XNAS:FMNB Farmers National Banc Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly period ended March 31, 2012

Commission file number 001-35296

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

 

 

 

OHIO     34-1371693

(State or other jurisdiction

of incorporation or organization)

   

(I.R.S. Employer

Identification No)

20 South Broad Street Canfield, OH   44406
(Address of principal executive offices)   (Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

 

 

Not applicable

(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 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 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   ¨      Smaller reporting company   ¨

Indicate 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 outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class

   Outstanding at April 30, 2012

Common Stock, No Par Value

   18,802,269 shares

 

 

 


PART I—FINANCIAL INFORMATION

 

Item 1 Financial Statements (Unaudited)

     Page Number   

Included in Part I of this report:

  

Farmers National Banc Corp. and Subsidiaries

  

Consolidated Balance Sheets

     3   

Consolidated Statements of Income

     4   

Consolidated Statements of Comprehensive Income

     5   

Consolidated Statements of Cash Flows

     6   

Notes to Unaudited Consolidated Financial Statements

     7   

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3 Quantitative and Qualitative Disclosures About Market Risk

     35   

Item 4 Controls and Procedures

     35   
PART II - OTHER INFORMATION   

Item 1 Legal Proceedings

     36   

Item 1A Risk Factors

     36   

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

     36   

Item 3 Defaults Upon Senior Securities

     36   

Item 4 Mine Safety Disclosures

     36   

Item 5 Other Information

     36   

Item 6 Exhibits

     37   

SIGNATURES

  

10-Q Certifications

  

Section 906 Certifications

  

 

2


CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

 

     (In Thousands of Dollars)  
     March 31,
2012
     December 31,
2011
 

ASSETS

     

Cash and due from banks

   $ 13,833       $ 14,161   

Federal funds sold and other

     54,742         38,261   
  

 

 

    

 

 

 
TOTAL CASH AND CASH EQUIVALENTS      68,575         52,422   
  

 

 

    

 

 

 

Securities available for sale

     412,009         400,029   

Loans held for sale

     3,195         677   

Loans

     576,627         571,806   

Less allowance for loan losses

     9,446         9,820   
  

 

 

    

 

 

 

NET LOANS

     567,181         561,986   
  

 

 

    

 

 

 

Premises and equipment, net

     17,027         16,461   

Goodwill

     3,709         3,709   

Other intangibles

     2,630         2,732   

Bank owned life insurance

     15,149         15,015   

Other assets

     16,970         14,840   
  

 

 

    

 

 

 

TOTAL ASSETS

     $1,106,445         $1,067,871   
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Deposits:

     

Noninterest-bearing

   $ 107,113       $ 96,117   

Interest-bearing

     779,480         744,008   
  

 

 

    

 

 

 

TOTAL DEPOSITS

     886,593         840,125   
  

 

 

    

 

 

 

Short-term borrowings

     89,918         98,088   

Long-term borrowings

     10,652         11,263   

Other liabilities

     3,878         3,950   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     991,041         953,426   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Stockholders’ Equity:

     

Common Stock—Authorized 25,000,000 shares; issued 18,780,573 in 2012 and 18,757,437 in 2011

     104,382         104,261   

Retained earnings

     3,527         2,133   

Accumulated other comprehensive income

     7,495         8,051   

Treasury stock, at cost; 13 shares in 2012 and 2011

     0         0   
  

 

 

    

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     115,404         114,445   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,106,445       $ 1,067,871   
  

 

 

    

 

 

 

See accompanying notes

 

3


CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

 

     (In Thousands except Per Share Data)  
     For the Three Months Ended  
     March 31,
2012
     March 31,
2011
 

INTEREST AND DIVIDEND INCOME

     

Loans, including fees

   $ 7,996       $ 8,466   

Taxable securities

     2,106         1,869   

Tax exempt securities

     713         739   

Dividends

     50         46   

Federal funds sold and other interest income

     21         9   
  

 

 

    

 

 

 

TOTAL INTEREST AND DIVIDEND INCOME

     10,886         11,129   
  

 

 

    

 

 

 

INTEREST EXPENSE

     

Deposits

     1,525         1,698   

Short-term borrowings

     42         97   

Long-term borrowings

     98         251   
  

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

     1,665         2,046   
  

 

 

    

 

 

 

NET INTEREST INCOME

     9,221         9,083   

Provision for loan losses

     0         1,875   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER

     

PROVISION FOR LOAN LOSSES

     9,221         7,208   
  

 

 

    

 

 

 

NONINTEREST INCOME

     

Service charges on deposit accounts

     474         473   

Bank owned life insurance income, including death benefits

     135         159   

Trust fees

     1,418         1,338   

Insurance agency commissions

     36         64   

Investment commissions

     186         191   

Net gains on sale of loans

     65         0   

Other operating income

     414         392   
  

 

 

    

 

 

 

TOTAL NONINTEREST INCOME

     2,728         2,617   
  

 

 

    

 

 

 

NONINTEREST EXPENSES

     

Salaries and employee benefits

     4,729         4,188   

Occupancy and equipment

     1,059         916   

State and local taxes

     307         247   

Professional fees

     407         406   

Advertising

     248         145   

FDIC insurance

     186         348   

Intangible amortization

     102         143   

Core processing charges

     301         245   

Other operating expenses

     1,300         1,176   
  

 

 

    

 

 

 

TOTAL NONINTEREST EXPENSES

     8,639         7,814   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     3,310         2,011   

INCOME TAXES

     790         321   
  

 

 

    

 

 

 

NET INCOME

   $ 2,520       $ 1,690   
  

 

 

    

 

 

 

NET INCOME PER SHARE—basic and diluted

   $ 0.13       $ 0.10   
  

 

 

    

 

 

 

See accompanying notes

 

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

 

    

(In Thousands except Per Share Data)

For the Three Months Ended

 
     March 31,
2012
    March 31,
2011
 

NET INCOME

   $ 2,520      $ 1,690   

Other comprehensive income:

    

Net unrealized holding gains (losses) on available for sale securities

     (856     66   

Reclassification adjustment for (gains) losses realized in income

     0        0   
  

 

 

   

 

 

 

Net unrealized holding gains (losses)

     (856     66   

Income tax effect

     300        (23
  

 

 

   

 

 

 

Net of tax comprehensive income (loss)

     (556     43   
  

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME

   $ 1,964      $ 1,733   
  

 

 

   

 

 

 

See accompanying notes

 

5


CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

 

    

(In Thousands of Dollars)

Three Months Ended

 
     March 31,
2012
    March 31,
2011
 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 2,520      $ 1,690   

Adjustments to reconcile net income to net cash from operating activities:

    

Provision for loan losses

     0        1,875   

Depreciation and amortization

     413        428   

Net amortization of securities

     584        345   

Loss on sale of other real estate owned

     0        16   

Increase in bank owned life insurance

     (134     (159

Origination of loans held for sale

     (5,532     0   

Proceeds from loans held for sale

     3,079        0   

Net gain on sale of loans

     (65     0   

Net change in other assets and liabilities

     (1,966     (1,628
  

 

 

   

 

 

 

NET CASH FROM OPERATING ACTIVITIES

     (1,101     2,567   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from maturities and repayments of securities available for sale

     15,684        12,030   

Purchases of securities available for sale

     (29,106     (13,002

Loan originations and payments, net

     (5,210     12,473   

Proceeds from sale of other real estate owned

     56        59   

Proceeds from BOLI death benefit

     0        108   

Additions to premises and equipment

     (852     (83
  

 

 

   

 

 

 

NET CASH FROM INVESTING ACTIVITIES

     (19,428     11,585   

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     46,468        4,227   

Net change in short-term borrowings

     (8,170     13,863   

Repayment of Federal Home Loan Bank borrowings and other debt

     (611     (949

Cash dividends paid

     (1,126     (559

Proceeds from dividend reinvestment

     121        128   

Net proceeds from issuance of common shares

     0        13,772   
  

 

 

   

 

 

 

NET CASH FROM FINANCING ACTIVITIES

     36,682        30,482   
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     16,153        44,634   

Beginning cash and cash equivalents

     52,422        37,305   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 68,575      $ 81,939   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 1,677      $ 2,068   

Income taxes paid

   $ 0      $ 0   

Supplemental noncash disclosures:

    

Transfer of loans to other real estate

   $ 15      $ 399   

See accompanying notes

 

6


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (the “Company”) is a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (the “Bank”). The Company provides trust services through its subsidiary, Farmers Trust Company (the “Trust”), and insurance services through the Bank’s subsidiary, Farmers National Insurance. The consolidated financial statements include the accounts of the Company, the Bank and its subsidiary and the Trust. All significant intercompany balances and transactions have been eliminated in the consolidation.

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2011 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.

Estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, deferred tax assets, carrying amount of goodwill and fair values of financial instruments are particularly subject to change.

Allowance for Loan Losses:

The Company changed its methodology for estimating the valuation allowance for probable incurred loan losses for the three month period ended March 31, 2012. During the most recent period end, management computed the historical loss percentage based upon the loss history of the past 12 quarters. In previous periods, management used a historical loss percentage based on the past 8 quarters. Using a 12 quarter loss history resulted in a larger historical loss ratio than what would have been computed using an 8 quarter history. The primary factor for the change was the lower historical loss percentage applied to homogeneous and pass rated loans due to recent lower levels of net charge-offs. This new 12 quarter history methodology did not result in a provision for loan losses for the three month period ended March 31, 2012.

Segments:

The Company provides a broad range of financial services to individuals and companies in northeastern Ohio. While the Company's chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is primarily aggregated and reported in two lines of business, the Bank segment and the Trust segment.

 

7


Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss consists solely of the change in net unrealized gains and losses on securities available for sale, net of reclassification for gains or losses recognized in income.

Recent Accounting Pronouncements

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition, but the additional disclosures are included in the Fair Value footnote.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted. The Company adopted this amendment for year ended December 31, 2011, by presenting comprehensive income in a new Consolidated Statements of Comprehensive Income. The new statement follows the Consolidated Statements of Income.

Securities:

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at March 31, 2012 and December 31, 2011 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

(In Thousands of Dollars)

March 31, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Treasury and U.S. government sponsored entities

   $ 54,094       $ 2,048       $ 0      $ 56,142   

State and political subdivisions

     77,717         3,986         (28     81,675   

Corporate bonds

     1,239         13         0        1,252   

Mortgage-backed securities — residential

     231,567         5,226         (296     236,497   

Collateralized mortgage obligations

     35,417         391         0        35,808   

Small business administration

     305         1         (4     302   

Equity securities

     139         199         (5     333   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 400,478       $ 11,864       $ (333   $ 412,009   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(In Thousands of Dollars)

December 31, 2011

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

U.S. Treasury and U.S. government sponsored entities

   $ 53,689       $ 2,300       $ (1   $ 55,988   

State and political subdivisions

     78,288         4,446         (44     82,690   

Corporate bonds

     758         11         0        769   

Mortgage-backed securities — residential

     217,644         5,384         (310     222,718   

Collateralized mortgage obligations

     36,806         416         0        37,222   

Small business administration

     318         1         (4     315   

Equity securities

     139         194         (6     327   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 387,642       $ 12,752       $ (365   $ 400,029   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

8


There were no security sales during the three months ended March 31, 2012 and 2011.

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed and CMO securities are not due at a single maturity date and are shown separately.

 

     March 31, 2012  
(In Thousands of Dollars)    Amortized      Fair  
Maturity    Cost      Value  

Within one year

   $ 19,844       $ 20,196   

One to five years

     62,342         65,477   

Five to ten years

     36,638         38,400   

Beyond ten years

     14,226         14,996   

Mortgage-backed, CMO and SBA securities

     267,289         272,607   
  

 

 

    

 

 

 

Total

   $ 400,339       $ 411,676   
  

 

 

    

 

 

 

The following table summarizes the investment securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by major security type and length of time in a continuous unrealized loss position:

 

     Less Than 12 Months     12 Months or Longer     Total  

(In Thousands of Dollars)

March 31, 2012

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Available-for-sale

               

State and political subdivisions

   $ 0       $ 0      $ 301       $ (28   $ 301       $ (28

Corporate bonds

     233         0        0         0        233         0   

Mortgage-backed securities — residential

     58,325         (231     9,344         (65     67,669         (296

Small business administration

     0         0        190         (4     190         (4

Equity securities

     1         0        7         (5     8         (5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 58,559       $ (231   $ 9,842       $ (102   $ 68,401       $ (333
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Less Than 12 Months     12 Months or Longer     Total  
(In Thousands of Dollars)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 
December 31, 2011       

Available-for-sale

  

U.S. Treasury and U.S. government sponsored entities

   $ 249       $ (1   $ 0       $ 0      $ 249       $ (1

State and political subdivisions

     0         0        2,420         (44     2,420         (44

Corporate bonds

     507         0        0         0        507         0   

Mortgage-backed securities — residential

     43,426         (203     9,652         (107     53,078         (310

Small business administration

     0         0        233         (4     233         (4

Equity securities

     0         0        7         (6     7         (6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 44,182       $ (204   $ 12,312       $ (161   $ 56,494       $ (365
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

9


Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities are generally evaluated for OTTI under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income or loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

As of March 31, 2012, the Company’s security portfolio consisted of 419 securities, 31 of which were in an unrealized loss position. The majority of the unrealized losses on the Company’s securities are related to its holdings of mortgage-backed securities and small business administration securities as discussed below.

Unrealized losses on debt securities issued by state and political subdivisions have not been recognized into income. Generally these securities have maintained their investment grade ratings and management does not have the intent to sell these securities before their anticipated recovery. The fair value is expected to recover as the securities approach their maturity date.

All of the Company's holdings of mortgage-backed securities-residential were issued by U.S. government-sponsored entities. Unrealized losses on mortgage-backed securities-residential have not been recognized into income. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities-residential and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be OTTI.

 

10


Unrealized losses on small business administration securities issued by U.S. government-sponsored entities have not been recognized into income because the securities are of high credit quality, management does not have the intent to sell these securities before their anticipated recovery and the decline in fair value is largely due to fluctuations in market interest rates and not credit quality. Consequently, the fair value of such debt securities is expected to recover as the securities approach their maturity date.

The Company’s equity securities are made up of local and regional bank holdings. The unrealized losses associated with these holdings have not been recognized into income. Generally these securities have suffered as most banking securities have suffered during the recent economic cycle. The fair value is expected to recover as the banking sector recovers. Management does not have the intent to sell these securities before their anticipated recovery.

Loans:

Loan balances were as follows:

 

     March 31,     December 31,  
(In Thousands of Dollars)    2012     2011  

Commercial real estate

    

Owner occupied

   $ 97,727      $ 100,710   

Non-owner occupied

     89,197        80,585   

Other

     20,247        17,394   

Commercial

     76,260        74,875   

Residential real estate

    

1-4 family residential

     142,921        145,743   

Home equity lines of credit

     21,452        21,943   

Consumer

    

Indirect

     114,443        115,681   

Direct

     11,301        11,596   

Other

     1,316        1,520   
  

 

 

   

 

 

 

Subtotal

     574,864        570,047   

Net deferred loan costs

     1,763        1,759   

Allowance for loan losses

     (9,446     (9,820
  

 

 

   

 

 

 

Net loans

   $ 567,181      $ 561,986   
  

 

 

   

 

 

 

The following tables present the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012 and 2011:

Three Months Ended March 31, 2012

 

(In Thousands of Dollars)    Commercial
Real Estate
    Commercial     Residential
Real Estate
    Consumer     Unallocated     Total  

Allowance for loan losses

            

Beginning balance

   $ 4,880      $ 1,529      $ 1,802      $ 972      $ 637      $ 9,820   

Provision for loan losses

     230        13        72        145        (460     0   

Loans charged off

     (85     (42     (245     (249     0        (621

Recoveries

     35        18        13        181        0        247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,060      $ 1,518      $ 1,642      $ 1,049      $ 177      $ 9,446   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Three Months Ended March 31, 2011

(In Thousands of Dollars)    Commercial
Real Estate
    Commercial     Residential
Real Estate
    Consumer     Unallocated      Total  

Allowance for loan losses

             

Beginning balance

   $ 5,780      $ 1,707      $ 881      $ 875      $ 64       $ 9,307   

Provision for loan losses

     323        283        1,120        77        72         1,875   

Loans charged off

     (85     (134     (741     (299     0         (1,259

Recoveries

     2        22        1        189        0         214   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 6,020      $ 1,878      $ 1,261      $ 842      $ 136       $ 10,137   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012 and December 31, 2011. The recorded investment in loans includes the unpaid principal balance and unamortized loan origination fees and costs, but excludes accrued interest receivable, which is not considered to be material:

March 31, 2012

 

(In Thousands of Dollars)    Commercial
Real Estate
     Commercial      Residential
Real Estate
     Consumer      Unallocated      Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 842       $ 224       $ 0       $ 0       $ 0       $ 1,066   

Collectively evaluated for impairment

     4,218         1,294         1,642         1,049         177         8,380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 5,060       $ 1,518       $ 1,642       $ 1,049       $ 177       $ 9,446   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 8,318       $ 1,253       $ 676       $ 0       $ 0       $ 10,247   

Loans collectively evaluated for impairment

     198,181         75,007         163,062         130,130         0         566,380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 206,499       $ 76,260       $ 163,738       $ 130,130       $ 0       $ 576,627   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

(In Thousands of Dollars)    Commercial
Real Estate
     Commercial      Residential
Real Estate
     Consumer      Unallocated      Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 748       $ 237       $ 0       $ 0       $ 0       $ 985   

Collectively evaluated for impairment

     4,132         1,292         1,802         972         637         8,835   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,880       $ 1,529       $ 1,802       $ 972       $ 637       $ 9,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 8,317       $ 1,341       $ 697       $ 0       $ 0       $ 10,355   

Loans collectively evaluated for impairment

     189,724         73,534         166,334         131,859         0         561,451   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 198,041       $ 74,875       $ 167,031       $ 131,859       $ 0       $ 571,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


The following tables present information related to impaired loans by class of loans as of March 31, 2012 and December 31, 2011:

 

(In Thousands of Dollars)

March 31, 2012

   Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

With no related allowance recorded:

        

Commercial real estate

        

Owner occupied

   $ 338       $ 338       $ 0   

Non-owner occupied

     315         317         0   

Other

     198         198         0   

Commercial

     987         987         0   

Residential real estate

        

1-4 family residential

     674         676         0   

Home equity lines of credit

     0         0         0   

Consumer

        

Indirect

     0         0         0   

Direct

     0         0         0   

Other

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Subtotal

     2,512         2,516         0   
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Commercial real estate

        

Owner occupied

     4,529         4,538         214   

Non-owner occupied

     2,648         2,649         562   

Other

     278         278         66   

Commercial

     266         266         224   

Residential real estate

        

1-4 family residential

     0         0         0   

Home equity lines of credit

     0         0         0   

Consumer

        

Indirect

     0         0         0   

Direct

     0         0         0   

Other

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Subtotal

     7,721         7,731         1,066   
  

 

 

    

 

 

    

 

 

 

Total

   $ 10,233       $ 10,247       $ 1,066   
  

 

 

    

 

 

    

 

 

 

 

(In Thousands of Dollars)

December 31, 2011

   Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

With no related allowance recorded:

        

Commercial real estate

        

Owner occupied

   $ 759       $ 762       $ 0   

Non-owner occupied

     339         340         0   

Other

     589         590         0   

Commercial

     1,062         1,063         0   

Residential real estate

        

1-4 family residential

     695         697         0   

Home equity lines of credit

     0         0         0   

Consumer

        

Indirect

     0         0         0   

Direct

     0         0         0   

Other

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Subtotal

     3,444         3,452         0   
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Commercial real estate

        

Owner occupied

     4,164         4,169         309   

Non-owner occupied

     2,455         2,456         439   

Other

     0         0         0   

Commercial

     278         278         237   

Residential real estate

        

1-4 family residential

     0         0         0   

Home equity lines of credit

     0         0         0   

Consumer

        

Indirect

     0         0         0   

Direct

     0         0         0   

Other

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Subtotal

     6,897         6,903         985   
  

 

 

    

 

 

    

 

 

 

Total

   $ 10,341       $ 10,355       $ 985   
  

 

 

    

 

 

    

 

 

 

 

13


The following table presents the average recorded investment by class for the three month periods ended March 31, 2012 and 2011:

 

(In Thousands of Dollars)    Average Recorded Investment for
Three Months Ended March 31,
 
     2012      2011  

With no related allowance recorded:

     

Commercial real estate

     

Owner occupied

   $ 339       $ 1,356   

Non-owner occupied

     328         464   

Other

     200         1,267   

Commercial

     1,004         790   

Residential real estate

     

1-4 family residential

     677         0   

Home equity lines of credit

     0         0   

Consumer

     

Indirect

     0         0   

Direct

     0         0   

Other

     0         0   
  

 

 

    

 

 

 

Subtotal

     2,548         3,877   
  

 

 

    

 

 

 

With an allowance recorded:

     

Commercial real estate

     

Owner occupied

     4,559         2,435   

Non-owner occupied

     2,661         303   

Other

     279         645   

Commercial

     270         474   

Residential real estate

     

1-4 family residential

     0         0   

Home equity lines of credit

     0         0   

Consumer

     

Indirect

     0         0   

Direct

     0         0   

Other

     0         0   
  

 

 

    

 

 

 

Subtotal

     7,769         3,857   
  

 

 

    

 

 

 

Total

   $ 10,317       $ 7,734   
  

 

 

    

 

 

 

 

14


Interest income recognized during impairment for both periods was immaterial.

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
(In Thousands of Dollars)    Nonaccrual      Loans Past
Due over 90
Days Still
Accruing
     Nonaccrual      Loans Past
Due over 90
Days Still
Accruing
 

Commercial real estate

           

Owner occupied

   $ 2,280       $ 0       $ 2,640       $ 0   

Non-owner occupied

     2,966         0         2,795         0   

Other

     478         0         590         0   

Commercial

     578         0         527         0   

Residential real estate

           

1-4 family residential

     4,239         151         3,897         121   

Home equity lines of credit

     291         0         299         0   

Consumer

           

Indirect

     11         36         12         114   

Direct

     0         16         0         13   

Other

     0         10         0         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,843       $ 213       $ 10,760       $ 250   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 by class of loans:

 

(In Thousands of Dollars)

March 31, 2012

   30-59
Days Past
Due
     60-89
Days Past
Due
     Greater
than 90
Days Past
Due and
Nonaccrual
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial real estate

                 

Owner occupied

   $ 224       $ 0       $ 2,280       $ 2,504       $ 94,906       $ 97,410   

Non-owner occupied

     43         0         2,966         3,009         85,898         88,907   

Other

     0         0         478         478         19,704         20,182   

Commercial

     241         0         578         819         75,441         76,260   

Residential real estate

                 

1-4 family residential

     1,057         143         4,390         5,590         136,696         142,286   

Home equity lines of credit

     28         50         291         369         21,083         21,452   

Consumer

                 

Indirect

     754         100         47         901         116,612         117,513   

Direct

     50         210         16         276         11,025         11,301   

Other

     7         4         10         21         1,295         1,316   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,404       $ 507       $ 11,056       $ 13,967       $ 562,660       $ 576,627   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


(In Thousands of Dollars)

December 31, 2011

   30-59
Days Past
Due
     60-89
Days Past
Due
     Greater
than 90
Days Past
Due and
Nonaccrual
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial real estate

                 

Owner occupied

   $ 111       $ 0       $ 2,640       $ 2,751       $ 97,630       $ 100,381   

Non-owner occupied

     13         0         2,795         2,808         77,515         80,323   

Other

     0         0         590         590         16,747         17,337   

Commercial

     26         0         527         553         74,322         74,875   

Residential real estate

                 

1-4 family residential

     973         361         4,018         5,352         139,736         145,088   

Home equity lines of credit

     128         0         299         427         21,516         21,943   

Consumer

                 

Indirect

     1,458         218         126         1,802         116,941         118,743   

Direct

     120         41         13         174         11,422         11,596   

Other

     19         3         2         24         1,496         1,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,848       $ 623       $ 11,010       $ 14,481       $ 557,325       $ 571,806   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings:

Total troubled debt restructurings were $4.2 million and $4.3 million at March 31, 2012 and December 31, 2011, respectively. The Company has allocated $65 thousand and $48 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 and December 31, 2011. There are no commitments to lend additional amounts to borrowers with loans that are classified as troubled debt restructurings at March 31, 2012 and December 31, 2011.

During the three month period ended March 31, 2012, the terms of a certain commercial real estate loan were modified as a troubled debt restructuring. The modification of the terms of the loan included a reduction of the stated interest rate on the loan for the remaining life of the loan which is 41 months. There were no modifications involving an extension of the maturity date. The pre-modification outstanding recorded investment for this loan was $462 thousand and the post-modification outstanding recorded investment was $467 thousand.

The troubled debt restructuring described above had an immaterial affect on the allowance for loan losses at March 31, 2012. There were no charge offs as a result of the allowance adjustment.

There was one residential real estate loan modified as troubled debt restructurings for which there was a payment default during the twelve months following the modification during the quarter ended March 31, 2012. The loan was past due 33 days at March 31, 2012. There was no additional provision or any impact to the allowance for losses associated with this loan. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $300 thousand management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for the loans and leases in their respective portfolios on an annual basis. The Company uses the following definitions for risk ratings:

 

16


Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(In Thousands of Dollars)

March 31, 2012

   Pass      Special
Mention
     Sub-standard      Doubtful      Not Rated      Total  

Commercial real estate

                 

Owner occupied

   $ 80,445       $ 4,570       $ 12,349       $ 46       $ 0       $ 97,410   

Non-owner occupied

     76,708         3,781         8,418         0         0         88,907   

Other

     17,895         299         1,988         0         0         20,182   

Commercial

     66,982         6,110         2,989         179         0         76,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 242,030       $ 14,760       $ 25,744       $ 225       $ 0       $ 282,759   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(In Thousands of Dollars)

December 31, 2011

   Pass      Special
Mention
     Sub-standard      Doubtful      Not
Rated
     Total  

Commercial real estate

                 

Owner occupied

   $ 80,770       $ 6,359       $ 13,201       $ 51       $ 0       $ 100,381   

Non-owner occupied

     68,806         2,575         8,942         0         0         80,323   

Other

     14,491         301         2,545         0         0         17,337   

Commercial

     65,198         5,963         3,454         260         0         74,875   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 229,265       $ 15,198       $ 28,142       $ 311       $ 0       $ 272,916   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential, consumer and indirect loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential, consumer and indirect auto loans based on payment activity as of March 31, 2012 and December 31, 2011. Nonperforming loans are loans past due 90 days and still accruing interest and nonaccrual loans.

 

     Residential Real Estate      Consumer  

(In Thousands of Dollars)

March 31, 2012

   1-4 Family
Residential
     Home
Equity Lines
of Credit
     Indirect      Direct      Other  

Performing

   $ 137,896       $ 21,161       $ 117,466       $ 11,285       $ 1,306   

Nonperforming

     4,390         291         47         16         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 142,286       $ 21,452       $ 117,513       $ 11,301       $ 1,316   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


     Residential Real Estate      Consumer  

(In Thousands of Dollars)

December 31, 2011

   1-4 Family
Residential
     Home
Equity Lines
of Credit
     Indirect      Direct      Other  

Performing

   $ 140,070       $ 21,644       $ 118,617       $ 11,583       $ 1,518   

Nonperforming

     4,018         299         126         13         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 145,088       $ 21,943       $ 118,743       $ 11,596       $ 1,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings Per Share:

The computation of basic and diluted earnings per share is shown in the following table:

 

     Three Months Ended
March 31,
 
(In Thousands, except Share and Per Share Data)    2012      2011  

Basic EPS computation

     

Numerator — Net income

   $ 2,520       $ 1,690   

Denominator — Weighted average shares outstanding

     18,765,814         16,956,808   

Basic earnings per share

   $ .13       $ .10   
  

 

 

    

 

 

 

Diluted EPS computation

     

Numerator — Net income

   $ 2,520       $ 1,690   

Denominator — Weighted average shares outstanding for basic earnings per share

     18,765,814         16,956,808   

Effect of Stock Options

     0         0   
  

 

 

    

 

 

 

Weighted averages shares for diluted earnings per share

     18,765,814         16,956,808   
  

 

 

    

 

 

 

Diluted earnings per share

   $ .13       $ .10   
  

 

 

    

 

 

 

Stock options for 5,000 and 28,500 shares were not considered in the computing of diluted earnings per share for the three months ended March 31, 2012 and 2011, respectively, because they were antidilutive.

Stock Based Compensation:

The Company’s Stock Option Plan (the “Plan”), permitted the grant of share options to its directors, officers and employees. Under the terms of the Plan no additional shares can be issued. Option awards were granted with an exercise price equal to the market price of the Company's common shares at the date of grant, with a vesting period of 5 years and have 10-year contractual terms. At March 31, 2012 there were 5,000 outstanding options of which 3,000 were fully vested and are exercisable.

The fair value of each option award is estimated on the date of grant using a Black-Scholes model. Total compensation cost charged against income for the stock option plan for the three month period ended March 31, 2012 was not material. No related income tax benefit was recorded.

 

18


Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value:

Investment Securities: The Company used a third party service to estimate fair value on available for sale securities on a monthly basis. This service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities. They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing methods. The fair values for investment securities are determined by quoted market prices in active markets, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates. Finally, inputs used are derived principally from observable market data (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort by the Company’s Controller and Chief Financial Officer. For the period ended March 31, 2012 the fair value of Level 3 investment securities was immaterial.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

19


Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value.

Assets measured at fair value on a recurring basis, including financial assets for which the Company has elected the fair value option, are summarized below:

 

            Fair Value Measurements at
March 31, 2012 Using:
 
     Carrying      Quoted Prices
in Active
Markets for
Identical
Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
(In Thousands of Dollars)    Value      (Level 1)      (Level 2)      (Level 3)  

Financial Assets

           

Investment securities available-for sale

           

U.S. Treasury and U.S. government sponsored entities

   $ 56,142       $ 0       $ 56,142       $ 0   

State and political subdivisions

     81,675         0         81,675         0   

Corporate bonds

     1,252         0         1,252         0   

Mortgage-backed securities-residential

     236,497         0         236,485         12   

Collateralized mortgage obligations

     35,808         0         35,808         0   

Small business administration

     302         0         302         0   

Equity securities

     333         333         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 412,009       $ 333       $ 411,664       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Measurements at
December 31, 2011 Using:
 
     Carrying     

Quoted Prices

in Active
Markets for
Identical

Assets

     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
(In Thousands of Dollars)    Value      (Level 1)      (Level 2)      (Level 3)  

Financial Assets

           

Investment securities available-for sale

           

U.S. Treasury and U.S. government sponsored entities

   $ 55,988       $ 0       $ 55,988       $ 0   

State and political subdivisions

     82,690         0         82,690         0   

Corporate bonds

     769         0         769         0   

Mortgage-backed securities-residential

     222,718         0         222,706         12   

Collateralized mortgage obligations

     37,222         0         37,222         0   

Small business administration

     315         0         315         0   

Equity securities

     327         327         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 400,029       $ 327       $ 399,690       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


There were no significant transfers between Level 1 and Level 2 during the three month periods ended March 31, 2012 and 2011.

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

     Investment Securities
Available-for-sale
(Level 3)
 
     Three Months Ended March 31,  
(In Thousands of Dollars)    2012      2011  

Beginning balance

   $ 12       $ 12   

Total unrealized gains or losses:

     

Included in other comprehensive income or loss

     0         0   

Repayments

     0         0   

Transfer in and/or out of Level 3

     0         0   
  

 

 

    

 

 

 

Ending balance

   $ 12       $ 12   
  

 

 

    

 

 

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

     Fair Value Measurements
at March 31, 2012 Using:
 
            Quoted Prices
in Active
Markets for
Identical Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
(In Thousands of Dollars)    Carrying Value      (Level 1)      (Level 2)      (Level 3)  

Financial assets:

           

Impaired loans

           

Commercial real estate

           

Owner occupied

   $ 2,002       $ 0       $ 0       $ 2,002   

Non-owner occupied

     2,086         0         0         2,086   

Other

     212         0         0         212   

Commercial

     42         0         0         42   

Other real estate owned

           

Commercial real estate

     270         0         0         270   

1 — 4 family residential

     20         0         0         20   

 

     Fair Value Measurements
at December 31, 2011 Using:
 
            Quoted Prices
in Active
Markets for
Identical Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
(In Thousands of Dollars)    Carrying Value      (Level 1)      (Level 2)      (Level 3)  

Financial assets:

           

Impaired loans

           

Commercial real estate

           

Owner occupied

   $ 1,606       $ 0       $ 0       $ 1,606   

Non-owner occupied

     2,017         0         0         2,017   

Other

     0         0         0         0   

Commercial

     41         0         0         41   

Other real estate owned

           

Commercial real estate

     270         0         0         270   

1 — 4 family residential

     76         0         0         76   

 

21


Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $5.3 million with a valuation allowance of $1.0 million at March 31, 2012, resulting in an additional provision for loan losses of $81 thousand for the three month period. At December 31, 2011, impaired loans had a principal balance of $4.6 million, with a valuation allowance of $936 thousand. Provision for loan losses was $300 thousand for the three months ended March 31, 2011, for loans carried at fair value. Excluded from the fair value of impaired loans, at March 31, 2012 and December 31, 2011, discussed above are $2.4 million and $2.3 million of loans classified as troubled debt restructurings, which are not carried at fair value.

Impaired commercial real estate loans, both owner occupied and non-owner occupied are valued by independent external appraisals. These external appraisals are prepared using the sales comparison approach and income approach valuation techniques. Management makes subsequent unobservable adjustments to the impaired loan appraisals by reducing the appraised collateral value in the 0%—40% range, with a weighted average percentage of 21.7%. Impaired loans other than commercial real estate and other real estate owned are not considered material.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $290 thousand at March 31, 2012. The Company sold two other real estate owned properties during the three month period ended March 31, 2012. The Company did not record any adjustments to the carrying amount of other real estate owned for the three months ended March 31, 2012. At December 31, 2011, other real estate owned had a net carrying amount of $346 thousand. During the year ended December 31, 2011 five properties were charged down reflecting updated appraisals which resulted in a write-down of $115 thousand.

The carrying amounts and estimated fair values of financial instruments, at March 31, 2012 and December 31, 2011 are as follows:

 

            Fair Value Measurements at March 31, 2012 Using:  
(In Thousands of Dollars)    Carrying
Amount
     Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 68,575       $ 13,833       $ 54,742       $ 0       $ 68,575   

Securities available-for-sale

     412,009         333         411,664         12         412,009   

Restricted stock

     4,224         n/a         n/a         n/a         n/a   

Loans held for sale

     3,195         0         3,256         0         3,256   

Loans, net

     567,181         0         0         578,273         578,273   

Accrued interest receivable

     4,021         0         1,305         2,716         4,021   

Financial liabilities

              

Deposits

     886,593         630,774         262,012         0         892,786   

Short-term borrowings

     89,918         0         89,918         0         89,918   

Long-term borrowings

     10,652         0         12,037         0         12,037   

Accrued interest payable

     573         6         567         0         573   

.

 

(In Thousands of Dollars)

December 31, 2011

   Carrying Amount      Fair Value  

Financial assets

     

Cash and cash equivalents

   $ 52,422       $ 52,422   

Securities available-for-sale

     400,029         400,029   

Restricted stock

     4,224         n/a   

Loans held for sale

     677         677   

Loans, net

     561,986         574,391   

Accrued interest receivable

     3,794         3,794   

Financial liabilities

     

Deposits

     840,125         846,412   

Short-term borrowings

     98,088         98,088   

Long-term borrowings

     11,263         12,719   

Accrued interest payable

     585         585   

 

22


The methods and assumptions used to estimate fair value are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. The Company has determined that cash on hand and non-interest due from bank accounts are Level 1 whereas interest bearing fed funds sold and other are Level 2.

Restricted Stock: It is not practical to determine the fair value of restricted stock due to restrictions placed on its transferability.

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest receivable and payable approximate fair value resulting in a Level 2 or Level 3 classification. The classification is the result of the association with securities, loans and deposits.

Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings, and money market accounts—are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting Level 2 classification. Fair value for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Off-balance Sheet Instruments: The fair value of commitments is not material.

 

23


Segment Information

The reportable segments are determined by the products and services offered, primarily distinguished between banking and trust operations. They are also distinguished by the level of information provided to the chief operating decision makers in the Company, who use such information to review performance of various components of the business, which are then aggregated. Loans, investments, and deposits provide the revenues in the banking operation, and trust service fees provide the revenue in trust operations. All operations are domestic.

Significant segment totals are reconciled to the financial statements as follows:

 

(In Thousands of Dollars)

March 31, 2012

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Assets

          

Cash and cash equivalents

   $ 1,384       $ 67,304       $ (113   $ 68,575   

Securities available for sale

     3,371         408,473         165        412,009   

Loans held for sale

     0         3,195         0        3,195   

Net loans

     0         567,181         0        567,181   

Premises and equipment, net

     89         16,938         0        17,027   

Goodwill and other intangibles

     6,339         0         0        6,339   

Other assets

     872         30,911         336        32,119   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 12,055       $ 1,094,002       $ 388      $ 1,106,445   
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Deposits, borrowings and other liabilities

   $ 677       $ 994,783       $ (4,419   $ 991,041   

Stockholders’ equity

     11,378         99,219         4,807        115,404   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 12,055       $ 1,094,002       $ 388      $ 1,106,445   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(In Thousands of Dollars)

December 31, 2011

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Assets

          

Cash and cash equivalents

   $ 2,208       $ 50,327       $ (113   $ 52,422   

Securities available for sale

     2,388         397,513         128        400,029   

Loans held for sale

     0         677         0        677   

Net loans

     0         561,986         0        561,986   

Premises and equipment, net

     101         16,360         0        16,461   

Goodwill and other intangibles

     6,441         0         0        6,441   

Other assets

     463         28,904         488        29,855   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 11,601       $ 1,055,767       $ 503      $ 1,067,871   
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Deposits, borrowings and other liabilities

   $ 345       $ 957,780       $ (4,699   $ 953,426   

Stockholders’ equity

     11,256         97,987         5,202        114,445   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 11,601       $ 1,055,767       $ 503      $ 1,067,871   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(In Thousands of Dollars)

For the Three Months Ended

March 31, 2012

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Net interest income

   $ 10       $ 9,223       $ (12   $ 9,221   

Provision for loan losses

     0         0         0        0   

Service fees, security gains and other noninterest income

     1,437         1,354         (63     2,728   

Noninterest expense

     1,264         7,241         134        8,639   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     183         3,336         (209     3,310   

Income taxes

     63         798         (71     790   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income

   $ 120       $ 2,538       $ (138   $ 2,520   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(In Thousands of Dollars)

For the Three Months Ended

March 31, 2011

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Net interest income

   $ 11       $ 9,085       $ (13   $ 9,083   

Provision for loan losses

     0         1,875         0        1,875   

Service fees, security gains and other noninterest income

     1,350         1,305         (38     2,617   

Noninterest expense

     1,200         6,512         102        7,814   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     161         2,003         (153     2,011   

Income taxes

     55         318         (52     321   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income

   $ 106       $ 1,685       $ (101   $ 1,690   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

24


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Discussions in this report that are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” intend,” and “plan”) are forward-looking statements that involve risks and uncertainties. Any forward-looking statement is not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission, including without limitation, the risk factors disclosed in Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Many of these factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on those forward-looking statements. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting the Company, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in these forward-looking statements:

 

   

general economic conditions in market areas where we conduct business, which could materially impact credit quality trends;

 

   

business conditions in the banking industry;

 

   

the regulatory environment;

 

   

fluctuations in interest rates;

 

   

demand for loans in the market areas where we conduct business;

 

   

rapidly changing technology and evolving banking industry standards;

 

   

competitive factors, including increased competition with regional and national financial institutions;

 

   

new service and product offerings by competitors and price pressures; and other like items.

 

25


Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

Net income for the three months ended March 31, 2012 was $2.5 million, compared to $1.7 million for the same three month period in 2011. On a per share basis, net income for the first quarter ended March 31, 2012 was $0.13 per diluted share, compared to $0.10 for the first quarter ended March 31, 2011 and $0.16 for the fourth quarter ended December 31, 2011. The tangible common equity ratio increased to 9.91% at March 31, 2012, compared to 9.56% at March 31, 2011, mainly as a result of the increase in net income. Farmers’ total assets reported at March 31, 2012 were $1.1 billion, representing a 9.1% increase compared to $1.0 billion in total assets recorded at March 31, 2011.

Net loans increased $5.2 million, or 0.9%, since December 31, 2011. Most of the loan growth in the past three months has occurred in the commercial real estate portfolio. Net loans were reported at $567.2 million at March 31, 2012, which compares to $562.0 million at December 31, 2011. Farmers believes its demand experience for business and consumer credit is consistent with the experience of other banks in the Federal Reserve’s Fourth District and banks nationally per the Federal Reserve Beige Book. Deposits increased $46.5 million, or 5.5%, from $840.1 million at December 31, 2011 to $886.6 million at March 31, 2012, as customers continue to seek the safety and security of FDIC insured deposit accounts.

Stockholders’ equity totaled $115.4 million, or 10.4% of total assets, at March 31, 2012, an increase of $959 thousand, or 0.8%, compared to $114.4 million at December 31, 2011. The increase is the result of net income and mark to market adjustments in investment securities, offset by cash dividends paid to shareholders during the quarter. Shareholders received a special one-time $0.03 cash dividend on February 28, 2012, a regular $0.03 per share cash dividend on March 31, 2012 and a total of $0.15 per share cash dividends paid in the past four quarters. Book value per share increased from $6.10 per share at December 31, 2011 to $6.14 per share at March 31, 2012. Farmers’ tangible book value per share also increased from $5.76 per share at December 31, 2011 to $5.81 per share at March 31, 2012.

Results of Operations

The following is a comparison of selected financial ratios and other results at or for the three months ended March 31, 2012 and 2011:

 

     At or for the Three Months
Ended March 31,
 
(In Thousands, except Per Share Data)    2012     2011  

Total Assets

   $ 1,106,445      $ 1,014,561   

Net Income

   $ 2,520      $ 1,690   

Basic and Diluted Earnings Per Share

   $ .13      $ .10   

Return on Average Assets (Annualized)

     .94     .69

Return on Average Equity (Annualized)

     8.82     7.12

Efficiency Ratio (tax equivalent basis)

     68.42     62.57

Equity to Asset Ratio

     10.43     10.16

Tangible Common Equity Ratio *

     9.91     9.56

Dividends to Net Income

     44.68     33.08

Net Loans to Assets

     51.26     55.82

Loans to Deposits

     65.04     75.33

 

26


* The tangible common equity ratio is calculated by dividing total common stockholders' equity by total assets, after reducing both amounts by intangible assets. The tangible common equity ratio is not required by U.S.GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of the Company’s capital levels. Since there is no authoritative requirement to calculate the tangible common equity ratio, the Company’s tangible common equity ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-U.S.GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S.GAAP. With respect to the calculation of the actual unaudited tangible common equity ratio as of March 31, 2012 and 2011, reconciliations of tangible common equity to U.S.GAAP total common stockholders' equity and tangible assets to U.S.GAAP total assets are set forth below:

 

(In Thousands of Dollars)    March 31,
2012
     December 31,
2011
 

Reconciliation of Common Stockholders’ Equity
to Tangible Common Equity

     

Stockholders’ Equity

   $ 115,404       $ 114,445   

Less Goodwill and other intangibles

     6,339         6,441   
  

 

 

    

 

 

 

Tangible Common Equity

   $ 109,065       $ 108,004   
  

 

 

    

 

 

 

 

(In Thousands of Dollars)    March 31,
2012
     December 31,
2011
 

Reconciliation of Total Assets to Tangible Assets

     

Total Assets

   $ 1,106,445       $ 1,067,871   

Less Goodwill and other intangibles

     6,339         6,441   
  

 

 

    

 

 

 

Tangible Assets

   $ 1,100,106       $ 1,061,430   
  

 

 

    

 

 

 

Net Interest Income. The following schedule details the various components of net interest income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where applicable. Security yields are based on amortized cost.

 

27


Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 
     AVERAGE
BALANCE
    INTEREST      RATE (1)     AVERAGE
BALANCE
    INTEREST      RATE (1)  

EARNING ASSETS

              

Loans (3) (5) (6)

   $ 562,031      $ 8,072         5.78   $ 573,047      $ 8,554         6.05

Loans held for sale

     1,144        5         1.76        0        0         0.00   

Taxable securities (4)

     312,909        2,106         2.71        236,729        1,869         3.20   

Tax-exempt securities (4) (6)

     74,061        1,084         5.89        77,070        1,124         5.91   

Equity securities (2) (6)

     4,363        50         4.61        4,126        46         4.52   

Federal funds sold and other

     43,500        21         0.19        29,494        9         0.12   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total earning assets

     998,008        11,338         4.57        920,466        11,602         5.11   

NONEARNING ASSETS

              

Cash and due from banks

     22,599             27,111        

Premises and equipment

     16,790             13,887        

Allowance for loan losses

     (9,684          (9,559     

Unrealized gains (losses) on securities

     13,050             3,614        

Other assets (3)

     42,705             42,049        
  

 

 

        

 

 

      

Total assets

   $ 1,083,468           $ 997,568        
  

 

 

        

 

 

      

INTEREST-BEARING LIABILITIES

              

Time deposits

   $ 257,074      $ 1,216         1.90   $ 252,828      $ 1,308         2.10

Savings deposits

     391,860        298         0.31        323,802        372         0.47   

Demand deposits

     112,886        11         0.04        111,268        18         0.07   

Short term borrowings

     90,281        42         0.19        105,496        97         0.37   

Long term borrowings

     10,690        98         3.69        23,996        251         4.24   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     862,791        1,665         0.78        817,390        2,046         1.02   

NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Demand deposits

     102,029             80,326        

Other liabilities

     3,709             3,539        

Stockholders’ equity

     114,939             96,313        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,083,468           $ 997,568        
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income and interest rate spread

     $ 9,673         3.79     $ 9,556         4.09
    

 

 

    

 

 

     

 

 

    

 

 

 

Net interest margin

          3.90          4.22

 

(1) Rates are calculated on an annualized basis.
(2) Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.
(3) Non-accrual loans and overdraft deposits are included in other assets.
(4) Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost.
(5) Interest on loans includes fee income of $504 thousand and $436 thousand for 2012 and 2011 respectively and is reduced by amortization of $471 thousand and $447 thousand for 2012 and 2011 respectively.
(6) For 2012, adjustments of $81 thousand and $371 thousand respectively are made to tax equate income on tax exempt loans and tax exempt securities. For 2011, adjustments of $88 thousand and $385 thousand respectively are made to tax equate income on tax exempt loans and tax exempt securities. These adjustments are based on a marginal federal income tax rate of 35%, less disallowances.

 

28


Net interest income. Net interest income was $9.2 million for the first quarter of 2012, which compared to $9.1 million in the first quarter of 2011. The net interest margin to average earning assets on a fully taxable equivalent basis decreased 32 basis points to 3.90% for the three months ended March 31, 2012, compared to 4.22% for the same period in the prior year. The decrease in net interest margin is largely a result of the change in the mix of interest earning assets. Loans, which yield more than securities, comprised a smaller level of interest-earning assets in the current period. For the three months ended March 31, 2012, loans were 56% of average earning assets, compared to 62% for the three months ended March 31, 2011. In comparing the quarters ended March 31, 2012 and 2011, yields on earning assets decreased 54 basis points, while the cost of interest bearing liabilities decreased 24 basis points.

Noninterest Income. Noninterest income was $2.7 million for the first quarter of 2012, increasing 4.2% from $2.6 million compared to the same quarter of 2011. Trust fees were $1.4 million for the quarter ended March 31, 2012, an increase of $80 thousand, or 6%, compared to the same quarter in 2011. Income from the sale of residential real estate loans was $65 thousand in the first quarter of 2012 as the Company continues to develop its’ secondary mortgage operations. There were no sales of loans or gains recognized during the three months ended March 31, 2011.

Noninterest Expense. Noninterest expense totaled $8.6 million for the first quarter of 2012, which is $825 thousand more than the $7.8 million in the same quarter in 2011. Most of this increase is a result of a $541 thousand or 12.9% increase salaries and employee benefits, due to a higher number of employees in the current quarter. The higher employee count is attributed primarily to our North Canton and Secondary Mortgage project expansions. Employee health insurance costs also increased $142 thousand as a result of a higher level of claims. Advertising expense is also $103 thousand higher in the first quarter of 2012 compared to the same quarter in 2011. This increase is primarily a result of a higher level of production costs related to television advertisements in the current period.

The following is a detail of non-interest expense line items classified between the Trust and the other entities in the Company for the three month periods ended March 31, 2012 and 2011:

 

     For the Three Months Ended  
(In Thousands of Dollars)    March 31, 2012      March 31, 2011  
     Trust
Company
     Bank and
Others
     Total
Company
     Trust
Company
     Bank and
Others
     Total
Company
 

Noninterest expense

                 

Salaries and employee benefits

   $ 723       $ 4,006       $ 4,729       $ 712       $ 3,476       $ 4,188   

Occupancy and equipment

     178         881         1,059         139         777         916   

State and local taxes

     26         281         307         25         222         247   

Professional fees

     121         286         407         97         309         406   

Advertising

     2         246         248         0         145         145   

FDIC insurance

     0         186         186         0         348         348   

Intangible amortization

     102         0         102         143         0         143   

Core processing charges

     0         301         301         0         245         245   

Other operating expenses

     112         1,188         1,300         84         1,092         1,176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $ 1,264       $ 7,375       $ 8,639       $ 1,200       $ 6,614       $ 7,814   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s tax equivalent efficiency ratio for the three month period ended March 31, 2012 was 68.4% compared to 62.6% for the same period in 2011. The decline in the efficiency ratio was the result of the $825 thousand increase in noninterest expenses as explained in the previous paragraph.

 

29


Income Taxes. Income tax expense totaled $790 thousand for the quarter ended March 31, 2012 and $321 thousand for the quarter ended March 31, 2011. The increase in the current quarter tax expense can be attributed to the $1.3 million increase in income before taxes. The effective tax rate for the first three months of 2012 was 23.87%, compared to 15.96% for the same period in 2011. The effective tax rate increase over the same period in 2011 was primarily due to the increase in income before taxes while tax exempt income remained stable.

Other Comprehensive Income. For the quarter ended March 31, 2012, the change in net unrealized gains on securities, net of reclassifications, resulted in an unrealized loss, net of tax, of $556 thousand, compared to an unrealized gain of $43 thousand for the same period in 2011. Management believes the decrease in fair value for the three month period ended March 31, 2012 is the result of the low interest rate environment pulling back to more sustainable levels in the debt securities market.

Financial Condition

Cash and cash equivalents. Cash and cash equivalents increased $16.2 million during the first three months of 2012. The Company expects these levels to remain steady over the next few months. The increase is largely due to the scarcity of viable investment options that produce a reasonably yield for the risk and management’s effort to maintain a larger balance at the Federal Reserve Bank for future liquidity needs.

Securities. Securities available-for-sale increased by $12.0 million since December 31, 2011. Securities were purchased in an effort to increase returns on some of the cash available from the additional core deposit account balances and repurchase agreements sold during the period.

Loans. Gross loans increased $4.8 million, or 0.84%, since December 31, 2011. Most of the loan growth occurred in the commercial real estate loan portfolio. The increase in loans is related to the economic growth being experienced in the Mahoning Valley. The demand experience for the Bank’s business and consumer credit is consistent with the experience of other banks in the Federal Reserve’s Fourth District and banks nationally per the Federal Reserve Beige Book. The increase in loan balances was not enough to overcome the low interest rate environment that caused a lower level of loan income for the current quarter compared to the same quarter in 2011. On a fully tax equivalent basis, loans contributed 71.19% of total interest income for the three months ended March 31, 2012 and 73.73% for the same period in 2011.

Allowance for Loan Losses. The following table indicates key asset quality ratios that management evaluates on an ongoing basis. The unpaid principal balance of non-performing loans and non-performing assets was used in the calculation of amounts and ratios on the table below.

Asset Quality History

(In Thousands of Dollars)

 

     3/31/12     12/31/11     9/30/11     6/30/11     3/31/11  

Nonperforming loans

   $ 11,030      $ 10,984      $ 10,884      $ 7,865      $ 11,011   

Nonperforming loans as a % of total loans

     1.91     1.92     1.92     1.38     1.91

Loans delinquent 30-89 days

   $ 2,890      $ 3,431      $ 3,386      $ 3,758      $ 3,392   

Loans delinquent 30-89 days as a % of total loans

     0.50     0.60     0.60     0.66     0.59

Allowance for loan losses

   $ 9,446      $ 9,820      $ 10,984      $ 10,876      $ 10,137   

Allowance for loan losses as a % of loans

     1.64     1.72     1.93     1.91     1.76

Allowance for loan losses as a % of nonperforming loans

     85.64     89.40     100.92     138.28     92.06

Annualized net charge-offs to average net loans outstanding

     0.27     0.84     0.43     0.24     0.74

Non-performing assets

   $ 11,574      $ 11,569      $ 11,453      $ 8,664      $ 11,867   

Non-performing assets as a % of total assets

     1.05     1.08     1.05     0.85     1.17

Net charge-offs for the quarter

   $ 374      $ 1,165      $ 591      $ 336      $ 1,045   

 

30


For the three months ended March 31, 2012, management did not record a provision to the allowance for loan losses, compared to providing $1.9 million over the same three month period in the prior year. Although non-performing loans remained consistent from the previous quarter, other factors lead to not recording a provision in the first quarter. The primary factor was the lower historical loss percentage applied to homogeneous and pass rated loans due to recent lower levels of net charge-offs. During the most recent period end, management computed the historical loss percentage based upon the loss history of the past 12 quarters. In previous periods, management used a historical loss percentage based on the past 8 quarters. Using a 12 quarter loss history resulted in a larger historical loss ratio than what would have been computed using an 8 quarter history. The Company believes that using a loss history of the previous 12 quarters will capture more cyclicality in the loan portfolio. Net charge-offs for the quarter ended March 31, 2012 decreased to $374 thousand, compared to $1.2 million and $1.0 million for the fourth quarter of 2011 and the first quarter of 2011, respectively. The lower level of charge-offs and a lower level of delinquencies from the year ago period, which are factors considered in management’s quarterly estimate of loan loss provisions and the adequacy of the allowance for loan losses.

Non-performing loans equaled 1.91% of total loans at March 31, 2012, unchanged from March 31, 2011. Loans 30–89 days delinquent decreased $502 thousand, or 14.8%, to $2.9 million since March 31, 2011. Non-performing loans totaled $11.0 million at March 31, 2012, unchanged compared to December 31, 2011 and March 31, 2011, respectively. On March 31, 2012, the ratio of the allowance for loan losses (ALLL) to non-performing loans was 86%, compared to 92% at March 31, 2011. At March 31, 2012, the ALLL/total loan ratio was 1.64%, compared to 1.76% at March 31, 2011. The decrease in this ratio over the last three months is mainly the result of the asset quality metrics and improving net charge-off levels.

Based on the evaluation of the adequacy of the allowance for loan losses, management believes that the allowance for loan losses at March 31, 2012 to be adequate and reflects probable incurred losses in the portfolio. The provision for loan losses is based on management's judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

Deposits. Total deposits increased $46.5 million, or 5.53%, since December 31, 2011. Balances in the Company’s non-interest bearing deposits increased $11.0 million, or 11.44%, between December 31, 2011 and March 31, 2012. Money market accounts also increased $23.4 million between December 31, 2011 and March 31, 2012. Savings and other interest bearing demand deposits increased $11.5 million between December 31, 2011 and March 31, 2012. The Company’s focus is on core deposit growth and the Company will continue to price deposit rates to remain competitive within the market and to retain customers. At March 31, 2012, core deposits — savings and money market accounts, time deposits less than $100,000 and demand deposits — represented approximately 88.91% of total deposits.

 

31


Borrowings. Total borrowings decreased $8.8 million, or 8.03%, since December 31, 2011. The decrease in borrowings is the result of a $7.4 million decrease in securities sold under repurchase agreements. The decrease in repurchase agreements is due to public funds deposits moving to money market deposit accounts in an effort to remain liquid and to maximize interest rate return.

Capital Resources. Total stockholders’ equity increased from $114.4 million at December 31, 2011 to $115.4 million at March 31, 2012. The increase is the result of net income and partially offset by fair value adjustments in the Company’s investment securities and cash dividends paid to shareholders during the past three months. Shareholders received a $0.06 per share cash dividend during the first quarter of 2012 which included a one-time special $0.03 dividend. Book value per share increased 0.66% from $6.10 per share at December 31, 2011 to $6.14 per share at March 31, 2012. This increase is mainly the result of net income from the quarter ended March 31, 2012.

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company. As of March 31, 2012 the Company's total risk-based capital ratio stood at 17.35%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 16.09% and 9.55%, respectively. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of March 31, 2012.

Due to the continuing growth in the Bank’s business and the higher levels of its allowance for loan losses associated with current economic conditions, senior management and the Board have determined that higher levels of capital are appropriate. The Office of the Comptroller of the Currency (the “OCC”) concurred in the Board’s view that additional capital would be beneficial in supporting its continued growth and operations. As a result, effective February 2, 2010, the OCC proposed and the Bank accepted the following individual minimum capital requirements for the Bank: Tier I Capital to Adjusted Total Assets of 7.20% and Total Capital to Risk-Weighted Assets of 11.00%. At March 31, 2012, the Bank is in compliance with these minimum capital requirements.

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified two accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for loan losses and other-than-temporary impairment of securities. The change in methodology for historical loss experience used in calculating the unallocated portion of the allowance for loan losses from 8 previous quarters to now using the 12 previous quarters was previously discussed. Additional information regarding these policies is included in the notes to the aforementioned 2011 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 2 (Securities), Note 3 (Loans), and the sections captioned “Loan Portfolio” and “Investment Securities”.

 

32


Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. U.S.GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Company’s trust subsidiary to provide quality, cost-effective trust services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. U.S.GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of the goodwill, which resides on the books of the Trust, is estimated by reviewing the past and projected operating results for the subsidiary and trust banking industry comparable information.

Liquidity

The Company maintains, in the opinion of management, liquidity sufficient to satisfy depositors' requirements and meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Company's ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. The Company’s objective in liquidity management is to maintain the ability to meet loan commitments, purchase securities or to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings. Principal sources of liquidity for the Company include assets considered relatively liquid, such as federal funds sold, cash and due from banks, as well as cash flows from maturities and repayments of loans, and securities.

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at major domestic banks. At March 31, 2012, these lines of credited totaled $24.5 million and the Bank had not borrowed against these lines. In addition, the Company has a $1.5 million revolving line of credit with a correspondent bank. The outstanding balance at March 31, 2012 was $350 thousand. Management feels that its liquidity position is adequate and continues to monitor the position on a monthly basis. As of March 31, 2012, the Bank had outstanding balances with the Federal Home Loan Bank of Cincinnati (“FHLB”) of $10.5 million with additional borrowing capacity of approximately $88.1 million with the FHLB as well as access to the Federal Reserve Discount Window, which provides an additional source of funds. The Bank views its membership in the FHLB as a solid source of liquidity.

The primary investi