XNAS:ATLO Ames National Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q
[Mark One]
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                      
For the quarterly period ended June 30, 2012

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                      
                      
For the transition period from ____________ to ____________

Commission File Number 0-32637

AMES NATIONAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
 
IOWA
 
42-1039071
(State or Other Jurisdiction of Incorporation or Organization)
 
(I. R. S. Employer Identification Number)
 
405 FIFTH STREET
AMES, IOWA 50010
(Address of Principal Executive Offices)

Registrant's Telephone Number, Including Area Code: (515) 232-6251

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

Large accelerated filer o   Accelerated filer x   Non-accelerated filer o  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
COMMON STOCK, $2.00 PAR VALUE
 
9,310,913
(Class)
 
(Shares Outstanding at July 27, 2012)
 


 
 

 
 
AMES NATIONAL CORPORATION

INDEX

    Page
     
PART I.
Financial Information
 
 
   
Item 1.
3
     
 
3
     
 
4
     
  5
     
  6
     
 
7
     
  9
     
Item 2.
28
     
Item 3.
46
     
Item 4.
47
     
PART II.
Other Information
 
     
Item 1.
47
     
Item 1.A.
47
     
Item 2.
47
     
Item 3.
48
     
Item 4.
48
     
Item 5.
48
     
Item 6.
49
     
  50
 
 
 

 
AMES NATIONAL CORPORATION AND SUBSIDIARIES

(unaudited)
ASSETS
 
June 30,
2012
   
December 31,
2011
 
             
Cash and due from banks
  $ 22,610,045     $ 22,829,291  
Interest bearing deposits in financial institutions
    47,084,933       33,741,406  
Securities available-for-sale
    561,082,556       508,624,622  
Loans receivable, net
    487,437,889       438,650,837  
Loans held for sale
    1,881,226       1,212,620  
Bank premises and equipment, net
    12,038,794       11,362,626  
Accrued income receivable
    6,829,553       6,467,509  
Other real estate owned
    8,661,061       9,538,440  
Core deposit intangible, net
    1,450,816       -  
Goodwill
    5,600,749       -  
Other assets
    3,046,378       3,136,482  
                 
Total assets
  $ 1,157,724,000     $ 1,035,563,833  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES
               
Deposits
               
Demand, noninterest bearing
  $ 149,898,320     $ 126,059,239  
NOW accounts
    276,405,263       229,810,463  
Savings and money market
    254,983,000       216,768,048  
Time, $100,000 and over
    100,817,049       107,944,525  
Other time
    162,960,408       138,123,116  
Total deposits
    945,064,040       818,705,391  
                 
Securities sold under agreements to repurchase
    31,541,867       41,696,585  
Federal Home Loan Bank (FHLB) advances
    14,645,456       15,179,335  
Other long-term borrowings
    20,000,000       20,000,000  
Dividend payable
    1,396,637       1,210,419  
Deferred income taxes
    1,517,571       885,433  
Accrued expenses and other liabilities
    3,523,482       3,329,285  
Total liabilities
    1,017,689,053       901,006,448  
                 
STOCKHOLDERS' EQUITY
               
Common stock, $2 par value, authorized 18,000,000 shares; issued 9,432,915 shares; outstanding 9,310,913 shares as of June 30, 2012 and December 31, 2011
    18,865,830       18,865,830  
Additional paid-in capital
    22,651,222       22,651,222  
Retained earnings
    89,623,377       85,564,078  
Accumulated other comprehensive income-net unrealized gain on securities available-for-sale
    10,911,016       9,492,753  
Treasury stock, at cost; 122,002 shares at June 30, 2012 and December 31, 2011, respectively
    (2,016,498 )     (2,016,498 )
Total stockholders' equity
    140,034,947       134,557,385  
                 
Total liabilities and stockholders' equity
  $ 1,157,724,000     $ 1,035,563,833  
 
See Notes to Consolidated Financial Statements.
 
 
3


AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Interest income:
                       
Loans, including fees
  $ 6,245,560     $ 5,999,888     $ 12,056,317     $ 11,740,320  
Securities:
                               
Taxable
    1,593,490       1,796,068       3,218,134       3,458,537  
Tax-exempt
    1,698,430       1,630,994       3,349,145       3,267,959  
Interest bearing deposits and federal funds sold
    132,926       116,767       258,179       224,693  
Total interest income
    9,670,406       9,543,717       18,881,775       18,691,509  
                                 
Interest expense:
                               
Deposits
    1,153,164       1,382,703       2,322,482       2,753,614  
Other borrowed funds
    319,638       354,265       649,136       732,907  
Total interest expense
    1,472,802       1,736,968       2,971,618       3,486,521  
                                 
Net interest income
    8,197,604       7,806,749       15,910,157       15,204,988  
                                 
Provision for loan losses
    64,412       404,788       115,705       404,788  
                                 
Net interest income after provision for loan losses
    8,133,192       7,401,961       15,794,452       14,800,200  
                                 
Noninterest income:
                               
Trust services income
    530,942       557,156       1,035,714       1,071,700  
Service fees
    393,773       364,660       731,212       694,218  
Securities gains, net
    10,535       164,971       318,068       586,126  
Gain on sale of loans held for sale
    356,855       207,523       641,894       428,388  
Merchant and ATM fees
    239,292       195,623       536,250       371,494  
Other noninterest income
    199,535       151,349       368,382       306,896  
Total noninterest income
    1,730,932       1,641,282       3,631,520       3,458,822  
                                 
Noninterest expense:
                               
Salaries and employee benefits
    3,200,188       2,955,348       6,180,807       5,721,856  
Data processing
    564,874       481,003       1,074,204       926,818  
Occupancy expenses
    348,071       322,307       707,755       716,465  
FDIC insurance assessments
    164,755       205,754       319,216       478,496  
Other real estate owned, net
    342,415       120,001       440,793       166,136  
Core deposit intangible amortization
    49,184       -       49,184       -  
Other operating expenses, net
    825,441       676,957       1,561,752       1,331,548  
Total noninterest expense
    5,494,928       4,761,370       10,333,711       9,341,319  
                                 
Income before income taxes
    4,369,196       4,281,873       9,092,261       8,917,703  
                                 
Provision for income taxes
    1,059,780       1,038,501       2,239,687       2,201,810  
                                 
Net income
  $ 3,309,416     $ 3,243,372     $ 6,852,574     $ 6,715,893  
                                 
Basic and diluted earnings per share
  $ 0.36     $ 0.34     $ 0.74     $ 0.71  
                                 
Dividends declared per share
  $ 0.15     $ 0.13     $ 0.30     $ 0.26  
 
See Notes to Consolidated Financial Statements.                                                                                                         

 
4

 
AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
                         
Net income
  $ 3,309,416     $ 3,243,372     $ 6,852,574     $ 6,715,893  
Other comprehensive income, before tax:
                               
Unrealized gains on securities without other than temporary impairment before tax:
                               
Unrealized holding gains arising during the period
    1,610,451       6,347,579       2,569,279       8,563,217  
Less: reclassification adjustment for gains realized in net income
    10,535       164,971       318,068       586,126  
Other comprehensive income before tax
    1,599,916       6,182,608       2,251,211       7,977,091  
Tax expense related to other comprehensive income
    (591,968 )     (2,287,565 )     (832,948 )     (2,951,525 )
Other comprehensive income, net of tax
    1,007,948       3,895,043       1,418,263       5,025,566  
Comprehensive income
  $ 4,317,364     $ 7,138,415     $ 8,270,837     $ 11,741,459  
 
See Notes to Consolidated Financial Statements.                                                                                                           

 
5

 
AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Six Months Ended June 30, 2012 and 2011
   
Common
Stock
   
Additional
Paid-in-Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income, Net of
Taxes
   
Treasury Stock
   
Total
Stockholders'
Equity
 
                                     
Balance, December 31, 2010
  $ 18,865,830     $ 22,651,222     $ 76,519,493     $ 3,326,479     $ -     $ 121,363,024  
Net income
    -       -       6,715,893       -       -       6,715,893  
Other comprehensive income
    -       -       -       5,025,566       -       5,025,566  
Cash dividends declared, $0.26 per share
    -       -       (2,452,558 )     -       -       (2,452,558 )
Purchase of 22,033 shares of treasury stock
    -       -       -       -       (374,533 )     (374,533 )
Balance, June 30, 2011
    18,865,830       22,651,222       80,782,828       8,352,045       (374,533 )     130,277,392  
                                                 
Balance, December 31, 2011
    18,865,830       22,651,222       85,564,078       9,492,753       (2,016,498 )   $ 134,557,385  
Net income
    -       -       6,852,574       -       -       6,852,574  
Other comprehensive income
    -       -       -       1,418,263       -       1,418,263  
Cash dividends declared, $0.30 per share
    -       -       (2,793,275 )     -       -       (2,793,275 )
Balance, June 30, 2012
  $ 18,865,830     $ 22,651,222     $ 89,623,377     $ 10,911,016     $ (2,016,498 )   $ 140,034,947  
 
See Notes to Consolidated Financial Statements.
 
 
6


AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30, 2012 and 2011
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 6,852,574     $ 6,715,893  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    115,705       404,788  
Provision for off-balance sheet commitments
    6,000       5,000  
Amortization, net of securities available for sale
    3,036,365       2,461,727  
Amortization of core deposit intangible asset
    49,184       -  
Depreciation
    363,147       336,162  
Credit for deferred income taxes
    (200,810 )     (185,547 )
Securities gains, net
    (318,068 )     (586,126 )
Impairment of other real estate owned
    296,141       163,443  
Loss (gain) on sale of other real estate owned, net
    46,867       (98,833 )
Change in assets and liabilities:
               
Decrease (increase) in loans held for sale
    (668,606 )     439,654  
Decrease (increase) in accrued income receivable
    152,716       (116,698 )
Decrease in other assets
    82,645       274,117  
Increase in accrued expenses and other liabilities
    68,587       262,909  
Net cash provided by operating activities
    9,882,447       10,076,489  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of securities available-for-sale
    (130,819,189 )     (125,856,535 )
Proceeds from sale of securities available-for-sale
    10,032,564       20,926,918  
Proceeds from maturities and calls of securities available-for-sale
    67,701,604       84,465,457  
Net increase in interest bearing deposits in financial institutions
    (13,343,527 )     (9,041,073 )
Net decrease in federal funds sold
    -       2,968,000  
Net increase in loans
    (2,972,374 )     (7,504,207 )
Net proceeds from the sale of other real estate owned
    796,407       576,252  
Purchase of bank premises and equipment, net
    (167,356 )     (204,439 )
Other changes in other real estate owned
    -       (47,468 )
Cash aquired, net of cash paid, for aquired bank offices
    44,303,137       -  
Net cash used in investing activities
    (24,468,734 )     (33,717,095 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Increase in deposits
    27,662,695       37,913,669  
Decrease in federal funds purchased and securities sold under agreements to repurchase
    (10,154,718 )     (8,038,240 )
Payments from other short-term borrowings, net
    -       (1,131,995 )
Payments on FHLB borrowings
    (533,879 )     (532,818 )
Purchase of treasury stock
    -       (374,533 )
Dividends paid
    (2,607,057 )     (2,263,900 )
Net cash provided by financing activities
    14,367,041       25,572,183  
                 
Net increase (decrease) in cash and due from banks
    (219,246 )     1,931,577  
                 
CASH AND DUE FROM BANKS
               
Beginning
    22,829,291       15,478,133  
Ending
  $ 22,610,045     $ 17,409,710  

 
7

 
AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Six Months Ended June 30, 2012 and 2011
   
2012
   
2011
 
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
           
Cash payments for:
           
Interest
  $ 2,999,826     $ 3,456,462  
Income taxes
    2,515,403       2,345,541  
                 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
               
Transfer of loans to other real estate owned
  $ 262,036     $ 213,586  
                 
Business Combination:
               
Fair value of loans receivable acquired
  $ 46,103,022     $ -  
Fair value of bank premises and equipment acquired
    864,500       -  
Fair value of other tangible assets acquired
    514,760       -  
Goodwill
    5,600,749       -  
Core deposit intangible asset
    1,500,000       -  
Deposits assumed
    98,766,558       -  
Other liabilities assumed
    119,610       -  

See Notes to Consolidated Financial Statements.

 
8

 
AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

1. 
Significant Accounting Policies

The consolidated financial statements for the three and six month periods ended June 30, 2012 and 2011 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting only of normal recurring accruals, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with generally accepted accounting principles have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.

Goodwill and core deposit intangible asset:  Goodwill represents the excess of cost over the fair value of net assets acquired.  Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred.  Goodwill is tested for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit.  The second step, if necessary, measures the amount of impairment, if any.

Significant judgment is applied when goodwill is assessed for impairment.  This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium.  At June 30, 2012, the Company believes there is not any potential impairment due to the proximity of the acquisition to June 30, 2012.

The only other significant intangible asset is a core deposit intangible.  The core deposit intangible asset is determined to have a definite life and is amortized over the estimated useful life.  The core deposit intangible asset is customer based relationships valuation attributed to the expectation of a lower cost versus alternative funds.  The core deposit intangible asset is reviewed for impairment whenever events occur or circumstances indicate that the carrying amount may not be recoverable.

Fair value of financial instruments:  The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and due from banks and interest bearing deposits in financial institutions:  The recorded amount of these assets approximates fair value.

Securities available-for-sale:  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securities credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Loans receivable:  The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan.  The estimate of maturity is based on the historical experience, with repayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions.  The effect of nonperforming loans is considered in assessing the credit risk inherent in the fair value estimate.
 
 
9

 
Loans held for sale:  The fair value of loans held for sale is based on prevailing market prices.

Deposit liabilities:  Fair values of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW and money market accounts, are equal to the amount payable on demand as of the respective balance sheet date.  Fair values of certificates of deposit are based on the discounted value of contractual cash flows.  The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.  The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Securities sold under agreements to repurchase:  The carrying amounts of securities sold under agreements to repurchase approximate fair value because of the generally short-term nature of the instruments.

FHLB advances and other long-term borrowings:  Fair values of FHLB advances and other long-term borrowings are estimated using discounted cash flow analysis based on interest rates currently being offered with similar terms.

Accrued income receivable and accrued interest payable:  The carrying amounts of accrued income receivable and interest payable approximate fair value.

New Accounting Pronouncements:
 
In June, 2011, the FASB issued guidance on comprehensive income to require that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, the guidance requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The guidance is effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s financial statements.
 
In April, 2011, the FASB issued guidance which modifies certain aspects contained in the Receivables topic of FASB ASC 310.  The standard clarifies the guidance on evaluating whether a receivable term modification constitutes a troubled debt restructuring (TDR).  The amendments in this guidance was effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption.  The adoption did not have a material impact on the Company's consolidated financial statements.

In May, 2011, the FASB issued amended guidance which eliminates terminology difference between U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”) on the measurement of fair value and the related fair value disclosures.  While largely consistent with existing fair value measurement principles and disclosures, the changes were made as part of the continuing efforts to converge GAAP and IFRS.  The adoption of this guidance was effective for annual periods beginning after December 15, 2011, and did not have a significant impact on the Company’s financial statements.

2. 
Branch Acquisition

On April 27, 2012 Reliance State Bank (RSB) completed the purchase of two bank branches of Liberty Bank, F.S.B. located in Garner and Klemme, Iowa.  This acquisition was consistent with the Bank’s strategy to strengthen and expand its Iowa market share.  The acquired assets and liabilities were recorded at fair value at the date of acquisition and were reflected in the June 30, 2012 financial statements as such.  These branches were purchased for cash consideration of $5.4 million.  As a result of the acquisition, the Company recorded a core deposit intangible asset of $1,500,000 and goodwill of $5,601,000. The results of operations for this acquisition have been included since the transaction date of April 27, 2012. None of these purchased loans have shown evidence of credit deterioration since origination. Non-routine expenses associated with this transaction were approximately $200,000 for the six months ended June 30, 2012.
 
 
10

 
The following table summarizes the fair value of the total consideration transferred as a part of the acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.
 
   
April 27,
2012
 
       
Cash consideration transferred
  $ 5,400,000  
         
Recognized amounts of identifiable assets acquired and liabilities assumed:
       
         
Cash
  $ 49,703,137  
Loans receivable
    46,103,022  
Accrued interest receivable
    514,760  
Bank premises and equipment
    864,500  
Core deposit intangible asset
    1,500,000  
Deposits
    (98,766,558 )
Accrued interest payable and other liabilities
    (119,610 )
         
Total identifiable net liabilities
  $ (200,749 )
         
Goodwill
  $ 5,600,749  

On April 27, 2012, the contractual balance of loans receivable acquired was $46,972,000 and the contractual balance of the deposits assumed was $98,109,000.  Loans receivable acquired include agricultural real estate, commercial real estate, 1-4 family real estate, commercial operating, agricultural operating and consumer loans determined to be pass rated.

The core deposit intangible asset is amortized to expense on a declining basis over a period of seven years.  The loan market valuation is accreted to income on a declining basis over a nine year period.  The time deposits market valuation is amortized to expense on a declining basis over a three year period.

The excess cash in the transaction has been utilized through purchases within RSB’s investment portfolio.  Going forward any excess cash will be used in the form of continued investment growth and to fund loan growth.

3. 
Dividends

On May 9, 2012, the Company declared a cash dividend on its common stock, payable on August 15, 2012 to stockholders of record as of August 1, 2012, equal to $0.15 per share.
 
 
11

 
4.
Earnings Per Share

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended June 30, 2012 and 2011 were 9,310,913 and 9,427,711, respectively.  The weighted average outstanding shares for the six months ended June 30, 2012 and 2011 were 9,310,913 and 9,430,362, respectively.  The Company had no potentially dilutive securities outstanding during the periods presented.

5. 
Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.  No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2011.

6.
Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments as described in Note 1 were as follows:

   
June 30,
2012
   
December 31,
2011
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
                         
Financial assets:
                       
Cash and due from banks
  $ 22,610,045     $ 22,610,000     $ 22,829,291     $ 22,829,000  
Interest bearing deposits
    47,084,933       47,085,000       33,741,406       33,741,000  
Securities available-for-sale
    561,082,556       561,083,000       508,624,622       508,625,000  
Loans receivable, net
    487,437,889       494,340,000       438,650,837       445,240,000  
Loans held for sale
    1,881,226       1,881,000       1,212,620       1,213,000  
Accrued income receivable
    6,829,553       6,830,000       6,467,509       6,468,000  
Financial liabilities:
                               
Deposits
  $ 945,064,040     $ 948,638,000     $ 818,705,391     $ 821,979,000  
Securities sold under agreements to repurchase
    31,541,867       31,542,000       41,696,585       41,697,000  
FHLB and other long-term borrowings
    34,645,456       37,997,000       35,179,335       38,705,000  
Accrued interest payable
    774,639       775,000       802,847       803,000  
 
The methodology used to determine fair value as of June 30, 2012 did not change from the methodology used in the December 31, 2011 Annual Report.

 
12

 
7. 
Fair Value Measurements

Assets and liabilities carried at fair value are required to be classified and disclosed according to the process for determining fair value.  There are three levels of determining fair value.

 
Level 1:
Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
 
 
Level 2: 
Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.
 
 
Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
 
 
13

 
The following table presents the balances of assets measured at fair value on a recurring basis by level as of June 30, 2012 and December 31, 2011:

Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
2012
                       
                         
U.S. government agencies
  $ 48,072,000     $ -     $ 48,072,000     $ -  
U.S. government mortgage-backed securities
    202,663,000       -       202,663,000       -  
State and political subdivisions
    283,509,000       -       283,509,000       -  
Corporate bonds
    23,364,000       -       23,364,000       -  
Equity securities, financial industry common stock
    625,000       625,000       -       -  
Equity securities, other
    2,850,000       -       2,850,000       -  
                                 
 
  $ 561,083,000     $ 625,000     $ 560,458,000     $ -  
                                 
2011
                               
                                 
U.S. government agencies
  $ 63,200,000     $ -     $ 63,200,000     $ -  
U.S. government mortgage-backed securities
    159,855,000       -       159,855,000       -  
State and political subdivisions
    259,393,000       -       259,393,000       -  
Corporate bonds
    20,387,000       -       20,387,000       -  
Equity securities, financial industry common stock
    2,810,000       2,810,000       -       -  
Equity securities, other
    2,980,000       -       2,980,000       -  
                                 
 
  $ 508,625,000     $ 2,810,000     $ 505,815,000     $ -  

Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.  Other securities available-for-sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

 
14

 
Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level with the valuation hierarchy as of June 30, 2012 and December 31, 2011:  

Description
 
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
2012
                       
                         
Loans receivable
  $ 3,054,000     $ -     $ -     $ 3,054,000  
Other real estate owned
    8,661,000       -       -       8,661,000  
                                 
Total
  $ 11,715,000     $ -     $ -     $ 11,715,000  
                                 
2011
                               
                                 
Loans receivable
  $ 2,453,000     $ -     $ -     $ 2,453,000  
Other real estate owned
    9,538,000       -       -       9,538,000  
                                 
Total
  $ 11,991,000     $ -     $ -     $ 11,991,000  

Loans: Loans in the tables above consist of impaired credits held for investment.  In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans.  Fair value for impaired loans is based upon appraised values of collateral adjusted for trends observed in the market.  A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method.  This valuation is a component of the allowance for loan losses.  The Company considers these fair values Level 3.

Other Real Estate Owned:  Other real estate owned in the table above consists of real estate obtained through foreclosure.  Other real estate owned is recorded at fair value less estimated selling costs, at the date of transfer.  Subsequent to the transfer, other real estate owned is carried at the lower of cost or fair value, less estimated selling costs.  The carrying value of other real estate owned is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value less estimated selling costs.  Management uses appraised values and adjusts for trends observed in the market and for disposition costs in determining the value of other real estate owned. A valuation allowance was recorded for the excess of the asset’s recorded investment over the amount determined by the fair value, less estimated selling costs.  This valuation allowance is a component of the allowance for other real estate owned.  The Company considers these fair values Level 3.

 
15

 
8.
Debt and Equity Securities

The amortized cost of securities available-for-sale and their fair values are summarized below:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
June 30, 2012:
                       
U.S. government agencies
  $ 45,588,393     $ 2,483,758     $ -     $ 48,072,151  
U.S. government mortgage-backed securities
    198,366,067       4,441,212       (144,345 )     202,662,934  
State and political subdivisions
    273,353,650       10,413,275       (258,537 )     283,508,388  
Corporate bonds
    22,715,821       696,674       (48,613 )     23,363,882  
Equity securities, financial industry common stock
    889,552       -       (264,351 )     625,201  
Equity securities, other
    2,850,000       -       -       2,850,000  
    $ 543,763,483     $ 18,034,919     $ (715,846 )   $ 561,082,556  

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
December 31, 2011:
                       
U.S. government agencies
  $ 60,868,023     $ 2,341,093     $ (8,720 )   $ 63,200,396  
U.S. government mortgage-backed securities
    156,310,052       3,643,552       (99,143 )     159,854,461  
State and political subdivisions
    249,707,887       9,788,715       (103,279 )     259,393,323  
Corporate bonds
    20,288,210       465,331       (366,798 )     20,386,743  
Equity securities, financial industry common stock
    3,402,389       -       (592,889 )     2,809,500  
Equity securities, other
    2,980,199       -       -       2,980,199  
    $ 493,556,760     $ 16,238,691     $ (1,170,829 )   $ 508,624,622  

The proceeds, gains and losses from securities available-for-sale for the three and six months ended June 30, 2012 and 2011 are summarized below:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Proceeds from sales of securities available-for-sale
  $ 1,384,247     $ 7,843,822     $ 10,032,564     $ 20,926,918  
Gross realized gains on securities available-for-sale
    10,535       169,279       318,298       590,934  
Gross realized losses on securities available-for-sale
    -       4,308       230       4,808  
Tax provision applicable to net realized gains on securities available-for-sale
    4,000       62,000       119,000       219,000  

 
16

 
Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2012 and December 31, 2011, are summarized as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrealized
 Losses
   
Fair Value
   
Unrealized
 Losses
   
Fair Value
   
Unrealized
Losses
 
2012:
                                   
                                     
Securities available-for-sale:
                                   
U.S. government mortgage-backed securities
  $ 28,224,416     $ (144,345 )   $ -     $ -     $ 28,224,416     $ (144,345 )
State and political subdivisions
    26,633,752       (256,612 )     210,464       (1,925 )     26,844,216       (258,537 )
Corporate bonds
    3,718,417       (48,613 )     -       -       3,718,417       (48,613 )
Equity securities, financial industry common stock
    -       -       889,552       (264,351 )     889,552       (264,351 )
    $ 58,576,585     $ (449,570 )   $ 1,100,016     $ (266,276 )   $ 59,676,601     $ (715,846 )

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair Value
   
Unrealized
 Losses
   
Fair Value
   
Unrealized
 Losses
   
Fair Value
   
Unrealized
 Losses
 
2011:
                                   
                                     
Securities available-for-sale:
                                   
U.S. government agencies
  $ 4,256,053     $ (8,720 )   $ -     $ -     $ 4,256,053     $ (8,720 )
U.S. government mortgage-backed securities
    20,579,759       (99,143 )     -       -       20,579,759       (99,143 )
State and political subdivisions
    6,838,342       (102,718 )     454,850       (561 )     7,293,192       (103,279 )
Corporate bonds
    6,571,481       (366,798 )     -       -       6,571,481       (366,798 )
Equity securities, financial industry common stock
    -       -       2,809,500       (592,889 )     2,809,500       (592,889 )
    $ 38,245,635     $ (577,379 )   $ 3,264,350     $ (593,450 )   $ 41,509,985     $ (1,170,829 )

Gross unrealized losses on debt securities totaled $451,495 as of June 30, 2012.  These unrealized losses are generally due to changes in interest rates or general market conditions.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management concluded that the gross unrealized losses on debt securities were temporary.  Gross unrealized losses on equity securities totaled $264,351 as of June 30, 2012.  Management analyzed the financial condition of the equity issuers and considered the general market conditions and other factors in concluding that the gross unrealized losses on equity securities were temporary.  Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.
 
 
17

 
9. 
Loan Receivable and Credit Disclosures

Activity in the allowance for loan losses, on a disaggregated basis, for the three and six months ended June 30, 2012 and 2011 is as follows:
 
   
Three Months Ended June 30 2012
 
   
Construction
Real Estate
   
1-4 Family
Residential
Real Estate
   
Commercial
Real Estate
   
Agricultural
Real Estate
   
Commercial
   
Agricultural
   
Consumer
and Other
   
Total
 
Balance, March 31, 2012
  $ 817,000     $ 1,385,000     $ 2,817,000     $ 516,000     $ 1,417,000     $ 804,000     $ 210,000     $ 7,966,000  
Provision (credit) for loan losses
    (78,000 )     88,000       95,000       (50,000 )     -       16,000       (7,000 )     64,000  
Recoveries of loans charged-off
    -       -       -       -       1,000       -       12,000       13,000  
Loans charged-off
    -       -       -       -       (12,000 )     -       (10,000 )     (22,000 )
Balance, June 30, 2012
  $ 739,000     $ 1,473,000     $ 2,912,000     $ 466,000     $ 1,406,000     $ 820,000     $ 205,000     $ 8,021,000  
 
   
Six Months Ended June 30 2012
 
   
Construction
Real Estate
   
1-4 Family
Residential
Real Estate
   
Commercial
Real Estate
   
Agricultural
Real Estate
   
Commercial
   
Agricultural
   
Consumer
and Other
   
Total
 
Balance, December 31, 2011
  $ 793,000     $ 1,402,000     $ 2,859,000     $ 501,000     $ 1,352,000     $ 764,000     $ 234,000     $ 7,905,000  
Provision (credit) for loan losses
    (54,000 )     78,000       53,000       (35,000 )     61,000       56,000       (43,000 )     116,000  
Recoveries of loans charged-off
    -       3,000       -       -       5,000       -       33,000       41,000  
Loans charged-off
    -       (10,000 )     -       -       (12,000 )     -       (19,000 )     (41,000 )
Balance, June 30, 2012
  $ 739,000     $ 1,473,000     $ 2,912,000     $ 466,000     $ 1,406,000     $ 820,000     $ 205,000     $ 8,021,000  
 
   
Three Months Ended June 30 2011
 
   
Construction
Real Estate
   
1-4 Family
Residential
Real Estate
   
Commercial
Real Estate
   
Agricultural
Real Estate
   
Commercial
   
Agricultural
   
Consumer
and Other
   
Total
 
Balance, March 31, 2011
  $ 766,000     $ 1,421,000     $ 2,728,000     $ 516,000     $ 1,120,000     $ 702,000     $ 274,000     $ 7,527,000  
Provision (credit) for loan losses
    (19,000 )     22,000       111,000       9,000       312,000       3,000       (33,000 )     405,000  
Recoveries of loans charged-off
    -       -       -       -       1,000       4,000       4,000       9,000  
Loans charged-off
    -       (6,000 )     (51,000 )     -       -       (6,000 )     (2,000 )     (65,000 )
Balance, June 30, 2011
  $ 747,000     $ 1,437,000     $ 2,788,000     $ 525,000     $ 1,433,000     $ 703,000     $ 243,000     $ 7,876,000  
 
   
Six Months Ended June 30, 2011
 
   
Construction
Real Estate
   
1-4 Family
Residential
Real Estate
   
Commercial
Real Estate
   
Agricultural
Real Estate
   
Commercial
   
Agricultural
   
Consumer
and Other
   
Total
 
Balance, December 31, 2010
  $ 731,000     $ 1,404,000     $ 2,720,000     $ 486,000     $ 1,152,000     $ 735,000     $ 293,000     $ 7,521,000  
Provision (credit) for loan losses
    16,000       39,000       119,000       39,000       266,000       (29,000 )     (45,000 )     405,000  
Recoveries of loans charged-off
    -       -       -       -       15,000       7,000       7,000       29,000  
Loans charged-off
    -       (6,000 )     (51,000 )     -       -       (10,000 )     (12,000 )     (79,000 )
Balance, June 30, 2011
  $ 747,000     $ 1,437,000     $ 2,788,000     $ 525,000     $ 1,433,000     $ 703,000     $ 243,000     $ 7,876,000  

Allowance for loan losses disaggregated on the basis of impairment analysis method as of June 30, 2012 and December 31, 2011 is as follows:

 
18

 
Allowance for loan losses disaggregated on the basis of impairment analysis method as of June 30, 2012 and December 31, 2011 is as follows:
 
2012
 
 
 
   
Construction
Real Estate
   
1-4 Family
Residential
Real Estate
   
Commercial
Real Estate
   
Agricultural
Real Estate
   
Commercial
   
Agricultural
   
Consumer
and Other
   
Total
 
Individually evaluated for impairment
  $ 100,000     $ 174,000     $ 154,000     $ -     $ 438,000     $ -     $ 4,000     $ 870,000  
Collectively evaluated for impairment
    639,000       1,299,000       2,758,000       466,000       968,000       820,000       201,000       7,151,000  
Balance June 30 2012
  $ 739,000     $ 1,473,000     $ 2,912,000     $ 466,000     $ 1,406,000     $ 820,000     $ 205,000     $ 8,021,000  
                                                                 
2011
 
 
 
   
Construction
Real Estate
   
1-4 Family
Residential
Real Estate
   
Commercial
Real Estate
   
Agricultural
Real Estate
   
Commercial
   
Agricultural
   
Consumer
and Other
   
Total
 
Individually evaluated for impairment
  $ 165,000     $ 111,000     $ 199,000     $ -     $ 400,000     $ -     $ 1,000     $ 876,000  
Collectively evaluated for impairment
    628,000       1,291,000       2,660,000       501,000       952,000       764,000       233,000       7,029,000  
Balance December 31, 2011
  $ 793,000     $ 1,402,000     $ 2,859,000     $ 501,000     $ 1,352,000     $ 764,000     $ 234,000     $ 7,905,000  
 
Loans receivable disaggregated on the basis of impairment analysis method as of June 30, 2012 and December 31, 2011 is as follows:
 
2012
 
 
 
   
Construction
Real Estate
   
1-4 Family
Residential
Real Estate
   
Commercial
Real Estate
   
Agricultural
Real Estate
   
Commercial
   
Agricultural
   
Consumer
and Other
   
Total
 
Individually evaluated for  impairment
  $ 2,176,000     $ 2,087,000     $ 2,607,000     $ -     $ 712,000     $ -     $ 7,000     $ 7,589,000  
Collectively evaluated for  impairment
    25,177,000       98,099,000       157,927,000       38,500,000