FORM 10-Q
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period June 30, 2013

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number 0-14492

 

 

FARMERS & MERCHANTS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

OHIO   34-1469491

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

307 North Defiance Street, Archbold, Ohio   43502
(Address of principal executive offices)   (Zip Code)

(419) 446-2501

Registrant’s telephone number, including area code

 

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

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

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares of each of the issuers’ classes of common stock, as of the latest practicable date:

 

Common Stock, No Par Value

 

4,679,938

Class   Outstanding as of July 31, 2013

 

 

 


Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10Q

FARMERS & MERCHANTS BANCORP, INC.

INDEX

 

Form 10-Q Items

       Page  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Condensed Consolidated Balance Sheets - June 30, 2013 and December 31, 2012

     3   
 

Condensed Consolidated Statement of Income & Comprehensive Income Three Months and Six Months Ended June 30, 2013 and June 30, 2012

     4   
 

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2013 and June 30, 2012

     5   
 

Notes to Condensed Financial Statements

     6-26   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27-44   

Item 3.

 

Qualitative and Quantitative Disclosures About Market Risk

     44   

Item 4.

 

Controls and Procedures

     45   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     46   

Item 1A.

 

Risk Factors

     46   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     46   

Item 3.

 

Defaults Upon Senior Securities

     46   

Item 4.

 

Mine Safety Disclosures

     46   

Item 5.

 

Other Information

     46   

Item 6.

 

Exhibits

     46   

Signatures

       47   

Exhibit 31.

 

Certifications Under Section 302

  

Exhibit 32.

 

Certifications Under Section 906

  

101.INS

 

XBRL Instance Document (1)

  

101.SCH

 

XBRL Taxonomy Extension Schema Document (1)

  

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (1)

  

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (1)

  

101.LAB

 

XBRL Taxonomy Extension Laabel Linkbase Document (1)

  

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (1)

  

 

(1) Pursuant to Rule 406T of Regulation S-T, the interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

2


Table of Contents
ITEM 1 FINANCIAL STATEMENTS

FARMERS & MERCHANTS BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)    (in thousands of dollars)

Farmers & Merchants Bancorp, Inc. and Subsidiary

Condensed Consolidated Balance Sheets        

(in thousands of dollars)                    

 

     June 30, 2013     December 31, 2012  

Assets

    

Cash and due from banks

   $ 15,054      $ 25,620   

Interest bearing deposits with banks

     6,463        11,941   

Federal Funds Sold

     946        6,531   
  

 

 

   

 

 

 

Total cash and cash equivalents

     22,463        44,092   

Securities - available for sale (Note 2)

     354,474        355,905   

Other Securities, at cost

     4,216        4,365   

Loans, net (Note 4)

     495,777        496,178   

Bank premises and equipment

     18,287        17,599   

Goodwill

     4,074        4,074   

Mortgage Servicing Rights

     2,047        2,063   

Other Real Estate Owned

     1,754        2,310   

Accrued interest and other assets

     19,241        20,074   
  

 

 

   

 

 

 

Total Assets

   $ 922,333      $ 946,660   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities

    

Deposits

    

Noninterest-bearing

   $ 95,442      $ 103,966   

Interest-bearing

    

NOW accounts

     201,843        196,971   

Savings

     195,888        192,808   

Time

     254,439        269,507   
  

 

 

   

 

 

 

Total deposits

     747,612        763,252   

Federal funds purchased and securities sold under agreement to repurchase

     54,728        51,312   

FHLB Advances

     7,100        11,600   

Dividend payable

     930        931   

Accrued expenses and other liabilities

     4,673        9,326   
  

 

 

   

 

 

 

Total liabilities

   $ 815,043      $ 836,421   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Common stock - No par value - authorized 6,500,000 shares; issued & outstanding 5,200,000 shares

     12,677        12,677   

Treasury Stock - 515,902 shares 2013, 515,942 shares 2012

     (10,677     (10,588

Unearned Stock Awards - 30,210 shares 2013, 30,670 shares 2012

     (572     (584

Retained earnings

     105,434        102,641   

Accumulated other comprehensive income

     428        6,093   
  

 

 

   

 

 

 

Total stockholders’ equity

     107,290        110,239   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 922,333      $ 946,660   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements.

Note: The December 31, 2012 Balance Sheet has been derived from the audited financial statements of that date.

 

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Table of Contents

FARMERS & MERCHANTS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF INCOME & COMPREHENSIVE INCOME

(Unaudited)    (in thousands of dollars, except per share data)

Farmers & Merchants Bancorp, Inc. and Subsidiary

Condensed Consolidated Statement of Income & Comprehensive Income

(in thousands of dollars, except per share data)

 

     Three Months Ended     Six Months Ended  
     June 30, 2013     June 30, 2012     June 30, 2013     June 30, 2012  

Interest Income

        

Loans, including fees

   $ 6,089      $ 6,804      $ 12,167      $ 13,601   

Debt securities:

        

U.S. Treasury securities

     64        92        125        173   

Securities of U.S. Government Agencies

     1,016        1,055        2,008        2,080   

Municipalities

     541        518        1,049        1,028   

Dividends

     45        46        94        95   

Federal funds sold

     4        4        11        11   

Other

     6        6        13        13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     7,765        8,525        15,467        17,001   

Interest Expense

        

Deposits

     1,079        1,470        2,206        2,909   

Federal funds purchased and securities sold under agreements to repurchase

     62        60        122        121   

Borrowed funds

     43        123        89        247   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,184        1,653        2,417        3,277   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income - Before provision for loan losses

     6,581        6,872        13,050        13,724   

Provision for Loan Losses (Note 4)

     112        78        279        206   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income After Provision For Loan Losses

     6,469        6,794        12,771        13,518   

Noninterest Income

        

Customer service fees

     1,256        1,245        2,617        2,569   

Other service charges and fees

     967        860        1,829        1,618   

Net gain (loss) on sale of other assets owned

     (110     (210     (126     (277

Net gain on sale of loans

     322        622        802        783   

Net gain on sale of securities

     377        —          598        169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,812        2,517        5,720        4,862   

Noninterest Expenses

        

Salaries and Wages

     2,260        2,193        4,697        4,479   

Pension and other employee benefits

     610        744        1,454        1,572   

Occupancy expense (net)

     288        386        618        791   

Furniture and equipment

     358        349        707        701   

Data processing

     300        286        610        551   

Franchise taxes

     255        236        510        473   

FDIC Assessment

     141        89        260        219   

Mortgage servicing rights amortization

     120        178        257        372   

Other general and administrative

     1,438        1,292        2,783        2,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Noninterest Expense

     5,770        5,753        11,896        11,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Federal Income Taxes

     3,511        3,558        6,595        6,772   

Federal Income Taxes

     1,009        1,020        1,941        1,950   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 2,502      $ 2,538      $ 4,654      $ 4,822   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Net of Tax):

        

Unrealized gains (loss) on securities

   $ (4,916   $ 1,159      $ (5,666   $ 6,764   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ (2,414   $ 3,697      $ (1,012   $ 11,586   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Share

   $ 0.53      $ 0.54      $ 0.99      $ 1.02   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Shares Outstanding

     4,679,971        4,695,151        4,681,805        4,704,674   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends Declared

   $ 0.20      $ 0.19      $ 0.40      $ 0.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements

 

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Table of Contents

FARMERS & MERCHANTS BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)    (in thousands of dollars)

Farmers & Merchants Bancorp, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows

Six Months Ended

 

     Six Months Ended  
     June 30, 2013     June 30, 2012  

Cash Flows from Operating Activities

    

Net income

   $ 4,654      $ 4,822   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     609        577   

Accretion and amortization of securities

     1,220        1,587   

Amortization of servicing rights

     257        372   

Amortization of core deposit intangible

     156        156   

Stock Based Compensation

     93        86   

Provision for loan loss

     279        206   

Gain on sale of loans held for sale

     (802     (783

Originations of loans held for sale

     (43,331     (69,946

Proceeds from sale of loans held for sale

     46,881        71,746   

Loss on sale of other assets

     126        277   

Gain on sales of investment securities

     (598     (169

Change in operating assets and other liabilities, net

     (194     4,728   
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,350        13,659   

Cash Flows from Investing Activities

    

Activity in securities:

    

Maturities, prepayments and calls

     17,305        16,428   

Securities

     58,413        24,584   

Purchases

     (83,310     (71,740

Proceeds from sales of assets

     3        2   

Additions to premises and equipment

     (1,300     (477

Loan originations and principal collections, net

     (3,428     5,786   
  

 

 

   

 

 

 

Net cash used in investing activities

     (12,317     (25,417

Cash Flows from Financing Activities

    

Net increase (decrease) in deposits

     (15,640     10,769   

Net change in short-term debt

     3,416        2,034   

Repayments of long-term debt

     (4,500     (34

Purchase of Treasury Stock

     (77     (683

Cash dividends paid on common stock

     (1,861     (1,780
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (18,662     10,306   
  

 

 

   

 

 

 

Decrease in Cash and Cash Equivalents

     (21,629     (1,452

Cash and Cash Equivalents - Beginning of Year

     44,092        43,143   
  

 

 

   

 

 

 

Cash and Cash Equivalents - End of Period

   $ 22,463      $ 41,691   
  

 

 

   

 

 

 

RECONCILIATION OF CASH AND CASH EQUIVALENTS:

    

Cash and cash due from banks

   $ 15,054      $ 15,579   

Interest bearing deposits with banks

     6,463        14,049   

Federal funds sold

     946        12,063   
  

 

 

   

 

 

 

Cash at end of period

   $ 22,463      $ 41,691   
  

 

 

   

 

 

 

Supplemental Information

    

Cash paid during the year for:

    

Interest

   $ 2,528      $ 3,295   
  

 

 

   

 

 

 

Income taxes

   $ 1,770      $ 2,266   
  

 

 

   

 

 

 

Noncash investing activities:

    

Transfer of loans to other real estate owned

   $ 175      $ 182   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements

 

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

 

NOTE 1 BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10Q and Rule 10-01 of Regulation S-X; accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2013 are not necessarily indicative of the results that are expected for the year ended December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.

 

NOTE 2 FAIR VALUE OF INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of financial instruments are management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.

The following assumptions and methods were used in estimating the fair value for financial instruments.

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash, cash equivalents and federal funds sold approximate their fair values. Also included in this line item are the carrying amounts of interest-bearing deposits maturing within ninety days which approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Securities

Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market price, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Other Securities

The carrying value of Federal Home Loan Bank stock, listed as “other securities”, approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans

For those variable-rate loans that re-price frequently, and with no significant change in credit risk, fair values are based on carrying values. The fair values of the fixed rate and all other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Deposits - Interest Bearing, Non-interest Bearing and Time

The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair value for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

6


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

Short-Term Borrowings

The carrying value of short-term borrowings approximates fair values.

FHLB Advances

Fair values of FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types or borrowing arrangements.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate their fair values.

Dividends Payable

The carrying amounts of dividends payable approximate their fair values and are generally paid within forty days of declaration.

Off Balance Sheet Financial Instruments

Fair values for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter-parties’ credit standing.

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of June 30, 2013 and December 31, 2012 are reflected below.

 

     (In Thousands)  
     June 2013  
     Carrying
Amount
     Fair
Value
     Level 1      Level 2      Level 3  

Financial Assets:

              

Cash and Cash Equivalents

   $ 22,463       $ 22,463       $ 22,463       $ —         $ —     

Securities - available for sale

     354,474         354,474         25,479         316,571         12,424   

Other Securities

     4,216         4,216         —           —           4,216   

Loans, net

     495,777         504,731         —           —           504,731   

Interest receivable

     3,776         3,776         —           —           3,776   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 880,706       $ 889,660       $ 47,942       $ 316,571       $ 525,147   

Financial Liabilities:

              

Interest bearing Deposits

   $ 397,731       $ 399,483       $ —         $ —         $ 399,483   

Non-interest bearing Deposits

     95,442         96,348         —           96,348         —     

Time Deposits

     254,439         255,153         —           —           255,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Deposits

   $ 747,612       $ 750,984       $ —         $ 96,348       $ 654,636   

Short-term debt

     54,728         54,728         —           —           54,728   

Federal Home Loan Bank advances

     7,100         8,489         —           —           8,489   

Interest payable

     270         270         —           —           270   

Dividends payable

     930         930         —           930         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 810,640       $ 815,401       $ —         $ 97,278       $ 718,123   

 

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Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

     (In Thousands)  
     December 2012  
     Carrying
Amount
     Fair
Value
     Level 1      Level 2      Level 3  

Financial Assets:

              

Cash and Cash Equivalents

   $ 44,092       $ 44,092       $ 44,092       $ —         $ —     

Securities - available for sale

     355,905         355,905         10,568         328,929         16,408   

Other Securities

     4,365         4,365         —           —           4,365   

Loans, net

     496,178         502,125         —           —           502,125   

Interest receivable

     3,603         3,603         —           —           3,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 904,143       $ 910,090       $ 54,660       $ 328,929       $ 526,501   

Financial Liabilities:

              

Interest bearing Deposits

   $ 389,779       $ 390,066       $ —         $ —         $ 390,066   

Non-interest bearing Deposits

     103,966         104,529         —           104,529         —     

Time Deposits

     269,507         272,591         —           —           272,591   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Deposits

   $ 763,252       $ 767,186       $ —         $ 104,529       $ 662,657   

Short-term debt

     51,312         51,312         —           —           51,312   

Federal Home Loan Bank advances

     11,600         11,012         —           —           11,012   

Interest payable

     288         288         —           —           288   

Dividends payable

     931         931         —           931         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 827,383       $ 830,729       $ —         $ 105,460       $ 725,269   

Fair Value Measurements

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities in active markets that the Company has the ability to access.

Available-for-sale securities- When quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1. The quoted prices are not adjusted.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the market place.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. Local municipals have been purchased that the Bank evaluates based on the credit strength of the underlying project such as the hospital or retirement home. The fair value is determined by valuing similar credit payment streams at similar rates.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

 

8


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

Fair Value Measurement (Continued)

 

The following summarizes financial assets measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis  

(In Thousands)

June 30, 2013

   Quoted Prices in Active
Active Markets
for Identical
Assets (Level 1)
     Significant
Observable
Inputs

(Level 2)
     Significant
Observable
Inputs

(Level 3)
 

Assets-(Securities Available for Sale)

        

U.S. Treasury

   $ 25,479       $ —         $ —     

U.S. Government agency

     —           210,915         —     

Mortgage-backed securities

     —           45,338         —     

State and local governments

     —           60,318         12,424   
  

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 25,479       $ 316,571       $ 12,424   
  

 

 

    

 

 

    

 

 

 

 

(In Thousands)

December 31, 2012

   Quoted Prices in Active
Active Markets
for Identical
Assets (Level 1)
     Significant
Observable
Inputs
(Level 2)
     Significant
Observable
Inputs
(Level 3)
 

Assets-(Securities Available for Sale)

        

U.S. Treasury

   $ 10,568       $ —         $ —     

U.S. Government agency

        220,200         —     

Mortgage-backed securities

        53,006         —     

State and local governments

     —           55,723         16,408   
  

 

 

    

 

 

    

 

 

 

Total Securities Available for Sale

   $ 10,568       $ 328,929       $ 16,408   
  

 

 

    

 

 

    

 

 

 

Most of the Company’s available for sale securities, including any bonds issued by local municipalities, have CUSIP numbers or have similar characteristics of those in the municipal markets, making them marketable and comparable as Level 2.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At June 30, 2013 and December 31, 2012, such assets consist primarily of impaired loans. Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals.)

At June 30, 2013 and December 31, 2012, impaired loans categorized as Level 3 were $4.5 and $4.6 million, respectively. The specific allocation for impaired loans was $771 and $865 thousand as of June 30, 2013 and December 31, 2012, respectively, which are accounted for in the allowance for loan losses (see Note 4).

Other real estate is reported at either the lower of the fair value of the real estate minus the estimated costs to sell the asset or the cost of the asset. The determination of fair value of the real estate relies primarily on appraisals from third parties. If the fair value of the real estate, minus the estimated costs to sell the asset, is less than the asset’s cost, the deficiency is recognized as a valuation allowance against the asset through a charge to expense. The valuation allowance is therefore increased or decreased, through charges or credits to expense, for changes in the asset’s fair value or estimated selling costs.

 

9


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

The following table presents impaired loans and other real estate owned as recorded at fair value on June 30, 2013 and December 31, 2012:

 

            Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2013  
     Quoted Prices in Active             Change in  
($ in Thousands)    Balance at
    June 30, 2013    
     Markets for
Identical
sets (Level 1)
     Significant
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
     fair value for
Six-month period
ended June 30, 2013
 

Impaired loans

   $ 4,521       $ —         $ —         $ 4,521       $ (3

Other real estate owned residential mortgages

   $ 609       $ —         $ —         $ 609       $ (16

Other real estate owned commercial

   $ 1,145       $ —         $ —         $ 1,145       $ (64
              

 

 

 
               $ (83
              

 

 

 

 

            Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2012  
     Quoted Prices in Active             Change in  
($ in Thousands)    Balance at
December 31, 2012
     Markets for
Identical
sets (Level 1)
     Significant
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
     fair value for
twelve-month period
ended Dec. 31, 2012
 

Impaired loans

   $ 4,591       $ —         $ —         $ 4,591       $ (76

Other real estate owned residential mortgages

   $ 783       $ —         $ —         $ 783       $ (62

Other real estate owned commercial

   $ 1,526       $ —         $ —         $ 1,526       $ (214
              

 

 

 
               $ (352
              

 

 

 

The Company also has other assets, which under certain conditions, are subject to measurement at fair value. These assets include loans held for sale, bank owned life insurance, and mortgage servicing rights. The Company estimated the fair values of these assets utilizing Level 3 inputs, including, the discounted present value of expected future cash flows. At June 30, 2013 and December 31, 2012, the Company estimates that there is no impairment of these assets, with the exception of mortgage servicing rights. Mortgage servicing rights recognized impairment in one stratum with a charge of $16 thousand in 2012 to expense. The impairment however was eliminated, as of June 30, 2013. Therefore, no impairment charge to other expense was required to adjust these assets to their estimated fair values.

 

NOTE 3 ASSET PURCHASES

In connection with a December 31, 2007 Knisely acquisition, the Company recognized a core deposit intangible asset of $1.1 million, which is being amortized on a straight line basis over 7 years, which represents the estimated remaining economic useful life of the deposits.

The Company also recognized core deposit intangible assets of $1.09 million with the purchase of the Hicksville office on July 9, 2010. These are being amortized over an estimated remaining economic useful life of the deposits of 7 years on a straight line basis.

The amortization expense for the year ended December 31, 2012 was $312 thousand. Of the $312 thousand to be expensed in 2013, $156 thousand has been expensed as of June 30, 2013.

 

10


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

 

  NOTE 3 ASSET PURCHASES (Continued)

 

            (In Thousands)  
     Knisley      Hicksville      Total  

2013

   $ 157       $ 155       $ 312   

2014

     157         155         312   

2015

     —           155         155   

2016

     —           155         155   

2017

     —           79         79   

Thereafter

     —           —           —     
  

 

 

    

 

 

    

 

 

 
   $ 314       $ 699       $ 1,013   
  

 

 

    

 

 

    

 

 

 

 

NOTE 4 LOANS

The Company had $565.7 thousand in loans held for sale as of June 30, 2013 as compared to $2.5 million in loans held for sale on December 31, 2012. Due to lack of materiality, these loans are included in the Consumer Real Estate loans below.

Loan balances as of June 30, 2013 and December 31, 2012:

 

     (In Thousands)  

Loans:

   June 30, 2013     December 31, 2012  

Commercial real estate

   $ 215,246      $ 199,999   

Agricultural real estate

     35,746        40,143   

Consumer real estate

     77,948        80,287   

Commercial and industrial

     93,978        101,624   

Agricultural

     55,331        57,770   

Consumer

     19,881        20,413   

Industrial Development Bonds

     3,102        1,299   
  

 

 

   

 

 

 
     501,232        501,535   
  

 

 

   

 

 

 

Less: Net deferred loan fees and costs

     (158     (133
  

 

 

   

 

 

 
     501,074        501,402   

Less: Allowance for loan losses

     (5,297     (5,224
  

 

 

   

 

 

 

Loans - Net

   $ 495,777      $ 496,178   
  

 

 

   

 

 

 

The following is a maturity schedule by major category of loans as of June 30, 2013:

 

     Maturities (In Thousands)  
     Within
One Year
     After One
Year Within
Five Years
     After
Five Years
 

Commercial Real Estate

   $ 36,770       $ 103,283       $ 75,193   

Agricultural Real Estate

     2,609         9,126         24,011   

Consumer Real Estate

     11,501         13,082         53,365   

Commercial/Industrial

     61,597         27,005         5,376   

Agricultural

     32,792         19,349         3,190   

Consumer

     5,210         12,573         1,940   

Industrial Development Bonds

     2,220         490         392   

 

11


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of June 30, 2013. Variable rate loans whose current rates are equal to their floor or ceiling are classified as fixed in this table.

 

     (In Thousands)  
     Fixed
Rate
     Variable
Rate
 

Commercial Real Estate

   $ 127,488       $ 87,758   

Agricultural Real Estate

   $ 25,836       $ 9,910   

Consumer Real Estate

   $ 64,041       $ 13,907   

Commercial/Industrial

   $ 73,134       $ 20,844   

Agricultural

   $ 50,697       $ 4,634   

Consumer

   $ 16,415       $ 3,308   

Industrial Development Bonds

   $ 3,102       $ —     

As of June 30, 2013 and December 31, 2012 one to four family residential mortgage loans amounting to $26.8 and $26.8 million, respectively, have been pledged as security for loans the Bank has received from the Federal Home Loan Bank.

The percentage of delinquent loans has trended downward since the beginning of January 2010 from a high of 2.85% of total loans to a low of .64% as of March 31, 2012. As of June 30, 2013, past dues were 1.07%. These percentages do not include nonaccrual loans which are not past due (nonaccruals are not considered past due if current). This level of delinquency is due in part to an adherence to sound underwriting practices over the course of time, an improvement in the financial status of companies to which the Bank extends credit, continued financial stability in the agricultural loan portfolio, and the writing down of uncollectable credits in a timely manner.

Industrial Development Bonds are included in the commercial and industrial category for the remainder of the tables in this Note 4.

 

12


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

The following table represents the contractual aging of the recorded investment in past due loans by portfolio segment of loans as of June 30, 2013 and December 31, 2012, net of deferred fees:

 

June 30, 2013    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total
Past Due
     Current      Total
Financing
Receivables
     Recorded
Investment
> 90 Days and
Accruing
 

Residential

   $ 453       $ 249       $ 319       $ 1,021       $ 76,927       $ 77,948       $ —     

Ag Real Estate

     104         —           88         192         35,554         35,746         —     

Ag

     —           —           —           —           55,331         55,331         —     

Commercial Real Estate

     501         —           1,035         1,536         213,710         215,246         —     

Commercial and Industrial

     65         —           2,552         2,617         94,463         97,080         —     

Consumer

     13         7         —           20         19,703         19,723         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,136       $ 256       $ 3,994       $ 5,386       $ 495,688       $ 501,074       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total
Past Due
     Current      Total
Financing
Receivables
     Recorded
Investment
> 90 Days and
Accruing
 

Residential

   $ 575       $ —         $ 648       $ 1,223       $ 79,064       $ 80,287       $ —     

Ag Real Estate

     —           —           —           —           40,143         40,143         —     

Ag

     11         —           —           11         57,759         57,770         —     

Commercial Real Estate

     —           —           877         877         199,122         199,999         —     

Commercial and Industrial

     78         —           2,567         2,645         100,278         102,923         —     

Consumer

     65         7         —           72         20,208         20,280         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $    729       $ 7       $ 4,092       $ 4,828       $ 496,574       $ 501,402       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

The following table presents the recorded investment in nonaccrual loans by class of loans as of June 30, 2013 and December 31, 2012:

 

     (In Thousands)  
     June 30
2013
     December 31
2012
 

Consumer Real Estate

   $ 551       $ 964   

Agricultural Real Estate

     88         —     

Agriculture

     —           —     

Commercial Real Estate

     1,035         877   

Commercial and Industrial

     2,935         2,987   

Consumer

     —           —     
  

 

 

    

 

 

 

Total

   $ 4,609       $ 4,828   
  

 

 

    

 

 

 

The Bank uses a nine tier risk rating system to grade its loans. The grade of a loan may change during the life of the loan.

The risk ratings are described as follows.

 

  1. Zero (0) Unclassified. Any loan which has not been assigned a classification.

 

  2. One (1) Excellent. Credit to premier customers having the highest credit rating based on an extremely strong financial condition, which compares favorably with industry standards (upper quartile of Risk Management Association ratios). Financial statements indicate a sound earnings and financial ratio trend for several years with satisfactory profit margins and excellent liquidity exhibited. Prime credits may also be borrowers with loans fully secured by highly liquid collateral such as traded stocks, bonds, certificates of deposit, savings account, etc. No credit or collateral exceptions exist and the loan adheres to the Bank’s loan policy in every respect. Financing alternatives would be readily available and would qualify for unsecured credit. This grade is summarized by high liquidity, minimum risk, strong ratios, and low handling costs.

 

  3. Two (2) Good. Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Loan supported by financial statements containing strong balance sheets, generally with a leverage position less than 1.50, and a history of profitability. Probability of serious financial deterioration is unlikely. Possessing a sound repayment source (and a secondary source), which would allow repayment in a reasonable period of time. Individual loans backed by liquid personal assets, established history and unquestionable character.

 

  4. Three (3) Satisfactory. Satisfactory loans of average or slightly above average risk – having some deficiency or vulnerability to changing economic conditions, but still fully collectible. Projects should normally demonstrate acceptable debt service coverage. Generally, customers should have a leverage position less than 2.00. May be some weakness but with offsetting features of other support readily available. Loans that are meeting the terms of repayment.

Loans may be graded 3 when there is no recent information on which to base a current risk evaluation and the following conditions apply:

At inception, the loan was properly underwritten and did not possess an unwarranted level of credit risk:

 

  a. At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss;

 

  b. The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance;

 

  c. During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the business is in an industry which is known to be experiencing problems. If any of the credit weaknesses is observed, a lower risk grade is warranted.

 

  5.

Four (4) Satisfactory / Monitored. A “4” (Satisfactory/Monitored) risk grade may be established for a loan considered satisfactory but which is of average credit risk due to financial weakness or

 

14


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

  uncertainty. The loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in Satisfactory/Monitored classification is considered acceptable and within normal underwriting guidelines, so long as the loan is given management supervision.

 

  6. Five (5) Special Mention. Loans that possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential”, versus “defined”, impairments to the primary source of loan repayment and collateral.

 

  7. Six (6) Substandard. One or more of the following characteristics may be exhibited in loans classified substandard:

 

  a. Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, are uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.

 

  b. Loans are inadequately protected by the current net worth and paying capacity of the borrower.

 

  c. The primary source of repayment is weakened, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.

 

  d. Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

 

  e. Unusual courses of action are needed to maintain a high probability of repayment.

 

  f. The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments.

 

  g. The lender is forced into a subordinate position or unsecured collateral position due to flaws in documentation.

 

  h. Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.

 

  i. The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

 

  j. There is significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

 

  8. Seven (7) Doubtful. One or more of the following characteristics may be exhibited in loans classified Doubtful:

 

  a. Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.

 

  b. The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

 

  c. The possibility of loss is high, but, because of certain important pending factors which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established deferring the realization of the loss.

 

  9. Eight (8) Loss. Loans are considered uncollectable and of such little value that continuing to carry them as assets on the institution’s financial statements is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

15


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

The following table represents the risk category of loans by class based on the most recent analysis performed as of June 30, 2013 and December 31, 2012:

 

(in Thousands)    Agriculture
Real Estate
     Agriculture      Commercial
Real Estate
     Commercial
and Industrial
     Industrial
Development
Bonds
 

June 30, 2013

              

1-2

   $ 3,258       $ 5,014       $ 2,573       $ 605       $ —     

3

     12,953         21,695         53,936         23,894         2,758   

4

     18,625         28,588         147,286         63,047         344   

5

     786         34         5,283         2,245         —     

6

     36         —           6,168         1,517         —     

7

     88         —           —           2,670         —     

8

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,746       $ 55,331       $ 215,246       $ 93,978       $ 3,102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Agriculture
Real Estate
     Agriculture      Commercial
Real Estate
     Commercial
and Industrial
     Industrial
Development
Bonds
 

December 31, 2012

              

1-2

   $ 2,719       $ 5,022       $ 4,046       $ 750       $ 97   

3

     15,111         23,525         42,467         21,750         859   

4

     21,481         29,188         137,537         71,228         343   

5

     794         35         8,984         3,385         —     

6

     38         —           6,295         2,202         —     

7

     —           —           670         2,309         —     

8

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,143       $ 57,770       $ 199,999       $ 101,624       $ 1,299   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

For consumer residential real estate, and other, the Company also evaluates credit quality based on the aging status of the loan, which was previously stated, and by payment activity. The following tables present the recorded investment in those classes based on payment activity and assigned risk grading as of June 30, 2013 and December 31, 2012.

 

     (In Thousands)  
     Consumer
Real Estate
     Consumer
Real Estate
 
     June 30
2013
     December 31
2012
 

Grade

     

Pass

   $ 77,531       $ 79,766   

Special Mention (5)

     —           —     

Substandard (6)

     393         110   

Doubtful (7)

     24         411   
  

 

 

    

 

 

 

Total

   $ 77,948       $ 80,287   
  

 

 

    

 

 

 

 

     (In Thousands)  
     Consumer - Credit      Consumer - Other  
     June 30
2013
     December 31
2012
     June 30
2013
     December 31
2012
 

Performing

   $ 3,498       $ 3,470       $ 16,225       $ 16,775   

Nonperforming

     —           3         —           32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,498       $ 3,473       $ 16,225       $ 16,807   
  

 

 

    

 

 

    

 

 

    

 

 

 

Information about impaired loans as of June 30, 2013, December 31, 2012 and June 30, 2012 are as follows:

 

            (In Thousands)         
     June 30, 2013      December 31, 2012      June 30, 2012  

Impaired loans without a valuation allowance

   $ 1,703       $ 730       $ 806   

Impaired loans with a valuation allowance

     2,818         3,861         3,548   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 4,521       $ 4,591       $ 4,354   
  

 

 

    

 

 

    

 

 

 

Valuation allowance related to impaired loans

   $ 771       $ 865       $ 557   

Total non-accrual loans

   $ 4,609       $ 4,828       $ 4,893   

Total loans past-due ninety days or more and still accruing

   $ —         $ 1       $ —     

Three months ended average investment in impaired loans

   $ 4,363       $ 4,468       $ 2,772   

Six months ended average investment in impaired loans

   $ 4,342       $ 4,508       $ 2,363   

No additional funds are committed to be advanced in connection with impaired loans.

The Bank had approximately $2.9 million of its impaired loans classified as troubled debt restructured as of June 30, 2013, $627.3 thousand as of December 31, 2012 and $207 thousand as of June 30, 2012.

 

17


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

The following table represents three months and six months ended June 30, 2013.

 

Three Months

June 30, 2013

Troubled Debt Restructurings

   Number of
Contracts
Modified in the

Last 3 Months
     Modification
Outstanding
Recorded
Investment
     Modification
Outstanding

Recorded
Investment
    

Six Months

June 30, 2013

Troubled Debt Restructurings

   Number of
Contracts

Modified in  the
Last 3 Months
     Modification
Outstanding
Recorded
Investment
     Modification
Outstanding

Recorded
Investment
 

Commercial Real Estate

      $ —         $ —        

Commercial Real Estate

      $ —         $ —     

Ag Real Estate

      $ —         $ —        

Ag Real Estate

      $ —         $ —     

Commercial and Industrial

     3       $ 2,251       $ 2,251      

Commercial and Industrial

     4       $ 2,294       $ 2,332   

 

Troubled Debt Restructurings

That Subsequently Defaulted

   Number of
Contracts
Modified in the
Last 3 Months
   Recorded
Investment
    

Troubled Debt Restructurings

That Subsequently Defaulted

   Number of
Contracts
Modified in the

Last 3 Months
   Recorded
Investment
 

Commercial Real Estate

      $ —        

Commercial Real Estate

      $ —     

Ag Real Estate

      $ —        

Ag Real Estate

      $ —     

Commercial and Industrial

      $ —        

Commercial and Industrial

      $ —     

The following table represents three months and six months ended June 30, 2012.

 

Three Months

June 30, 2012

Troubled Debt Restructurings

   Number of
Contracts
Modified in the
Last 6 Months
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
    

Six Months

June 30, 2012

Troubled Debt Restructurings

   Number of
Contracts
Modified in the

Last 6 Months
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Commercial Real Estate

     1       $ 1,937       $ 1,937      

Commercial Real Estate

     1       $ 1,937       $ 1,937   

Ag Real Estate

      $ —         $ —        

Ag Real Estate

      $ —         $ —     

Commercial and Industrial

      $ —         $ —        

Commercial and Industrial

      $ —         $ —     

 

Troubled Debt Restructurings

That Subsequently Defaulted

   Number of
Contracts
Modified in the
Last 6 Months
   Recorded
Investment
    

Troubled Debt Restructurings

That Subsequently Defaulted

   Number of
Contracts
Modified in the

Last 6 Months
   Recorded
Investment
 

Commercial Real Estate

      $ —        

Commercial Real Estate

      $ —     

Ag Real Estate

      $ —        

Ag Real Estate

      $ —     

Commercial and Industrial

      $ —        

Commercial and Industrial

      $ —     

 

18


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

For the majority of the Bank’s impaired loans, the Bank will apply the observable market price methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine observable market price, collateral asset values securing an impaired loan are periodically evaluated. Maximum time for re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated appraisals are received, the Bank may discount the collateral value used.

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge-off in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial and agricultural credits are charged down at 120 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-off may be realized as further unsecured positions are recognized.

The following table presents loans individually evaluated for impairment by class of loans for three months ended June 30, 2013.

 

Three Months Ended June 30, 2013    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 
(in thousands)                                   

With no related allowance recorded:

              

Consumer real estate

   $ 359       $ 431       $ —         $ 202       $ —     

Agriculture real estate

     —           —           —           —           —     

Agriculture

     —           —           —           —           —     

Commercial real estate

     1,035         1,459         —           1,038         —     

Commercial and industrial

     309         309         —           309         —     

Consumer

     —           3         —           —           —     

With a specific allowance recorded:

              

Consumer real estate

     111         111         38         111         —     

Agriculture real estate

     88         88         15         111         —     

Agriculture

     —           —           —           —           —     

Commercial real estate

     —           —           —           15         —     

Commercial and industrial

     2,619         2,619         718         2,659         —     

Consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

              

Consumer real estate

   $ 470       $ 542       $ 38       $ 313       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agriculture real estate

   $ 88       $ 88       $ 15       $ 111       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agriculture

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate

   $ 1,035       $ 1,459       $ —         $ 1,053       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

   $ 2,928       $ 2,928       $ 718       $ 2,968       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ —         $ 3       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

Three Months Ended June 30, 2012

(in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded

Investment
     Interest
Income

Recognized
 

With no related allowance recorded:

              

Consumer real estate

   $ 340       $ 355       $ —         $ 213       $ —     

Agriculture real estate

     —           —           —           —           —     

Agriculture

     —           —           —           —           —     

Commercial real estate

     207         384         —           207         —     

Commercial and industrial

     364         364         —           122         —     

Consumer

     —           10         —           —           —     

With a specific allowance recorded:

              —        

Consumer real estate

     398         425         139         400         —     

Agriculture real estate

     —           —           —           —           —     

Agriculture

     —           —           —           —           —     

Commercial real estate

     600         847         —           664         —     

Commercial and industrial

     2,441         2,441         417         1,162         1   

Consumer

     4         4         1         4         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

              

Consumer real estate

   $ 738       $ 780       $ 139       $ 613       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agriculture real estate

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agriculture

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate

   $ 807       $ 1,231       $ —         $ 871       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and industrial

   $ 2,805       $ 2,805       $ 417       $ 1,284       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ 4       $ 14       $ 1       $ 4       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

The following table presents loans individually evaluated for impairment by class of loans for six months ended June 30, 2013.

 

Six Months Ended June 30, 2013    Recorded
Investment
     Unpaid
Principal

Balance
     Related
Allowance
     Average
Recorded

Investment
     Interest
Income

Recognized
 
(in thousands)                                   

With no related allowance recorded:

              

Consumer Real Estate

   $ 359       $ 431       $ —         $ 131       $ —     

Agriculture Real Estate

     —           —           —           —           —     

Agriculture

     —           —           —           —           —     

Commercial Real Estate

     1,035         1,459         —           622         —     

Commercial and Industrial

     309         309         —           297         —     

Consumer

     —           3         —           —           —     

With a specific allowance recorded:

              

Consumer Real Estate

     111         111         38         121         —     

Agriculture Real Estate

     88         88         15         55         —     

Agriculture

     —           —           —           —           —     

Commercial Real Estate

     —           —           —           332         —     

Commercial and Industrial

     2,619         2,619         718         2,701         —     

Consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

              

Consumer Real Estate

   $ 470       $ 542       $ 38       $ 252       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agriculture Real Estate

   $ 88       $ 88       $ 15       $ 55       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agriculture

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Real Estate

   $ 1,035       $ 1,459       $ —         $ 954       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and Industrial

   $ 2,928       $ 2,928       $ 718       $ 2,998       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ —         $ 3       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

Six Months Ended June 30, 2012    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded

Investment
     Interest
Income

Recognized
 
(in thousands)                                   

With no related allowance recorded:

              

Consumer Real Estate

   $ 340       $ 355       $ —         $ 185       $ —     

Agriculture Real Estate

     —           —           —           —           —     

Agriculture

     —           —           —           —           —     

Commercial Real Estate

     207         384         —           207         —     

Commercial and Industrial

     364         364         —           61         —     

Consumer

     —           10         —           —           —     

With a specific allowance recorded:

              

Consumer Real Estate

     398         425         139         395         5   

Agriculture Real Estate

     —           —           —           —           —     

Agriculture

     —           —           —           —           —     

Commercial Real Estate

     600         847         —           683         —     

Commercial and Industrial

     2,441         2,441         417         827         2   

Consumer

     4         4         1         4         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

              

Consumer Real Estate

   $ 738       $ 780       $ 139       $ 580       $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agriculture Real Estate

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agriculture

   $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Real Estate

   $ 807       $ 1,231       $ —         $ 890       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and Industrial

   $ 2,805       $ 2,805       $ 417       $ 888       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ 4       $ 14       $ 1       $ 4       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The ALLL has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense. The following tables summarize the activities in the allowance for credit losses.

 

     (In Thousands)  
     Six Months Ended
June 30, 2013
    Twelve Months Ended
December 31, 2012
 

Allowance for Loan Losses

    

Balance at beginning of year

   $ 5,224      $ 5,091   

Provision for loan loss

     279        738   

Loans charged off

     (362     (891

Recoveries

     156        286   
  

 

 

   

 

 

 

Allowance for Loan & Leases Losses

   $ 5,297      $ 5,224   
  

 

 

   

 

 

 

Allowance for Unfunded Loan Commitments & Letters of Credit

   $ 187      $ 162   
  

 

 

   

 

 

 

Total Allowance for Credit Losses

   $ 5,484      $ 5,386   
  

 

 

   

 

 

 

The Company segregates its Allowance for Loan and Lease Losses (ALLL) into two reserves: The ALLL and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these reserves constitute the total Allowance for Credit Losses (ACL).

The AULC is reported within other liabilities on the balance sheet while the ALLL is netted within the loans, net asset line. The ACL presented above represents the full amount of reserves available to absorb possible credit losses.

 

22


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

The following table breaks down the activity within ACL for each loan portfolio segment and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs.

Additional analysis related to the allowance for credit losses for three months ended June 30, 2013 is as follows:

 

    Consumer Real
Estate
    Agriculture
Real Estate
    Agriculture     Commercial
Real Estate
    Commercial
and Industrial
    Consumer     Unfunded Loan
Commitment &
Letters of Credit
    Unallocated     Total  
(in thousands)                                                      

Three Months Ended June 30, 2013

                 

ALLOWANCE FOR CREDIT LOSSES:

                 

Beginning balance

  $ 463      $ 105      $ 260      $ 1,566      $ 1,972      $ 256      $ 172      $ 722      $ 5,516   

Charge Offs

    (89     —          —          (44     —          (112     —          —        $ (245

Recoveries

    4        —          3        —          41        38        —          —        $ 86   

Provision

    (17     10        14        (62     125        84        —          (42   $ 112   

Other Non-interest expense related to unfunded

    —          —          —          —          —          —          15        —        $ 15   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 361      $ 115      $ 277      $ 1,460      $ 2,138      $ 266      $ 187      $ 680      $ 5,484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 38      $ 15      $ —        $ —        $ 718      $ —        $ —        $ —        $ 771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 323      $ 100      $ 277      $ 1,460      $ 1,420      $ 266      $ 187      $ 680      $ 4,713   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 2      $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 2   

FINANCING RECEIVABLES:

                  $ —     

Ending balance

  $ 77,948      $ 35,746      $ 55,331      $ 215,246      $ 97,080      $ 19,723      $ —        $ —        $ 501,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 470      $ 88      $ —        $ 1,035      $ 2,928      $ —        $ —        $ —        $ 4,521   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 77,478      $ 35,658      $ 55,331      $ 214,211      $ 94,152      $ 19,723      $ —        $ —        $ 496,553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 549      $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 549   

 

23


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

    Consumer Real
Estate
    Agriculture
Real Estate
    Agriculture     Commercial
Real Estate
    Commercial
and Industrial
    Consumer     Unfunded Loan
Commitment &
Letters of Credit
    Unallocated     Total  
(in thousands)                                                      

Three Months Ended June 30, 2012

                 

ALLOWANCE FOR CREDIT LOSSES:

                 

Beginning balance

  $ 433      $ 90      $ 272      $ 1,569      $ 1,859      $ 293      $ 140      $ 636      $ 5,292   

Charge Offs

    (53     —          —          (97     —          (121     —          —          (271

Recoveries

    25        —          3        1        4        45        —          —          78   

Provision

    55        2        —          249        (7     66        —          (288     77   

Other Non-interest expense related to unfunded

    —          —          —          —          —          —          1        —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 460      $ 92      $ 275      $ 1,722      $ 1,856      $ 283      $ 141      $ 348      $ 5,177   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 139      $ —        $ —        $ —        $ 417      $ 1      $ —        $ —        $ 557   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 321      $ 92      $ 275      $ 1,722      $ 1,439      $ 282      $ 141      $ 348      $ 4,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 1      $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 1   

FINANCING RECEIVABLES:

                 

Ending balance

  $ 81,252      $ 32,408      $ 54,808      $ 202,900      $ 105,423      $ 21,577      $ —        $ —        $ 498,368   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 738      $ —        $ —        $ 807      $ 2,805      $ 4      $ —        $ —        $ 4,354   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 80,514      $ 32,408      $ 54,808      $ 202,093      $ 102,618      $ 21,573      $ —        $ —        $ 494,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 547      $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 547   

 

24


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

Additional analysis related to the allowance for credit losses for six months ended June 30, 2013 is as follows:

 

    Consumer Real
Estate
    Agriculture
Real Estate
    Agriculture     Commercial
Real Estate
    Commercial
and Industrial
    Consumer     Unfunded Loan
Commitment &
Letters of Credit
    Unallocated     Total  
(in thousands)                                                      

Six Months Ended June 30, 2013

                 

ALLOWANCE FOR CREDIT LOSSES:

                 

Beginning balance

  $ 368      $ 113      $ 290      $ 1,749      $ 2,183      $ 268      $ 162      $ 253      $ 5,386   

Charge Offs

    (100     —          —          (64     —          (198       $ (362

Recoveries

    9        —          4        —          56        87          $ 156   

Provision

    84        2        (17     (225     (101     109        —          427      $ 279   

Other Non-interest expense related to unfunded

    —          —          —          —          —          —          25        —        $ 25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 361      $ 115      $ 277      $ 1,460      $ 2,138      $ 266      $ 187      $ 680      $ 5,484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 38      $ 15      $ —        $ —        $ 718      $ —        $ —        $ —        $ 771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 323      $ 100      $ 277      $ 1,460      $ 1,420      $ 266      $ 187      $ 680      $ 4,713   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 2      $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 2   

FINANCING RECEIVABLES:

                  $ —     

Ending balance

  $ 77,948      $ 35,746      $ 55,331      $ 215,246      $ 97,080      $ 19,723      $ —        $ —        $ 501,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 470      $ 88      $ —        $ 1,035      $ 2,928      $ —        $ —        $ —        $ 4,521   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 77,478      $ 35,658      $ 55,331      $ 214,211      $ 94,152      $ 19,723      $ —        $ —        $ 496,553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 549      $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 549   

 

25


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

    Consumer Real
Estate
    Agriculture
Real Estate
    Agriculture     Commercial
Real Estate
    Commercial
and Industrial
    Consumer     Unfunded Loan
Commitment &
Letters of Credit
    Unallocated     Total  
(in thousands)                                                      

Six Months Ended June 30, 2012

                 

ALLOWANCE FOR CREDIT LOSSES:

                 

Beginning balance

  $ 261      $ 140      $ 266      $ 2,088      $ 1,947      $ 315      $ 130      $ 74      $ 5,221   

Charge Offs

    93        —          —          (97     —          (208     —          —          (398

Recoveries

    30        —          10        2        19        76        —          —          137   

Provision

    262        (48     (1     (271     (110     100        —          274        206   

Other Non-interest expense related to unfunded

    —          —          —          —          —          —          11        —          11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 460      $ 92      $ 275      $ 1,722      $ 1,856      $ 283      $ 141      $ 348      $ 5,177   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 139      $ —        $ —        $ —        $ 417      $ 1      $ —        $ —        $ 557   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 321      $ 92      $ 275      $ 1,722      $ 1,439      $ 282      $ 141      $ 348      $ 4,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 1      $ —        $ —        $ —        $ —        $ —        $ —        $ —        $ 1   

FINANCING RECEIVABLES:

                 

Ending balance

  $ 81,252      $ 32,408      $ 54,808      $ 202,900      $ 105,423      $ 21,577      $ —        $ —