FHLB Advances, Other Borrowings and Junior Subordinated Notes

The composition of borrowed funds at December 31, 2013 and 2012 was as follows. Weighted average balances represent year-to-date averages.



	December 31, 2013						December 31, 2012
	Balance		Weighted average balance		Weighted average rate		Balance		Weighted average balance		Weighted average rate
	(Dollars in Thousands)
Federal funds purchased	$	—	$	260	0.74	%	$	—	$	237	0.82	%
FHLB advances	—		6,471		0.19		469		2,034		1.59
Line of credit	10		10		3.41		10		1,666		4.07
Subordinated notes payable	11,926		11,926		6.92		11,926		37,481		7.02
Junior subordinated notes	10,315		10,315		10.78		10,315		10,315		10.81
	$	22,251	$	28,982	6.78		$	22,720	$	51,733	7.46

Short-term borrowings	$	10					$	479
Long-term borrowings	22,241						22,241
	$	22,251					$	22,720

The Corporation’s FHLB advances fully matured in February 2013. At December 31, 2013 and 2012, there were no securities sold under agreements to repurchase. There were no outstanding federal funds purchased at any month-end during fiscal years December 31, 2013 and 2012.

The Corporation has a $65.8 million FHLB line of credit available for advances and open line borrowings which is collateralized by mortgage-related securities, unencumbered first mortgage loans and secured small business loans as noted below. At December 31, 2013, $65.8 million of this line remained unused. There were no advances outstanding on the Corporation’s open line at December 31, 2013 and 2012. There were no Term FHLB advances outstanding at December 31, 2013. At December 31, 2012, Term FHLB advances totaled $469,000. The advances bore fixed interest rates which ranged from 5.91% to 6.06% at December 31, 2012.

The Corporation is required to maintain, as collateral, mortgage-related securities and unencumbered first mortgage loans and secured small business loans in its portfolio aggregating at least the amount of outstanding advances from the FHLB. Loans totaling approximately $37.1 million and $35.4 million and collateralized mortgage obligations totaling approximately $39.5 million and $18.9 million were pledged as collateral for FHLB advances and unused available credit at December 31, 2013 and 2012, respectively.

The Corporation has a senior line of credit with a third-party financial institution of $10.5 million. As of December 31, 2013, the line of credit carried an interest rate of LIBOR + 2.75% with a floor of 3.25% and had certain performance debt covenants of which the Corporation was in compliance. The Corporation pays an unused line fee on its senior line of credit. For the years ended December 31, 2013 and 2012, the Corporation incurred $13,000 and $11,000 of additional interest expense due to this fee. On February 19, 2014, the credit line was renewed for one additional year with pricing terms of LIBOR + 2.75% with an interest rate floor of 3.25% and a maturity date of February 19, 2015.

The Corporation has subordinated notes payable. At December 31, 2013 and 2012, the amount of subordinated notes payable outstanding was $11.9 million. The subordinated notes payable qualify for Tier 2 capital. At December 31, 2013, $5.7 million of the subordinated notes bore an interest rate of LIBOR + 4.75% with an interest rate floor of 6.00% and $6.2 million bore a fixed interest rate of 7.50%. There are no debt covenants on the subordinated notes payable. $5.7 million of the subordinated notes outstanding as of December 31, 2013 were held by a third party financial institution and mature on May 15, 2021. The remaining $6.2 million of the subordinated notes consists of notes which the Corporation offered and sold to certain accredited investors in 2012. The notes were structured to qualify as Tier 2 capital, mature on January 15, 2022 and bear a fixed interest rate of 7.50% per year for their entire term. The Corporation may, at its option, redeem the notes, in whole or part, at any time after the fifth anniversary of issuance. The Corporation used the net proceeds from the sale of the notes to repay a portion of its then-existing $39.0 million of other subordinated notes. In December 2012, the Corporation successfully raised approximately $29.1 million through the issuance of 1,265,000 shares of common stock at a price of $23.00 per share. The net proceeds of the offering, approximately $27.1 million, were immediately used to further repay a portion of its $39.0 million of subordinated notes outstanding at that time. On January 17, 2014 the Corporation repaid an additional $4.0 million of the third party financial institution subordinated notes. As of the filing of the 10-K, the outstanding balance of the third party financial institution debt was $1.7 million and total subordinated debt was $7.9 million.

In September 2008, Trust II completed the sale of $10.0 million of 10.50% fixed rate trust preferred securities (“Preferred Securities”). Trust II also issued common securities of $315,000. Trust II used the proceeds from the offering to purchase $10.3 million of 10.50% Junior Subordinated Notes (“Notes”) of the Corporation. The Preferred Securities are mandatorily redeemable upon the maturity of the Notes on September 26, 2038. The Preferred Securities qualify under the risk-based capital guidelines as Tier 1 capital for regulatory purposes. Per the provisions of the Dodd-Frank Act, bank holding companies with total assets of less than $15 billion are not required to phase out trust preferred securities as an element of Tier 1 capital as other, larger institutions must. The Corporation used the proceeds from the sale of the Notes for general corporate purposes including providing additional capital to its subsidiaries. Debt issuance costs of approximately $428,000 were capitalized in 2008 and are amortizing over the life of the Notes as an adjustment to interest expense. As of December 31, 2013, $353,000 of debt issuance costs remain reflected in other assets on the consolidated balance sheets.

The Corporation has the right to redeem the Notes at each interest payment date on or after September 26, 2013. The Corporation also has the right to redeem the Notes, in whole but not in part, after the occurrence of a special event. Special events are limited to: (1) a change in capital treatment resulting in the inability of the Corporation to include the Notes in Tier 1 capital, (2) a change in laws or regulations that could require Trust II to register as an investment company under The Investment Company Act of 1940, as amended; and (3) a change in laws or regulations that would require Trust II to pay income tax with respect to interest received on the Notes or, prohibit the Corporation from deducting the interest payable by the Corporation on the Notes or result in greater than a de minimis amount of taxes for Trust II.

Trust II, a wholly owned subsidiary of the Corporation, was not consolidated into the financial statements of the Corporation. Therefore, the Corporation presents in its Consolidated Financial Statements junior subordinated notes as a liability and its investment in Trust II as a component of other assets.