” according to management’s intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date.
Securities held to maturity
– Certain debt securities for which we have the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts. There are no securities classified as held to maturity in the accompanying financial statements.
Securities available for sale
- Securities not classified as "held to maturity" or as "trading" are classified as "available for sale." Securities classified as "available for sale" are those securities that we intend to hold for an indefinite period of time, but not necessarily to maturity. "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes, and reported as a separate component of shareholders' equity.
Trading securities
- There are no securities classified as "trading" in the accompanying financial statements.
Impairment assessment:
Impairment exists when the fair value of a security is less than its cost. Cost includes adjustments made to the cost basis of a security for accretion, amortization and previous other-than-temporary impairments. We perform a quarterly assessment of the debt and equity securities in our investment portfolio that have an unrealized loss to determine whether the decline in the fair value of these securities below their cost is other-than-temporary. This determination requires significant judgment. Impairment is considered other-than-temporary when it becomes probable that we will be unable to recover the cost of an investment. This assessment takes into consideration factors such as the length of time and the extent to which the market values have been less than cost, the financial condition and near term prospects of the issuer including events specific to the issuer or industry, defaults or deferrals of scheduled interest, principal or dividend payments, external credit ratings and recent downgrades, and our intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value. If a decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value which then becomes the new cost basis. The amount of the write down is included in other-than-temporary impairment of securities in the consolidated statements of income. The new cost basis is not adjusted for subsequent recoveries in fair value, if any.
Realized gains and losses on sales of securities are recognized on the specific identification method. Amortization of premiums and accretion of discounts are computed using the interest method.
The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31, 2013 and 2012, are summarized as follows:
|
December 31, 2013
|
|
Amortized
|
|
Unrealized
|
|
Estimated
|
Dollars in thousands
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
Available for Sale
|
|
|
|
|
|
|
|
Taxable debt securities
|
|
|
|
|
|
|
|
U. S. Government agencies
|
|
|
|
|
|
|
|
and corporations
|
$
|
29,100
|
|
$
|
675
|
|
$
|
118
|
|
$
|
29,657
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored agencies
|
|
155,270
|
|
|
2,019
|
|
|
1,573
|
|
|
155,716
|
Nongovernment-sponsored entities
|
|
11,519
|
|
|
321
|
|
|
21
|
|
|
11,819
|
State and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
General obligations
|
|
9,317
|
|
|
-
|
|
|
475
|
|
|
8,842
|
Water and sewer revenues
|
|
3,229
|
|
|
-
|
|
|
114
|
|
|
3,115
|
Other revenues
|
|
4,051
|
|
|
4
|
|
|
142
|
|
|
3,913
|
Corporate debt securities
|
|
3,973
|
|
|
24
|
|
|
31
|
|
|
3,966
|
Total taxable debt securities
|
|
216,459
|
|
|
3,043
|
|
|
2,474
|
|
|
217,028
|
Tax-exempt debt securities
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
General obligations
|
|
41,156
|
|
|
675
|
|
|
1,154
|
|
|
40,677
|
Water and sewer revenues
|
|
8,996
|
|
|
15
|
|
|
306
|
|
|
8,705
|
Lease revenues
|
|
7,956
|
|
|
-
|
|
|
391
|
|
|
7,565
|
Lottery/casino revenues
|
|
4,443
|
|
|
63
|
|
|
169
|
|
|
4,337
|
Other revenues
|
|
10,527
|
|
|
55
|
|
|
191
|
|
|
10,391
|
Residential mortgage-backed securities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total tax-exempt debt securities
|
|
73,078
|
|
|
808
|
|
|
2,211
|
|
|
71,675
|
Equity securities
|
|
77
|
|
|
-
|
|
|
-
|
|
|
77
|
Total available for sale securities
|
$
|
289,614
|
|
$
|
3,851
|
|
$
|
4,685
|
|
$
|
288,780
|
|
December 31, 2012
|
|
Amortized
|
|
Unrealized
|
|
Estimated
|
Dollars in thousands
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
Available for Sale
|
|
|
|
|
|
|
|
Taxable debt securities
|
|
|
|
|
|
|
|
U. S. Government agencies
|
|
|
|
|
|
|
|
and corporations
|
$
|
28,128
|
|
$
|
892
|
|
$
|
-
|
|
$
|
29,020
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored agencies
|
|
133,812
|
|
|
3,250
|
|
|
492
|
|
|
136,570
|
Nongovernment-sponsored entities
|
|
15,380
|
|
|
509
|
|
|
144
|
|
|
15,745
|
State and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
General obligations
|
|
8,847
|
|
|
58
|
|
|
57
|
|
|
8,848
|
Water and sewer revenues
|
|
1,920
|
|
|
-
|
|
|
32
|
|
|
1,888
|
Other revenues
|
|
1,420
|
|
|
13
|
|
|
-
|
|
|
1,433
|
Corporate debt securities
|
|
1,959
|
|
|
29
|
|
|
38
|
|
|
1,950
|
Total taxable debt securities
|
|
191,466
|
|
|
4,751
|
|
|
763
|
|
|
195,454
|
Tax-exempt debt securities
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
General obligations
|
|
54,948
|
|
|
3,259
|
|
|
145
|
|
|
58,062
|
Water and sewer revenues
|
|
5,773
|
|
|
171
|
|
|
47
|
|
|
5,897
|
Lease revenues
|
|
6,910
|
|
|
159
|
|
|
13
|
|
|
7,056
|
Lottery/casino revenues
|
|
4,500
|
|
|
305
|
|
|
9
|
|
|
4,796
|
Other revenues
|
|
7,272
|
|
|
210
|
|
|
23
|
|
|
7,459
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored agencies
|
|
2,738
|
|
|
-
|
|
|
-
|
|
|
2,738
|
Total tax-exempt debt securities
|
|
82,141
|
|
|
4,104
|
|
|
237
|
|
|
86,008
|
Equity securities
|
|
77
|
|
|
-
|
|
|
-
|
|
|
77
|
Total available for sale securities
|
$
|
273,684
|
|
$
|
8,855
|
|
$
|
1,000
|
|
$
|
281,539
|
The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our portfolio are located. We own no such securities of any single issuer which we deem to be a concentration
.
|
December 31, 2013
|
|
Amortized
|
|
Unrealized
|
|
Estimated
|
Dollars in thousands
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
West Virginia
|
$
|
15,277
|
|
$
|
78
|
|
$
|
285
|
|
$
|
15,070
|
California
|
|
9,177
|
|
|
86
|
|
|
249
|
|
|
9,014
|
Illinois
|
|
8,968
|
|
|
21
|
|
|
543
|
|
|
8,446
|
Texas
|
|
7,651
|
|
|
240
|
|
|
190
|
|
|
7,701
|
Washington
|
|
4,400
|
|
|
104
|
|
|
85
|
|
|
4,419
|
Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards. Prior to July 1, 2013, we principally used credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSROs”) to support analyses of our portfolio of securities issued by state and political subdivisions, as we generally do not purchase securities that are rated below the six highest NRSRO rating categories. Beginning July 1, 2013, in addition to considering a security’s NRSRO rating, we now also assess or confirm through an internal review of an issuer’s financial information and other applicable information that: 1) the issuer’s risk of default is low; 2) the characteristics of the issuer’s demographics and economic environment are satisfactory; and 3) the issuer’s budgetary position and stability of tax or other revenue sources are sound.
The proceeds from sales, calls and maturities of securities, including principal payments received on available for sale mortgage-backed obligations and the related gross gains and losses realized are as follows:
Dollars in thousands
|
|
Proceeds from
|
|
Gross realized
|
|
|
|
|
Calls and
|
|
Principal
|
|
|
|
|
Years ended December 31,
|
|
Sales
|
|
Maturities
|
|
Payments
|
|
Gains
|
|
Losses
|
2013
|
|
$
|
54,340
|
|
$
|
2,669
|
|
$
|
62,179
|
|
$
|
674
|
|
$
|
434
|
2012
|
|
$
|
72,056
|
|
$
|
4,618
|
|
$
|
66,377
|
|
$
|
3,253
|
|
$
|
905
|
2011
|
|
$
|
131,950
|
|
$
|
8,049
|
|
$
|
57,670
|
|
$
|
4,450
|
|
$
|
444
|
Residential mortgage-backed obligations having contractual maturities ranging from 1 to 50 years are reflected in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 1 to 34 years. Accordingly, discounts are accreted and premiums are amortized over the anticipated average life to maturity of the specific obligation.
The maturities, amortized cost and estimated fair values of securities at December 31, 2013, are summarized as follows:
|
Amortized
|
|
Estimated
|
Dollars in thousands
|
Cost
|
|
Fair Value
|
|
|
|
|
Due in one year or less
|
$
|
61,493
|
|
$
|
61,994
|
Due from one to five years
|
|
103,138
|
|
|
103,532
|
Due from five to ten years
|
|
36,957
|
|
|
36,599
|
Due after ten years
|
|
87,949
|
|
|
86,578
|
Equity securities
|
|
77
|
|
|
77
|
Total
|
$
|
289,614
|
|
$
|
288,780
|
At December 31, 2013 and 2012, securities with estimated fair values of $120.0 million and $122.1 million respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.
During 2013 and 2012 we recorded other-than-temporary impairment losses on residential mortgage-backed nongovernment sponsored entity securities as follows:
|
|
|
|
Dollars in thousands
|
2013
|
|
2012
|
Total other-than-temporary impairment losses
|
$
|
(155
|
)
|
$
|
(1,308)
|
Portion of loss recognized in
|
|
|
|
|
|
other comprehensive income
|
|
37
|
|
|
857
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
$
|
(118
|
)
|
$
|
(451)
|
Activity related to the credit component recognized on debt securities available for sale for which a portion of other-than-temporary impairment was recognized in other comprehensive income for the years ended December 31, 2013 and 2012 is as follows:
Dollars in thousands
|
2013
|
|
2012
|
Balance, January 1
|
$
|
(2,903
|
)
|
$
|
(6,355)
|
Additions for the credit component on debt securities in which
|
|
|
|
|
|
other-than-temporary impairment was not previously recognized
|
|
(118
|
)
|
|
(451)
|
Securities sold or deemed worthless during the period
|
|
-
|
|
|
3,903
|
Balance, December 31
|
$
|
(3,021
|
)
|
$
|
(2,903)
|
At December 31, 2013, our debt securities with other-than-temporary impairment in which only the amount of loss related to credit was recognized in earnings consisted solely of residential mortgage-backed securities issued by nongovernment-sponsored entities. We utilize third party vendors to estimate the portion of loss attributable to credit using discounted cash flow models. The vendors estimate cash flows of the underlying loan collateral of each mortgage-backed security using models that incorporate their best estimates of current key assumptions, such as default rates, loss severity and prepayment rates. Assumptions utilized could vary widely from security to security, and are influenced by such factors as loan interest rate, geographical location of underlying borrowers, collateral type and other borrower characteristics.
Our vendors performing these valuations also analyze the structure of each mortgage-backed instrument in order to determine how the estimated cash flows of the underlying collateral will be distributed to each security issued from the structure. Expected principal and interest cash flows on the impaired debt securities are discounted predominantly using unobservable discount rates which the vendors assume that market participants would utilize in pricing the specific security. Based on the discounted expected cash flows derived from our vendors’ models, we expect to recover the remaining unrealized losses on residential mortgage-backed securities issued by nongovernment sponsored entities.
We held 134 available for sale securities having an unrealized loss at December 31, 2013. We do not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized bases. We believe that this decline in value is primarily attributable to the lack of market liquidity and to changes in market interest rates and not due to credit quality. Accordingly, no additional other-than-temporary impairment charge to earnings is warranted at this time. Provided below is a summary of securities available for sale which were in an unrealized loss position at December 31, 2013 and 2012, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income.
|
2013
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
Dollars in thousands
|
Fair Value
|
|
Loss
|
|
Fair Value
|
|
Loss
|
|
Fair Value
|
|
Loss
|
Temporarily impaired securities
|
|
|
|
|
|
|
|
|
|
|
|
Taxable debt securities
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
and corporations
|
$
|
10,868
|
|
$
|
(118
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
10,868
|
|
$
|
(118)
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored agencies
|
|
55,035
|
|
|
(1,385
|
)
|
|
13,249
|
|
|
(188
|
)
|
|
68,284
|
|
|
(1,573)
|
Nongovernment-sponsored entities
|
|
2,407
|
|
|
(12
|
)
|
|
565
|
|
|
(7
|
)
|
|
2,972
|
|
|
(19)
|
State and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations
|
|
4,505
|
|
|
(264
|
)
|
|
2,337
|
|
|
(211
|
)
|
|
6,842
|
|
|
(475)
|
Water and sewer revenues
|
|
1,309
|
|
|
(31
|
)
|
|
1,554
|
|
|
(83
|
)
|
|
2,863
|
|
|
(114)
|
Other revenues
|
|
3,142
|
|
|
(142
|
)
|
|
-
|
|
|
-
|
|
|
3,142
|
|
|
(142)
|
Corporate debt securities
|
|
2,968
|
|
|
(31
|
)
|
|
-
|
|
|
-
|
|
|
2,968
|
|
|
(31)
|
Tax-exempt debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations
|
|
19,603
|
|
|
(997
|
)
|
|
2,102
|
|
|
(157
|
)
|
|
21,705
|
|
|
(1,154)
|
Water and sewer revenues
|
|
5,643
|
|
|
(224
|
)
|
|
983
|
|
|
(82
|
)
|
|
6,626
|
|
|
(306)
|
Lease revenues
|
|
6,112
|
|
|
(349
|
)
|
|
958
|
|
|
(42
|
)
|
|
7,070
|
|
|
(391)
|
Lottery/casino revenues
|
|
2,720
|
|
|
(132
|
)
|
|
554
|
|
|
(37
|
)
|
|
3,274
|
|
|
(169)
|
Other revenues
|
|
8,815
|
|
|
(191
|
)
|
|
-
|
|
|
-
|
|
|
8,815
|
|
|
(191)
|
Total temporarily impaired securities
|
|
123,127
|
|
|
(3,876
|
)
|
|
22,302
|
|
|
(807
|
)
|
|
145,429
|
|
|
(4,683)
|
Other-than-temporarily impaired securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nongovernment-sponsored entities
|
|
-
|
|
|
-
|
|
|
1
|
|
|
(2
|
)
|
|
1
|
|
|
(2)
|
Total other-than-temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired securities
|
|
-
|
|
|
-
|
|
|
1
|
|
|
(2
|
)
|
|
1
|
|
|
(2)
|
Total
|
$
|
123,127
|
|
$
|
(3,876
|
)
|
$
|
22,303
|
|
$
|
(809
|
)
|
$
|
145,430
|
|
$
|
(4,685)
|
|
2012
|
|
Less than 12 months
|
|
12 months or more
|
|
Total
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
|
Estimated
|
|
Unrealized
|
Dollars in thousands
|
Fair Value
|
|
Loss
|
|
Fair Value
|
|
Loss
|
|
Fair Value
|
|
Loss
|
Temporarily impaired securities
|
|
|
|
|
|
|
|
|
|
|
|
Taxable debt securities
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government agencies
|
|
|
|
|
|
|
|
|
|
|
|
and corporations
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored agencies
|
|
36,498
|
|
|
(414
|
)
|
|
8,997
|
|
|
(78
|
)
|
|
45,495
|
|
|
(492)
|
Nongovernment-sponsored entities
|
|
-
|
|
|
(4
|
)
|
|
1,478
|
|
|
(14
|
)
|
|
1,478
|
|
|
(18)
|
State and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations
|
|
2,526
|
|
|
(57
|
)
|
|
-
|
|
|
-
|
|
|
2,526
|
|
|
(57)
|
Water and sewer revenues
|
|
1,240
|
|
|
(28
|
)
|
|
387
|
|
|
(4
|
)
|
|
1,627
|
|
|
(32)
|
Other revenues
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Corporate debt securities
|
|
-
|
|
|
-
|
|
|
962
|
|
|
(38
|
)
|
|
962
|
|
|
(38)
|
Tax-exempt debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General obligations
|
|
11,926
|
|
|
(145
|
)
|
|
-
|
|
|
-
|
|
|
11,926
|
|
|
(145)
|
Water and sewer revenues
|
|
2,534
|
|
|
(47
|
)
|
|
-
|
|
|
-
|
|
|
2,534
|
|
|
(47)
|
Lease revenues
|
|
1,013
|
|
|
(13
|
)
|
|
-
|
|
|
-
|
|
|
1,013
|
|
|
(13)
|
Lottery/casino revenues
|
|
1,777
|
|
|
(9
|
)
|
|
-
|
|
|
-
|
|
|
1,777
|
|
|
(9)
|
Other revenues
|
|
2,684
|
|
|
(23
|
)
|
|
-
|
|
|
-
|
|
|
2,684
|
|
|
(23)
|
Other equity securties
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total temporarily impaired securities
|
|
60,198
|
|
|
(740
|
)
|
|
11,824
|
|
|
(134
|
)
|
|
72,022
|
|
|
(874)
|
Other-than-temporarily impaired securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nongovernment-sponsored entities
|
|
265
|
|
|
(6
|
)
|
|
593
|
|
|
(120
|
)
|
|
858
|
|
|
(126)
|
Total other-than-temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired securities
|
|
265
|
|
|
(6
|
)
|
|
593
|
|
|
(120
|
)
|
|
858
|
|
|
(126)
|
Total
|
$
|
60,463
|
|
$
|
(746
|
)
|
$
|
12,417
|
|
$
|
(254
|
)
|
$
|
72,880
|
|
$
|
(1,000)
|
NOTE 5. LOANS
Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and allowance for loan losses. Interest on loans is accrued daily on the outstanding balances. Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life. We categorize residential real estate loans in excess of $600,000 as jumbo loans.
Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on nonaccrual status. Impaired loans are placed on nonaccrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on nonaccrual loans is recognized primarily using the cost-recovery method. Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.
Commercial-related loans or portions thereof (which are risk-rated) are charged off to the allowance for loan losses when the loss has been confirmed. This determination includes many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity. We deem a loss confirmed when a loan or a portion of a loan is classified “loss” in accordance with bank regulatory classification guidelines, which state, “Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted”.
Consumer-related loans are generally charged off to the allowance for loan losses upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.
Loans are summarized as follows:
Dollars in thousands
|
2013
|
|
2012
|
Commercial
|
$
|
88,352
|
|
$
|
85,829
|
Commercial real estate
|
|
|
|
|
|
Owner-occupied
|
|
149,618
|
|
|
154,252
|
Non-owner occupied
|
|
280,790
|
|
|
276,082
|
Construction and development
|
|
|
|
|
|
Land and land development
|
|
71,453
|
|
|
79,335
|
Construction
|
|
15,155
|
|
|
3,772
|
Residential real estate
|
|
|
|
|
|
Non-jumbo
|
|
212,946
|
|
|
216,714
|
Jumbo
|
|
53,406
|
|
|
61,567
|
Home equity
|
|
54,844
|
|
|
53,263
|
Consumer
|
|
19,889
|
|
|
20,586
|
Other
|
|
3,276
|
|
|
3,701
|
Total loans, net of unearned fees
|
|
949,729
|
|
|
955,101
|
Less allowance for loan losses
|
|
12,659
|
|
|
17,933
|
Loans, net
|
$
|
937,070
|
|
$
|
937,168
|
The following presents loan maturities at December 31, 2013:
|
Within
|
|
After 1 but
|
|
After
|
Dollars in thousands
|
1Year
|
|
within 5 Years
|
|
5 Years
|
Commercial
|
$
|
31,351
|
|
$
|
37,753
|
|
$
|
19,248
|
Commercial real estate
|
|
32,535
|
|
|
90,640
|
|
|
307,233
|
Construction and development
|
|
35,864
|
|
|
8,888
|
|
|
41,856
|
Residential real estate
|
|
11,376
|
|
|
18,772
|
|
|
291,048
|
Consumer
|
|
4,069
|
|
|
14,005
|
|
|
1,815
|
Other
|
|
497
|
|
|
1,032
|
|
|
1,747
|
|
$
|
115,692
|
|
$
|
171,090
|
|
$
|
662,947
|
|
|
|
|
|
|
|
|
|
Loans due after one year with:
|
|
|
|
|
|
|
|
|
Variable rates
|
|
|
|
$
|
100,298
|
|
|
|
Fixed rates
|
|
|
|
|
733,739
|
|
|
|
|
|
|
|
$
|
834,037
|
|
|
|
The following table presents the contractual aging of the recorded investment in past due loans by class as of December 31, 2013 and 2012.
|
At December 31, 2013
|
|
Past Due
|
|
|
|
> 90 days
|
Dollars in thousands
|
30-59 days
|
|
60-89 days
|
|
> 90 days
|
|
Total
|
|
Current
|
|
and accruing
|
Commercial
|
$
|
74
|
|
$
|
34
|
|
$
|
1,190
|
|
$
|
1,298
|
|
$
|
87,054
|
|
$
|
-
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
328
|
|
|
459
|
|
|
487
|
|
|
1,274
|
|
|
148,344
|
|
|
-
|
Non-owner occupied
|
|
912
|
|
|
115
|
|
|
128
|
|
|
1,155
|
|
|
279,635
|
|
|
-
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and land development
|
|
1,627
|
|
|
-
|
|
|
8,638
|
|
|
10,265
|
|
|
61,188
|
|
|
-
|
Construction
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,155
|
|
|
-
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-jumbo
|
|
2,708
|
|
|
1,673
|
|
|
1,321
|
|
|
5,702
|
|
|
207,244
|
|
|
-
|
Jumbo
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
53,406
|
|
|
-
|
Home equity
|
|
588
|
|
|
87
|
|
|
-
|
|
|
675
|
|
|
54,169
|
|
|
-
|
Consumer
|
|
224
|
|
|
82
|
|
|
106
|
|
|
412
|
|
|
19,477
|
|
|
-
|
Other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,276
|
|
|
-
|
Total
|
$
|
6,461
|
|
$
|
2,450
|
|
$
|
11,870
|
|
$
|
20,781
|
|
$
|
928,948
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
Past Due
|
|
|
|
|
> 90 days
|
Dollars in thousands
|
30-59 days
|
|
60-89 days
|
|
> 90 days
|
|
Total
|
|
Current
|
|
and accruing
|
Commercial
|
$
|
225
|
|
$
|
5
|
|
$
|
2,294
|
|
$
|
2,524
|
|
$
|
83,305
|
|
$
|
-
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
57
|
|
|
-
|
|
|
1,023
|
|
|
1,080
|
|
|
153,172
|
|
|
-
|
Non-owner occupied
|
|
182
|
|
|
193
|
|
|
908
|
|
|
1,283
|
|
|
274,799
|
|
|
-
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and land development
|
|
-
|
|
|
-
|
|
|
11,795
|
|
|
11,795
|
|
|
67,540
|
|
|
-
|
Construction
|
|
-
|
|
|
-
|
|
|
153
|
|
|
153
|
|
|
3,619
|
|
|
-
|
Residential mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-jumbo
|
|
3,344
|
|
|
2,616
|
|
|
2,797
|
|
|
8,757
|
|
|
207,957
|
|
|
-
|
Jumbo
|
|
-
|
|
|
-
|
|
|
12,564
|
|
|
12,565
|
|
|
49,002
|
|
|
-
|
Home equity
|
|
337
|
|
|
448
|
|
|
179
|
|
|
964
|
|
|
52,299
|
|
|
-
|
Consumer
|
|
255
|
|
|
79
|
|
|
48
|
|
|
382
|
|
|
20,204
|
|
|
-
|
Other
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,701
|
|
|
-
|
Total
|
$
|
4,400
|
|
$
|
3,341
|
|
$
|
31,761
|
|
$
|
39,503
|
|
$
|
915,598
|
|
$
|
-
|
Nonaccrual loans:
The following table presents the nonaccrual loans included in the net balance of loans at December 31, 2013 and 2012.
Dollars in thousands
|
2013
|
|
2012
|
Commercial
|
$
|
1,224
|
|
$
|
5,002
|
Commercial real estate
|
|
|
|
|
|
Owner-occupied
|
|
1,953
|
|
|
1,524
|
Non-owner occupied
|
|
365
|
|
|
1,032
|
Construction and development
|
|
|
|
|
|
Land & land development
|
|
12,830
|
|
|
13,487
|
Construction
|
|
-
|
|
|
154
|
Residential mortgage
|
|
|
|
|
|
Non-jumbo
|
|
2,446
|
|
|
3,518
|
Jumbo
|
|
-
|
|
|
12,564
|
Home equity
|
|
-
|
|
|
440
|
Consumer
|
|
128
|
|
|
55
|
Other
|
|
-
|
|
|
-
|
Total
|
$
|
18,946
|
|
$
|
37,776
|
Impaired loans:
Impaired loans include the following:
§
|
Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2.0 million, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.
|
§
|
Loans that have been modified in a troubled debt restructuring.
|
Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured in a troubled debt restructuring, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in our accounting policy are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.
The table below sets forth information about our impaired loans.
Method Used to Measure Impairment of Impaired Loans
|
|
|
Dollars in thousands
|
|
|
|
|
|
|
December 31,
|
|
Method Used
|
Loan Category
|
2013
|
|
2012
|
|
to measure impairment
|
Commerical
|
$
|
1,864
|
|
$
|
10,776
|
|
Fair value of collateral
|
|
|
158
|
|
|
165
|
|
Discounted cash flow
|
Commerical real estate
|
|
|
|
|
|
|
|
Owner-occupied
|
|
10,067
|
|
|
14,028
|
|
Fair value of collateral
|
|
|
2,483
|
|
|
2,686
|
|
Discounted cash flow
|
Non-owner occupied
|
|
5,832
|
|
|
9,468
|
|
Fair value of collateral
|
Construction and development
|
|
|
|
|
|
|
|
Land & land development
|
|
24,625
|
|
|
29,307
|
|
Fair value of collateral
|
|
|
644
|
|
|
656
|
|
Discounted cash flow
|
Residential mortgage
|
|
|
|
|
|
|
|
Non-jumbo
|
|
5,516
|
|
|
5,626
|
|
Fair value of collateral
|
|
|
566
|
|
|
692
|
|
Discounted cash flow
|
Jumbo
|
|
8,768
|
|
|
21,543
|
|
Fair value of collateral
|
Home equity
|
|
212
|
|
|
219
|
|
Fair value of collateral
|
Consumer
|
|
47
|
|
|
66
|
|
Discounted cash flow
|
Total
|
$
|
60,782
|
|
$
|
95,232
|
|
|
The following tables present loans individually evaluated for impairment at December 31, 2013 and 2012.
|
December 31, 2013
|
|
|
|
|
|
|
|
Average
|
|
Interest Income
|
|
Recorded
|
|
Unpaid
|
|
Related
|
|
Impaired
|
|
Recognized
|
Dollars in thousands
|
Investment
|
|
Principal Balance
|
|
Allowance
|
|
Balance
|
|
while impaired
|
|
|
|
|
|
|
|
|
|
|
Without a related allowance
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,161
|
|
$
|
1,167
|
|
$
|
-
|
|
$
|
1,518
|
|
$
|
98
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
8,434
|
|
|
8,434
|
|
|
-
|
|
|
7,675
|
|
|
226
|
Non-owner occupied
|
|
5,075
|
|
|
5,077
|
|
|
-
|
|
|
5,110
|
|
|
253
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land & land development
|
|
14,732
|
|
|
14,737
|
|
|
-
|
|
|
11,628
|
|
|
325
|
Construction
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-jumbo
|
|
3,587
|
|
|
3,595
|
|
|
-
|
|
|
2,858
|
|
|
157
|
Jumbo
|
|
7,862
|
|
|
7,867
|
|
|
-
|
|
|
7,910
|
|
|
405
|
Home equity
|
|
186
|
|
|
186
|
|
|
-
|
|
|
186
|
|
|
11
|
Consumer
|
|
26
|
|
|
27
|
|
|
-
|
|
|
28
|
|
|
1
|
Total without a related allowance
|
$
|
41,063
|
|
$
|
41,090
|
|
$
|
-
|
|
$
|
36,913
|
|
$
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With a related allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
855
|
|
$
|
855
|
|
$
|
406
|
|
$
|
1,013
|
|
$
|
-
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
4,116
|
|
|
4,116
|
|
|
305
|
|
|
3,945
|
|
|
184
|
Non-owner occupied
|
|
747
|
|
|
755
|
|
|
175
|
|
|
515
|
|
|
28
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land & land development
|
|
10,532
|
|
|
10,532
|
|
|
3,186
|
|
|
11,310
|
|
|
147
|
Construction
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-jumbo
|
|
2,485
|
|
|
2,487
|
|
|
256
|
|
|
2,292
|
|
|
107
|
Jumbo
|
|
900
|
|
|
901
|
|
|
37
|
|
|
906
|
|
|
45
|
Home equity
|
|
27
|
|
|
26
|
|
|
22
|
|
|
27
|
|
|
-
|
Consumer
|
|
20
|
|
|
20
|
|
|
13
|
|
|
9
|
|
|
-
|
Total with a related allowance
|
$
|
19,682
|
|
$
|
19,692
|
|
$
|
4,400
|
|
$
|
20,017
|
|
$
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
45,652
|
|
$
|
45,673
|
|
$
|
4,072
|
|
$
|
42,714
|
|
$
|
1,261
|
Residential real estate
|
|
15,047
|
|
|
15,062
|
|
|
315
|
|
|
14,179
|
|
|
725
|
Consumer
|
|
46
|
|
|
47
|
|
|
13
|
|
|
37
|
|
|
1
|
Total
|
$
|
60,745
|
|
$
|
60,782
|
|
$
|
4,400
|
|
$
|
56,930
|
|
$
|
1,987
|
|
December 31, 2012
|
|
|
|
|
|
|
|
Average
|
|
Interest Income
|
|
Recorded
|
|
Unpaid
|
|
Related
|
|
Impaired
|
|
Recognized
|
Dollars in thousands
|
Investment
|
|
Principal Balance
|
|
Allowance
|
|
Balance
|
|
while impaired
|
|
|
|
|
|
|
|
|
|
|
Without a related allowance
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
10,518
|
|
$
|
10,537
|
|
$
|
-
|
|
$
|
3,131
|
|
$
|
134
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
9,992
|
|
|
9,996
|
|
|
-
|
|
|
8,528
|
|
|
368
|
Non-owner occupied
|
|
6,143
|
|
|
6,145
|
|
|
-
|
|
|
6,056
|
|
|
304
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land & land development
|
|
11,596
|
|
|
11,596
|
|
|
-
|
|
|
11,093
|
|
|
367
|
Construction
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-jumbo
|
|
3,497
|
|
|
3,505
|
|
|
-
|
|
|
3,040
|
|
|
125
|
Jumbo
|
|
7,347
|
|
|
7,349
|
|
|
-
|
|
|
5,399
|
|
|
272
|
Home equity
|
|
191
|
|
|
191
|
|
|
-
|
|
|
191
|
|
|
11
|
Consumer
|
|
38
|
|
|
38
|
|
|
-
|
|
|
32
|
|
|
1
|
Total without a related allowance
|
$
|
49,322
|
|
$
|
49,357
|
|
$
|
-
|
|
$
|
37,470
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With a related allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
404
|
|
$
|
404
|
|
$
|
85
|
|
$
|
515
|
|
$
|
6
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
|
6,719
|
|
|
6,718
|
|
|
461
|
|
|
4,442
|
|
|
187
|
Non-owner occupied
|
|
3,321
|
|
|
3,323
|
|
|
286
|
|
|
3,341
|
|
|
115
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land & land development
|
|
18,367
|
|
|
18,367
|
|
|
2,611
|
|
|
17,633
|
|
|
344
|
Construction
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-jumbo
|
|
2,812
|
|
|
2,813
|
|
|
394
|
|
|
2,378
|
|
|
77
|
Jumbo
|
|
14,189
|
|
|
14,194
|
|
|
3,216
|
|
|
13,585
|
|
|
59
|
Home equity
|
|
28
|
|
|
28
|
|
|
28
|
|
|
29
|
|
|
-
|
Consumer
|
|
28
|
|
|
28
|
|
|
16
|
|
|
2
|
|
|
-
|
Total with a related allowance
|
$
|
45,868
|
|
$
|
45,875
|
|
$
|
7,097
|
|
$
|
41,925
|
|
$
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
67,060
|
|
$
|
67,086
|
|
$
|
3,443
|
|
$
|
54,739
|
|
$
|
1,825
|
Residential real estate
|
|
28,064
|
|
|
28,080
|
|
|
3,638
|
|
|
24,622
|
|
|
544
|
Consumer
|
|
66
|
|
|
66
|
|
|
16
|
|
|
34
|
|
|
1
|
Total
|
$
|
95,190
|
|
$
|
95,232
|
|
$
|
7,097
|
|
$
|
79,395
|
|
$
|
2,370
|
The average recorded investment of impaired loans during 2011 was $55.5 million, and $1.1 million interest income was recognized on those loans while impaired.
A modification of a loan is considered a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of both. A loan continues to be classified as a TDR for the life of the loan. Included in impaired loans are TDRs of $34.5 million, of which $33.6 million were current with respect to restructured contractual payments at December 31, 2013, and $56.7 million, of which $42.3 million were current with respect to restructured contractual payments at December 31, 2012. There were no commitments to lend additional funds under these restructurings at either balance sheet date.
The following table presents by class the TDRs that were restructured during 2013 and 2012. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.
|
2013
|
|
|
2012
|
|
|
|
Pre-
|
|
Post-
|
|
|
|
|
Pre-
|
|
Post-
|
|
|
|
modification
|
|
modification
|
|
|
|
|
modification
|
|
modification
|
|
Number of
|
|
Recorded
|
|
Recorded
|
|
|
Number of
|
|
Recorded
|
|
Recorded
|
dollars in thousands
|
Modifications
|
|
Investment
|
|
Investment
|
|
|
Modifications
|
|
Investment
|
|
Investment
|
Commercial
|
2
|
|
$
|
76
|
|
$
|
79
|
|
|
9
|
|
$
|
6,238
|
|
$
|
5,681
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Non-owner occupied
|
1
|
|
|
244
|
|
|
244
|
|
|
3
|
|
|
4,063
|
|
|
3,685
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land & land development
|
2
|
|
|
747
|
|
|
748
|
|
|
3
|
|
|
3,715
|
|
|
2,927
|
Construction
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-jumbo
|
7
|
|
|
1,137
|
|
|
1,137
|
|
|
8
|
|
|
1,394
|
|
|
1,405
|
Jumbo
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
2,301
|
|
|
2,701
|
Home equity
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Consumer
|
1
|
|
|
11
|
|
|
12
|
|
|
4
|
|
|
66
|
|
|
66
|
Total
|
13
|
|
$
|
2,215
|
|
$
|
2,220
|
|
|
30
|
|
$
|
17,777
|
|
$
|
16,465
|
The following table presents defaults during 2013 of TDRs that were restructured during 2013 and defaults during 2012 of TDRs that were restructured during 2012. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.
|
2013
|
|
|
2012
|
|
Number
|
|
Recorded
|
|
|
Number
|
|
Recorded
|
|
of
|
|
Investment
|
|
|
of
|
|
Investment
|
dollars in thousands
|
Defaults
|
|
at Default Date
|
|
|
Defaults
|
|
at Default Date
|
Commercial
|
-
|
|
$
|
-
|
|
|
3
|
|
$
|
2,377
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
Owner-occupied
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Non-owner occupied
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Construction and development
|
|
|
|
|
|
|
|
|
|
|
Land & land development
|
1
|
|
|
698
|
|
|
-
|
|
|
-
|
Construction
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
Non-jumbo
|
2
|
|
|
347
|
|
|
3
|
|
|
382
|
Jumbo
|
-
|
|
|
-
|
|
|
1
|
|
|
1,300
|
Home equity
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Consumer
|
-
|
|
|
-
|
|
|
3
|
|
|
58
|
Total
|
3
|
|
$
|
1,045
|
|
|
10
|
|
$
|
4,117
|
The following table details the activity regarding TDRs by loan type during 2013, and the related allowance on TDRs.
2013
|
|
Construction & Land Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land &
|
|
|
|
|
|
Commercial Real Estate
|
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Develop-
|
|
Construc-
|
|
Commer-
|
|
Owner
|
|
Owner
|
|
|
Non-
|
|
|
|
Home
|
|
Con-
|
|
|
|
|
|
Dollars in thousands
|
ment
|
|
tion
|
|
cial
|
|
Occupied
|
|
Occupied
|
|
|
jumbo
|
|
Jumbo
|
|
Equity
|
|
sumer
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2013
|
$
|
9,570
|
|
$
|
-
|
|
$
|
4,981
|
|
$
|
10,692
|
|
$
|
7,331
|
|
|
$
|
5,089
|
|
$
|
19,000
|
|
$
|
-
|
|
$
|
65
|
|
$
|
-
|
|
|
$
|
56,728
|
Additions
|
|
747
|
|
|
-
|
|
|
76
|
|
|
-
|
|
|
244
|
|
|
|
1,137
|
|
|
-
|
|
|
-
|
|
|
11
|
|
|
-
|
|
|
|
2,215
|
Charge-offs
|
|
(888
|
)
|
|
-
|
|
|
(195
|
)
|
|
(63
|
)
|
|
-
|
|
|
|
(37
|
)
|
|
(4,680
|
)
|
|
-
|
|
|
(10
|
)
|
|
-
|
|
|
|
(5,873)
|
Net (paydowns) advances
|
|
(3,265
|
)
|
|
-
|
|
|
(3,620
|
)
|
|
(412
|
)
|
|
(140
|
)
|
|
|
(458
|
)
|
|
(42
|
)
|
|
-
|
|
|
(20
|
)
|
|
-
|
|
|
|
(7,957)
|
Transfer into OREO
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(519
|
)
|
|
-
|
|
|
|
(189
|
)
|
|
(8,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(8,708)
|
Refinance out of TDR status
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,891
|
)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(1,891)
|
Balance December 31, 2013
|
$
|
6,164
|
|
$
|
-
|
|
$
|
1,242
|
|
$
|
9,698
|
|
$
|
5,544
|
|
|
$
|
5,542
|
|
$
|
6,278
|
|
$
|
-
|
|
$
|
46
|
|
$
|
-
|
|
|
$
|
34,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
troubled debt restructurings
|
$
|
190
|
|
$
|
-
|
|
$
|
16
|
|
$
|
204
|
|
$
|
175
|
|
|
$
|
243
|
|
$
|
37
|
|
$
|
-
|
|
$
|
13
|
|
$
|
-
|
|
|
$
|
878
|
We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure exceeding $2 million, at which time these loans are re-graded. We use the following definitions for our risk grades:
Pass:
Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.
OLEM (Special Mention):
Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.
Substandard:
Commercial loans categorized as Substandard are inadequately protected by the borrower’s ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.
Doubtful:
Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.
Loss:
Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future.
The following table presents the recorded investment in construction and development, commercial, and commercial real estate loans which are generally evaluated based upon the internal risk ratings defined above.
Loan Risk Profile by Internal Risk Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and Development
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
Land and land development
|
|
Construction
|
|
|
Commercial
|
|
|
Owner Occupied
|
|
Non-Owner Occupied
|
Dollars in thousands
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
2013
|
|
2012
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Pass
|
$
|
41,662
|
|
$
|
43,572
|
|
$
|
15,022
|
|
$
|
3,619
|
|
|
$
|
82,323
|
|
$
|
73,425
|
|
|
$
|
143,982
|
|
$
|
139,176
|
|
$
|
268,967
|
|
$
|
262,132
|
OLEM (Special Mention)
|
|
5,550
|
|
|
7,349
|
|
|
133
|
|
|
-
|
|
|
|
4,544
|
|
|
1,260
|
|
|
|
1,412
|
|
|
1,034
|
|
|
10,222
|
|
|
11,477
|
Substandard
|
|
24,131
|
|
|
28,414
|
|
|
-
|
|
|
153
|
|
|
|
1,485
|
|
|
11,144
|
|
|
|
4,224
|
|
|
14,042
|
|
|
1,601
|
|
|
2,473
|
Doubtful
|
|
110
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Total
|
$
|
71,453
|
|
$
|
79,335
|
|
$
|
15,155
|
|
$
|
3,772
|
|
|
$
|
88,352
|
|
$
|
85,829
|
|
|
$
|
149,618
|
|
$
|
154,252
|
|
$
|
280,790
|
|
$
|
276,082
|
The following table presents the recorded investment in consumer, residential real estate, and home equity loans, which are generally evaluated based on the aging status of the loans, which was previously presented, and payment activity.
|
Performing
|
|
|
Nonperforming
|
Dollars in thousands
|
2013
|
|
2012
|
|
|
2013
|
|
2012
|
Residential real estate
|
|
|
|
|
|
|
|
|
Non-jumbo
|
$
|
210,500
|
|
$
|
213,196
|
|
|
$
|
2,446
|
|
$
|
3,518
|
Jumbo
|
|
53,406
|
|
|
49,003
|
|
|
|
-
|
|
|
12,564
|
Home Equity
|
|
54,844
|
|
|
52,823
|
|
|
|
-
|
|
|
440
|
Consumer
|
|
19,761
|
|
|
20,531
|
|
|
|
128
|
|
|
55
|
Other
|
|
3,276
|
|
|
3,701
|
|
|
|
-
|
|
|
-
|
Total
|
$
|
341,787
|
|
$
|
339,254
|
|
|
$
|
2,574
|
|
$
|
16,577
|
Industry concentrations:
At December 31, 2013 and 2012, we had no concentrations of loans to any single industry in excess of 10% of total loans.
Loans to related parties
: We have had, and may be expected to have in the future, banking transactions in the ordinary course of business with our directors, principal officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties). These transactions have been, in our opinion, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.
The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status):
Dollars in thousands
|
2013
|
|
2012
|
Balance, beginning
|
$
|
18,973
|
|
$
|
17,063
|
Additions
|
|
7,978
|
|
|
10,097
|
Amounts collected
|
|
(8,317
|
)
|
|
(8,204)
|
Other changes, net
|
|
(57
|
)
|
|
17
|
Balance, ending
|
$
|
18,577
|
|
$
|
18,973
|
Loan commitments:
ASC Topic 815,
Derivatives and Hedging,
requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability.
NOTE 6. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate to provide for our estimate of probable credit losses inherent in the loan portfolio. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Loans are charged against the allowance for loan losses when we believe that collectability is unlikely. While we use the best information available to make our evaluation, future adjustments may be necessary if there are significant changes in conditions.
The allowance is comprised of three distinct reserve components: (1) specific reserves related to loans individually evaluated, (2) quantitative reserves related to loans collectively evaluated, and (3) qualitative reserves related to loans collectively evaluated. A summary of the methodology we employ on a quarterly basis with respect to each of these components in order to evaluate the overall adequacy of our allowance for loan losses is as follows.
Specific Reserve for Loans Individually Evaluated
First, we identify loan relationships having aggregate balances in excess of $500,000 and that may also have credit weaknesses. Such loan relationships are identified primarily through our analysis of internal loan evaluations, past due loan reports, and loans adversely classified by regulatory authorities. Each loan so identified is then individually evaluated to determine whether it is impaired – that is, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the underlying loan agreement. Substantially all of our impaired loans historically have been collateral dependent, meaning repayment of the loan is expected to be provided solely from the sale of the loan’s underlying collateral. For such loans, we measure impairment based on the fair value of the loan’s collateral, which is generally determined utilizing current appraisals. A specific reserve is established in an amount equal to the excess, if any, of the recorded investment in each impaired loan over the fair value of its underlying collateral, less estimated costs to sell. Our policy is to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral’s value, in which case a new appraisal is obtained.
Quantitative Reserve for Loans Collectively Evaluated
Second, we stratify the loan portfolio into the following ten loan pools: land and land development, construction, commercial, commercial real estate -- owner-occupied, commercial real estate -- non-owner occupied, conventional residential mortgage, jumbo residential mortgage, home equity, consumer, and other. Loans within each pool are then further segmented between (1) loans which were individually evaluated for impairment and not deemed to be impaired, (2) larger-balance loan relationships exceeding $2 million which are assigned an internal risk rating in conjunction with our normal ongoing loan review procedures and (3) smaller-balance homogenous loans.
Quantitative reserves relative to each loan pool are established as follows: for all loan segments detailed above an allocation equaling 100% of the respective pool’s average 12 month historical net loan charge-off rate (determined based upon the most recent twelve quarters) is applied to the aggregate recorded investment in the pool of loans.
Qualitative Reserve for Loans Collectively Evaluated
Third, we consider the necessity to adjust our average historical net loan charge-off rates relative to each of the above ten loan pools for potential risks factors that could result in actual losses deviating from prior loss experience. For example, if we observe a significant increase in delinquencies within the conventional mortgage loan pool above historical trends, an additional allocation to the average historical loan charge-off rate is applied. Such qualitative risk factors considered are: (1) levels of and trends in delinquencies and impaired loans, (2) levels of and trends in charge-offs and recoveries, (3) trends in volume and term of loans, (4) effects of any changes in risk selection and underwriting standards, and other changes in lending policies, procedures, and practice, (5) experience, ability, and depth of lending management and other relevant staff, (6) national and local economic trends and conditions, (7) industry conditions, and (8) effects of changes in credit concentrations.
An analysis of the allowance for loan losses for the years ended December 31, 2013, 2012 and 2011 is as follows:
Dollars in thousands
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
17,933
|
|
$
|
17,712
|
|
$
|
17,224
|
Losses
|
|
|
|
|
|
|
|
|
Commercial
|
|
723
|
|
|
1,273
|
|
|
506
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
1,031
|
|
|
636
|
|
|
508
|
Non-owner occupied
|
|
9
|
|
|
806
|
|
|
78
|
Construction and development
|
|
|
|
|
|
|
|
|
Land and land development
|
|
3,596
|
|
|
3,390
|
|
|
3,568
|
Construction
|
|
-
|
|
|
367
|
|
|
-
|
Residential real estate
|
|
|
|
|
|
|
|
|
Non-jumbo
|
|
541
|
|
|
1,372
|
|
|
3,178
|
Jumbo
|
|
4,741
|
|
|
737
|
|
|
1,511
|
Home equity
|
|
77
|
|
|
5
|
|
|
346
|
Consumer
|
|
79
|
|
|
136
|
|
|
162
|
Other
|
|
162
|
|
|
95
|
|
|
86
|
Total
|
|
10,959
|
|
|
8,817
|
|
|
9,943
|
Recoveries
|
|
|
|
|
|
|
|
|
Commercial
|
|
12
|
|
|
13
|
|
|
35
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
8
|
|
|
33
|
|
|
37
|
Non-owner occupied
|
|
674
|
|
|
31
|
|
|
55
|
Construction and development
|
|
|
|
|
|
|
|
|
Land and land development
|
|
187
|
|
|
61
|
|
|
43
|
Construction
|
|
-
|
|
|
-
|
|
|
-
|
Real estate - mortgage
|
|
|
|
|
|
|
|
|
Non-jumbo
|
|
127
|
|
|
81
|
|
|
83
|
Jumbo
|
|
6
|
|
|
86
|
|
|
14
|
Home equity
|
|
5
|
|
|
61
|
|
|
1
|
Consumer
|
|
79
|
|
|
95
|
|
|
112
|
Other
|
|
87
|
|
|
77
|
|
|
51
|
Total
|
|
1,185
|
|
|
538
|
|
|
431
|
Net losses
|
|
9,774
|
|
|
8,279
|
|
|
9,512
|
Provision for loan losses
|
|
4,500
|
|
|
8,500
|
|
|
10,000
|
Balance, end of year
|
$
|
12,659
|
|
$
|
17,933
|
|
$
|
17,712
|
Activity in the allowance for loan losses by loan class during 2013 and 2012 is as follows:
|
2013
|
|
Construction & Land Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land &
|
|
|
|
|
|
Commercial Real Estate
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Develop-
|
|
Construc-
|
|
Commer-
|
|
Owner
|
|
Owner
|
|
Non-
|
|
|
|
Home
|
|
Con-
|
|
|
|
|
|
Dollars in thousands
|
ment
|
|
tion
|
|
cial
|
|
Occupied
|
|
Occupied
|
|
jumbo
|
|
Jumbo
|
|
Equity
|
|
sumer
|
|
Other
|
|
|
Total
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
5,220
|
|
$
|
138
|
|
$
|
782
|
|
$
|
1,387
|
|
$
|
3,269
|
|
$
|
2,617
|
|
$
|
3,942
|
|
$
|
425
|
|
$
|
132
|
|
$
|
21
|
|
|
$
|
17,933
|
Charge-offs
|
|
3,596
|
|
|
-
|
|
|
723
|
|
|
1,031
|
|
|
9
|
|
|
541
|
|
|
4,741
|
|
|
77
|
|
|
79
|
|
|
162
|
|
|
|
10,959
|
Recoveries
|
|
187
|
|
|
-
|
|
|
12
|
|
|
8
|
|
|
674
|
|
|
127
|
|
|
6
|
|
|
5
|
|
|
79
|
|
|
87
|
|
|
|
1,185
|
Provision
|
|
3,644
|
|
|
131
|
|
|
1,252
|
|
|
605
|
|
|
(3,293
|
)
|
|
(360
|
)
|
|
2,681
|
|
|
(180
|
)
|
|
(84
|
)
|
|
104
|
|
|
|
4,500
|
Ending balance
|
$
|
5,455
|
|
$
|
269
|
|
$
|
1,323
|
|
$
|
969
|
|
$
|
641
|
|
$
|
1,843
|
|
$
|
1,888
|
|
$
|
173
|
|
$
|
48
|
|
$
|
50
|
|
|
$
|
12,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
$
|
3,186
|
|
$
|
-
|
|
$
|
406
|
|
$
|
306
|
|
$
|
175
|
|
$
|
256
|
|
$
|
37
|
|
$
|
22
|
|
$
|
13
|
|
$
|
-
|
|
|
$
|
4,401
|
Loans collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
2,269
|
|
|
269
|
|
|
918
|
|
|
663
|
|
|
466
|
|
|
1,586
|
|
|
1,851
|
|
|
151
|
|
|
35
|
|
|
50
|
|
|
|
8,258
|
Loans acquired with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deteriorated credit quality
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
Total
|
$
|
5,455
|
|
$
|
269
|
|
$
|
1,324
|
|
$
|
969
|
|
$
|
641
|
|
$
|
1,842
|
|
$
|
1,888
|
|
$
|
173
|
|
$
|
48
|
|
$
|
50
|
|
|
$
|
12,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
$
|
25,269
|
|
$
|
-
|
|
$
|
2,023
|
|
$
|
12,550
|
|
$
|
5,832
|
|
$
|
6,082
|
|
$
|
8,768
|
|
$
|
212
|
|
$
|
47
|
|
$
|
-
|
|
|
$
|
60,783
|
Loans collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
46,184
|
|
|
15,155
|
|
|
86,329
|
|
|
137,068
|
|
|
274,958
|
|
|
206,864
|
|
|
44,638
|
|
|
54,632
|
|
|
19,842
|
|
|
3,276
|
|
|
|
888,946
|
Loans acquired with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deteriorated credit quality
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
Total
|
$
|
71,453
|
|
$
|
15,155
|
|
$
|
88,352
|
|
$
|
149,618
|
|
$
|
280,790
|
|
$
|
212,946
|
|
$
|
53,406
|
|
$
|
54,844
|
|
$
|
19,889
|
|
$
|
3,276
|
|
|
$
|
949,729
|
|
2012
|
|
Construction & Land Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land &
|
|
|
|
|
|
Commercial Real Estate
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Develop-
|
|
Construc-
|
|
Commer-
|
|
Owner
|
|
Owner
|
|
Non-
|
|
|
|
Home
|
|
Con-
|
|
|
|
|
|
Dollars in thousands
|
ment
|
|
tion
|
|
cial
|
|
Occupied
|
|
Occupied
|
|
jumbo
|
|
Jumbo
|
|
Equity
|
|
sumer
|
|
Other
|
|
|
Total
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
7,262
|
|
$
|
120
|
|
$
|
770
|
|
$
|
1,335
|
|
$
|
3,283
|
|
$
|
2,587
|
|
$
|
1,331
|
|
$
|
830
|
|
$
|
161
|
|
$
|
33
|
|
|
$
|
17,712
|
Charge-offs
|
|
3,390
|
|
|
367
|
|
|
1,273
|
|
|
636
|
|
|
806
|
|
|
1,372
|
|
|
737
|
|
|
5
|
|
|
136
|
|
|
95
|
|
|
|
8,817
|
Recoveries
|
|
61
|
|
|
-
|
|
|
13
|
|
|
33
|
|
|
31
|
|
|
81
|
|
|
86
|
|
|
61
|
|
|
95
|
|
|
77
|
|
|
|
538
|
Provision
|
|
1,287
|
|
|
385
|
|
|
1,272
|
|
|
655
|
|
|
761
|
|
|
1,321
|
|
|
3,262
|
|
|
(461
|
)
|
|
12
|
|
|
6
|
|
|
|
8,500
|
Ending balance
|
$
|
5,220
|
|
$
|
138
|
|
$
|
782
|
|
$
|
1,387
|
|
$
|
3,269
|
|
$
|
2,617
|
|
$
|
3,942
|
|
$
|
425
|
|
$
|
132
|
|
$
|
21
|
|
|
$
|
17,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
$
|
2,611
|
|
$
|
-
|
|
$
|
85
|
|
$
|
461
|
|
$
|
286
|
|
$
|
394
|
|
$
|
3,216
|
|
$
|
28
|
|
$
|
16
|
|
$
|
-
|
|
|
$
|
7,097
|
Loans collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
2,609
|
|
|
138
|
|
|
697
|
|
|
926
|
|
|
2,983
|
|
|
2,223
|
|
|
726
|
|
|
397
|
|
|
116
|
|
|
21
|
|
|
|
10,836
|
Loans acquired with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deteriorated credit quality
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
Total
|
$
|
5,220
|
|
$
|
138
|
|
$
|
782
|
|
$
|
1,387
|
|
$
|
3,269
|
|
$
|
2,617
|
|
$
|
3,942
|
|
$
|
425
|
|
$
|
132
|
|
$
|
21
|
|
|
$
|
17,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
$
|
29,963
|
|
$
|
-
|
|
$
|
10,941
|
|
$
|
16,714
|
|
$
|
9,468
|
|
$
|
6,318
|
|
$
|
21,543
|
|
$
|
219
|
|
$
|
66
|
|
$
|
-
|
|
|
$
|
95,232
|
Loans collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for impairment
|
|
49,372
|
|
|
3,772
|
|
|
74,888
|
|
|
137,538
|
|
|
266,614
|
|
|
210,396
|
|
|
40,024
|
|
|
53,044
|
|
|
20,520
|
|
|
3,701
|
|
|
|
859,869
|
Loans acquired with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deteriorated credit quality
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
Total
|
$
|
79,335
|
|
$
|
3,772
|
|
$
|
85,829
|
|
$
|
154,252
|
|
$
|
276,082
|
|
$
|
216,714
|
|
$
|
61,567
|
|
$
|
53,263
|
|
$
|
20,586
|
|
$
|
3,701
|
|
|
$
|
955,101
|
NOTE 7. PROPERTY HELD FOR SALE
Property held for sale consists of premises qualifying as held for sale under ASC Topic 360
Property, Plant, and Equipment,
and of real estate acquired through foreclosure on loans secured by such real estate. Qualifying premises are transferred to property held for sale at the lower of carrying value or estimated fair value less anticipated selling costs. Foreclosed property is recorded at the estimated fair value less anticipated selling costs based upon the property’s appraised value at the date of foreclosure, with any difference between the fair value of foreclosed property and the carrying value of the related loan charged to the allowance for loan losses. We perform periodic valuations of property held for sale subsequent to transfer. Changes in value subsequent to transfer are recorded in noninterest expense. Gains or losses not previously recognized resulting from the sale of property held for sale is recognized on the date of sale and is included in noninterest expense. Depreciation is not recorded on property held for sale. Expenses incurred in connection with operating foreclosed properties are charged to noninterest expense.
The following table presents the activity of property held for sale during 2013 and 2012.
Dollars in thousands
|
2013
|
|
2012
|
Beginning balance
|
$
|
56,172
|
|
$
|
63,938
|
Acquisitions
|
|
11,805
|
|
|
8,352
|
Capitalized improvements
|
|
276
|
|
|
942
|
Dispositions
|
|
(11,139
|
)
|
|
(9,777)
|
Valuation adjustments
|
|
(3,722
|
)
|
|
(6,862)
|
Reclassification of covered loans
|
|
-
|
|
|
(421)
|
Balance at year end
|
$
|
53,392
|
|
$
|
56,172
|
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method for premises and equipment over the estimated useful lives of the assets. The estimated useful lives employed are on average 30 years for premises and 3 to 10 years for furniture and equipment. Repairs and maintenance expenditures are charged to operating expenses as incurred. Major improvements and additions to premises and equipment, including construction period interest costs, are capitalized. No interest was capitalized during 2013, 2012, or 2011.
The major categories of premises and equipment and accumulated depreciation at December 31, 2013 and 2012 are summarized as follows:
Dollars in thousands
|
2013
|
|
2012
|
Land
|
$
|
6,308
|
|
$
|
6,308
|
Buildings and improvements
|
|
20,165
|
|
|
20,110
|
Furniture and equipment
|
|
12,777
|
|
|
12,648
|
|
|
39,250
|
|
|
39,066
|
Less accumulated depreciation
|
|
18,627
|
|
|
17,937
|
|
|
|
|
|
|
Total premises and equipment, net
|
$
|
20,623
|
|
$
|
21,129
|
Depreciation expense for the years ended December 31, 2013, 2012 and 2011 approximated $1.16 million, $1.29 million, and $1.39 million, respectively.
NOTE 9. INTANGIBLE ASSETS
Goodwill and certain other intangible assets with indefinite useful lives are not amortized into net income over an estimated life, but rather are tested at least annually for impairment. Intangible assets determined to have definite useful lives are amortized over their estimated useful lives and also are subject to impairment testing.
In accordance with ASU 2011-08,
Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment,
which
amends Topic 350,
Intangibles – Goodwill and Other,
entities are permitted to first assess qualitative factors (Step 0) to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-than-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the entity concludes otherwise, then it is required to perform the first step (Step 1) of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. A fair value is determined based on at least one of three various market valuation methodologies. If the fair value equals or exceeds the book value, no write-down of recorded goodwill is necessary. If the fair value is less than the book value, an expense may be required on our books to write down the goodwill to the proper carrying value. The second step (Step 2) of impairment testing is necessary only if the reporting unit does not pass Step 1. Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination.
During the third quarter, we completed Step 1 of the required annual impairment test for our insurance services reporting unit for 2013 and determined that no impairment write-offs were necessary. We performed the Step 0 qualitative assessment of the goodwill relative to our community banking reporting unit, and determined that it was not more likely than not that the fair value was less than its carrying value and noted no indicators of impairment.
In addition, at December 31, 2013 and December 31, 2012, we had $50,000 and $202,000, respectively, in unamortized acquired intangible assets consisting entirely of unidentifiable intangible assets recorded in accordance with ASC Topic 805,
Business Combinations,
and $1.70 million and $1.90 million in unamortized identifiable customer intangible assets at December 31, 2013 and 2012, respectively.
|
Goodwill Activity
|
|
Community
|
|
Insurance
|
|
|
Dollars in thousands
|
Banking
|
|
Services
|
|
Total
|
Balance, January 1, 2013
|
$
|
1,488
|
|
$
|
4,710
|
|
$
|
6,198
|
Acquired goodwill, net
|
|
-
|
|
|
-
|
|
|
-
|
Balance, December 31, 2013
|
$
|
1,488
|
|
$
|
4,710
|
|
$
|
6,198
|
|
Other Intangible Assets
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Community
|
|
Insurance
|
|
|
|
|
Community
|
|
Insurance
|
|
|
Dollars in thousands
|
Banking
|
|
Services
|
|
Total
|
|
|
Banking
|
|
Services
|
|
Total
|
Unidentifiable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
2,267
|
|
$
|
-
|
|
$
|
2,267
|
|
|
$
|
2,267
|
|
$
|
-
|
|
$
|
2,267
|
Less: accumulated amortization
|
|
2,216
|
|
|
-
|
|
|
2,216
|
|
|
|
2,065
|
|
|
-
|
|
|
2,065
|
Net carrying amount
|
$
|
51
|
|
$
|
-
|
|
$
|
51
|
|
|
$
|
202
|
|
$
|
-
|
|
$
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
-
|
|
$
|
3,000
|
|
$
|
3,000
|
|
|
$
|
-
|
|
$
|
3,000
|
|
$
|
3,000
|
Less: accumulated amortization
|
|
-
|
|
|
1,300
|
|
|
1,300
|
|
|
|
-
|
|
|
1,100
|
|
|
1,100
|
Net carrying amount
|
$
|
-
|
|
$
|
1,700
|
|
$
|
1,700
|
|
|
$
|
-
|
|
$
|
1,900
|
|
$
|
1,900
|
We recorded amortization expense of $351,000 for the year ended December 31, 2013 relative to our other intangible assets. Annual amortization is expected to be approximately $251,000 in 2014, and $200,000 for each of the years ending 2015 through 2018. The remaining amortization period is 9.5 years.
NOTE 10. DEPOSITS
The following is a summary of interest bearing deposits by type as of December 31, 2013 and 2012:
Dollars in thousands
|
2013
|
|
2012
|
Demand deposits, interest bearing
|
$
|
186,578
|
|
$
|
175,706
|
Savings deposits
|
|
193,446
|
|
|
193,039
|
Time deposits
|
|
530,951
|
|
|
557,788
|
Total
|
$
|
910,975
|
|
$
|
926,533
|
Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $143.3 million and $190.4 million at December 31, 2013 and 2012, respectively.
A summary of the scheduled maturities for all time deposits as of December 31, 2013, follows:
Dollars in thousands
|
Amount
|
2014
|
$
|
203,906
|
2015
|
|
82,956
|
2016
|
|
100,006
|
2017
|
|
35,314
|
2018
|
|
42,899
|
Thereafter
|
|
65,870
|
Total
|
$
|
530,951
|
Time certificates of deposit in denominations of $100,000 or more totaled $391.8 million and $397.2 million at December 31, 2013 and 2012, respectively. The following is a summary of the maturity distribution of these deposits as of December 31, 2013:
Dollars in thousands
|
Amount
|
|
Percent
|
Three months or less
|
$
|
29,746
|
|
7.6%
|
Three through six months
|
|
46,436
|
|
11.9%
|
Six through twelve months
|
|
60,887
|
|
15.5%
|
Over twelve months
|
|
254,693
|
|
65.0%
|
Total
|
$
|
391,762
|
|
100.0%
|
At December 31, 2013 and 2012, our deposits of related parties including directors, executive officers, and their related interests approximated $13.6 million and $17.5 million, respectively.
NOTE 11. BORROWED FUNDS
Our subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”). Membership in the FHLB makes available short-term and long-term advances under collateralized borrowing arrangements with each subsidiary bank. All FHLB advances are collateralized primarily by similar amounts of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations. We had $86.1 million available on a short term line of credit with the Federal Reserve Bank at December 31, 2013, which is primarily secured by commercial and industrial loans and consumer loans. We also had $6.0 million available on an unsecured line of credit with a correspondent bank.
At December 31, 2013, our subsidiary banks had combined additional borrowings availability of $330.8 million from the FHLB. Short-term FHLB advances are granted for terms of 1 to 365 days and bear interest at a fixed or variable rate set at the time of the funding request.
Short-term borrowings:
At December 31, 2013, we had $92.1 million borrowing availability through credit lines and Federal funds purchased agreements. A summary of short-term borrowings is presented below.
|
2013
|
|
|
2012
|
|
Short-term
|
|
Federal Funds
|
|
|
Short-term
|
|
Federal Funds
|
|
FHLB
|
|
Purchased and
|
|
|
FHLB
|
|
Purchased and
|
Dollars in thousands
|
Advances
|
|
Lines of Credit
|
|
|
Advances
|
|
Lines of Credit
|
Balance at December 31
|
$
|
53,800
|
|
$
|
8,969
|
|
|
$
|
3,000
|
|
$
|
958
|
Average balance outstanding for the year
|
|
29,786
|
|
|
4,313
|
|
|
|
12,291
|
|
|
957
|
Maximum balance outstanding at any
|
|
|
|
|
|
|
|
|
|
|
|
|
month end
|
|
55,300
|
|
|
8,969
|
|
|
|
20,000
|
|
|
958
|
Weighted average interest rate for the year
|
|
0.28
|
%
|
|
0.25
|
%
|
|
|
0.24
|
%
|
|
0.25%
|
Weighted average interest rate for
|
|
|
|
|
|
|
|
|
|
|
|
|
balances outstanding at December 31
|
|
0.26
|
%
|
|
0.25
|
%
|
|
|
0.25
|
%
|
|
0.25%
|
Federal funds purchased and repurchase agreements mature the next business day. The securities underlying the repurchase agreements are under our control and secure the total outstanding daily balances.
We generally account for securities sold under agreements to repurchase as collateralized financing transactions and record them at the amounts at which the securities were sold, plus accrued interest. Securities, generally U.S. government and Federal agency securities, pledged as collateral under these financing arrangements cannot be sold or repledged by the secured party. The fair value of collateral provided is continually monitored and additional collateral is provided as needed.
Long-term borrowings:
Our long-term borrowings of $163.5 million and $203.3 million as of December 31, 2013 and 2012, respectively, consisted primarily of advances from the FHLB and structured reverse repurchase agreements with two unaffiliated institutions.
|
Balance at December 31,
|
Dollars in thousands
|
2013
|
|
2012
|
Long-term FHLB advances
|
$
|
82,600
|
|
$
|
122,693
|
Long-term reverse repurchase agreements
|
|
72,000
|
|
|
72,000
|
Term loans
|
|
8,916
|
|
|
8,575
|
Total
|
$
|
163,516
|
|
$
|
203,268
|
The term loans are secured by the common stock of our subsidiary bank. $5.4 million bears a variable interest rate of prime minus 50 basis points with a final maturity in 2017, and $3.5 million bears a fixed rate of 8% with a final maturity of 2023.
Long-term borrowings bear both fixed and variable interest rates and mature in varying amounts through the year 2026. The average interest rate paid on long-term borrowings during 2013 and 2012 approximated 3.90% and 3.89%, respectively.
Subordinated debentures:
We have subordinated debt totaling $16.8 million at December 31, 2013 and 2012. The subordinated debt qualifies as Tier 2 capital under Federal Reserve Board guidelines, until the debt is within 5 years of its maturity; thereafter the amount qualifying as Tier 2 capital is reduced by 20 percent each year until maturity. During 2009, we issued $6.8 million in subordinated debt, of which $5.0 million was issued to an affiliate of a director of Summit. We also issued $1.0 million and $0.8 million to two unrelated parties. These three issuances bear an interest rate of 10 percent per annum, a term of 10 years, and are not prepayable by us within the first five years. During 2008, we issued $10.0 million of subordinated debt to an unrelated institution, which bears a variable interest rate of 1 month LIBOR plus 275 basis points and a term of 7.5 years.
Subordinated debentures owed to unconsolidated subsidiary trusts:
We have three statutory business trusts that were formed for the purpose of issuing mandatorily redeemable securities (the “capital securities”) for which we are obligated to third party investors and investing the proceeds from the sale of the capital securities in our junior subordinated debentures (the “debentures”). The debentures held by the trusts are their sole assets. Our subordinated debentures totaled $19.6 million at December 31, 2013 and 2012.
In October 2002, we sponsored SFG Capital Trust I, in March 2004, we sponsored SFG Capital Trust II, and in December 2005, we sponsored SFG Capital Trust III, of which 100% of the common equity of each trust is owned by us. SFG Capital Trust I issued $3.5 million in capital securities and $109,000 in common securities and invested the proceeds in $3.61 million of debentures. SFG Capital Trust II issued $7.5 million in capital securities and $232,000 in common securities and invested the proceeds in $7.73 million of debentures. SFG Capital Trust III issued $8.0 million in capital securities and $248,000 in common securities and invested the proceeds in $8.25 million of debentures. Distributions on the capital securities issued by the trusts are payable quarterly at a variable interest rate equal to 3 month LIBOR plus 345 basis points for SFG Capital Trust I, 3 month LIBOR plus 280 basis points for SFG Capital Trust II, and 3 month LIBOR plus 145 basis points for SFG Capital Trust III, and equals the interest rate earned on the debentures held by the trusts, and is recorded as interest expense by us. The capital securities are subject to mandatory redemption in whole or in part, upon repayment of the debentures. We have entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of the guarantee. The debentures of each Capital Trust are redeemable by us quarterly.
The capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under Federal Reserve Board guidelines. In accordance with these Guidelines, trust preferred securities generally are limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.
A summary of the maturities of all long-term borrowings and subordinated debentures for the next five years and thereafter is as follows:
|
|
|
|
|
Subordinated
|
|
|
|
|
|
debentures owed
|
|
Long-term
|
|
Subordinated
|
|
to unconsolidated
|
Dollars in thousands
|
borrowings
|
|
debentures
|
|
subsidiary trusts
|
2014
|
$
|
82,526
|
|
$
|
-
|
|
$
|
-
|
2015
|
|
1,909
|
|
|
10,000
|
|
|
-
|
2016
|
|
28,911
|
|
|
-
|
|
|
-
|
2017
|
|
918
|
|
|
-
|
|
|
-
|
2018
|
|
45,017
|
|
|
-
|
|
|
-
|
Thereafter
|
|
4,235
|
|
|
6,800
|
|
|
19,589
|
Total
|
$
|
163,516
|
|
$
|
16,800
|
|
$
|
19,589
|
NOTE 12. INCOME TAXES
The consolidated provision for income taxes includes Federal and state income taxes and is based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740
Income Taxes
clarifies the accounting and disclosure for uncertain tax positions, as defined. ASC Topic 740 requires that a tax position meet a "probable recognition threshold" for the benefit of the uncertain tax position to be recognized in the financial statements. A tax position that fails to meet the probable recognition threshold will result in either reduction of a current or deferred tax asset or receivable, or recording a current or deferred tax liability. ASC Topic 740 also provides guidance on measurement, derecognition of tax benefits, classification, interim period accounting disclosure, and transition requirements in accounting for uncertain tax positions.
The components of applicable income tax expense (benefit) for the years ended December 31, 2013, 2012 and 2011, are as follows:
Dollars in thousands
|
2013
|
|
2012
|
|
2011
|
Current
|
|
|
|
|
|
Federal
|
$
|
861
|
|
$
|
1,716
|
|
$
|
4,397
|
State
|
|
41
|
|
|
5
|
|
|
21
|
|
|
902
|
|
|
1,721
|
|
|
4,418
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
1,587
|
|
|
(610
|
)
|
|
(3,533)
|
State
|
|
199
|
|
|
108
|
|
|
150
|
|
|
1,786
|
|
|
(502
|
)
|
|
(3,383)
|
Total
|
$
|
2,688
|
|
$
|
1,219
|
|
$
|
1,035
|
Reconciliation between the amount of reported income tax expense and the amount computed by multiplying the statutory income tax rates by book pretax income for the years ended December 31, 2013, 2012 and 2011 is as follows:
|
2013
|
|
2012
|
|
2011
|
Dollars in thousands
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
Computed tax at applicable
|
|
|
|
|
|
|
|
|
|
|
|
statutory rate
|
$
|
3,765
|
|
35
|
|
$
|
2,426
|
|
35
|
|
$
|
1,788
|
|
35
|
Increase (decrease) in taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and dividends, net
|
|
(932
|
)
|
(9
|
)
|
|
(1,019
|
)
|
(15
|
)
|
|
(1,032
|
)
|
(20)
|
State income taxes, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Federal income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
|
|
156
|
|
1
|
|
|
74
|
|
1
|
|
|
112
|
|
2
|
Other, net
|
|
(301
|
)
|
(3
|
)
|
|
(262
|
)
|
(4
|
)
|
|
167
|
|
3
|
Applicable income taxes
|
$
|
2,688
|
|
24
|
|
$
|
1,219
|
|
17
|
|
$
|
1,035
|
|
20
|
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized. Our WV net operating loss carryforward expires in 2028.
The tax effects of temporary differences, which give rise to our deferred tax assets and liabilities as of December 31, 2013 and 2012, are as follows:
Dollars in thousands
|
2013
|
|
2012
|
Deferred tax assets
|
|
|
|
Allowance for loan losses
|
$
|
4,681
|
|
$
|
6,635
|
Depreciation
|
|
135
|
|
|
14
|
Foreclosed properties
|
|
4,928
|
|
|
5,063
|
Deferred compensation
|
|
2,006
|
|
|
1,646
|
Other deferred costs and accrued expenses
|
|
371
|
|
|
446
|
Other-than-temporarily impaired securities
|
|
931
|
|
|
1,331
|
Net unrealized loss on securities available for sale
|
|
308
|
|
|
-
|
NOL and tax credit carryforwards
|
|
404
|
|
|
178
|
Total
|
|
13,764
|
|
|
15,313
|
Deferred tax liabilities
|
|
|
|
|
|
Accretion on tax-exempt securities
|
|
6
|
|
|
5
|
Net unrealized gain on securities available for sale
|
|
-
|
|
|
2,985
|
Net unrealized gain on interest rate swaps
|
|
297
|
|
|
-
|
Purchase accounting adjustments and goodwill
|
|
869
|
|
|
932
|
Total
|
|
1,172
|
|
|
3,922
|
Net deferred tax assets
|
$
|
12,592
|
|
$
|
11,391
|
In accordance with ASC Topic 740, we concluded that there were no significant uncertain tax positions requiring recognition in the consolidated financial statements. The evaluation was performed for the years ended 2010 through 2013, the tax years which remain subject to examination by major tax jurisdictions.
We may from time to time be assessed interest or penalties associated with tax liabilities by major tax jurisdictions, although any such assessments are estimated to be minimal and immaterial. To the extent we have received an assessment for interest and/or penalties; it has been classified in the consolidated statements of income as a component of other noninterest expense.
We are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2010 through 2012. Tax years 2009 through 2012 remain subject to West Virginia State examination.
NOTE 13. EMPLOYEE BENEFITS
Retirement Plans:
We have defined contribution profit-sharing plans with 401(k) provisions covering substantially all employees. Contributions to the plans are at the discretion of the Board of Directors. Contributions made to the plans and charged to expense were $354,000, $331,000, and $313,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
Employee Stock Ownership Plan:
We have an Employee Stock Ownership Plan (“ESOP”), which enables eligible employees to acquire shares of our common stock. The cost of the ESOP is borne by us through annual contributions to an Employee Stock Ownership Trust in amounts determined by the Board of Directors.
The expense recognized by us is based on cash contributed or committed to be contributed by us to the ESOP during the year. Contributions to the ESOP for the years ended December 31, 2013, 2012 and 2011 were $173,000, $100,000, and $69,000 respectively. Dividends paid by us to the ESOP are reported as a reduction to retained earnings. The ESOP owned 321,781 and 304,781 shares of our common stock at December 31, 2013 and 2012, respectively, all of which were purchased at the prevailing market price and are considered outstanding for earnings per share computations. The trustees of the Retirement Plans and ESOP are also members of our Board of Directors.
Supplemental Executive Retirement Plan:
In May 1999, Summit Community Bank entered into a non-qualified Supplemental Executive Retirement Plan (“SERP”) with certain senior officers, which provides participating officers with an income benefit payable at retirement age or death. During 2000, Shenandoah Valley National Bank adopted a similar plan and during 2002, Summit Financial Group, Inc. adopted a similar plan. The liabilities accrued for the SERP’s at December 31, 2013 and 2012 were $3.41 million and $2.95 million, respectively, which are included in other liabilities. In addition, we purchased certain life insurance contracts to fund the liabilities arising under these plans. At December 31, 2013 and 2012, the cash surrender value of these insurance contracts was $35.2 million and $29.2 million, respectively, and is included in other assets in the accompanying consolidated balance sheets.
Stock Option Plan:
The 2009 Officer Stock Option Plan was adopted by our shareholders in May 2009 and provides for the granting of stock options for up to 350,000 shares of common stock to our key officers. Each option granted under the Plan vests according to a schedule designated at the grant date and has a term of no more than 10 years following the vesting date. Also, the option price per share was not to be less than the fair market value of our common stock on the date of grant. The 2009 Officer Stock Option Plan, which expires in May 2019, replaces the 1998 Officer Stock Option Plan (collectively the “Plans”) that expired in May 2008.
The fair value of our employee stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Because our employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options at the time of grant. There were no options granted in 2013 or 2012.
We recognize compensation expense based on the estimated number of stock awards expected to actually vest, exclusive of the awards expected to be forfeited. During 2011, 2012, and 2013, our stock compensation expense and related deferred taxes were insignificant.
A summary of activity in our Officer Stock Option Plans during 2011, 2012 and 2013 is as follows:
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Exercise Price
|
|
Options
|
|
(WAEP)
|
Outstanding, December 31, 2010
|
317,180
|
|
$
|
18.17
|
Granted
|
-
|
|
|
-
|
Exercised
|
-
|
|
|
-
|
Forfeited
|
-
|
|
|
-
|
Expired
|
-
|
|
|
-
|
Outstanding, December 31, 2011
|
317,180
|
|
$
|
18.17
|
Granted
|
-
|
|
|
-
|
Exercised
|
-
|
|
|
-
|
Forfeited
|
(44,680
|
)
|
|
-
|
Expired
|
(22,800
|
)
|
|
-
|
Outstanding, December 31, 2012
|
249,700
|
|
$
|
18.98
|
Granted
|
-
|
|
|
-
|
Exercised
|
(17,800
|
)
|
|
5.37
|
Forfeited
|
(1,750
|
)
|
|
19.69
|
Expired
|
(44,740
|
)
|
|
21.83
|
Outstanding, December 31, 2013
|
185,410
|
|
$
|
19.59
|
|
|
|
|
|
Exercisable Options:
|
|
|
|
|
December 31, 2013
|
182,810
|
|
$
|
19.82
|
December 31, 2012
|
245,500
|
|
$
|
19.24
|
December 31, 2011
|
311,280
|
|
$
|
18.44
|
Other information regarding options outstanding and exercisable at December 31, 2013 is as follows:
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
Wted. Avg.
|
|
Aggregate
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
|
Intrinsic
|
Range of
|
# of
|
|
|
|
Contractual
|
|
Value
|
|
|
# of
|
|
|
|
Value
|
exercise price
|
shares
|
|
WAEP
|
|
Life (yrs)
|
|
(in thousands)
|
|
|
shares
|
|
WAEP
|
|
(in thousands)
|
$
|
2.54 - $6.00
|
16,950
|
|
$
|
4.69
|
|
3.78
|
|
$
|
88
|
|
|
14,950
|
|
$
|
4.98
|
|
$
|
74
|
|
6.01 - 10.00
|
23,160
|
|
|
9.07
|
|
3.23
|
|
|
20
|
|
|
22,560
|
|
|
9.14
|
|
|
17
|
|
10.01 - 17.50
|
2,300
|
|
|
17.43
|
|
0.16
|
|
|
-
|
|
|
2,300
|
|
|
17.43
|
|
|
-
|
|
17.51 - 20.00
|
38,500
|
|
|
17.80
|
|
3.00
|
|
|
-
|
|
|
38,500
|
|
|
8.00
|
|
|
-
|
|
20.01 - 25.93
|
104,500
|
|
|
25.04
|
|
2.74
|
|
|
-
|
|
|
104,500
|
|
|
25.04
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,410
|
|
$
|
19.59
|
|
|
|
$
|
108
|
|
|
182,810
|
|
$
|
19.82
|
|
$
|
91
|
NOTE 14. COMMITMENTS AND CONTINGENCIES
Lending related financial instruments with off-balance sheet risk
: We are a party to certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract amounts of these instruments reflect the extent of involvement that we have in this class of financial instruments.
Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:
|
December 31,
|
Dollars in thousands
|
2013
|
|
2012
|
Commitments to extend credit:
|
|
|
|
Revolving home equity and
|
|
|
|
credit card lines
|
$
|
51,621
|
|
$
|
47,690
|
Construction loans
|
|
28,549
|
|
|
16,226
|
Other loans
|
|
36,495
|
|
|
35,401
|
Standby letters of credit
|
|
1,711
|
|
|
1,934
|
Total
|
$
|
118,376
|
|
$
|
101,251
|
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. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if we deem necessary upon extension of credit, is based on our credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
Operating leases
: We occupy certain facilities under long-term operating leases. The aggregate minimum annual rental commitments under those leases total approximately $204,000 in 2014 and $38,000 in 2015. Total net rent expense included in the accompanying consolidated financial statements was $278,000 in 2013, $298,000 in 2012, and $294,000 in 2011.
Litigation
: We are involved in various legal actions arising in the ordinary course of business. To the best of our knowledge, no matters have been specifically identified to management that are reasonably possible to have a significant adverse effect on the consolidated financial statements.
Employment Agreements
:
We have various employment agreements with our chief executive officer and certain other executive officers. These agreements contain change in control provisions that would entitle the officers to receive compensation in the event there is a change in control in the Company (as defined) and a termination of their employment without cause (as defined).
NOTE 15. PREFERRED STOCK
On September 30, 2009, we sold in a private placement 3,710 shares, or $3.7 million, of 8% Non-Cumulative Convertible Preferred Stock, Series 2009, $1.00 par value, with a liquidation preference of $1,000 per share (the “Series 2009 Preferred Stock”), based on the private placement exemption under Section 4(2) of the Securities Act of 1933 (the “Securities Act”) and Rule 506 of Regulation D.
The terms of the Series 2009 Preferred Stock provide that it may be converted into common stock under three different scenarios. First, the Series 2009 Preferred Stock may be converted at the holder’s option, on any dividend payment date, at the option of the holder, into shares of common stock based on a conversion rate determined by dividing $1,000 by $5.50, plus cash in lieu of fractional shares and subject to anti-dilution adjustments (the “Series 2009 Conversion Rate”). Second, on or after June 1, 2012, Summit may, at its option, on any dividend payment date, convert some or all of the Series 2009 Preferred Stock into shares of Summit’s common stock at the applicable Series 2009 Conversion Rate. Summit may exercise this conversion right if, for 20 trading days within any period of 30 consecutive trading dates during the six months immediately preceding the conversion, the closing price of the common stock exceeds 135% of $5.50. Third, after ten years, on June 1, 2019, all remaining outstanding shares of the Series 2009 Preferred Stock will be converted at the applicable Series 2009 Conversion Rate. Adjustments to the Series 2009 Conversion Rate will be made in the event of a stock dividend, stock split, reclassification, reorganization, merger or other similar transaction.
In late 2011, we sold pursuant to both subscription rights distributed to our common shareholders and to a supplemental public offering 12,000 shares, or $6.0 million, of 8% Non-Cumulative Convertible Preferred Stock, Series 2011, $1.00 par value, with a liquidation preference of $500 per share (the “Series 2011 Preferred Stock”).
The terms of the Series 2011 Preferred Stock also provide that it may be converted into common stock under three different scenarios. First, the Series 2011 Preferred Stock may be converted at the holder’s option, on any dividend payment date, at the option of the holder, into shares of common stock based on a conversion rate determined by dividing $500 by $4.00, plus cash in lieu of fractional shares and subject to anti-dilution adjustments (the “Series 2011 Conversion Rate”). Second, on or after June 1, 2014, Summit may, at its option, on any dividend payment date, convert some or all of the Series 2011 Preferred Stock into shares of Summit’s common stock at the applicable Series 2011 Conversion Rate. Summit may exercise this conversion right if, for 20 trading days during the 30 consecutive trading days immediately preceding the date of notice of the conversion, the closing price of the common stock exceeds 135% of $4.00. Third, after ten years, on June 1, 2021, all remaining outstanding shares of the Series 2011 Preferred Stock will be converted at the applicable Series 2011 Conversion Rate. Adjustments to the Series 2011 Conversion Rate will be made in the event of a stock dividend, stock split, reclassification, reorganization, merger or other similar transaction.
Both the Series 2009 and Series 2011 Preferred Stock pay noncumulative dividends, if and when declared by the Board of Directors, at a rate of 8.0% per annum. Dividends declared are payable quarterly in arrears on the 1
st
day of March, June, September and December of each year. The Series 2009 and Series 2011 Preferred Stock qualify as Tier 1 capital for regulatory capital purposes.
NOTE 16.
|
REGULATORY MATTERS
|
The primary source of funds for our dividends paid to our shareholders is dividends received from our subsidiaries. Dividends paid by the subsidiary bank are subject to restrictions by banking law and regulations and require approval by the bank’s regulatory agency if dividends declared in any year exceed the bank’s current year's net income, as defined, plus its retained net profits of the two preceding years. During 2014, the Bank will have $11.6 million plus net income for the interim periods through the date of declaration, available for dividends for distribution to us. Presently, as a result of the bank MOU, the bank is restricted from paying any cash dividends unless it has provided 30 days prior notice to its regulatory authorities, and its regulatory authorities did not object. Summit Community received regulatory approval for and paid two upstream dividends to Summit totaling $2.0 million during 2013.
We and our subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we and each of our subsidiaries must meet specific capital guidelines that involve quantitative measures of our and our subsidiaries’ assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our and each of our subsidiaries’ capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet these minimum capital requirements can result in certain mandatory and possible additional discretionary actions by regulators that could have a material impact on our financial position and results of operations.
Quantitative measures established by regulation to ensure capital adequacy require us and each of our subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). We believe, as of December 31, 2013, that we and each of our subsidiaries met all capital adequacy requirements to which we were subject.
The most recent notifications from the banking regulatory agencies categorized us and each of our subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, we and each of our subsidiaries must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.
Our subsidiary banks are required to maintain reserve balances with the Federal Reserve Bank. The required reserve balance was $508,000 at December 31, 2013.
Summit’s and its subsidiary bank, Summit Community Bank’s (“SCB”) actual capital amounts and ratios are also presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
To be Well Capitalized
|
|
|
|
|
|
|
Minimum Required
|
|
|
under Prompt Corrective
|
|
Actual
|
|
|
Regulatory Capital
|
|
|
Action Provisions
|
Dollars in thousands
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
|
|
Amount
|
|
Ratio
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
$
|
144,202
|
|
14.5
|
%
|
|
$
|
79,638
|
|
8.0
|
%
|
|
$
|
99,547
|
|
10.0%
|
Summit Community
|
|
156,473
|
|
15.7
|
%
|
|
|
79,627
|
|
8.0
|
%
|
|
|
99,534
|
|
10.0%
|
Tier 1 Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
122,918
|
|
12.4
|
%
|
|
|
39,499
|
|
4.0
|
%
|
|
|
59,248
|
|
6.0%
|
Summit Community
|
|
143,989
|
|
14.5
|
%
|
|
|
39,814
|
|
4.0
|
%
|
|
|
59,720
|
|
6.0%
|
Tier 1 Capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
122,918
|
|
8.9
|
%
|
|
|
55,151
|
|
4.0
|
%
|
|
|
68,938
|
|
5.0%
|
Summit Community
|
|
143,989
|
|
10.4
|
%
|
|
|
55,150
|
|
4.0
|
%
|
|
|
68,938
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
$
|
138,593
|
|
14.0
|
%
|
|
$
|
79,391
|
|
8.0
|
%
|
|
$
|
99,238
|
|
10.0%
|
Summit Community
|
|
148,803
|
|
15.0
|
%
|
|
|
79,484
|
|
8.0
|
%
|
|
|
99,354
|
|
10.0%
|
Tier 1 Capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
115,221
|
|
11.6
|
%
|
|
|
39,695
|
|
4.0
|
%
|
|
|
59,543
|
|
6.0%
|
Summit Community
|
|
136,231
|
|
13.7
|
%
|
|
|
39,742
|
|
4.0
|
%
|
|
|
59,613
|
|
6.0%
|
Tier 1 Capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
|
|
115,221
|
|
8.3
|
%
|
|
|
55,591
|
|
4.0
|
%
|
|
|
69,489
|
|
5.0%
|
Summit Community
|
|
136,231
|
|
9.8
|
%
|
|
|
55,581
|
|
4.0
|
%
|
|
|
69,476
|
|
5.0%
|
Summit Financial Group, Inc. (“Summit”) and its bank subsidiary, Summit Community Bank, Inc. (the “Bank”), have entered into informal Memoranda of Understanding (“MOU’s”) with their respective regulatory authorities. A memorandum of understanding is characterized by the regulatory authorities as an informal action that is not published or publicly available and that is used when circumstances warrant a milder form of action than a formal supervisory action, such as a formal written agreement or order.
Under the Summit MOU, Summit has agreed among other things to:
§
|
Summit suspending all cash dividends on its common stock until further notice. Dividends on all preferred stock, as well as interest payments on subordinated notes underlying Summit’s trust preferred securities, continue to be permissible; and,
|
§
|
Summit not incurring any additional debt, other than trade payables, without the prior written consent of the principal banking regulators.
|
Additional information regarding Summit’s MOU is included in Part I. Item 1A – Risk Factors on our Form 10-K for the year ended December 31, 2013.
On October 25, 2012, the Bank entered into a revised MOU (“Bank MOU”) which replaced the Bank MOU effective September 24, 2009 and subsequently amended on February 1, 2011. In general, the Bank MOU includes provisions substantially similar to those in the prior Bank MOU with the exception that several provisions deemed no longer applicable by the regulatory authorities were removed and a provision relative to reducing the Bank’s levels of classified assets was added.
In summary, we have agreed, among other things, to address the following matters relative to the Bank:
§
|
maintaining a Board committee which monitors and promotes compliance with the provisions of the Bank MOU;
|
§
|
providing the Bank’s regulatory authorities with updated reports of criticized assets and/or formal workout plans for all nonperforming borrower relationships with an aggregate outstanding balance exceeding $1 million;
|
§
|
developing and submitting to regulatory authorities a written plan to reduce the Bank’s risk exposure in each adversely classified credit relationship in excess of $1 million and all OREO;
|
§
|
establishing procedures to report all loans with balances exceeding $500,000 that have credit weaknesses or that fall outside of the Bank’s policy;
|
§
|
annually reviewing the organizational structure and operations of the Bank’s loan department;
|
§
|
maintaining an adequate allowance for loan and lease losses through charges to current operating income;
|
§
|
reviewing overall liquidity objectives and developing and submitting to regulatory authorities plans and procedures aimed to improve liquidity and reduce reliance on volatile liabilities;
|
§
|
preparing comprehensive budgets and earnings forecasts for the Bank and submitting reports comparing actual performance to the budget plan;
|
§
|
maintaining a minimum Tier 1 Leverage Capital ratio of at least 8% and a Total Risk-based Capital ratio of at least 11%;
|
§
|
not paying any cash dividends without the prior written consent of the banking regulators; and,
|
§
|
providing quarterly progress reports to the Bank’s regulatory authorities detailing steps taken to comply with the Bank MOU.
|
NOTE 17. SEGMENT INFORMATION
We operate two business segments: community banking and an insurance agency. These segments are primarily identified by the products or services offered. The community banking segment consists of our full service banks which offer customers traditional banking products and services through various delivery channels. The insurance agency segment consists of three insurance agency offices that sell insurance products. The accounting policies discussed throughout the notes to the consolidated financial statements apply to each of our business segments.
Intersegment revenue and expense consists of management fees allocated to the bank and Summit Insurance Services, LLC for overall direction in the areas of strategic planning, investment portfolio management, asset/liability management, financial reporting and other financial and administrative services. Information for each of our segments is included below:
|
December 31, 2013
|
|
Community
|
|
Insurance
|
|
|
|
|
|
|
Dollars in thousands
|
Banking
|
|
Services
|
|
Parent
|
|
Eliminations
|
|
Total
|
Net interest income
|
$
|
40,725
|
|
$
|
-
|
|
$
|
(1,922
|
)
|
$
|
-
|
|
$
|
38,803
|
Provision for loan losses
|
|
4,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,500
|
Net interest income after provision for loan losses
|
|
36,225
|
|
|
-
|
|
|
(1,922
|
)
|
|
-
|
|
|
34,303
|
Other income
|
|
6,666
|
|
|
4,543
|
|
|
1,087
|
|
|
(1,087
|
)
|
|
11,209
|
Other expenses
|
|
29,795
|
|
|
4,331
|
|
|
1,717
|
|
|
(1,087
|
)
|
|
34,756
|
Income (loss) before income taxes
|
|
13,096
|
|
|
212
|
|
|
(2,552
|
)
|
|
-
|
|
|
10,756
|
Income tax expense (benefit)
|
|
3,490
|
|
|
92
|
|
|
(894
|
)
|
|
-
|
|
|
2,688
|
Net income
|
|
9,606
|
|
|
120
|
|
|
(1,658
|
)
|
|
-
|
|
|
8,068
|
Dividends on preferred shares
|
|
-
|
|
|
-
|
|
|
775
|
|
|
-
|
|
|
775
|
Net income applicable to common shares
|
$
|
9,606
|
|
$
|
120
|
|
$
|
(2,433
|
)
|
$
|
-
|
|
$
|
7,293
|
Intersegment revenue (expense)
|
$
|
(979
|
)
|
$
|
(108
|
)
|
$
|
1,087
|
|
$
|
-
|
|
$
|
-
|
Average assets
|
$
|
1,431,131
|
|
$
|
6,176
|
|
$
|
157,249
|
|
$
|
(211,600
|
)
|
$
|
1,382,956
|
|
December 31, 2012
|
|
Community
|
|
Insurance
|
|
|
|
|
|
|
Dollars in thousands
|
Banking
|
|
Services
|
|
Parent
|
|
Eliminations
|
|
Total
|
Net interest income
|
$
|
41,600
|
|
$
|
-
|
|
$
|
(1,780
|
)
|
$
|
-
|
|
$
|
39,820
|
Provision for loan losses
|
|
8,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,500
|
Net interest income after provision for loan losses
|
|
33,100
|
|
|
-
|
|
|
(1,780
|
)
|
|
-
|
|
|
31,320
|
Other income
|
|
8,475
|
|
|
4,422
|
|
|
1,026
|
|
|
(1,044
|
)
|
|
12,879
|
Other expenses
|
|
32,685
|
|
|
3,965
|
|
|
1,661
|
|
|
(1,044
|
)
|
|
37,267
|
Income (loss) before income taxes
|
|
8,890
|
|
|
457
|
|
|
(2,415
|
)
|
|
-
|
|
|
6,932
|
Income tax expense (benefit)
|
|
1,868
|
|
|
184
|
|
|
(833
|
)
|
|
-
|
|
|
1,219
|
Net income
|
|
7,022
|
|
|
273
|
|
|
(1,582
|
)
|
|
-
|
|
|
5,713
|
Dividends on preferred shares
|
|
-
|
|
|
-
|
|
|
777
|
|
|
-
|
|
|
777
|
Net income applicable to common shares
|
$
|
7,022
|
|
$
|
273
|
|
$
|
(2,359
|
)
|
$
|
-
|
|
$
|
4,936
|
Intersegment revenue (expense)
|
$
|
(942
|
)
|
$
|
(102
|
)
|
$
|
1,044
|
|
$
|
-
|
|
$
|
-
|
Average assets
|
$
|
1,477,636
|
|
$
|
6,399
|
|
$
|
154,506
|
|
$
|
(217,440
|
)
|
$
|
1,421,101
|
|
December 31, 2011
|
|
Community
|
|
Insurance
|
|
|
|
|
|
|
Dollars in thousands
|
Banking
|
|
Services
|
|
Parent
|
|
Eliminations
|
|
Total
|
Net interest income
|
$
|
41,658
|
|
$
|
-
|
|
$
|
(1,814
|
)
|
$
|
-
|
|
$
|
39,844
|
Provision for loan losses
|
|
10,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,000
|
Net interest income after provision for loan losses
|
|
31,658
|
|
|
-
|
|
|
(1,814
|
)
|
|
-
|
|
|
29,844
|
Other income
|
|
6,189
|
|
|
4,606
|
|
|
2,155
|
|
|
(1,044
|
)
|
|
11,906
|
Other expenses
|
|
31,828
|
|
|
4,216
|
|
|
1,641
|
|
|
(1,044
|
)
|
|
36,641
|
Income (loss) before income taxes
|
|
6,019
|
|
|
390
|
|
|
(1,300
|
)
|
|
-
|
|
|
5,109
|
Income tax expense (benefit)
|
|
1,304
|
|
|
158
|
|
|
(427
|
)
|
|
-
|
|
|
1,035
|
Net income
|
|
4,715
|
|
|
232
|
|
|
(873
|
)
|
|
-
|
|
|
4,074
|
Dividends on preferred shares
|
|
-
|
|
|
-
|
|
|
371
|
|
|
-
|
|
|
371
|
Net income applicable to common shares
|
$
|
4,715
|
|
$
|
232
|
|
$
|
(1,244
|
)
|
$
|
-
|
|
$
|
3,703
|
Intersegment revenue (expense)
|
$
|
(942
|
)
|
$
|
(102
|
)
|
$
|
1,044
|
|
$
|
-
|
|
$
|
-
|
Average assets
|
$
|
1,532,600
|
|
$
|
6,618
|
|
$
|
143,379
|
|
$
|
(212,803
|
)
|
$
|
1,469,794
|
NOTE 18. EARNINGS PER SHARE
The computations of basic and diluted earnings per share (“EPS”) follow:
|
For the Year Ended December 31,
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Common
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
Common
|
|
|
Dollars in thousands,
|
Income
|
|
Shares
|
|
Per
|
|
|
Income
|
|
Shares
|
|
Per
|
|
|
Income
|
|
Shares
|
|
Per
|
except per share amounts
|
(Numerator)
|
|
(Denominator)
|
|
Share
|
|
|
(Numerator)
|
|
(Denominator)
|
|
Share
|
|
|
(Numerator)
|
|
(Denominator)
|
|
Share
|
Net income
|
$
|
8,068
|
|
|
|
|
|
|
$
|
5,713
|
|
|
|
|
|
|
$
|
4,074
|
|
|
|
|
Less preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dividends
|
|
(775
|
)
|
|
|
|
|
|
|
(777
|
)
|
|
|
|
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
7,293
|
|
7,442,689
|
|
$
|
0.98
|
|
|
$
|
4,936
|
|
7,425,472
|
|
$
|
0.66
|
|
|
$
|
3,703
|
|
7,425,472
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
-
|
|
7,532
|
|
|
|
|
|
|
-
|
|
1,152
|
|
|
|
|
|
|
-
|
|
-
|
|
|
|
Series 2011 convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred stock
|
|
478
|
|
1,496,738
|
|
|
|
|
|
|
480
|
|
1,500,000
|
|
|
|
|
|
|
74
|
|
238,182
|
|
|
|
Series 2009 convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred stock
|
|
297
|
|
674,545
|
|
|
|
|
|
|
297
|
|
674,545
|
|
|
|
|
|
|
297
|
|
674,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
$
|
8,068
|
|
9,621,504
|
|
$
|
0.84
|
|
|
$
|
5,713
|
|
9,601,169
|
|
$
|
0.60
|
|
|
$
|
4,074
|
|
8,338,199
|
|
$
|
0.49
|
Stock option grants and the convertible preferred shares are disregarded in this computation if they are determined to be anti-dilutive. Our anti-dilutive stock options at December 31, 2013, 2012, and 2011, totaled 165,460 shares, 244,700 shares, and 312,180 shares, respectively.
NOTE 19. DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative instruments primarily to protect against the risk of adverse interest rate movements on the cash flows of certain liabilities. Derivative instruments represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based upon a notional amount and an underlying as specified in the contract. A notional amount represents the number of units of a specific item, such as currency units. An underlying represents a variable, such as an interest rate or price index. The amount of cash or other asset delivered from one party to the other is determined based upon the interaction of the notional amount of the contract with the underlying. Derivatives can also be implicit in certain contracts and commitments.
As with any financial instrument, derivative instruments have inherent risks, primarily market and credit risk. Market risk associated with changes in interest rates is managed by establishing and monitoring limits as to the degree of risk that may be undertaken as part of our overall market risk monitoring process. Credit risk occurs when a counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. Credit risk is managed by monitoring the size and maturity structure of the derivative portfolio, and applying uniform credit standards to all activities with credit risk.
In accordance with ASC 815,
Derivatives and Hedging
, all derivative instruments are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction.
Fair-value hedges
– For transactions in which we are hedging changes in fair value of an asset, liability, or a firm commitment, changes in the fair value of the derivative instrument are generally offset in the income statement by changes in the hedged item’s fair value.
Cash-flow hedges
– For transactions in which we are hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument are reported in other comprehensive income. The gains and losses on the derivative instrument, which are reported in comprehensive income, are reclassified to earnings in the periods in which earnings are impacted by the variability of cash flows of the hedged item.
The ineffective portion of all hedges is recognized in current period earnings.
Other derivative
instruments – For risk management purposes that do not meet the hedge accounting criteria and, therefore, do not qualify for hedge accounting. These derivative instruments are accounted for at fair value with changes in fair value recorded in the income statement.
We have entered into two forward-starting, pay-fixed/receive LIBOR interest rate swaps. $40 million notional with an effective date of July 18, 2016, was designated as a cash flow hedge of $40 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 2.98% for a 3 year period. $30 million notional with an effective date of April 18, 2016, was designated as a cash flow hedge of $30 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 2.89% for a 4.5 year period.
A summary of our derivative financial instruments as of December 31, 2013 follows:
|
December 31, 2013
|
|
|
|
Derivative
|
|
Net Ineffective
|
|
Notional
|
|
Fair Value
|
|
Hedge Gains
|
Dollars in thousands
|
Amount
|
|
Asset
|
|
Liability
|
|
(Losses)
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
Pay-fixed/receive-variable interest rate swaps
|
|
|
|
|
|
|
Long term borrowings
|
$
|
70,000
|
|
$
|
803
|
|
$
|
-
|
|
$
|
-
|
|
$
|
70,000
|
|
$
|
803
|
|
$
|
-
|
|
$
|
-
|
NOTE 20. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Our investment in our wholly-owned subsidiaries is presented on the equity method of accounting. Information relative to our balance sheets at December 31, 2013 and 2012, and the related statements of income and cash flows for the years ended December 31, 2013, 2012 and 2011, are presented as follows:
Balance Sheets
|
|
|
|
|
December 31,
|
Dollars in thousands
|
2013
|
|
2012
|
Assets
|
|
|
|
Cash
|
$
|
5,278
|
|
$
|
5,495
|
Investment in subsidiaries, eliminated in consolidation
|
|
151,289
|
|
|
148,951
|
Securities available for sale
|
|
181
|
|
|
422
|
Premises and equipment
|
|
82
|
|
|
-
|
Accrued interest receivable
|
|
2
|
|
|
3
|
Cash surrender value of life insurance policies
|
|
48
|
|
|
44
|
Other assets
|
|
1,657
|
|
|
1,502
|
Total assets
|
$
|
158,537
|
|
$
|
156,417
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
Short-term borrowings
|
$
|
-
|
|
$
|
-
|
Long-term borrowings
|
|
8,916
|
|
|
8,575
|
Subordinated debentures
|
|
16,800
|
|
|
16,800
|
Subordinated debentures owed to unconsolidated subsidiary trusts
|
|
19,589
|
|
|
19,589
|
Other liabilities
|
|
2,160
|
|
|
2,898
|
Total liabilities
|
|
47,465
|
|
|
47,862
|
Preferred stock and related surplus, authorized 250,000 shares:
|
|
|
|
|
|
Series 2009, 8% Non-cumulative convertible preferred stock,
|
|
|
|
|
|
par value $1.00; issued 3,710 shares
|
|
3,519
|
|
|
3,519
|
Series 2011, 8% Non-cumulative convertible preferred stock,
|
|
|
|
|
|
par value $1.00; issued 2013 - 11,938 shares; 2012 - 12,000 shares
|
|
5,776
|
|
|
5,807
|
Common stock and related surplus, $2.50 par value, authorized
|
|
|
|
|
|
20,000,000 shares; issued 2013 - 7,451,022 shares; 2012 - 7,425,472 shares
|
|
24,664
|
|
|
24,520
|
Retained earnings
|
|
77,134
|
|
|
69,841
|
Accumulated other comprehensive income
|
|
(21
|
)
|
|
4,868
|
Total shareholders' equity
|
|
111,072
|
|
|
108,555
|
Total liabilities and shareholders' equity
|
$
|
158,537
|
|
$
|
156,417
|
Statements of Income
|
|
|
|
|
|
|
For the Year Ended December 31,
|
Dollars in thousands
|
2013
|
|
2012
|
|
2011
|
Income
|
|
|
|
|
|
Dividends from subsidiaries
|
$
|
2,500
|
|
$
|
500
|
|
$
|
500
|
Other dividends and interest income
|
|
26
|
|
|
41
|
|
|
19
|
Realized securities gains (losses)
|
|
-
|
|
|
(18
|
)
|
|
1,112
|
Management and service fees from subsidiaries
|
|
1,087
|
|
|
1,044
|
|
|
1,044
|
Total income
|
|
3,613
|
|
|
1,567
|
|
|
2,675
|
Expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
1,948
|
|
|
1,821
|
|
|
1,833
|
Operating expenses
|
|
1,717
|
|
|
1,661
|
|
|
1,641
|
Total expenses
|
|
3,665
|
|
|
3,482
|
|
|
3,474
|
Income (loss) before income taxes and equity in
|
|
|
|
|
|
|
|
|
undistributed income of subsidiaries
|
|
(52
|
)
|
|
(1,915
|
)
|
|
(799)
|
Income tax (benefit)
|
|
(894
|
)
|
|
(833
|
)
|
|
(426)
|
Income (loss) before equity in undistributed income of subsidiaries
|
|
842
|
|
|
(1,082
|
)
|
|
(373)
|
Equity in (distributed) undistributed income of subsidiaries
|
|
7,226
|
|
|
6,795
|
|
|
4,447
|
Net income
|
|
8,068
|
|
|
5,713
|
|
|
4,074
|
Dividends on preferred shares
|
|
775
|
|
|
777
|
|
|
371
|
Net income applicable to common shares
|
$
|
7,293
|
|
$
|
4,936
|
|
$
|
3,703
|
Statements of Cash Flows
|
|
|
|
|
|
|
For the Year Ended December 31,
|
Dollars in thousands
|
2013
|
|
2012
|
|
2011
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net income (loss)
|
$
|
8,068
|
|
$
|
5,713
|
|
$
|
4,074
|
Adjustments to reconcile net earnings to
|
|
|
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Equity in (undistributed) distributed net income of
|
|
|
|
|
|
|
|
|
subsidiaries
|
|
(7,226
|
)
|
|
(6,795
|
)
|
|
(4,447)
|
Deferred tax (benefit)
|
|
(107
|
)
|
|
(61
|
)
|
|
(11)
|
Depreciation
|
|
2
|
|
|
12
|
|
|
21
|
Other-than-temporary impairment of securities
|
|
-
|
|
|
-
|
|
|
-
|
Realized securities (gains) losses
|
|
-
|
|
|
18
|
|
|
(1,112)
|
Tax benefit of exercise of stock options
|
|
16
|
|
|
-
|
|
|
-
|
Stock compensation expense
|
|
1
|
|
|
2
|
|
|
10
|
(Increase) decrease in cash surrender value of bank owned life insurance
|
|
(5
|
)
|
|
(1
|
)
|
|
5
|
(Increase) decrease in other assets
|
|
(1
|
)
|
|
(11
|
)
|
|
44
|
Increase (decrease) in other liabilities
|
|
(737
|
)
|
|
599
|
|
|
439
|
Net cash provided by (used in) operating activities
|
|
11
|
|
|
(524
|
)
|
|
(977)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds sales of available for sale securities
|
|
-
|
|
|
648
|
|
|
1,130
|
Principal payments received on available for sale securities
|
|
440
|
|
|
662
|
|
|
-
|
Purchase of available for sale securities
|
|
(199
|
)
|
|
(1,672
|
)
|
|
-
|
Purchases of premises and equipment
|
|
(84
|
)
|
|
-
|
|
|
-
|
Net cash provided by (used in) investing activities
|
|
157
|
|
|
(362
|
)
|
|
1,130
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock
|
|
(776
|
)
|
|
(731
|
)
|
|
(297)
|
Exercise of stock options
|
|
96
|
|
|
-
|
|
|
-
|
Net proceeds from long-term borrowings
|
|
3,454
|
|
|
-
|
|
|
-
|
Repayment of long-term borrowings
|
|
(3,159
|
)
|
|
(1,354
|
)
|
|
(1,805)
|
Net proceeds from issuance of preferred stock
|
|
-
|
|
|
-
|
|
|
5,807
|
Net cash provided by (used in) financing activities
|
|
(385
|
)
|
|
(2,085
|
)
|
|
3,705
|
Increase (decrease) in cash
|
|
(217
|
)
|
|
(2,971
|
)
|
|
3,858
|
Cash:
|
|
|
|
|
|
|
|
|
Beginning
|
|
5,495
|
|
|
8,466
|
|
|
4,608
|
Ending
|
$
|
5,278
|
|
$
|
5,495
|
|
$
|
8,466
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
Interest
|
$
|
1,942
|
|
$
|
1,824
|
|
$
|
1,832
|
NOTE 21. QUARTERLY FINANCIAL DATA (Unaudited
)
A summary of our unaudited selected quarterly financial data is as follows:
|
2013
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Dollars in thousands, except per share amounts
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
Interest income
|
$
|
14,568
|
|
$
|
14,308
|
|
$
|
14,045
|
|
$
|
14,359
|
Net interest income
|
|
9,758
|
|
|
9,504
|
|
|
9,538
|
|
|
10,003
|
Net income (loss)
|
|
1,792
|
|
|
1,216
|
|
|
2,272
|
|
|
2,788
|
Net income (loss) applicable to common shares
|
|
1,598
|
|
|
1,023
|
|
|
2,078
|
|
|
2,594
|
Basic earnings per share
|
$
|
0.22
|
|
$
|
0.14
|
|
$
|
0.28
|
|
$
|
0.35
|
Diluted earnings per share
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.24
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Dollars in thousands, except per share amounts
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
Interest income
|
$
|
16,797
|
|
$
|
16,278
|
|
$
|
15,589
|
|
$
|
15,220
|
Net interest income
|
|
10,018
|
|
|
9,971
|
|
|
9,935
|
|
|
9,896
|
Net income (loss)
|
|
1,698
|
|
|
913
|
|
|
997
|
|
|
2,105
|
Net income (loss) applicable to common shares
|
|
1,504
|
|
|
719
|
|
|
803
|
|
|
1,910
|
Basic earnings per share
|
$
|
0.20
|
|
$
|
0.10
|
|
$
|
0.11
|
|
$
|
0.26
|
Diluted earnings per share
|
$
|
0.18
|
|
$
|
0.09
|
|
$
|
0.10
|
|
$
|
0.22
|