XNAS:MSFG MainSource Financial Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:MSFG Fair Value Estimate
Premium
XNAS:MSFG Consider Buying
Premium
XNAS:MSFG Consider Selling
Premium
XNAS:MSFG Fair Value Uncertainty
Premium
XNAS:MSFG Economic Moat
Premium
XNAS:MSFG Stewardship
Premium
 

Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 0-12422

 

MAINSOURCE FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

INDIANA

 

35-1562245

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

2105 NORTH STATE ROAD 3 BYPASS, GREENSBURG,

 

 

INDIANA

 

47240

(Address of principal executive offices)

 

(Zip Code)

 

(812) 663-6734

(Registrant’s telephone number, including area code)

 

N/A

(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 website, 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 o

 

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. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a 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 o No x

 

As of August 9, 2012 there were outstanding 20,287,425 shares of common stock, without par value, of the registrant.

 

 

 




Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

 

Item 1. Financial Statements

 

 

 

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

54,645

 

$

66,864

 

Money market funds and federal funds sold

 

47,667

 

42,284

 

Cash and cash equivalents

 

102,312

 

109,148

 

Securities available for sale

 

896,037

 

876,090

 

Loans held for sale

 

10,878

 

16,620

 

Loans, net of allowance for loan losses of $38,289 and $39,889

 

1,508,221

 

1,494,490

 

Restricted stock, at cost

 

15,845

 

15,856

 

Premises and equipment, net

 

49,740

 

50,652

 

Goodwill

 

61,919

 

61,919

 

Purchased intangible assets

 

6,263

 

7,163

 

Cash surrender value of life insurance

 

48,771

 

48,204

 

Interest receivable and other assets

 

66,647

 

74,038

 

Total assets

 

$

2,766,633

 

$

2,754,180

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest bearing

 

$

364,030

 

$

334,345

 

Interest bearing

 

1,821,066

 

1,825,555

 

Total deposits

 

2,185,096

 

2,159,900

 

Securities sold under agreement to repurchase

 

24,428

 

25,789

 

Federal Home Loan Bank (FHLB) advances

 

146,150

 

151,427

 

Subordinated debentures

 

50,342

 

50,267

 

Other liabilities

 

30,759

 

30,244

 

Total liabilities

 

2,436,775

 

2,417,627

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, no par value Authorized shares - 400,000 Issued and outstanding shares — 34,150 and 57,000 Aggregate liquidation preference — $34,150 and $57,000

 

33,843

 

56,387

 

Common stock $.50 stated value: Authorized shares - 100,000,000 Issued shares — 20,844,627 and 20,780,616 Outstanding shares — 20,280,225 and 20,206,214

 

10,430

 

10,411

 

Treasury stock — 564,402 and 574,402 at cost

 

(9,204

)

(9,367

)

Additional paid-in capital

 

223,738

 

223,510

 

Retained earnings

 

45,374

 

32,720

 

Accumulated other comprehensive income

 

25,677

 

22,892

 

Total shareholders’ equity

 

329,858

 

336,553

 

Total liabilities and shareholders’ equity

 

$

2,766,633

 

$

2,754,180

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

(Dollar amounts in thousands except per share data)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Interest income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

21,332

 

$

23,725

 

$

42,752

 

$

47,695

 

Securities

 

6,275

 

7,333

 

12,729

 

14,517

 

Other interest income

 

71

 

64

 

106

 

87

 

Total interest income

 

27,678

 

31,122

 

55,587

 

62,299

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

2,040

 

3,829

 

4,275

 

8,115

 

Federal Home Loan Bank advances

 

1,404

 

1,421

 

2,805

 

2,881

 

Subordinated debentures

 

456

 

437

 

922

 

866

 

Other borrowings

 

28

 

45

 

57

 

97

 

Total interest expense

 

3,928

 

5,732

 

8,059

 

11,959

 

Net interest income

 

23,750

 

25,390

 

47,528

 

50,340

 

Provision for loan losses

 

2,500

 

4,000

 

5,600

 

9,600

 

Net interest income after provision for loan losses

 

21,250

 

21,390

 

41,928

 

40,740

 

Non-interest income

 

 

 

 

 

 

 

 

 

Mortgage banking

 

2,099

 

1,197

 

4,214

 

2,515

 

Trust and investment product fees

 

908

 

813

 

1,736

 

1,753

 

Service charges on deposit accounts

 

4,910

 

4,517

 

9,286

 

8,415

 

Net realized gains on securities

 

48

 

2,521

 

1,035

 

3,654

 

Other-than-temporary loss

 

 

 

 

 

 

 

 

 

Total impairment loss

 

 

 

(500

)

 

Loss recognized in other comprehensive income

 

 

 

 

 

Net impairment loss recognized in earnings

 

 

 

(500

)

 

Increase in cash surrender value of life insurance

 

280

 

303

 

567

 

594

 

Interchange income

 

1,732

 

1,564

 

3,382

 

2,980

 

Gain/(Loss) on sale and write-down of OREO

 

39

 

(196

)

(213

)

(561

)

Other income

 

727

 

801

 

1,058

 

1,489

 

Total non-interest income

 

10,743

 

11,520

 

20,565

 

20,839

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

12,535

 

12,580

 

24,791

 

25,413

 

Net occupancy

 

1,684

 

1,648

 

3,346

 

3,415

 

Equipment

 

2,159

 

1,938

 

4,243

 

3,918

 

Intangibles amortization

 

448

 

492

 

900

 

984

 

Telecommunications

 

432

 

493

 

837

 

965

 

Stationery printing and supplies

 

355

 

385

 

672

 

799

 

FDIC assessment

 

512

 

907

 

1,420

 

2,168

 

Marketing

 

994

 

1,126

 

1,942

 

2,207

 

Collection expense

 

968

 

902

 

2,017

 

1,916

 

Consultant expense

 

250

 

 

250

 

 

Other expenses

 

3,105

 

2,912

 

6,305

 

5,418

 

Total non-interest expense

 

23,442

 

23,383

 

46,723

 

47,203

 

Income before income tax

 

8,551

 

9,527

 

15,770

 

14,376

 

Income tax expense

 

1,569

 

1,901

 

2,777

 

2,204

 

Net income

 

6,982

 

7,626

 

12,993

 

12,172

 

Preferred dividends and discount accretion

 

(473

)

(764

)

(1,236

)

(1,527

)

Net income available to common shareholders

 

$

6,509

 

$

6,862

 

$

11,757

 

$

10,645

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,982

 

$

7,626

 

$

12,993

 

$

12,172

 

Other comprehensive income, net of tax:

 

2,824

 

3,063

 

2,785

 

5,902

 

Comprehensive income

 

$

9,806

 

$

10,689

 

$

15,778

 

$

18,074

 

Cash dividends declared per common share

 

0.01

 

0.01

 

0.02

 

0.02

 

Net income per common share-basic and diluted

 

.32

 

.34

 

.58

 

.53

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Dollar amounts in thousands)

 

 

 

Six month ended
June 30,

 

 

 

2012

 

2011

 

Operating Activities

 

 

 

 

 

Net income

 

$

12,993

 

$

12,172

 

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

 

 

 

 

 

Provision for loan losses

 

5,600

 

9,600

 

Depreciation expense

 

2,730

 

2,546

 

Amortization of mortgage servicing rights

 

933

 

552

 

Valuation allowance on mortgage servicing rights

 

226

 

 

Securities amortization, net

 

2,187

 

1,103

 

Stock based compensation expense

 

344

 

134

 

Amortization of purchased intangible assets

 

900

 

984

 

Earnings on cash surrender value of life insurance policies

 

(567

)

(594

)

Gain on life insurance benefit

 

 

(141

)

Securities gains

 

(535

)

(3,654

)

Loss on sale and write-down of OREO

 

213

 

561

 

Gain on loans sold

 

(2,703

)

(1,510

)

Loans originated for sale

 

(99,336

)

(73,243

)

Proceeds from loan sales

 

107,781

 

76,076

 

Change in other assets and liabilities

 

(398

)

2,807

 

Net cash provided by operating activities

 

30,368

 

27,393

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of securities available for sale

 

(93,938

)

(199,816

)

Proceeds from calls, maturities, and payments on securities available for sale

 

55,739

 

65,032

 

Proceeds from sales of securities available for sale

 

20,886

 

120,600

 

Proceeds from life insurance benefit

 

 

893

 

Proceeds from sale of OREO

 

8,452

 

9,667

 

Loan originations and payment, net

 

(22,277

)

41,064

 

Purchases of premises and equipment

 

(1,818

)

(3,447

)

Proceeds from redemption of restricted stock

 

11

 

2,191

 

Net cash provided/(used) by investing activities

 

(32,945

)

36,184

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in deposits

 

25,196

 

32,082

 

Net change in other borrowings

 

(1,361

)

7,627

 

Repayment of FHLB advances

 

(5,277

)

(10,373

)

Proceeds from exercise of stock options

 

66

 

 

Repurchase of preferred stock

 

(21,324

)

 

Cash dividends on preferred stock

 

(1,154

)

(1,425

)

Cash dividends on common stock

 

(405

)

(403

)

Net cash provided/(used) by financing activities

 

(4,259

)

27,508

 

Net change in cash and cash equivalents

 

(6,836

)

91,085

 

Cash and cash equivalents, beginning of year

 

109,148

 

60,123

 

Cash and cash equivalents, end of period

 

$

102,312

 

$

151,208

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands except per share data)

 

NOTE 1 - BASIS OF PRESENTATION

 

The significant accounting policies followed by MainSource Financial Group, Inc. (“Company”) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The consolidated interim financial statements have been prepared according to accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q. The interim statements do not include all information and footnotes normally included in the annual financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. Some items in prior period financial statements were reclassified to conform to current presentation. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Adoption of New Accounting Standards

 

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 Note 8.

 

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 shareholder’s 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. The adoption of this amendment has changed the presentation of the components of comprehensive income for the Company as part of the consolidated statement of comprehensive income.

 

NOTE 2 - STOCK PLANS AND STOCK BASED COMPENSATION

 

From time to time, common stock and options to buy common stock are granted to directors and officers of the Company under the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (the “2007 Stock Incentive Plan”), which was adopted and approved by the Board of Directors of the Company on January 16, 2007. The plan was effective upon the approval of the plan by the Company’s shareholders, which occurred on April 26, 2007 at the Company’s annual meeting of shareholders. The 2007 Stock Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards. Incentive stock options may be granted only to employees. An aggregate of 650,000 shares of common stock are reserved for issuance under the 2007 Stock Incentive Plan. Shares issuable under the 2007 Stock Incentive Plan will be authorized from unissued shares of common stock or treasury shares. The 2007 Stock Incentive Plan is in addition to, and not in replacement of, the MainSource Financial Group, Inc. 2003 Stock Option Plan (“the 2003 Option Plan”), which was approved by the Company’s Board of Directors on January 21, 2003, and was effective upon approval by the Company’s shareholders on April 23, 2003. The 2003 Option Plan provided for the grant of up to 607,754 incentive and nonstatutory stock options. Upon the approval of the 2007 Stock Incentive Plan, no further awards of options may be made under the 2003 Option Plan. Unexercised options which were previously issued under the 2003 Option Plan have not been terminated, but will otherwise continue in accordance with the 2003 Option Plan and the agreements pursuant to which the options were issued. All stock options granted under either the 2003 Option Plan or the 2007 Stock Incentive Plan have an exercise price that is at least equal to the fair market value of the Company’s common stock on the date the options were granted. The maximum option term is ten years, and options vest immediately for the directors’ grant and over four years for the officers’ grant, except as otherwise determined by the Executive Compensation Committee of the Board of Directors.

 

All share-based payments to employees, including grants of employee stock options, are recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values.  For options with graded vesting, the Company values the stock option grants and recognizes compensation expense as if each vesting portion of the award was a single award.

 

6



Table of Contents

 

The following table summarizes stock option activity:

 

 

 

Six Months Ended
June 30, 2012

 

 

 

Shares

 

Weighted
Average
Exercise Price

 

Outstanding, beginning of year

 

403,223

 

$

13.15

 

Granted

 

66,000

 

11.73

 

Exercised

 

(10,000

)

(5.40

)

Forfeited or expired

 

(9,681

)

(13.02

)

Outstanding, period end

 

449,542

 

$

13.12

 

Options exercisable at period end

 

300,302

 

$

14.27

 

Fully vested and expected to vest

 

439,343

 

$

13.17

 

 

The following table details stock options outstanding:

 

 

 

June 30,
2012

 

December 31,
2011

 

Stock options vested and currently exercisable:

 

 

 

 

 

Number

 

300,302

 

311,154

 

Weighted average exercise price

 

$

14.27

 

$

14.19

 

Aggregate intrinsic value

 

$

549

 

$

294

 

Weighted average remaining life (in years)

 

3.8

 

4.5

 

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The Company recorded $31 and $48 in stock compensation expense during the three and six months ended June 30, 2012 and $16 and $33 in stock compensation expense during the three and six months ended June 30, 2011 to salaries and employee benefits. There were 66,000 options granted in the second quarter of 2012.  In order to calculate the fair value of the options granted in 2012, the following weighted-average assumptions were used as of the grant dates:  risk free interest rate of 1.34%, expected option life 7.0 years, expected price volatility 40.5%, and dividend yield of 0.34%.  The weighted average fair value of the options issued in 2012 was $4.91.  There were 6,000 options granted in the first quarter of 2011, 3,500 options in the second quarter of 2011, and 5,000 in the third quarter of 2011.  In order to calculate the fair value of the options granted in 2011, the following weighted-average assumptions were used as of the grant dates:  risk free interest rate of 2.36%, expected option life 7.0 years, expected price volatility 61.4%, and dividend yield of 0.46%.  The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of the Company’s stock, and other factors. Expected dividends are based on dividend trends and the market price of the Company’s stock price at grant. The Company uses historical data to estimate option exercises within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

Unrecognized stock option compensation expense related to unvested awards for the remainder of 2012 and beyond is estimated as follows:

 

Year

 

(in thousands)

 

July 2012 - December 2012

 

$

86

 

2013

 

105

 

2014

 

111

 

2015

 

93

 

 

During the second quarter of 2012, the Compensation Committee of the Board of Directors of the Company granted restricted stock awards to certain executive officers pursuant to the Company’s annual performance-based incentive bonus plan.  Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date.  The value of the awards was determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date, April 25, 2012 ($11.85).  The stock awards vest as follows — 80% on the second anniversary of the date of grant and 20% on the third anniversary of the date of grant.  A total of 48,061 shares of common stock of the Company were granted.  Total compensation expense for the restricted stock grants was $94 and $129 for the three and six month periods ended June 30, 2012.  The compensation expense for the three and six month periods ended June 30, 2011 was $47 and $47.

 

During the second quarter of 2011, the Compensation Committee of the Board of Directors of the Company granted restricted stock awards to certain executive officers pursuant to the Company’s annual performance-based incentive bonus plan.  Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date.  The value of the awards was determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date, April 8, 2011 ($9.68).  The stock awards vest as follows — 80% on the second anniversary of the date of grant and 20% on the third anniversary of the date of grant.  A total of 46,244 shares of common stock of the Company were granted.

 

A summary of changes in the Company’s nonvested shares for the year follows:

 

7



Table of Contents

 

 

 

Shares

 

Weighted Average Grant
Date Fair Value

 

 

 

 

 

 

 

Nonvested at January 1, 2012

 

46,244

 

$

9.68

 

 

 

 

 

 

 

Granted

 

48,061

 

11.85

 

 

 

 

 

 

 

Vested

 

0

 

0

 

 

 

 

 

 

 

Forfeited

 

0

 

0

 

 

 

 

 

 

 

Nonvested at June 30, 2012

 

94,305

 

$

10.79

 

 

As of June 30, 2012, there was $840 of total unrecognized compensation costs related to nonvested restricted stock awards granted under this plan that will be recognized over the remaining vesting period of approximately 2.3 years.  The recognized compensation costs related to this plan were $129 and $37 for the first six months of 2012 and 2011 respectively.

 

Beginning with the retainer paid to the Board in 2011, members of the Board of Directors of the Company can make an annual election to have their retainer paid in cash, Company stock, or a combination of cash and stock during the following year.  The annual retainer is paid quarterly, on May 1, August 1, November 1, and February 1 of each year, for all directors serving on the Board on those dates.  Other expense is recognized over the three month period of the awards based on the fair value of the stock at the issue dates.  The value of the quarterly awards is determined by multiplying the award amount by the average closing price of a share of Company common stock on the five trading days prior to the issuance of the stock ($9.53 for the second quarter 2011 payouts, $8.80 for the third quarter 2011 payouts, $9.44 for the fourth quarter 2011 payouts, $9.29 for the first quarter 2012 payouts, and $11.83 for the second quarter 2012 payouts).  The shares issued vest immediately. Shares awarded by quarter were as follows:

 

Quarter

 

Year

 

Shares

 

2 Q

 

2011

 

6,750

 

3 Q

 

2011

 

7,902

 

4 Q

 

2011

 

9,130

 

1 Q

 

2012

 

8,750

 

2 Q

 

2012

 

7,200

 

 

The expense associated with the directors’ shares was $85 and $166 for the three and six month periods ended June 30, 2012.  For the three and six month periods ended June 30, 2011, the expense was $64 and $64.

 

8



Table of Contents

 

NOTE 3 - SECURITIES

 

The amortized cost and fair value of securities available for sale and related unrealized gains/losses recognized in accumulated other comprehensive income was as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

As of June 30, 2012

 

Cost

 

Gains

 

Losses

 

Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

2,122

 

$

36

 

$

 

$

2,158

 

State and municipal

 

300,468

 

25,767

 

(94

)

326,141

 

Mortgage-backed securities-residential (GSE’s)

 

264,228

 

8,912

 

(25

)

273,115

 

Collateralized mortgage obligations

 

281,204

 

4,994

 

(55

)

286,143

 

Equity securities

 

4,938

 

 

 

4,938

 

Other securities

 

3,573

 

 

(31

)

3,542

 

Total available for sale

 

$

856,533

 

$

39,709

 

$

(205

)

$

896,037

 

 

As of December 31, 2011

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

State and municipal

 

$

320,269

 

$

24,723

 

$

(115

)

$

344,877

 

Mortgage-backed securities-residential (GSE’s)

 

264,619

 

7,074

 

(189

)

271,504

 

Collateralized mortgage obligations

 

246,985

 

3,807

 

(25

)

250,767

 

Equity securities

 

5,410

 

 

 

5,410

 

Other securities

 

3,589

 

 

(57

)

3,532

 

Total available for sale

 

$

840,872

 

$

35,604

 

$

(386

)

$

876,090

 

 

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity or with no maturity are shown separately.

 

 

 

Available
for Sale

 

June 30, 2012

 

Amortized Cost

 

Fair Value

 

Within one year

 

$

3,238

 

$

3,277

 

One through five years

 

50,431

 

52,995

 

Six through ten years

 

83,972

 

90,722

 

After ten years

 

168,522

 

184,847

 

Mortgage-backed securities-residential (GSE’s)

 

264,228

 

273,115

 

Collateralized mortgage obligations

 

281,204

 

286,143

 

Equity securities

 

4,938

 

4,938

 

Total available for sale securities

 

$

856,533

 

$

896,037

 

 

Proceeds from sales of securities available for sale were $20,886 and $120,600 for the six months ended June 30, 2012 and 2011, respectively. Gross gains of $1,070 and $3,737 and gross losses of $35 and $83 were realized on these sales during 2012 and 2011, respectively.  In addition to the gross gains and losses from sales, there was a $500 impairment loss recognized on one investment during the first quarter of 2012.

 

Proceeds from sales of securities available for sale were $930 and $77,172 for the three months ended June 30, 2012 and 2011, respectively. Gross gains of $48 and $2,521 and gross losses of $0 and $0 were realized on these sales during 2012 and 2011, respectively.

 

Below is a summary of securities with unrealized losses as of June 30, 2012 and December 31, 2011 presented by length of time the securities have been in a continuous unrealized loss position.

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

June 30, 2012
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

State and municipal

 

$

2,191

 

$

(72

)

$

265

 

$

(22

)

$

2,456

 

$

(94

)

Mortgage-backed securities-residential (GSE’s)

 

11,133

 

(25

)

 

 

11,133

 

(25

)

Collateralized mortgage obligations

 

11,932

 

(55

)

 

 

11,932

 

(55

)

Other securities

 

 

 

970

 

(31

)

970

 

(31

)

Total temporarily impaired

 

25,256

 

(152

)

1,235

 

(53

)

26,491

 

(205

)

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

December 31, 2011
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

State and municipal

 

$

1,576

 

$

(72

)

$

237

 

$

(43

)

$

1,813

 

$

(115

)

Mortgage-backed securities-residential (GSE’s)

 

50,493

 

(189

)

 

 

50,493

 

(189

)

Collateralized mortgage obligations

 

25,527

 

(25

)

 

 

25,527

 

(25

)

Other securities

 

945

 

(57

)

 

 

945

 

(57

)

Total temporarily impaired

 

$

78,541

 

$

(343

)

$

237

 

$

(43

)

$

78,778

 

$

(386

)

 

9



Table of Contents

 

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. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under ASC 320. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325-10.

 

In determining OTTI under ASC 320, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity 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. 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 under either model, 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, less any current-period credit loss. 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, less any current-period credit loss, 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. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

As of June 30, 2012, the Company’s security portfolio consisted of 944 securities, 14 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the securities before their anticipated recovery. The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. The Company monitors the financial condition of these issuers. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

 

At June 30, 2012, almost all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value of approximately $25 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 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 other-than-temporarily impaired at June 30, 2012.

 

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $286,143 which had unrealized losses of approximately $55 at June 30, 2012. The Company monitors to ensure it has adequate credit support and as of June 30, 2012, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. All securities are investment grade.

 

The unrealized losses on other securities are related to one single issue trust preferred security and have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the security before its anticipated recovery. The Company performs a quarterly review of this security and based on this review, no evidence of adverse changes in expected cash flows is anticipated. The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not the expected cash flows of the individual security. Currently, the issuer has made all contractual payments and given no indication that they will not be able to make them into the future. The fair value of these debt securities is expected to recover as the securities approach their maturity date. As of June 30, 2012, the fair value of the security was $970 with an unrealized loss of $31.

 

During the first quarter of 2012, the Company determined that one of its equity holdings was other than temporarily impaired and wrote down the security by $500 to its fair value of $250. This amount was included in net realized gains/(losses) on securities.

 

10



Table of Contents

 

NOTE 4 - LOANS AND ALLOWANCE

 

Loans were as follows:

 

 

 

June 30,
2012

 

December 31,
2011

 

Commercial

 

 

 

 

 

Commercial and industrial

 

122,893

 

114,367

 

Agricultural

 

21,576

 

20,741

 

Commercial Real Estate

 

 

 

 

 

Farm

 

57,823

 

46,308

 

Hotel

 

139,650

 

146,358

 

Construction and development

 

29,918

 

30,746

 

Other

 

522,026

 

540,752

 

Residential

 

 

 

 

 

1-4 family

 

381,374

 

365,710

 

Home equity

 

217,925

 

212,202

 

Consumer

 

 

 

 

 

Direct

 

49,566

 

51,157

 

Indirect

 

3,759

 

6,038

 

Total loans

 

1,546,510

 

1,534,379

 

Allowance for loan losses

 

(38,289

)

(39,889

)

Net loans

 

$

1,508,221

 

$

1,494,490

 

 

Activity in the allowance for loan losses for the six months ended June 30, 2012 and 2011 and the recorded investment of loans and allowances by portfolio segment and impairment method as of June 30, 2012 were as follows:

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2012

 

$

5,562

 

$

30,476

 

$

2,972

 

$

879

 

$

39,889

 

Provision charged to expense

 

(795

)

4,091

 

1,709

 

595

 

5,600

 

Losses charged off

 

(277

)

(6,089

)

(1,832

)

(1,506

)

(9,704

)

Recoveries

 

455

 

1,102

 

126

 

821

 

2,504

 

Balance, June 30, 2012

 

$

4,945

 

$

29,580

 

$

2,975

 

$

789

 

$

38,289

 

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2011

 

$

6,386

 

$

32,653

 

$

2,281

 

$

1,285

 

$

42,605

 

Provision charged to expense

 

(259

)

7,816

 

1,653

 

390

 

9,600

 

Losses charged off

 

(543

)

(9,266

)

(1,710

)

(1,038

)

(12,557

)

Recoveries

 

205

 

648

 

364

 

597

 

1,814

 

Balance, June 30, 2011

 

$

5,789

 

$

31,851

 

$

2,588

 

$

1,234

 

$

41,462

 

 

The balance of recorded investment of loans and allowance for loan losses by portfolio segment and impairment method as of June 30, 2012 and December 31, 2011 were as follows:

 

As of June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

1,000

 

$

5,974

 

$

 

$

 

$

6,974

 

Ending Balance collectively evaluated for impairment

 

3,945

 

23,606

 

2,975

 

789

 

31,315

 

Total ending allowance balance

 

$

4,945

 

$

29,580

 

$

2,975

 

$

789

 

$

38,289

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

5,363

 

$

33,247

 

$

15,275

 

$

1,095

 

$

54,980

 

Ending Balance collectively evaluated for impairment

 

139,106

 

716,170

 

584,024

 

52,230

 

1,491,530

 

Total ending loan balance excludes $5,401 of accrued interest

 

$

144,469

 

$

749,417

 

$

599,299

 

$

53,325

 

$

1,546,510

 

 

As of December 31, 2011

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Ending Balance individually evaluated for impairment

 

$

1,193

 

$

5,476

 

$

 

$

 

$

6,669

 

Ending Balance collectively evaluated for impairment

 

4,369

 

25,000

 

2,972

 

879

 

33,220

 

Total ending allowance balance

 

$

5,562

 

$

30,476

 

$

2,972

 

$

879

 

$

39,889

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

5,144

 

$

41,149

 

$

14,522

 

$

1,116

 

$

61,931

 

Ending Balance collectively evaluated for impairment

 

129,964

 

723,015

 

563,390

 

56,079

 

1,472,448

 

Total ending loan balance excludes $5,835 of accrued interest

 

$

135,108

 

$

764,164

 

$

577,912

 

$

57,195

 

$

1,534,379

 

 

The recorded investment in loans excludes accrued interest receivable due to immateriality.

 

Activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2012 and June 30, 2011 was as follows:

 

 

 

June 30, 2012

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1

 

$

5,331

 

$

30,240

 

$

2,012

 

$

958

 

$

38,541

 

Provision charged to expense

 

(577

)

1,198

 

1,527

 

352

 

2,500

 

Losses charged off

 

(97

)

(2,181

)

(618

)

(887

)

(3,783

)

Recoveries

 

288

 

323

 

54

 

366

 

1,031

 

Balance, June 30

 

$

4,945

 

$

29,580

 

$

2,975

 

$

789

 

$

38,289

 

 

 

 

June 30, 2011

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1

 

$

5,949

 

$

33,229

 

$

2,607

 

$

1,470

 

$

43,255

 

Provision charged to expense

 

(53

)

3,450

 

606

 

(3

)

4,000

 

Losses charged off

 

(284

)

(5,004

)

(788

)

(488

)

(6,564

)

Recoveries

 

177

 

176

 

163

 

255

 

771

 

Balance, June 30

 

$

5,789

 

$

31,851

 

$

2,588

 

$

1,234

 

$

41,462

 

 

11



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2012:

 

June 30, 2012

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,349

 

$

2,346

 

$

1,000

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

461

 

461

 

124

 

Construction and development

 

1,304

 

1,206

 

606

 

Other

 

18,096

 

16,018

 

5,244

 

Subtotal — impaired with allowance recorded

 

22,210

 

20,031

 

6,974

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial & industrial

 

3,521

 

2,996

 

 

 

Agricultural

 

320

 

21

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

690

 

633

 

 

 

Hotel

 

265

 

 

 

 

 

Construction and development

 

6,460

 

3,568

 

 

 

Other

 

13,766

 

11,361

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

13,093

 

12,198

 

 

 

Home Equity

 

3,276

 

3,077

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

1,058

 

1,042

 

 

 

Indirect

 

56

 

53

 

 

 

Subtotal — impaired with allowance recorded

 

42,505

 

34,949

 

 

 

Total impaired loans

 

$

64,715

 

$

54,980

 

$

6,974

 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

 

The following tables presents the three and six month average balance of impaired loans at June 30, 2012 and 2011.

 

At June 30, 2012

 

Three Month
Average Balance

 

Six Month
Average Balance

 

Commercial

 

 

 

 

 

Commercial and industrial

 

$

4,999

 

$

5,028

 

Agricultural

 

28

 

38

 

Commercial Real Estate

 

 

 

 

 

Farm

 

1,048

 

1,038

 

Hotel

 

102

 

1,991

 

Construction and development

 

4,828

 

5,657

 

Other

 

26,591

 

26,743

 

Residential

 

 

 

 

 

1-4 family

 

12,055

 

12,052

 

Home equity

 

2,939

 

2,785

 

Consumer

 

 

 

 

 

Direct

 

1,043

 

1,056

 

Indirect

 

61

 

52

 

Total loans

 

53,694

 

56,440

 

 

At June 30, 2011

 

Three Month
Average Balance

 

Six Month
Average Balance

 

Commercial

 

 

 

 

 

Commercial and industrial

 

$

6,823

 

$

7,246

 

Agricultural

 

124

 

126

 

Commercial Real Estate

 

 

 

 

 

Farm

 

1,092

 

1,128

 

Hotel

 

6,066

 

8,265

 

Construction and development

 

6,664

 

10,777

 

Other

 

28,536

 

29,396

 

Residential

 

 

 

 

 

1-4 family

 

10,661

 

12,070

 

Home equity

 

1,708

 

1,776

 

Consumer

 

 

 

 

 

Direct

 

1,063

 

1,186

 

Indirect

 

59

 

64

 

Total loans

 

$

62,796

 

$

72,034

 

 

Total interest income recognized and cash basis interest recognized on impaired loans for the second quarter of 2012 and 2011 was $1 and $25 and total income recognized and cash basis interest recognized on impaired loans on the first six months of 2012 and 2011 was $28 and $73.

 

The following table presents loans individually evaluated for impairment by class of loans at December 31, 2011:

 

December 31, 2011

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

3,130

 

3,057

 

1,193

 

Agricultural

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

486

 

486

 

193

 

Hotel

 

5,385

 

5,385

 

100

 

Construction and development

 

5,558

 

5,476

 

2,371

 

Other

 

14,400

 

14,322

 

2,812

 

Subtotal — impaired with allowance recorded

 

28,959

 

28,726

 

6,669

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial & industrial

 

2,720

 

2,030

 

 

 

Agricultural

 

351

 

57

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

579

 

531

 

 

 

Hotel

 

876

 

384

 

 

 

Construction and development

 

2,996

 

1,839

 

 

 

Other

 

16,325

 

12,726

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

12,344

 

12,045

 

 

 

Home Equity

 

2,548

 

2,477

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

1,096

 

1,083

 

 

 

Indirect

 

35

 

33

 

 

 

Subtotal — impaired with allowance recorded

 

39,870

 

33,205

 

 

 

Total impaired loans

 

68,829

 

61,931

 

6,669

 

 

12



Table of Contents

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2012 and December 31, 2011

 

 

 

Non-accrual

 

Past due over
90 days and
still accruing

 

 

 

June 30, 2012

 

December 31,
2011

 

June 30, 2012

 

December 31,
2011

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,263

 

$

2,518

 

$

34

 

$

 

Agricultural

 

21

 

57

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

Farm

 

1,094

 

1,016

 

 

 

 

 

Hotel

 

 

384

 

 

 

 

 

Construction and development

 

4,773

 

3,240

 

 

 

 

 

Other

 

23,564

 

21,060

 

 

 

3,259

 

Residential

 

 

 

 

 

 

 

 

 

1-4 Family

 

11,222

 

10,873

 

 

 

 

 

Home Equity

 

2,656

 

2,105

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Direct

 

292

 

242

 

 

 

7

 

Indirect

 

53

 

33

 

 

 

 

 

Total

 

$

46,938

 

$

41,528

 

$

34

 

$

3,266

 

 

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

 

June 30, 2012

 

Total
Loans

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

Greater than
90 Days
Past Due

 

Total
Past Due

 

Loans Not
Past Due

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

122,893

 

$

131

 

$

406

 

$

2,604

 

$

3,141

 

$

119,752

 

Agricultural

 

21,576

 

 

 

21

 

21

 

21,555

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Farm

 

57,823

 

212

 

 

1,043

 

1,255

 

56,568

 

Hotel

 

139,650

 

 

 

 

 

139,650

 

Construction and development

 

29,918

 

360

 

549

 

4,544

 

5,453

 

24,465

 

Other

 

522,026

 

2,730

 

1,454

 

14,809

 

18,993

 

503,033

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family

 

381,374

 

3,289

 

2,192

 

6,306

 

11,787

 

369,587

 

Home Equity

 

217,925

 

707

 

249

 

1,803

 

2,759

 

215,166

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

49,566

 

106

 

83

 

39

 

228

 

49,338

 

Indirect

 

3,759

 

20

 

3

 

15

 

38

 

3,721

 

Total — excludes $5,401 of accrued interest

 

$

1,546,510

 

$

7,555

 

$

4,936

 

$

31,184

 

$

43,675

 

$

1,502,835

 

 

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

 

December 31, 2011

 

Total
Loans

 

30-59 Days
Past Due