Edgar Filing: FARMERS & MERCHANTS BANCORP INC

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FORM 10-Q

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

¨	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.

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

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.

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.

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

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

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.

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

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.

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.

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.

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

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.

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

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.

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

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.

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.

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:

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

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

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.

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

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.

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.

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

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.

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

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.

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

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

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

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

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

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

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

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

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.

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

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.

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.

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

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.

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

—

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	$	—	$	—	$	—

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	$	—

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	$	—	$	—	$	—

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.

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

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

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

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		$	—	$	—

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