XNAS:FMNB Farmers National Banc Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

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 June 30, 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 July 31, 2012

Common Stock, No Par Value    18,821,741 shares

 

 

 


Table of Contents
PART I — FINANCIAL INFORMATION   
         

Page

Number

 

Item 1

   Financial Statements (Unaudited)   
   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      26   

Item 3

   Quantitative and Qualitative Disclosures About Market Risk      38   

Item 4

   Controls and Procedures      39   
PART II — OTHER INFORMATION   

Item 1

   Legal Proceedings      39   

Item 1A

   Risk Factors      39   

Item 2

   Unregistered Sales of Equity Securities and Use of Proceeds      40   

Item 3

   Defaults Upon Senior Securities      40   

Item 4

   Mine Safety Disclosures      40   

Item 5

   Other Information      40   

Item 6

   Exhibits      40   

SIGNATURES

     41   

10-Q Certifications

  

Section 906 Certifications

  


Table of Contents

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

 

     (In Thousands of Dollars)  
     June 30,
2012
     December 31,
2011
 

ASSETS

     

Cash and due from banks

   $ 14,410       $ 14,161   

Federal funds sold and other

     61,149         38,261   
  

 

 

    

 

 

 

TOTAL CASH AND CASH EQUIVALENTS

     75,559         52,422   
  

 

 

    

 

 

 

Securities available for sale

     420,147         400,029   

Loans held for sale

     3,718         677   

Loans

     572,453         571,806   

Less allowance for loan losses

     9,048         9,820   
  

 

 

    

 

 

 

NET LOANS

     563,405         561,986   
  

 

 

    

 

 

 

Premises and equipment, net

     17,616         16,461   

Goodwill

     3,709         3,709   

Other intangibles

     2,528         2,732   

Bank owned life insurance

     15,275         15,015   

Other assets

     14,876         14,840   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 1,116,833       $ 1,067,871   
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

     

Deposits:

     

Noninterest-bearing

   $ 109,222       $ 96,117   

Interest-bearing

     777,371         744,008   
  

 

 

    

 

 

 

TOTAL DEPOSITS

     886,593         840,125   
  

 

 

    

 

 

 

Short-term borrowings

     96,465         98,088   

Long-term borrowings

     10,583         11,263   

Other liabilities

     4,254         3,950   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     997,895         953,426   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Stockholders' Equity:

     

Common Stock – Authorized 25,000,000 shares; issued 18,802,282 in 2012 and 18,757,437 in 2011

     104,504         104,261   

Retained earnings

     5,250         2,133   

Accumulated other comprehensive income

     9,184         8,051   

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

     0         0   
  

 

 

    

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     118,938         114,445   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,116,833       $ 1,067,871   
  

 

 

    

 

 

 

See accompanying notes

 

3


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

 

       (In Thousands except Per Share Data)  
       For the Three Months Ended        For the Six Months Ended  
       June 30,
2012
     June 30,
2011
       June 30,
2012
     June 30,
2011
 

INTEREST AND DIVIDEND INCOME

               

Loans, including fees

     $ 7,987       $ 8,354         $ 15,983       $ 16,820   

Taxable securities

       2,128         2,048           4,234         3,917   

Tax exempt securities

       706         729           1,419         1,468   

Dividends

       52         53           102         99   

Federal funds sold and other interest income

       30         10           51         19   
    

 

 

    

 

 

      

 

 

    

 

 

 

TOTAL INTEREST AND DIVIDEND INCOME

       10,903         11,194           21,789         22,323   
    

 

 

    

 

 

      

 

 

    

 

 

 

INTEREST EXPENSE

               

Deposits

       1,460         1,684           2,985         3,382   

Short-term borrowings

       25         104           67         201   

Long-term borrowings

       98         249           196         500   
    

 

 

    

 

 

      

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

       1,583         2,037           3,248         4,083   
    

 

 

    

 

 

      

 

 

    

 

 

 

NET INTEREST INCOME

       9,320         9,157           18,541         18,240   

Provision for loan losses

       400         1,075           400         2,950   
    

 

 

    

 

 

      

 

 

    

 

 

 

NET INTEREST INCOME AFTER

               

PROVISION FOR LOAN LOSSES

       8,920         8,082           18,141         15,290   
    

 

 

    

 

 

      

 

 

    

 

 

 

NONINTEREST INCOME

               

Service charges on deposit accounts

       485         500           959         973   

Bank owned life insurance income, including death benefits

       125         119           260         278   

Trust fees

       1,365         1,365           2,783         2,703   

Insurance agency commissions

       25         28           61         92   

Investment commissions

       249         263           435         454   

Net gains on sale of loans

       138         0           203         0   

Other operating income

       538         419           952         811   
    

 

 

    

 

 

      

 

 

    

 

 

 

TOTAL NONINTEREST INCOME

       2,925         2,694           5,653         5,311   
    

 

 

    

 

 

      

 

 

    

 

 

 

NONINTEREST EXPENSES

               

Salaries and employee benefits

       4,939         4,483           9,668         8,671   

Occupancy and equipment

       1,080         922           2,051         1,838   

State and local taxes

       304         238           611         485   

Professional fees

       456         403           863         810   

Advertising

       210         211           458         356   

FDIC insurance

       183         244           369         592   

Intangible amortization

       103         112           205         255   

Core processing charges

       332         310           720         624   

Other operating expenses

       1,270         1,169           2,571         2,275   
    

 

 

    

 

 

      

 

 

    

 

 

 

TOTAL NONINTEREST EXPENSES

       8,877         8,092           17,516         15,906   
    

 

 

    

 

 

      

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       2,968         2,684           6,278         4,695   

INCOME TAXES

       682         567           1,472         888   
    

 

 

    

 

 

      

 

 

    

 

 

 

NET INCOME

     $ 2,286       $ 2,117         $ 4,806       $ 3,807   
    

 

 

    

 

 

      

 

 

    

 

 

 

NET INCOME PER SHARE – basic and diluted

     $ 0.12       $ 0.11         $ 0.26       $ 0.21   
    

 

 

    

 

 

      

 

 

    

 

 

 

See accompanying notes

 

4


Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

 

     (In Thousands except Per Share Data)  
     For the Three Months Ended        For the Six Months Ended  
     June 30,
2012
    June 30,
2011
       June 30,
2012
    June 30,
2011
 

NET INCOME

   $ 2,286      $ 2,117         $ 4,806      $ 3,807   

Other comprehensive income:

           

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

     2,599        5,797           1,743        5,863   

Reclassification adjustment for (gains) losses realized in income

     0        0           0        0   
  

 

 

   

 

 

      

 

 

   

 

 

 

Net unrealized holding gains (losses)

     2,599        5,797           1,743        5,863   

Income tax effect

     (910     (2,028        (610     (2,051
  

 

 

   

 

 

      

 

 

   

 

 

 

Net of tax comprehensive income (loss)

     1,689        3,769           1,133        3,812   
  

 

 

   

 

 

      

 

 

   

 

 

 

TOTAL COMPREHENSIVE INCOME

   $ 3,975      $ 5,886         $ 5,939      $ 7,619   
  

 

 

   

 

 

      

 

 

   

 

 

 

See accompanying notes

 

5


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

 

     (In Thousands of Dollars)  
     Six Months Ended  
     June 30,
2012
    June 30,
2011
 

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 4,806      $ 3,807   

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

    

Provision for loan losses

     400        2,950   

Depreciation and amortization

     848        829   

Net amortization of securities

     1,225        671   

(Gain) loss on sale of other real estate owned

     (91     29   

Increase in bank owned life insurance

     (260     (278

Origination of loans held for sale

     (13,669     0   

Proceeds from loans held for sale

     10,831        0   

Net gain on sale of loans

     (203     0   

Net change in other assets and liabilities

     (564     (1,139
  

 

 

   

 

 

 

NET CASH FROM OPERATING ACTIVITIES

     3,323        6,869   

CASH FLOWS FROM INVESTING ACTIVITIES

    

Proceeds from maturities and repayments of securities available for sale

     35,245        21,120   

Proceeds from sales of securities available for sale

     0        3,361   

Purchases of securities available for sale

     (54,846     (63,277

Loan originations and payments, net

     (3,106     19,845   

Proceeds from sale of other real estate owned

     1,551        141   

Purchase of bank owned life insurance

     0        (3,000

Proceeds from BOLI death benefit

     0        108   

Additions to premises and equipment

     (1,748     (1,179
  

 

 

   

 

 

 

NET CASH FROM INVESTING ACTIVITIES

     (22,904     (22,881

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     46,468        9,013   

Net change in short-term borrowings

     (1,623     3,086   

Repayment of Federal Home Loan Bank borrowings and other debt

     (680     (1,161

Cash dividends paid

     (1,690     (1,119

Proceeds from dividend reinvestment

     243        255   

Net proceeds from issuance of common shares

     0        13,772   
  

 

 

   

 

 

 

NET CASH FROM FINANCING ACTIVITIES

     42,718        23,846   
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     23,137        7,834   

Beginning cash and cash equivalents

     52,422        37,305   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 75,559      $ 45,139   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 3,284      $ 4,108   

Income taxes paid

   $ 855      $ 2,085   

Supplemental noncash disclosures:

    

Transfer of loans to other real estate

   $ 1,287      $ 437   

See accompanying notes

 

6


Table of Contents

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. Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.

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 other intangibles 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 and six month periods ended June 30, 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 years, 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 resulted in a $400 thousand loan loss provision for the three and six month periods ended June 30, 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


Table of Contents

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 the year ended December 31, 2011, by presenting comprehensive income in new Consolidated Statements of Comprehensive Income. The new statements follow 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 June 30, 2012 and December 31, 2011 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

(In Thousands of Dollars)

June 30, 2012

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

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

   $ 56,492       $ 1,932       $ 0      $ 58,424   

State and political subdivisions

     77,089         4,984         (12     82,061   

Corporate bonds

     1,236         11         0        1,247   

Mortgage-backed securities - residential

     237,306         6,380         (68     243,618   

Collateralized mortgage obligations

     33,531         635         0        34,166   

Small business administration

     224         1         (2     223   

Equity securities

     139         274         (5     408   
  

 

 

    

 

 

    

 

 

   

 

 

 

Totals

   $ 406,017       $ 14,217       $ (87   $ 420,147   
  

 

 

    

 

 

    

 

 

   

 

 

 

(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   

 

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Table of Contents

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no security sales during the three and six months ended June 30, 2012. There was one security sale during the three and six month periods ended June 30, 2011. Proceeds from the sale were $3.4 million with no gain or loss recognized.

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, CMO and SBA securities are not due at a single maturity date and are shown separately.

 

     June 30, 2012  
(In Thousands of Dollars)    Amortized
Cost
     Fair
Value
 

Maturity

     

Within one year

   $ 21,086       $ 21,450   

One to five years

     66,379         69,844   

Five to ten years

     34,287         36,455   

Beyond ten years

     13,065         13,983   

Mortgage-backed, CMO and SBA securities

     271,061         278,007   
  

 

 

    

 

 

 

Total

   $ 405,878       $ 419,739   
  

 

 

    

 

 

 

The following table summarizes the investment securities with unrealized losses at June 30, 2012 and December 31, 2011, aggregated by major security type and length of time in a continuous unrealized loss position. Unrealized losses for U.S. Treasury and U.S. government sponsored entities and corporate bonds rounded to less than $1 thousand for the periods ended June 30, 2012 and December 31, 2011, respectively.

 

     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
 

June 30, 2012

               

Available-for-sale

               

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

   $ 100       $ 0      $ 0       $ 0      $ 100       $ 0   

State and political subdivisions

     0         0        321         (12     321         (12

Mortgage-backed securities – residential

     15,322         (68     23         0        15,345         (68

Small business administration

     0         0        114         (2     114         (2

Equity securities

     0         0        8         (5     8         (5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 15,422       $ (68   $ 466       $ (19   $ 15,888       $ (87
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
     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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 June 30, 2012, the Company’s security portfolio consisted of 416 securities, 18 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 as discussed below.

Unrealized losses on debt 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.

 

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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.

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:

 

(In Thousands of Dollars)    June 30,
2012
    December 31,
2011
 

Commercial real estate

    

Owner occupied

   $ 94,908      $ 100,710   

Non-owner occupied

     86,839        80,585   

Other

     22,472        17,394   

Commercial

     77,635        74,875   

Residential real estate

    

1-4 family residential

     139,305        145,743   

Home equity lines of credit

     22,178        21,943   

Consumer

    

Indirect

     114,483        115,681   

Direct

     11,373        11,596   

Other

     1,397        1,520   
  

 

 

   

 

 

 

Subtotal

     570,590        570,047   

Net deferred loan costs

     1,863        1,759   

Allowance for loan losses

     (9,048     (9,820
  

 

 

   

 

 

 

Net loans

   $ 563,405      $ 561,986   
  

 

 

   

 

 

 

 

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The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2012 and 2011:

Three Months Ended June 30, 2012

 

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

Allowance for loan losses

            

Beginning balance

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

Provision for loan losses

     (175     392        309        8        (134     400   

Loans charged off

     (283     (171     (363     (198     0        (1,015

Recoveries

     24        13        19        161        0        217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,626      $ 1,752      $ 1,607      $ 1,020      $ 43      $ 9,048   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Six Months Ended June 30, 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

     55        405        381        153        (594     400   

Loans charged off

     (368     (213     (608     (447     0        (1,636

Recoveries

     59        31        32        342        0        464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,626      $ 1,752      $ 1,607      $ 1,020      $ 43      $ 9,048   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Three Months Ended June 30, 2011

 

  

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

Allowance for loan losses

            

Beginning balance

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

Provision for loan losses

     582        51        34        272        136        1,075   

Loans charged off

     (555     (55     (155     (270     —          (1,035

Recoveries

     6        12        402        279        —          699   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 6,053      $ 1,886      $ 1,542      $ 1,123      $ 272      $ 10,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Six Months Ended June 30, 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

     905        334        1,154        349        208        2,950   

Loans charged off

     (640     (189     (896     (569     —          (2,294

Recoveries

     8        34        403        468        —          913   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 6,053      $ 1,886      $ 1,542      $ 1,123      $ 272      $ 10,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 June 30, 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:

 

June 30, 2012

 

                 

(In Thousands of Dollars)

Allowance for loan losses:

   Commercial
Real Estate
     Commercial      Residential
Real Estate
     Consumer      Unallocated      Total  

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 556       $ 448       $ 0       $ 0       $ 0       $ 1,004   

Collectively evaluated for impairment

     4,070         1,304         1,607         1,020         43         8,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 4,626       $ 1,752       $ 1,607       $ 1,020       $ 43       $ 9,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 8,956       $ 1,495       $ 725       $ 0       $ 0       $ 11,176   

Loans collectively evaluated for impairment

     194,626         76,140         160,141         130,370         0         561,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 203,582       $ 77,635       $ 160,866       $ 130,370       $ 0       $ 572,453   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

 

                 

(In Thousands of Dollars)

Allowance for loan losses:

   Commercial
Real Estate
     Commercial      Residential
Real Estate
     Consumer      Unallocated      Total  

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present information related to impaired loans by class of loans as of June 30, 2012 and December 31, 2011:

 

(In Thousands of Dollars)

June 30, 2012

   Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
 

With no related allowance recorded:

        

Commercial real estate

        

Owner occupied

   $ 1,302       $ 1,303       $ 0   

Non-owner occupied

     287         288         0   

Other

     0         0         0   

Commercial

     890         890         0   

Residential real estate

        

1-4 family residential

     723         725         0   
  

 

 

    

 

 

    

 

 

 

Subtotal

     3,202         3,206         0   
  

 

 

    

 

 

    

 

 

 

 

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With an allowance recorded:

        

Commercial real estate

        

Owner occupied

     4,673         4,683         315   

Non-owner occupied

     2,678         2,682         241   

Other

     0         0         0   

Commercial

     603         605         448   
  

 

 

    

 

 

    

 

 

 

Subtotal

     7,954         7,970         1,004   
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,156       $ 11,176       $ 1,004   
  

 

 

    

 

 

    

 

 

 

 

(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   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

 

Subtotal

     6,897         6,903         985   
  

 

 

    

 

 

    

 

 

 

Total

   $ 10,341       $ 10,355       $ 985   
  

 

 

    

 

 

    

 

 

 

The following table presents the average recorded investment in impaired loans by class for the three and six month periods ended June 30, 2012 and 2011:

 

(In Thousands of Dollars)    Average Recorded
Investment for Three
Months Ended June 30,
     Average Recorded
Investment for Six Months
Ended June 30,
 
     2012      2011      2012      2011  

With no related allowance recorded:

           

Commercial real estate

           

Owner occupied

   $ 1,207       $ 1,211       $ 1,104       $ 1,236   

Non-owner occupied

     302         0         313         0   

Other

     0         0         0         0   

Commercial

     922         655         946         671   

Residential real estate

           

1-4 family residential

     726         0         728         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     3,157         1,866         3,091         1,907   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Commercial real estate

           

Owner occupied

     4,726         2,375         4,764         2,405   

Non-owner occupied

     3,112         833         3,438         894   

Other

     0         802         0         812   

Commercial

     628         445         638         459   

Subtotal

     8,466         4,455         8,840         4,570   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,623       $ 6,321       $ 11,931       $ 6,477   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Interest income recognized during impairment for the three and six month periods was immaterial.

Nonaccrual loans and loans past due 90 days or more 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 90 days or more still on accrual by class of loans as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012      December 31, 2011  
(In Thousands of Dollars)    Nonaccrual      Loans Past
Due 90 Days
or More Still
Accruing
     Nonaccrual      Loans Past
Due 90 Days
or More Still
Accruing
 

Commercial real estate

           

Owner occupied

   $ 3,553       $ 0       $ 2,640       $ 0   

Non-owner occupied

     2,296         0         2,795         0   

Other

     0         0         590         0   

Commercial

     909         46         527         0   

Residential real estate

           

1-4 family residential

     2,565         195         3,897         121   

Home equity lines of credit

     288         0         299         0   

Consumer

           

Indirect

     11         61         12         114   

Direct

     0         3         0         13   

Other

     0         1         0         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,622       $ 306       $ 10,760       $ 250   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2012 and December 31, 2011 by class of loans:

 

(In Thousands of Dollars)

June 30, 2012

   30-59
Days Past
Due
     60-89
Days
Past Due
     90 Days or
More Past
Due and
Nonaccrual
     Total Past
Due
     Loans Not
Past Due
     Total  

Commercial real estate

                 

Owner occupied

   $ 207       $ 0       $ 3,553       $ 3,760       $ 90,577       $ 94,337   

Non-owner occupied

     11         0         2,296         2,307         84,261         86,568   

Other

     153         0         0         153         22,524         22,677   

Commercial

     25         24         741         790         76,845         77,635   

Residential real estate

                 

1-4 family residential

     953         135         2,974         4,062         134,626         138,688   

Home equity lines of credit

     0         0         288         288         21,890         22,178   

Consumer

                 

Indirect

     979         187         72         1,238         116,362         117,600   

Direct

     92         20         3         115         11,258         11,373   

Other

     8         13         1         22         1,375         1,397   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,428       $ 379       $ 9,928       $ 12,735       $ 559,718       $ 572,453   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

(In Thousands of Dollars)

December 31, 2011

   30-59
Days Past
Due
     60-89
Days
Past Due
     90 Days or
More 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 $6.5 million and $4.3 million at June 30, 2012 and December 31, 2011, respectively. The Company has allocated $91 thousand and $48 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 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 June 30, 2012 and December 31, 2011.

During the three and six month periods ended June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Troubled debt restructuring modifications involved a reduction of the notes stated interest rate in the range of 1% and 3.6% on loans with maturity periods ranging from 5 months to 41months. One loan involved an extension of the maturity date by 5 years.

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ended June 30, 2012:

 

(In Thousands of Dollars)

Troubled debt restructurings

   Number
of Loans
     Pre-Modification
Outstanding Recorded
Investment
     Post-Modification
Outstanding  Recorded
Investment
 

Commercial real estate

        

Owner occupied

     2       $ 787       $ 792   

Non-owner occupied

     3         2,376         2,419   

Residential real estate

        

1-4 family residential

     1         52         52   
  

 

 

    

 

 

    

 

 

 

Total

     6       $ 3,215       $ 3,263   
  

 

 

    

 

 

    

 

 

 

The troubled debt restructurings described above decreased the allowance for loan losses by $416 thousand during the six month period ended June 30, 2012. There were no charge offs as a result of the allowance adjustments.

 

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Table of Contents

There were two residential real estate loans modified as troubled debt restructurings for which there were payment defaults within the previous twelve months, for the period ended June 30, 2012. The loans were not past due at June 30, 2012. There was no additional provision or any impact to the allowance for losses associated with these loans. 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:

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 June 30, 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)

June 30, 2012

   Pass      Special
Mention
     Sub-
standard
     Doubtful      Not Rated      Total  

Commercial real estate

                 

Owner occupied

   $ 79,716       $ 2,069       $ 12,552       $ 0       $ 0       $ 94,337   

Non-owner occupied

     76,039         3,163         7,366         0         0         86,568   

Other

     20,403         1,044         1,230         0         0         22,677   

Commercial

     70,784         4,030         2,821         0         0         77,635   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 246,942       $ 10,306       $ 23,969       $ 0       $ 0       $ 281,217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential, consumer indirect and direct 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 indirect and direct auto loans based on payment activity as of June 30, 2012 and December 31, 2011. Nonperforming loans are loans past due 90 days or more and still accruing interest and nonaccrual loans.

 

(In Thousands of Dollars)

June 30, 2012

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

Performing

   $ 135,714       $ 21,890       $ 117,528       $ 11,370       $ 1,396   

Nonperforming

     2,974         288         72         3         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 138,688       $ 22,178       $ 117,600       $ 11,373       $ 1,397   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(In Thousands of Dollars)

December 31, 2011

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

Performing

   $ 141,070       $ 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
June 30,
     Six Months Ended
June 30,
 
(In Thousands, except Share and Per Share Data)    2012      2011      2012      2011  

Basic EPS computation

           

Numerator – Net income

   $ 2,286       $ 2,117       $ 4,806       $ 3,807   

Denominator – Weighted average shares outstanding

     18,800,122         18,674,213         18,782,968         17,820,254   

Basic earnings per share

   $ .12       $ .11       $ .26       $ .21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS computation

           

Numerator – Net income

   $ 2,286       $ 2,117       $ 4,806       $ 3,807   

Denominator – Weighted average shares outstanding for basic earnings per share

     18,800,122         18,674,213         18,782,968         17,820,254   

Effect of Stock Options

     0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted averages shares for diluted earnings per share

     18,800,122         18,674,213         18,782,968         17,820,254   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ .12       $ .11       $ .26       $ .21   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Stock options for 5,000 and 28,500 shares were not considered in the computing of diluted earnings per share for the three and six months ended June 30, 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 June 30, 2012 there were 5,000 outstanding options of which 3,000 were fully vested and 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 and six month period ended June 30, 2012 was not material. No related income tax benefit was recorded.

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 Chief Financial Officer and Controller. For the period ended June 30, 2012 the fair value of Level 3 investment securities was immaterial.

 

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Table of Contents

Impaired Loans: At the time loans are considered impaired, collateral dependent impaired loans are valued at the lower of cost or fair value and non-collateral dependent loans are valued based on discounted cash flows. 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.

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
June 30, 2012 Using:
 
(In Thousands of Dollars)    Carrying
Value
     Quoted Prices
in Active
Markets for
Identical
Assets (Level1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial Assets

           

Investment securities available-for sale

           

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

   $ 58,424       $ 0       $ 58,424       $ 0   

State and political subdivisions

     82,061         0         82,061         0   

Corporate bonds

     1,247         0         1,247         0   

Mortgage-backed securities-residential

     243,618         0         243,607         11   

 

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Table of Contents
                                                                                                                   

Collateralized mortgage obligations

     34,166         0         34,166         0   

Small business administration

     223         0         223         0   

Equity securities

     408         408         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 420,147       $ 408       $ 419,728       $ 11   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Measurements at December 31, 2011 Using:  
(In Thousands of Dollars)    Carrying Value      Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs (Level2)
     Significant
Unobservable
Inputs

( 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no significant transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 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 June 30,      Six Months Ended June 30,  
(In Thousands of Dollars)    2012     2011      2012     2011  

Beginning balance

   $ 12      $ 12       $ 12      $ 12   

Total unrealized gains or losses:

         

Included in other comprehensive income or loss

     0        0         0        0   

Repayments

     (1     0         (1     0   

Transfer in and/or out of Level 3

     0        0         0        0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 11      $ 12       $ 11      $ 12   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

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

 

     Fair Value Measurements
at June 30, 2012 Using:
 
(In Thousands of Dollars)    Carrying Value      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial assets:

           

Impaired loans

           

Commercial real estate

           

Owner occupied

   $ 2,162       $ 0       $ 0       $ 2,162   

Non-owner occupied

     492         0         0         492   

Other

     0         0         0         0   

Commercial

     155         0         0         155   

Other real estate owned

           

Commercial real estate

     187         0         0         187   

1 – 4 family residential

     89         0         0         89   

 

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

(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   

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $3.7 million with a valuation allowance of $864 thousand at June 30, 2012, resulting in an additional provision for loan losses of $339 thousand and $420 thousand for the three and six month periods ended June 30, 2012. At December 31, 2011, impaired loans had a principal balance of $4.6 million, with a valuation allowance of $936 thousand. The additional provision for loan losses was $66 thousand for the three months ended June 30, 2011 and $397 thousand for the six months ended June 30, 2011, for loans carried at fair value. Excluded from the fair value of impaired loans, at June 30, 2012 and December 31, 2011, discussed above are $4.3 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. Impaired loans other than commercial real estate and other real estate owned are not considered material.

 

22


Table of Contents

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2012:

 

(In Thousands of Dollars)    Fair
value
    

Valuation Technique(s)

 

Unobservable Input(s)

   Range(Weighted Average)

Impaired loans

          

Commercial real estate

   $ 2,654      

Sales

comparison

 

Adjustment for

differences between comparable sales

   -44.2% -70.0% (-12.5%)
     

Income

approach

 

Adjustment for

differences in net

operating income

   -36.8% -78.2% (14.9%)

Commercial

     155      

Sales

comparison

 

Adjustment for

differences between comparable sales

   -39.8% -48.9% (9.3%)

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $276 thousand at June 30, 2012. The Company sold nine other real estate owned properties during the six month period ended June 30, 2012. The Company recorded $73 thousand in write downs on four other real estate owned properties during the six month period ended June 30, 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 June 30, 2012 and December 31, 2011 are as follows:

 

            Fair Value Measurements at June 30, 2012 Using:  
(In Thousands of Dollars)    Carrying
Amount
     Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 75,559       $ 14,410       $ 61,149       $ 0       $ 75,559   

Securities available-for-sale

     420,147         408         419,728         11         420,147   

Restricted stock

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

Loans held for sale

     3,718         0         3,784         0         3,784   

Loans, net

     563,405         0         0         575,142         575,142   

Accrued interest receivable

     3,749         0         1,089         2,660         3,749   

Financial liabilities

              

Deposits

     886,593         641,629         251,245         0         892,874   

Short-term borrowings

     96,465         0         96,465         0         96,465   

Long-term borrowings

     10,583         0         11,956         0         11,956   

Accrued interest payable

     550         5         545         0         550   

.

 

(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   

 

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Table of Contents

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   

The methods and assumptions used to estimate fair value, not previously described, 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 bearing 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 considered material.

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.

 

24


Table of Contents

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

 

(In Thousands of Dollars)

June 30, 2012

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Assets

          

Cash and cash equivalents

   $ 2,383       $ 73,258       $ (82   $ 75,559   

Securities available for sale

     2,865         417,119         163        420,147   

Loans held for sale

     0         3,718         0        3,718   

Net loans

     0         563,405         0        563,405   

Premises and equipment, net

     89         17,527         0        17,616   

Goodwill and other intangibles

     6,237         0         0        6,237   

Other assets

     544         28,990         617        30,151   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 12,118       $ 1,104,017       $ 698      $ 1,116,833   
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Deposits, borrowings and other liabilities

   $ 658       $ 1,001,366       $ (4,129   $ 997,895   

Stockholders’ equity

     11,460         102,651         4,827        118,938   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 12,118       $ 1,104,017       $ 698      $ 1,116,833   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(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

June 30, 2012

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Net interest income

   $ 12       $ 9,310       $ (2   $ 9,320   

Provision for loan losses

     0         400         0        400   

Service fees, security gains and other noninterest income

     1,382         1,617         (74     2,925   

Noninterest expense

     1,263         7,395         219        8,877   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     131         3,132         (295     2,968   

Income taxes

     47         735         (100     682   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income

   $ 84       $ 2,397       $ (195   $ 2,286   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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(In Thousands of Dollars)

For the Six Months Ended

June 30, 2012

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Net interest income

   $ 22       $ 18,533       $ (14   $ 18,541   

Provision for loan losses

     0         400         0        400   

Service fees, security gains and other noninterest income

     2,819         2,971         (137     5,653   

Noninterest expense

     2,527         14,636         353        17,516   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     314         6,468         (504     6,278   

Income taxes

     110         1,533         (171     1,472   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income

   $ 204       $ 4,935       $ (333   $ 4,806   
  

 

 

    

 

 

    

 

 

   

 

 

 

(In Thousands of Dollars)

For the Three Months Ended

June 30, 2011

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Net interest income

   $ 11       $ 9,158       $ (12   $ 9,157   

Provision for loan losses

     0         1,075         0        1,075   

Service fees, security gains and other noninterest income

     1,377         1,356         (39     2,694   

Noninterest expense

     1,149         6,743         200        8,092   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     239         2,696         (251     2,684   

Income taxes

     82         570         (85     567   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income

   $ 157       $ 2,126       $ (166   $ 2,117   
  

 

 

    

 

 

    

 

 

   

 

 

 

(In Thousands of Dollars)

For the Six Months Ended

June 30, 2011

   Trust
Segment
     Bank
Segment
     Eliminations
and Others
    Consolidated
Totals
 

Net interest income

   $ 22       $ 18,243       $ (25   $ 18,240   

Provision for loan losses

     0         2,950         0        2,950   

Service fees, security gains and other noninterest income

     2,727         2,661         (77     5,311   

Noninterest expense

     2,349         13,255         302        15,906   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before taxes

     400         4,699         (404     4,695   

Income taxes

     137         888         (137     888   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Income

   $ 263       $ 3,811       $ (267   $ 3,807   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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:

 

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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.

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 June 30, 2012 was $2.3 million, compared to $2.1 million for the same three month period in 2011. On a per share basis, net income for the second quarter ended June 30, 2012 was $0.12 per diluted share, compared to $0.11 for the second quarter ended June 30, 2011. Net income for the six months ended June 30, 2012 was $4.8 million, compared to $3.8 million for the same six month period in 2011. On a per share basis, net income for the six months ended June 30, 2012 was $0.26, an increase of 23.8% compared to the same six month period in 2011. The tangible common equity ratio increased to 10.15% at June 30, 2012, compared to 10.11% at June 30, 2011, mainly as a result of net income. Farmers’ total assets reported at June 30, 2012 were $1.12 billion, representing a 4.6% increase compared to $1.07 billion in total assets recorded at December 31, 2011.

Net income increased to $2.3 million for the three months ended June 30, 2012, which represents an 8% increase over the $2.1 million reported for the same period in 2011. Noninterest income increased 8.6% during the same three month period, which is consistent with the strategy to diversify revenue. Asset quality continues to improve, evidenced by the reduction in the provision for loan losses from $1.1 million for the three month period ended June 30, 2011 to $400 thousand for the three months ended June 30, 2012. There has also been a decline in the 30-89 day delinquencies, from $3.8 million at June 30, 2011 to $2.8 million at June 30, 2012.

Net loans increased $1.4 million in comparing the June 30, 2012 balance to the December 31, 2011. Most of the loan growth in the current year has occurred in the commercial and commercial real estate portfolios. Net loans were reported at $563.4 million at June 30, 2012, which compares to $562.0 million at December 31, 2011. Deposits increased $46.5 million, or 5.5%, from $840.1 million at December 31, 2011 to $886.6 million at June 30, 2012, as customers continue to seek the safety and security of FDIC insured deposit accounts.

 

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Stockholders’ equity totaled $118.9 million, or 10.6% of total assets, at June 30, 2012, an increase of $4.5 million, or 3.9%, compared to $114.4 million at December 31, 2011. The increase is mainly the result of net income and fair value adjustments in investment securities, offset by cash dividends paid to shareholders during the past six months. Shareholders received a total of $0.15 per share in cash dividends paid in the past four quarters, including a special one-time $0.03 cash dividend on February 28, 2012. Book value per share increased 3.8% from $6.10 per share at December 31, 2011 to $6.33 per share at June 30, 2012. Farmers’ tangible book value per share also increased 4.0% from $5.76 per share at December 31, 2012 to $5.99 per share at June 30, 2012.

Results of Operations

The following is a comparison of selected financial ratios and other results at or for the three and six months ended June 30, 2012 and 2011:

 

     At or for the Three Months
Ended June 30,
    At or for the Six Months
Ended June 30,
 
(In Thousands, except Per Share Data)    2012     2011     2012     2011  

Total Assets

   $ 1,116,833      $ 1,014,221      $ 1,116,833      $ 1,014,221   

Net Income

   $ 2,286      $ 2,117      $ 4,806      $ 3,807   

Basic and Diluted Earnings Per Share

   $ .12      $ .11      $ .26      $ .21   

Return on Average Assets (Annualized)

     .82     .83     .88     .76

Return on Average Equity (Annualized)

     7.81     8.05     8.32     7.69

Efficiency Ratio (tax equivalent basis)

     68.54     64.42     68.48     63.50

Equity to Asset Ratio

     10.65     10.71     10.65     10.71

Tangible Common Equity Ratio *

     10.15     10.11     10.15     10.11

Dividends to Net Income

     24.67     26.45     35.16     29.39

Net Loans to Assets

     50.45     55.00     50.45     55.00

Loans to Deposits

     64.57     73.85     64.57     73.85

 

* 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 June 30, 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)    June 30, 2012      June 30, 2011  

Reconciliation of Common Stockholders’ Equity to Tangible Common Equity

     

Stockholders’ Equity

   $ 118,938       $ 108,576   

Less Goodwill and other intangibles

     6,237         6,665   
  

 

 

    

 

 

 

Tangible Common Equity

   $ 112,701       $ 101,911   
  

 

 

    

 

 

 

 

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(In Thousands of Dollars)    June 30, 2012      June 30, 2011  

Reconciliation of Total Assets to Tangible Assets

     

Total Assets

   $  1,116,833       $  1,014,221   

Less Goodwill and other intangibles

     6,237         6,665   
  

 

 

    

 

 

 

Tangible Assets

   $ 1,110,596       $ 1,007,556   
  

 

 

    

 

 

 

Net Interest Income. The following schedules detail 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.

 

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Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

     Three Months Ended
June 30, 2012
    Three Months Ended
June 30, 2011
 
     AVERAGE
BALANCE
    INTEREST      RATE
(1)
    AVERAGE
BALANCE
    INTEREST      RATE
(1)
 

EARNING ASSETS

              

Loans (3) (5) (6)

   $ 562,329      $ 8,056         5.75   $ 562,446    &nbs