Notes to Consolidated Financial Statements
Years Ended December 31, 2013, 2012 and 2011
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
NB&T Financial Group, Inc. (the Company) is a financial holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The National Bank and
Trust Company (the Bank), NB&T Insurance Group, Inc. (the Group), and NB&T Statutory Trust III (Trust III). In accordance with the Consolidation topic of the FASB Accounting Standards Codification
(ASC), Trust III is not consolidated into these financial statements. The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers in Brown, Clermont, Clinton, Highland,
Montgomery and Warren counties in Ohio. The Bank offers certain investment products through its
wholly-owned
subsidiary, the Group. The Bank is subject to competition from other financial institutions. The
Bank is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Bank and the Group. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are
particularly susceptible to significant change relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties
and collateral securing impaired loans.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31,
2013 and 2012, cash equivalents consisted primarily of interest-bearing accounts with the Federal Reserve Bank and the Federal Home Loan Bank of Cincinnati and non-interest bearing cash accounts with other financial institutions.
Currently, FDIC insurance limits are $250,000 per covered institution. At December 31, 2013, the Companys cash accounts
exceeded federally insured limits by $41,291,000. Of that amount, $41,098,000 was held at the Federal Reserve Bank.
Securities
The Company classifies all securities as available-for-sale securities, which are carried at fair value. The Company
has no immediate plan to sell but may sell securities in the future. Unrealized gains and losses are recorded, net of related income tax effects, in other comprehensive income.
Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are
recorded as net security gains (losses). Gains and losses on sales of securities are recorded on the trade date and are determined on the specific-identification method.
46
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The Company handles other-than-temporary impairment in the securities portfolio in
accordance with current accounting standards (ASC 320-10). When the Company does not intend to sell a debt security, and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it
recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.
As a result of this guidance, with respect to available-for-sale debt securities that management has no intent to sell and believes it is more likely than not the debt security will not be required to be
sold prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as
the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.
Loans Held for Sale
Mortgage loans originated and intended for sale
in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
Loans
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
For loans amortized at cost, interest income is accrued based on the
unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured
and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the
contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
Managements general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral. Consistent with regulatory guidance,
charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Companys policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
For all loan portfolio segments except residential and consumer loans, the Company promptly charges-off loans, or portions
thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values,
and/or (3) legal action, including bankruptcy, that impairs the borrowers ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss
has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
47
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The Company charges-off residential and consumer loans, or portions thereof, when the
Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance, which provide for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less
costs to sell when the loan is 180 days past due and charge down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is
both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.
For all classes, all interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual
loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of
satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
Generally, most
impaired loans, except for certain troubled debt restructurings, are on nonaccrual. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no
principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months.
Allowance for Loan Losses
The allowance for loan losses is
established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon managements periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to
repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For
those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers
non-impaired loans and is based on historical
charge-off
experience by segment. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the
Company over the prior one to three years. Management believes the one-to-three year historical loss experience methodology is appropriate in the current economic environment. Other adjustments (qualitative/environmental considerations) for each
segment may be added to the allowance for each loan segment after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due.
48
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record and the amount of the shortfall
in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loans effective interest rate, the
loans obtainable market price or the fair value of the collateral if the loan is collateral dependent. For impaired loans where the Company utilizes the discounted cash flows to determine the level of impairment, the Company includes the
entire change in the present value of cash flows as bad debt expense.
The fair values of collateral dependent impaired loans
are based on independent appraisals of the collateral. In general, the Company acquires an updated appraisal upon identification of impairment and periodically thereafter for commercial, commercial real estate and multi-family loans. After
determining the collateral value as described, the fair value is calculated based on the determined collateral value less selling expenses. The potential for outdated appraisal values is considered in our determination of the
allowance for loan losses through our analysis of various trends and conditions including the local economy, trends in charge-offs and delinquencies, etc. and the related qualitative adjustments assigned by the Company.
Segments of loans with similar risk characteristics are collectively evaluated for impairment based on the segments historical loss
experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless
such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
In the course of
working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work out an alternative payment schedule with the borrower in order to optimize collectability of the
loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (TDR) has occurred, which is when, for economic or legal reasons related to a borrowers financial difficulties, the Company
grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status, and the restructuring of the loan may include the transfer of
assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Company do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time foreclosure
proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Company may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.
It is the Companys policy to have any restructured loans which are on nonaccrual status prior to being restructured remain on
nonaccrual status until six months of satisfactory borrower performance, at which time management would consider its return to accrual status. If a loan was accruing at the time of restructuring, the Company reviews the loan to determine if it is
appropriate to continue the accrual of interest on the restructured loan.
With regard to determination of the amount of the
allowance for credit losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of impaired loans for each portfolio segment within troubled debt restructurings is the same as detailed
previously.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. Buildings and building
improvements are
49
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
depreciated over an average of 40 years and 10 years, respectively. Furniture, fixtures and equipment is depreciated over a range of three to seven years. Leasehold improvements are amortized
over the lesser of the assets useful life or the lease term, including any renewal periods for which renewal is reasonably assured.
Federal Reserve and Federal Home Loan Bank Stock
Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems. The required investment in the common
stock is based on a predetermined formula, carried at cost and evaluated for impairment.
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at
the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in net income or expense from foreclosed assets.
Goodwill
Goodwill is tested at least annually for impairment. If the implied fair value of goodwill is lower than its carrying
amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
Intangible Assets
Intangible assets are being amortized on an
accelerated basis over periods ranging from seven to ten years. Such assets are periodically evaluated as to the recoverability of their carrying value.
Treasury Stock
Treasury stock is stated at cost. Cost is determined
based on the average cost of all shares.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740,
Income Taxes
). The income tax accounting guidance results in two components of income tax
expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company
determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and
enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance
if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a
likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and
50
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all
relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to managements
judgment. With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2010. The Company recognizes interest and penalties, if any, on income taxes
as a component of income tax expense.
Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares
outstanding during each period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.
Treasury stock shares are not deemed outstanding for earnings per share calculations.
Marketing Expenses
Marketing costs are expensed as incurred.
Reclassifications
Certain reclassifications have been made to the
2012 and 2011 financial statements to conform to the 2013 financial statement presentation. These reclassifications had no effect on net income.
Note 2: Effect of Recent Accounting Standards
In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08 regarding the testing
for goodwill impairment. The objective of this ASU is to simplify how entities, both public and nonpublic, test goodwill for impairment. Under the revised standard, an entity will be allowed to first assess qualitative factors to determine whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The amendments are effective on annual or
interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Adoption of this standard has not had a material effect on the Companys financial statements.
In July 2012, the FASB issued ASU No. 2012-02 regarding testing indefinite-lived intangible assets for impairment other than
goodwill. The objective of this ASU is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment
testing guidance among long-lived asset categories. Under this revised standard, an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not
that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is
not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with
the carrying
51
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
amount. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of this standard has not had a material
effect on the Companys financial statements.
In October 2012, the FASB issued ASU No. 2012-06, Business
Combinations: Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. The objective of this ASU is to address the diversity in practice about
how to interpret the terms on the same basis and contractual limitations when subsequently measuring an indemnification asset recognized in a government-assisted (Federal Deposit Insurance Corporation) acquisition of a financial institution that
includes a loss-sharing agreement (indemnification agreement). When a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently a change in the cash flows
expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the
measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (i.e., the lesser of
the term of the indemnification agreement and the remaining life of the indemnified assets). For public and nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning on or after
December 15, 2012. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted
acquisition of a financial institution. Adoption of this standard has not had a significant impact on the valuation of the FDIC loss share receivable indemnification asset currently on the Companys balance sheet.
FASB also issued ASU 2013-02, which amended ASU 2011-05, Comprehensive Income, Topic 220: Presentation of Comprehensive Income, and
establishes requirements and an effective date for amendments deferred by ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05. The update requires public companies to report information on reclassifications out of accumulated other comprehensive income (AOCI), in their financial statements in one place
(either in the financial statements or in a single note) using information currently required to be disclosed elsewhere in the financial statements. Public companies are also required to comply with the requirements of this ASU at each reporting
date. The information may be condensed in accordance with the level of detail required by Subtopic 270-10. The amendments in the update do not change the requirements for reporting net income or other comprehensive income in the financial
statements. The new disclosure requirement takes effect prospectively for public companies in interim and annual reporting periods beginning after December 15, 2012. The Company adopted this standard on January 1, 2013. The effect of
adopting this standard increased our disclosure of items reclassified out of accumulated other comprehensive income.
Note 3: Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve
required at December 31, 2013 was $2,423,000.
52
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Note 4: Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as
follows (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Approximate
Fair Value
|
|
Available-for-Sale Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored entities
|
|
$
|
23,594
|
|
|
$
|
45
|
|
|
$
|
(100
|
)
|
|
$
|
23,539
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored entities-residential
|
|
|
59,565
|
|
|
|
793
|
|
|
|
(205
|
)
|
|
|
60,153
|
|
Private label-residential
|
|
|
1,895
|
|
|
|
56
|
|
|
|
0
|
|
|
|
1,951
|
|
State and political subdivisions
|
|
|
54,408
|
|
|
|
326
|
|
|
|
(2,279
|
)
|
|
|
52,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
139,462
|
|
|
$
|
1,220
|
|
|
$
|
(2,584
|
)
|
|
$
|
138,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored entities
|
|
$
|
19,668
|
|
|
$
|
414
|
|
|
$
|
(0
|
)
|
|
$
|
20,082
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government sponsored entities-residential
|
|
|
66,735
|
|
|
|
1,389
|
|
|
|
(49
|
)
|
|
|
68,075
|
|
Private label-residential
|
|
|
3,945
|
|
|
|
131
|
|
|
|
(53
|
)
|
|
|
4,023
|
|
State and political subdivisions
|
|
|
39,137
|
|
|
|
1,816
|
|
|
|
(113
|
)
|
|
|
40,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
129,485
|
|
|
$
|
3,750
|
|
|
$
|
(215
|
)
|
|
$
|
133,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of securities available for sale at December 31, 2013, by
contractual maturity, are shown below (thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Within one year
|
|
$
|
2,808
|
|
|
$
|
2,843
|
|
One to five years
|
|
|
22,348
|
|
|
|
22,308
|
|
Five to ten years
|
|
|
7,204
|
|
|
|
7,170
|
|
After ten years
|
|
|
45,642
|
|
|
|
43,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,002
|
|
|
|
75,994
|
|
Mortgage-backed securities
|
|
|
61,460
|
|
|
|
62,104
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
139,462
|
|
|
$
|
138,098
|
|
|
|
|
|
|
|
|
|
|
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes,
was $66,965,000 at December 31, 2013, and $61,727,000 at December 31, 2012.
Gross gains of $1,044,000 and gross
losses of $36,000 resulting from sales of available-for sale securities were realized during 2013. The $36,000 loss resulted from the sale of a private-label collateralized mortgage obligation for which other-than-temporary impairment charges were
recognized in prior periods. The $1,008,000 net gain in 2013 is a reclassification from accumulated other comprehensive income and is included in the net realized gains on sales of available-for-sale securities line item in the income statement. The
related $343,000 tax expense is a reclassification from accumulated other comprehensive income and is included in the provision for
53
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
income taxes line item in the income statement. In 2012, gross gains of $1,174,000 and gross losses of $0 were realized. Gross gains of $1,830,000 and gross losses of $10,000 resulting from sales
of available-for sale securities were realized in 2011. Gross gains are determined under the specific identification method.
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. These
declines primarily resulted from recent changes in market interest rates, failure of certain investments to maintain consistent credit quality ratings, changes in the markets perception of the current risks or failure to meet projected
earnings targets.
The table below indicates the gross unrealized losses and fair value, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position at December 31, 2013 and 2012 (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored entities
|
|
$
|
4,727
|
|
|
$
|
(100
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,727
|
|
|
$
|
(100
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored entities-residential
|
|
|
17,547
|
|
|
|
(205
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
17,547
|
|
|
|
(205
|
)
|
Municipal securities
|
|
|
31,351
|
|
|
|
(1,800
|
)
|
|
|
3,726
|
|
|
|
(479
|
)
|
|
|
35,077
|
|
|
|
(2,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
53,625
|
|
|
$
|
(2,105
|
)
|
|
$
|
3,726
|
|
|
$
|
(479
|
)
|
|
$
|
57,351
|
|
|
$
|
(2,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored entities-residential
|
|
$
|
12,902
|
|
|
$
|
(48
|
)
|
|
$
|
1,352
|
|
|
$
|
(1
|
)
|
|
$
|
14,254
|
|
|
$
|
(49
|
)
|
Private label-residential
|
|
|
0
|
|
|
|
0
|
|
|
|
604
|
|
|
|
(53
|
)
|
|
|
604
|
|
|
|
(53
|
)
|
Municipal securities
|
|
|
6,656
|
|
|
|
(113
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
6,656
|
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
19,558
|
|
|
$
|
(161
|
)
|
|
$
|
1,956
|
|
|
$
|
(54
|
)
|
|
$
|
21,514
|
|
|
$
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses on the Companys investments at December 31, 2013 were caused by interest
rate increases. For the U.S. government sponsored entities and municipal securities, the contractual terms do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. For the mortgage-backed
securities, the Company expects to recover the amortized cost basis over the remaining term. All securities are regularly reviewed for other than temporary credit impairment. The review consists of many factors, including but not limited to, the
nature of the investment, credit ratings and financial condition of the issuer, the existence of any government or agency guarantees, cash flows of the underlying collateral and market conditions. Because the decline in market value is attributable
to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost
bases, which may be maturity, the Company does not consider those investments to be to be other-than-temporarily impaired at December 31, 2013.
54
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Credit Losses Recognized on Investments
The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are
recorded in other comprehensive income (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Credit
Losses
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Credit losses on debt securities held
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
(119
|
)
|
|
$
|
(118
|
)
|
|
$
|
(170
|
)
|
Additions related to other-than-temporary losses not previously recognized
|
|
|
0
|
|
|
|
(35
|
)
|
|
|
0
|
|
Reductions related to losses realized which were previously recognized
|
|
|
119
|
|
|
|
34
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
0
|
|
|
$
|
(119
|
)
|
|
$
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The beginning accumulated credit loss balance related to one private-label collateralized mortgage
obligation. That security was sold during the first quarter of 2013 with an additional loss of $36,000 realized at the time of sale.
Note 5: Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), included in stockholders equity, are as follows
(thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Net unrealized gain (loss) on available-for-sale securities
|
|
$
|
(1,364
|
)
|
|
$
|
3,588
|
|
Net unrealized loss on available-for-sale securities for which a portion of an other-than-temporary impairment has been
recognized in income
|
|
|
0
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,364
|
)
|
|
|
3,535
|
|
Tax effect
|
|
|
464
|
|
|
|
1,202
|
|
|
|
|
|
|
|
|
|
|
Net-of-tax amount
|
|
$
|
(900
|
)
|
|
$
|
2,333
|
|
|
|
|
|
|
|
|
|
|
Note 6: Loans and Allowance for Loan Losses
Categories of loans at December 31, include (thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Commercial and industrial
|
|
$
|
36,792
|
|
|
$
|
54,961
|
|
Commercial real estate
|
|
|
189,660
|
|
|
|
179,905
|
|
Agricultural
|
|
|
35,160
|
|
|
|
33,679
|
|
Residential real estate
|
|
|
131,032
|
|
|
|
127,007
|
|
Consumer
|
|
|
6,766
|
|
|
|
6,319
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
399,410
|
|
|
|
401,871
|
|
Less: Net deferred loan fees, premiums and discounts
|
|
|
86
|
|
|
|
58
|
|
Allowance for loan losses
|
|
|
(4,053
|
)
|
|
|
(4,760
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
395,443
|
|
|
$
|
397,169
|
|
|
|
|
|
|
|
|
|
|
55
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The risk characteristics of each significant loan portfolio segment are as follows:
Commercial and Industrial
Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers,
however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may
include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers.
Commercial Real Estate
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real
estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.
Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Companys commercial real estate portfolio are diverse, but with
geographic location almost entirely in the Companys market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose
projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.
Agricultural
Agricultural loans are viewed primarily as cash flow loans where repayment comes from sales of crops and secondarily as loans secured by
real estate, farm equipment or livestock. Repayment of these loans is generally dependent on the successful operation of the farming operation and is highly dependent on weather conditions.
Residential and Consumer
Residential and consumer loans consist of two
segmentsresidential mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires
private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or
recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by
economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread
over a large number of borrowers.
56
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The following tables present the balance of the allowance for loan losses based on
portfolio segment for the years ended December 31, 2013, 2012 and 2011(thousands):
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Agricultural
|
|
|
Residential
1-4 Family
|
|
|
Residential
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
January 1, 2011
|
|
$
|
474
|
|
|
$
|
2,057
|
|
|
$
|
184
|
|
|
$
|
528
|
|
|
$
|
337
|
|
|
$
|
134
|
|
|
$
|
3,714
|
|
Charge-offs
|
|
|
(350
|
)
|
|
|
(1,300
|
)
|
|
|
(2
|
)
|
|
|
(262
|
)
|
|
|
(140
|
)
|
|
|
(198
|
)
|
|
|
(2,252
|
)
|
Recoveries
|
|
|
16
|
|
|
|
167
|
|
|
|
6
|
|
|
|
9
|
|
|
|
3
|
|
|
|
70
|
|
|
|
271
|
|
Provision
|
|
|
1,240
|
|
|
|
1,448
|
|
|
|
43
|
|
|
|
98
|
|
|
|
(5
|
)
|
|
|
111
|
|
|
|
2,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
1,380
|
|
|
|
2,372
|
|
|
|
231
|
|
|
|
373
|
|
|
|
195
|
|
|
|
117
|
|
|
|
4,668
|
|
Charge-offs
|
|
|
(1,513
|
)
|
|
|
(2,239
|
)
|
|
|
0
|
|
|
|
(343
|
)
|
|
|
(161
|
)
|
|
|
(109
|
)
|
|
|
(4,365
|
)
|
Recoveries
|
|
|
7
|
|
|
|
59
|
|
|
|
3
|
|
|
|
15
|
|
|
|
12
|
|
|
|
74
|
|
|
|
170
|
|
Provision
|
|
|
1,823
|
|
|
|
2,093
|
|
|
|
(149
|
)
|
|
|
415
|
|
|
|
153
|
|
|
|
(48
|
)
|
|
|
4,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
1,697
|
|
|
|
2,285
|
|
|
|
85
|
|
|
|
460
|
|
|
|
199
|
|
|
|
34
|
|
|
|
4,760
|
|
Charge-offs
|
|
|
(2,883
|
)
|
|
|
(415
|
)
|
|
|
0
|
|
|
|
(120
|
)
|
|
|
(169
|
)
|
|
|
(33
|
)
|
|
|
(3,620
|
)
|
Recoveries
|
|
|
10
|
|
|
|
230
|
|
|
|
0
|
|
|
|
17
|
|
|
|
1
|
|
|
|
65
|
|
|
|
323
|
|
Provision
|
|
|
2,633
|
|
|
|
(138
|
)
|
|
|
(16
|
)
|
|
|
0
|
|
|
|
174
|
|
|
|
(63
|
)
|
|
|
2,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
$
|
1,457
|
|
|
$
|
1,962
|
|
|
$
|
69
|
|
|
$
|
357
|
|
|
$
|
205
|
|
|
$
|
3
|
|
|
$
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the balance in the allowance for loan losses and the recorded investment in
loans based on portfolio segment and impairment method as of December 31, 2013 and December 31, 2012 (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluated for Impairment
|
|
|
|
|
|
|
Individually
|
|
|
Collectively
|
|
|
Total
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
108
|
|
|
$
|
1,349
|
|
|
$
|
1,457
|
|
Commercial Real Estate
|
|
|
418
|
|
|
|
1,544
|
|
|
|
1,962
|
|
Agricultural
|
|
|
0
|
|
|
|
69
|
|
|
|
69
|
|
Residential1-4 Family
|
|
|
0
|
|
|
|
357
|
|
|
|
357
|
|
ResidentialHome equity
|
|
|
0
|
|
|
|
205
|
|
|
|
205
|
|
Consumer
|
|
|
0
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
526
|
|
|
$
|
3,527
|
|
|
$
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
902
|
|
|
$
|
35,890
|
|
|
$
|
36,792
|
|
Commercial Real Estate
|
|
|
5,364
|
|
|
|
184,296
|
|
|
|
189,660
|
|
Agricultural
|
|
|
38
|
|
|
|
35,122
|
|
|
|
35,160
|
|
Residential1-4 Family
|
|
|
952
|
|
|
|
101,829
|
|
|
|
102,781
|
|
ResidentialHome equity
|
|
|
44
|
|
|
|
28,207
|
|
|
|
28,251
|
|
Consumer
|
|
|
9
|
|
|
|
6,757
|
|
|
|
6,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,309
|
|
|
$
|
392,101
|
|
|
$
|
399,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evaluated for Impairment
|
|
|
|
|
|
|
Individually
|
|
|
Collectively
|
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,029
|
|
|
$
|
668
|
|
|
$
|
1,697
|
|
Commercial Real Estate
|
|
|
413
|
|
|
|
1,872
|
|
|
|
2,285
|
|
Agricultural
|
|
|
0
|
|
|
|
85
|
|
|
|
85
|
|
Residential1-4 Family
|
|
|
1
|
|
|
|
459
|
|
|
|
460
|
|
ResidentialHome equity
|
|
|
0
|
|
|
|
199
|
|
|
|
199
|
|
Consumer
|
|
|
0
|
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,443
|
|
|
$
|
3,317
|
|
|
$
|
4,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,489
|
|
|
$
|
50,472
|
|
|
$
|
54,961
|
|
Commercial Real Estate
|
|
|
5,524
|
|
|
|
174,381
|
|
|
|
179,905
|
|
Agricultural
|
|
|
75
|
|
|
|
33,604
|
|
|
|
33,679
|
|
Residential1-4 Family
|
|
|
1,008
|
|
|
|
95,659
|
|
|
|
96,667
|
|
ResidentialHome equity
|
|
|
36
|
|
|
|
30,304
|
|
|
|
30,340
|
|
Consumer
|
|
|
16
|
|
|
|
6,303
|
|
|
|
6,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,148
|
|
|
$
|
390,723
|
|
|
$
|
401,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the Companys corporate and consumer credit exposure by category and
standard regulatory classification as of December 31, 2013 and December 31, 2012 (thousands):
Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial Real Estate
|
|
|
Agricultural
|
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Pass
|
|
$
|
32,436
|
|
|
$
|
47,481
|
|
|
$
|
173,630
|
|
|
$
|
161,671
|
|
|
$
|
35,122
|
|
|
$
|
33,378
|
|
Other Assets Especially Mentioned
|
|
|
1,800
|
|
|
|
2,647
|
|
|
|
3,377
|
|
|
|
3,983
|
|
|
|
0
|
|
|
|
226
|
|
Substandard
|
|
|
2,410
|
|
|
|
4,687
|
|
|
|
12,653
|
|
|
|
14,251
|
|
|
|
38
|
|
|
|
75
|
|
Doubtful
|
|
|
146
|
|
|
|
146
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,792
|
|
|
$
|
54,961
|
|
|
$
|
189,660
|
|
|
$
|
179,905
|
|
|
$
|
35,160
|
|
|
$
|
33,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential-1 to 4 Family
|
|
|
Residential-Home Equity
|
|
|
Consumer
|
|
December 31,
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Pass
|
|
$
|
100,362
|
|
|
$
|
94,262
|
|
|
$
|
28,072
|
|
|
$
|
30,110
|
|
|
$
|
6,696
|
|
|
$
|
6,295
|
|
Substandard
|
|
|
2,419
|
|
|
|
2,405
|
|
|
|
179
|
|
|
|
230
|
|
|
|
70
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
102,781
|
|
|
$
|
96,667
|
|
|
$
|
28,251
|
|
|
$
|
30,340
|
|
|
$
|
6,766
|
|
|
$
|
6,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The Company evaluates the loan risk grading system definitions and allowance for loan
loss methodology on an ongoing basis. No significant changes were made to either during the past year.
For purposes of
monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Company disaggregates the segment into the following classes: commercial and industrial, commercial real estate and agricultural.
To facilitate the monitoring of credit quality within the commercial portfolio segment, and for purposes of analyzing historical loss
rates used in the determination of the allowance for loan losses for the commercial portfolio segment, the Company utilizes the following categories of credit grades: pass, other assets especially mentioned, substandard, doubtful or loss. The five
categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.
Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically
based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis.
The
Company assigns an Other Assets Especially Mentioned rating to loans and leases that have potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the
deterioration of the repayment prospects for the loan or the Companys credit position.
The Company assigns a
substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly
repayment of the debt. Loans in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.
The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable
specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a
proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans. Loans rated as loss are loans with advances in excess of calculated current fair value which are considered
uncollectible.
For purposes of monitoring the credit quality and risk characteristics of its consumer portfolio segment, the
Company disaggregates the segment into the following classes: residential mortgage, home equity and other consumer. The Company considers repayment performance as the best indicator of credit quality for residential mortgage and consumer loans.
Consumer loans that have principal and interest payments that have become past due ninety days are classified as substandard unless such loans are both well secured and in the process of collection. All other loans are classified as pass. Well
secured loans are collateralized by perfected security interests in real and/or personal property for which the Company estimates proceeds from sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan
and pay all costs to sell the collateral. The Company considers a loan in the process of collection if collection efforts or legal action is proceeding and the Company expects to collect funds sufficient to bring the loan current or recover the
entire outstanding principal and accrued interest balance.
59
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Generally, all classes of loans are placed on non-accrual status at ninety days past due
and interest is considered a loss, unless the loan is well-secured and in the process of collection. Most impaired loans are on non-accrual status. Past due status is based on the contractual terms of the loan. Payments made while a loan is on
non-accrual are treated as reductions of principal. Typically, loans are not returned to accrual status until all loan payments have been current for at least six months.
The following tables present the Companys past due and non-accrual loans as of December 31, 2013 and December 31, 2012 (thousands):
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past Due Days
|
|
|
Current
|
|
|
Total
Financing
Receivables
|
|
|
90+
Days
&
Accruing
|
|
|
Non-
accrual
|
|
|
|
30-59
|
|
|
60-89
|
|
|
90+
|
|
|
Total
|
|
|
|
|
|
Commercial
|
|
$
|
309
|
|
|
$
|
22
|
|
|
$
|
432
|
|
|
$
|
763
|
|
|
$
|
36,029
|
|
|
$
|
36,792
|
|
|
$
|
32
|
|
|
$
|
890
|
|
Commercial Real Estate
|
|
|
212
|
|
|
|
0
|
|
|
|
2,789
|
|
|
|
3,001
|
|
|
|
186,659
|
|
|
|
189,660
|
|
|
|
0
|
|
|
|
3,402
|
|
Agricultural
|
|
|
0
|
|
|
|
25
|
|
|
|
28
|
|
|
|
53
|
|
|
|
35,107
|
|
|
|
35,160
|
|
|
|
0
|
|
|
|
38
|
|
Residential1 to 4 Family
|
|
|
0
|
|
|
|
150
|
|
|
|
502
|
|
|
|
652
|
|
|
|
102,129
|
|
|
|
102,781
|
|
|
|
0
|
|
|
|
1,175
|
|
ResidentialHome Equity
|
|
|
40
|
|
|
|
32
|
|
|
|
100
|
|
|
|
172
|
|
|
|
28,079
|
|
|
|
28,251
|
|
|
|
0
|
|
|
|
164
|
|
Consumer
|
|
|
10
|
|
|
|
1
|
|
|
|
24
|
|
|
|
35
|
|
|
|
6,731
|
|
|
|
6,766
|
|
|
|
0
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
571
|
|
|
$
|
230
|
|
|
$
|
3,875
|
|
|
$
|
4,676
|
|
|
$
|
394,734
|
|
|
$
|
399,410
|
|
|
$
|
32
|
|
|
$
|
5,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past Due Days
|
|
|
Current
|
|
|
Total
Financing
Receivables
|
|
|
90+
Days
&
Accruing
|
|
|
Non-
accrual
|
|
|
|
30-59
|
|
|
60-89
|
|
|
90+
|
|
|
Total
|
|
|
|
|
|
Commercial
|
|
$
|
65
|
|
|
$
|
91
|
|
|
$
|
4,594
|
|
|
$
|
4,750
|
|
|
$
|
50,211
|
|
|
$
|
54,961
|
|
|
$
|
620
|
|
|
$
|
4,418
|
|
Commercial Real Estate
|
|
|
602
|
|
|
|
26
|
|
|
|
3,590
|
|
|
|
4,218
|
|
|
|
175,687
|
|
|
|
179,905
|
|
|
|
0
|
|
|
|
3,950
|
|
Agricultural
|
|
|
0
|
|
|
|
0
|
|
|
|
53
|
|
|
|
53
|
|
|
|
33,626
|
|
|
|
33,679
|
|
|
|
0
|
|
|
|
75
|
|
Residential1 to 4 Family
|
|
|
460
|
|
|
|
24
|
|
|
|
540
|
|
|
|
1,024
|
|
|
|
95,643
|
|
|
|
96,667
|
|
|
|
134
|
|
|
|
1,116
|
|
ResidentialHome Equity
|
|
|
54
|
|
|
|
3
|
|
|
|
173
|
|
|
|
230
|
|
|
|
30,110
|
|
|
|
30,340
|
|
|
|
24
|
|
|
|
196
|
|
Consumer
|
|
|
22
|
|
|
|
38
|
|
|
|
10
|
|
|
|
70
|
|
|
|
6,249
|
|
|
|
6,319
|
|
|
|
0
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,203
|
|
|
$
|
182
|
|
|
$
|
8,960
|
|
|
$
|
10,345
|
|
|
$
|
391,526
|
|
|
$
|
401,871
|
|
|
$
|
778
|
|
|
$
|
9,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The following tables present impaired loan information at and for the years ended
December 31, 2013 and 2012 and the related allowance for loan losses. Interest income recognized is not materially different than interest income that would have been recognized on a cash basis (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
342
|
|
|
$
|
497
|
|
|
$
|
0
|
|
|
$
|
1,255
|
|
|
$
|
1,571
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
3,275
|
|
|
|
3,727
|
|
|
|
0
|
|
|
|
3,940
|
|
|
|
4,145
|
|
|
|
0
|
|
Agricultural
|
|
|
38
|
|
|
|
52
|
|
|
|
0
|
|
|
|
75
|
|
|
|
87
|
|
|
|
0
|
|
Residential1 to 4 Family
|
|
|
952
|
|
|
|
1,086
|
|
|
|
0
|
|
|
|
1,008
|
|
|
|
1,126
|
|
|
|
0
|
|
ResidentialHome equity
|
|
|
29
|
|
|
|
39
|
|
|
|
0
|
|
|
|
36
|
|
|
|
40
|
|
|
|
0
|
|
Consumer
|
|
|
9
|
|
|
|
10
|
|
|
|
0
|
|
|
|
16
|
|
|
|
16
|
|
|
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
560
|
|
|
$
|
569
|
|
|
$
|
108
|
|
|
$
|
3,234
|
|
|
$
|
3,290
|
|
|
$
|
1,029
|
|
Commercial real estate
|
|
|
2,089
|
|
|
|
2,174
|
|
|
|
418
|
|
|
|
1,584
|
|
|
|
1,665
|
|
|
|
413
|
|
Agricultural
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential1 to 4 Family
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
80
|
|
|
|
1
|
|
ResidentialHome equity
|
|
|
15
|
|
|
|
14
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
902
|
|
|
$
|
1,066
|
|
|
$
|
108
|
|
|
$
|
4,489
|
|
|
$
|
4,861
|
|
|
$
|
1,029
|
|
Commercial real estate
|
|
|
5,364
|
|
|
|
5,901
|
|
|
|
418
|
|
|
|
5,524
|
|
|
|
5,810
|
|
|
|
413
|
|
Agricultural
|
|
|
38
|
|
|
|
52
|
|
|
|
0
|
|
|
|
75
|
|
|
|
87
|
|
|
|
0
|
|
Residential1 to 4 Family
|
|
|
952
|
|
|
|
1,086
|
|
|
|
0
|
|
|
|
1,008
|
|
|
|
1,206
|
|
|
|
1
|
|
ResidentialHome equity
|
|
|
44
|
|
|
|
53
|
|
|
|
0
|
|
|
|
36
|
|
|
|
40
|
|
|
|
0
|
|
Consumer
|
|
|
9
|
|
|
|
10
|
|
|
|
0
|
|
|
|
16
|
|
|
|
18
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,309
|
|
|
$
|
8,168
|
|
|
$
|
526
|
|
|
$
|
11,148
|
|
|
$
|
12,022
|
|
|
$
|
1,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
2013
|
|
|
For the year ended
December 31,
2012
|
|
|
For the year ended
December 31,
2011
|
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
694
|
|
|
$
|
51
|
|
|
$
|
1,218
|
|
|
$
|
5
|
|
|
$
|
982
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
3,174
|
|
|
|
211
|
|
|
|
4,744
|
|
|
|
202
|
|
|
|
3,659
|
|
|
|
136
|
|
Agricultural
|
|
|
45
|
|
|
|
3
|
|
|
|
45
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential1 to 4 Family
|
|
|
963
|
|
|
|
29
|
|
|
|
1,293
|
|
|
|
38
|
|
|
|
1,105
|
|
|
|
51
|
|
ResidentialHome equity
|
|
|
35
|
|
|
|
1
|
|
|
|
28
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
12
|
|
|
|
1
|
|
|
|
12
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,725
|
|
|
$
|
0
|
|
|
$
|
3,264
|
|
|
$
|
0
|
|
|
$
|
1,090
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
2,373
|
|
|
|
0
|
|
|
|
3,928
|
|
|
|
0
|
|
|
|
2,191
|
|
|
|
0
|
|
Agricultural
|
|
|
0
|
|
|
|
0
|
|
|
|
9
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential1 to 4 Family
|
|
|
29
|
|
|
|
0
|
|
|
|
40
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
ResidentialHome equity
|
|
|
10
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,419
|
|
|
$
|
51
|
|
|
$
|
4,482
|
|
|
$
|
5
|
|
|
$
|
2,072
|
|
|
$
|
0
|
|
Commercial real estate
|
|
|
5,547
|
|
|
|
211
|
|
|
|
8,672
|
|
|
|
202
|
|
|
|
5,850
|
|
|
|
136
|
|
Agricultural
|
|
|
45
|
|
|
|
3
|
|
|
|
54
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential1 to 4 Family
|
|
|
992
|
|
|
|
29
|
|
|
|
1,333
|
|
|
|
38
|
|
|
|
1,105
|
|
|
|
51
|
|
ResidentialHome equity
|
|
|
45
|
|
|
|
1
|
|
|
|
28
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer
|
|
|
12
|
|
|
|
1
|
|
|
|
13
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,060
|
|
|
$
|
296
|
|
|
$
|
14,582
|
|
|
$
|
245
|
|
|
$
|
9,027
|
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present information regarding troubled debt restructurings (TDRs) by
segment: (dollars in thousands):
Newly classified troubled debt restructurings (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
|
|
Year Ended December 31, 2012
|
|
|
|
|
|
|
Outstanding Recorded Investment
|
|
|
|
|
|
Outstanding Recorded Investment
|
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
|
|
|
Post-
Modification
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
|
|
|
Post-
Modification
|
|
Commercial
|
|
|
1
|
|
|
$
|
24
|
|
|
$
|
22
|
|
|
|
3
|
|
|
$
|
473
|
|
|
$
|
399
|
|
Commercial real estate
|
|
|
2
|
|
|
|
1,111
|
|
|
|
850
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential
|
|
|
1
|
|
|
|
15
|
|
|
|
14
|
|
|
|
1
|
|
|
|
42
|
|
|
|
36
|
|
Consumer
|
|
|
1
|
|
|
|
8
|
|
|
|
2
|
|
|
|
2
|
|
|
|
20
|
|
|
|
16
|
|
The following table provides information on how restructured loans were modified during the years ended
December 31, 2013 and 2012 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Recorded
Investment
|
|
|
Amount
charged off
|
|
|
Allowance
Increased
|
|
|
Recorded
Investment
|
|
|
Amount
charged off
|
|
|
Allowance
Increased
|
|
Extended maturities
|
|
$
|
463
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
451
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Extended maturities and lowered interest rate
|
|
|
423
|
|
|
|
0
|
|
|
|
8
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Lowered interest rate
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
|
0
|
|
62
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
All TDRs are considered impaired loans. The Company considers TDRs that become 30 days
or more past due under the modified terms as subsequently defaulted. The Company had the following TDRs modified in the past twelve months that subsequently defaulted during the years ended December 31, 2013 and December 31, 2012
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Number of
Contracts
|
|
|
Recorded
Investment
|
|
|
Number of
Contracts
|
|
|
Recorded
Investment
|
|
Consumer
|
|
|
1
|
|
|
$
|
22
|
|
|
|
1
|
|
|
$
|
2
|
|
The allowance for loan loss on the above restructured loan is based on present value of future expected
cash flows and takes into account the past due payments.
The Company acquired loans from American National Bank on
March 19, 2010 and by its acquisition by merger of Community National Corporation on December 31, 2009. At the time of each acquisition, there was evidence of deterioration of credit quality since origination associated with these loans
for which it was probable, at acquisition, that all contractually required payments would not be collected. As of December 31, 2013 and 2012, such acquired credit-impaired loans represent less than one percent of total loans and the disclosures
required under ASC 310-30 are not considered material to the overall financial statements.
Note 7: Premises and Equipment
Major classifications of premises and equipment, stated at cost, were as follows (thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Land
|
|
$
|
4,474
|
|
|
$
|
4,588
|
|
Buildings and improvements
|
|
|
18,537
|
|
|
|
18,922
|
|
Leasehold improvements
|
|
|
445
|
|
|
|
420
|
|
Equipment
|
|
|
11,689
|
|
|
|
12,638
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,145
|
|
|
$
|
36,568
|
|
Less accumulated depreciation and amortization
|
|
|
(18,250
|
)
|
|
|
(18,151
|
)
|
|
|
|
|
|
|
|
|
|
Net premises and equipment
|
|
$
|
16,895
|
|
|
$
|
18,417
|
|
|
|
|
|
|
|
|
|
|
Note 8: Operating Leases
The Bank has entered into certain operating leases for some of its branch locations. Operating lease expense was
$99,000, $94,000, and $80,000 for years 2013, 2012, and 2011, respectively. The minimum future lease payments for each of the next five years are as follows (thousands):
|
|
|
|
|
2014
|
|
$
|
91
|
|
2015
|
|
|
91
|
|
2016
|
|
|
50
|
|
2017
|
|
|
42
|
|
2018
|
|
|
42
|
|
63
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Note 9: Goodwill
All goodwill is allocated to the banking segment of the business and totaled $3,625,000 at December 31, 2013 and
December 31, 2012.
Note 10: Other Intangible Assets
The carrying basis and accumulated amortization of recognized intangible assets at December 31, 2013 and 2012,
were (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Core deposit intangibles
|
|
$
|
1,523
|
|
|
$
|
(1,211
|
)
|
|
$
|
4,515
|
|
|
$
|
(3,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2013, 2012 and 2011, was $244,000, $275,000
and $353,000, respectively. Estimated amortization expense for each of the following five years is (thousands):
|
|
|
|
|
2014
|
|
$
|
179
|
|
2015
|
|
|
89
|
|
2016
|
|
|
44
|
|
2017
|
|
|
0
|
|
2018
|
|
|
0
|
|
Note 11: Interest-Bearing Deposits
Interest-bearing deposits in denominations of $100,000 or more were $18,328,000 on December 31, 2013, and
$26,991,000 on December 31, 2012. At December 31, 2013, the scheduled maturities of time deposits were as follows (thousands):
|
|
|
|
|
2014
|
|
$
|
54,147
|
|
2015
|
|
|
17,282
|
|
2016
|
|
|
8,577
|
|
2017
|
|
|
5,966
|
|
2018
|
|
|
5,760
|
|
Thereafter
|
|
|
4,602
|
|
|
|
|
|
|
|
|
$
|
96,334
|
|
|
|
|
|
|
Included in time deposits at December 31, 2013 and 2012 were $430,000 and $1,325,000 respectively,
of deposits which were obtained through the Certificate of Deposit Account Registry Service (CDARS). This service allows deposit customers to maintain fully insured balances in excess of the $250,000 FDIC insurance limit without the inconvenience of
having multi-banking relationships. Under the reciprocal program in which the Bank is currently participating, customers agree to allow the Bank to place their deposits with other participating banks in the CDARS program in insurable amounts under
$250,000. In exchange, other banks in the program agree to place their deposits with the Bank also in insurable amounts under $250,000.
Note 12: Short-Term Borrowings
The Company had no short-term borrowings at December 31, 2013 or December 31, 2012.
64
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The Company has a line of credit of $30.0 million with the Federal Home Loan Bank of
Cincinnati and two lines of credit with two other correspondent banks totaling $20.0 million at December 31, 2013. The Company has also pledged $7.5 million of securities with the Federal Reserve Bank to secure discount window borrowing if
necessary.
Note 13: Long-Term Debt
Long-term debt consisted of the following components (thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Federal Home Loan Bank advances
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Junior subordinated debentures
|
|
|
9,310
|
|
|
|
10,310
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,310
|
|
|
$
|
15,310
|
|
|
|
|
|
|
|
|
|
|
The Federal Home Loan Bank advances are secured by a blanket pledge of certain mortgage loans totaling
$110,439,838 at December 31, 2013. The advance of $5.0 million, at a fixed interest rate of 2.82%, matures on January 14, 2015. Until maturity, the Federal Home Loan Bank has the option quarterly to terminate the advance and require full
payment.
On June 25, 2007, NB&T Statutory Trust III (Trust III), a wholly owned subsidiary of the
Company, closed a pooled private offering of 10,000 Capital Securities with a liquidation amount of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for junior subordinated debentures with terms similar to the
Capital Securities. The sole assets of Trust III are the junior subordinated debentures of the Company and payments thereunder. The junior subordinated debentures and the back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by the Company of the obligations of Trust III under the Capital Securities. Distributions on the Capital Securities were payable quarterly at a fixed interest rate of 7.071% through September 6, 2012 and thereafter at the annual rate
of 1.50% over the 3 month LIBOR, which was 1.74% at December 31, 2013. Distributions on the Capital Securities are included in interest expense in the consolidated financial statements. These securities are considered Tier I capital (with
certain limitations applicable) under current regulatory guidelines.
The junior subordinated debentures are subject to
mandatory redemption, in whole or in part, upon repayment of the Capital Securities at maturity or their earlier redemption at the liquidation amount. Subject to the Company having received prior approval of the Federal Reserve, if then required,
the Capital Securities are redeemable prior to the maturity date of September 6, 2037, at the option of the Company. Since September 6, 2012, the Capital Securities are redeemable at par. The Company has the option to defer distributions
on the Capital Securities from time to time for a period not to exceed 20 consecutive semi-annual periods.
As of
December 31, 2013 and December 31, 2012, the outstanding principal balance of the Capital Securities was $9,000,000 and $10,000,000, respectively. In June 2013, the Company extinguished $1.0 million in debt at a discount with a gain of
$300,000 recognized. The Company accounts for its investment in the trust as assets, its subordinated debentures as debt, and the interest paid thereon as interest expense.
65
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Note 14: Income Taxes
The provision for income taxes includes these components (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Taxes currently payable
|
|
$
|
1,092
|
|
|
$
|
1,220
|
|
|
$
|
1,263
|
|
Deferred income taxes
|
|
|
(46
|
)
|
|
|
(227
|
)
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
1,046
|
|
|
$
|
993
|
|
|
$
|
1,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax expense at the statutory rate to actual income tax expense is shown below
(thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Computed at the statutory rate (34%)
|
|
$
|
1,798
|
|
|
$
|
1,656
|
|
|
$
|
1,735
|
|
Increase (decrease) resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt interest
|
|
|
(464
|
)
|
|
|
(291
|
)
|
|
|
(153
|
)
|
ESOP dividend
|
|
|
(131
|
)
|
|
|
(144
|
)
|
|
|
(158
|
)
|
Bank owned life insurance
|
|
|
(159
|
)
|
|
|
(284
|
)
|
|
|
(165
|
)
|
Other
|
|
|
2
|
|
|
|
56
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
1,046
|
|
|
$
|
993
|
|
|
$
|
1,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences related to deferred taxes shown on the balance sheets were
(thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
1,337
|
|
|
$
|
1,563
|
|
Accruals not currently deductible
|
|
|
225
|
|
|
|
235
|
|
Nonaccrual loan interest collected
|
|
|
271
|
|
|
|
280
|
|
Stock options not currently deductible
|
|
|
116
|
|
|
|
100
|
|
OREO expenses not currently deductible
|
|
|
240
|
|
|
|
403
|
|
Other-than-temporary impairment charge
|
|
|
0
|
|
|
|
37
|
|
Unrealized losses on available-for-sale securities
|
|
|
464
|
|
|
|
0
|
|
Other
|
|
|
16
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,669
|
|
|
|
2,641
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Deferred loan costs
|
|
|
(242
|
)
|
|
|
(214
|
)
|
Depreciation
|
|
|
(477
|
)
|
|
|
(537
|
)
|
FHLB stock dividends
|
|
|
(1,453
|
)
|
|
|
(1,453
|
)
|
Prepaid assets currently deductible
|
|
|
(32
|
)
|
|
|
(53
|
)
|
Unrealized gains on available-for-sale securities
|
|
|
0
|
|
|
|
(1,202
|
)
|
ANB purchase
|
|
|
(981
|
)
|
|
|
(1,423
|
)
|
Non-taxable purchase accounting adjustments
|
|
|
(260
|
)
|
|
|
(262
|
)
|
Bad debt recapture
|
|
|
0
|
|
|
|
(131
|
)
|
Intangible asset amortization
|
|
|
(709
|
)
|
|
|
(544
|
)
|
Other
|
|
|
(35
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,189
|
)
|
|
|
(5,867
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,520
|
)
|
|
$
|
(3,226
|
)
|
|
|
|
|
|
|
|
|
|
66
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Note 15: Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the regulators could require
adjustments to regulatory capital not reflected in these financial statements.
Quantitative measures established by
regulation to ensure capital adequacy require the Company and the subsidiary Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2013, that the Company and the Bank met all capital adequacy requirements to which they were subject.
As of December 31, 2013, the Company and the Bank met the capital requirements to be deemed well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Companys and Banks category.
The Companys and the Banks actual and required capital amounts and ratios are presented in the following table (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
For Capital Adequacy
Purposes
|
|
|
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
79,041
|
|
|
|
19.10
|
%
|
|
$
|
33,107
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
71,729
|
|
|
|
17.35
|
|
|
|
33,080
|
|
|
|
8.0
|
|
|
$
|
41,349
|
|
|
|
10.0
|
%
|
Tier I Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
74,988
|
|
|
|
18.12
|
|
|
|
16,553
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
67,676
|
|
|
|
16.37
|
|
|
|
16,540
|
|
|
|
4.0
|
|
|
|
24,810
|
|
|
|
6.0
|
|
Tier I Capital to Average Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
74,988
|
|
|
|
11.56
|
|
|
|
25,952
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
67,676
|
|
|
|
10.41
|
|
|
|
25,992
|
|
|
|
4.0
|
|
|
|
32,490
|
|
|
|
5.0
|
|
As of December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
79,975
|
|
|
|
19.51
|
%
|
|
$
|
32,791
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
71,899
|
|
|
|
17.55
|
|
|
|
32,766
|
|
|
|
8.0
|
|
|
$
|
40,957
|
|
|
|
10.0
|
%
|
Tier I Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
75,215
|
|
|
|
18.35
|
|
|
|
16,396
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
67,139
|
|
|
|
16.39
|
|
|
|
16,383
|
|
|
|
4.0
|
|
|
|
24,574
|
|
|
|
6.0
|
|
Tier I Capital to Average Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
75,215
|
|
|
|
11.27
|
|
|
|
26,701
|
|
|
|
4.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
67,139
|
|
|
|
10.12
|
|
|
|
26,534
|
|
|
|
4.0
|
|
|
|
33,167
|
|
|
|
5.0
|
|
67
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The Bank is subject to certain restrictions on the amount of dividends that it may
declare without prior regulatory approval. At December 31, 2013, approximately $10,000 in retained earnings were available for dividend declaration without prior regulatory approval.
Note 16: Related Party Transactions
The Bank had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related
parties). A summary of the related party loan activity follows (thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Balance, January 1
|
|
$
|
3,777
|
|
|
$
|
3,011
|
|
New loans
|
|
|
407
|
|
|
|
1,239
|
|
Payments
|
|
|
(1,437
|
)
|
|
|
(95
|
)
|
Other changes
|
|
|
0
|
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
2,747
|
|
|
$
|
3,777
|
|
|
|
|
|
|
|
|
|
|
In managements opinion, such loans and other extensions of credit and deposits were made in the
ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in managements opinion, these loans
did not involve more than normal risk of collectability or present other unfavorable features. Other changes represent reclassification of a loan previously reported as a related party transaction where the borrower is no longer a related party.
Deposits from related parties held by the Bank at December 31, 2013 and 2012 totaled $1,172,000 and $1,255,000
respectively.
Note 17: Employee Benefits
The Company has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute up to
50% of their compensation. The Banks plan was amended in 2013, and the Bank will now match 100% of the first 3% of compensation contributed by an employee and 50% of the next 2% of compensation contributed by an employee. In 2012 and 2011, the
Bank matched up to 3% of an employees compensation for the first 8% of their compensation contributed to the plan. Employer contributions charged to expense for 2013, 2012 and 2011 were $273,000, $164,000, and $195,000, respectively.
Also, the Bank has a deferred compensation agreement with one retired officer. The agreement provides level monthly or annual
payments for twenty years after retirement. The charge to expense for the agreement was $43,000, $45,000 and $47,000 for 2013, 2012 and 2011, respectively. Such charges reflect the straight-line interest accrual using a 6.5% discount factor.
The Company sponsors an employee stock ownership plan (ESOP) that covers substantially all employees who meet minimum age and
length of service requirements. Shares of the Companys common stock held by the ESOP were purchased with the proceeds of borrowings from the Company. In December 2010, the Plans debt, which was due to mature in 2011, was paid in full and
all remaining shares were released for allocation. There was no ESOP compensation expense in 2013, 2012 and 2011 due to all shares being fully allocated. Total ESOP shares, which were fully allocated, were 308,712 and 351,463, respectively, as of
December 31, 2013 and 2012.
68
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Note 18: Stock Option Plans
The Company adopted an equity plan in 2006, which is shareholder approved and permits the Company to grant options,
restricted stock or stock appreciation rights of up to 270,000 shares of common stock. The Company believes that such awards better align the interests of its directors and employees with those of its shareholders. Option awards are generally
granted with an exercise price equal to the market price of the Companys stock at the date of grant; those option awards generally vest based on three years of continuous service and have a ten-year contractual term. The previous plan, which
was terminated in 2006, still had options to purchase 25,000 shares outstanding at December 31, 2013. These options vest over five years. In addition, an option to purchase 30,000 shares was awarded to the Companys President upon his
employment, which vested over five years. Certain option and share awards provide for an exchange of unvested options for a cash payment or shares of stock if there is a change in control (as defined in the plan). The compensation cost for the stock
option expense recognized in 2013, 2012 and 2011 was calculated for all grants based on the grant dates fair value and totaled $192,000, $174,000 and $171,000, respectively. The related tax benefit for 2013, 2012 and 2011 was $65,000, $59,000
and $58,000, respectively.
The fair value of each option award is estimated on the date of grant using a binomial option
valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Companys stock and other factors. The Company uses historical data to estimate option exercise and participant
termination within the valuation model; separate groups of participants that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option
valuation model and represents the period of time that options granted are expected to be outstanding. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected volatility
|
|
|
49.2
|
%
|
|
|
50.2
|
%
|
|
|
50.4
|
%
|
Weighted-average volatility
|
|
|
49.2
|
%
|
|
|
50.2
|
%
|
|
|
50.4
|
%
|
Expected dividends
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
|
|
6.0
|
%
|
Expected term (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Risk-free rate
|
|
|
0.9
|
%
|
|
|
1.1
|
%
|
|
|
2.4
|
%
|
Weighted-average fair value of options granted during the year
|
|
$
|
4.88
|
|
|
$
|
5.01
|
|
|
$
|
6.16
|
|
Historically, the Company has fulfilled option exercises through available treasury shares.
A summary of option activity under the plans as of December 31, 2013, and changes during the year then ended, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding, beginning of year
|
|
|
267,874
|
|
|
$
|
20.54
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
52,000
|
|
|
|
19.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
16,585
|
|
|
|
17.10
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(35,667
|
)
|
|
|
22.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
267,622
|
|
|
$
|
20.19
|
|
|
|
5.34
|
|
|
$
|
141,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
197,246
|
|
|
$
|
20.37
|
|
|
|
4.10
|
|
|
$
|
139,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The total intrinsic value of options exercised during the year ended December 31,
2013 was $72,000. The total intrinsic value of options exercised during the year ended December 31, 2012 was $12,000. There were no options exercised during the year ended December 31, 2011. As of December 31, 2013, there was $205,000
of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of ten months.
Note 19: Earnings Per Share
Earnings per share (EPS) were computed as follows (thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,243
|
|
|
$
|
3,877
|
|
|
$
|
3,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,419,259
|
|
|
|
3,423,800
|
|
|
|
3,423,995
|
|
Basic earnings per share
|
|
$
|
1.24
|
|
|
$
|
1.13
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,243
|
|
|
$
|
3,877
|
|
|
$
|
3,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
3,419,259
|
|
|
|
3,423,800
|
|
|
|
3,423,995
|
|
Effect of dilutive securitiesstock options
|
|
|
11,458
|
|
|
|
6,550
|
|
|
|
12,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares and dilutive potential common shares
|
|
|
3,430,717
|
|
|
|
3,430,350
|
|
|
|
3,436,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.24
|
|
|
$
|
1.13
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, options to purchase 197,100 shares of common stock at $19.22 to $30.50 per
share were outstanding but not included in the computation of diluted EPS because the options exercise prices were greater than the average market price of the common shares.
As of December 31, 2012, options to purchase 212,267 shares of common stock at $19.00 to $30.50 per share were outstanding but not
included in the computation of diluted EPS because the options exercise prices were greater than the average market price of the common shares.
As of December 31, 2011, options to purchase 193,600 shares of common stock at $20.88 to $30.50 per share were outstanding but not included in the computation of diluted EPS because the options
exercise prices were greater than the average market price of the common shares.
Note 20: Commitments and Contingencies
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customers creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on managements credit evaluation of the counterparty.
Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.
70
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
At December 31, 2013 and 2012, the Bank had the following commitments outstanding
(thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Commitments at variable rates of interest
|
|
$
|
3,090
|
|
|
$
|
18,394
|
|
Commitments at fixed rates of interest
|
|
|
130
|
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
Total business loan commitments
|
|
$
|
3,220
|
|
|
$
|
22,594
|
|
|
|
|
|
|
|
|
|
|
The commitments extended over varying periods of time with the majority being disbursed within a one-year
period.
Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers.
At December 31, 2013 and 2012, the Bank had total outstanding
letters of credit of (thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Letters of credit
|
|
$
|
747
|
|
|
$
|
1,742
|
|
Range of terms
|
|
|
30 days to two years
|
|
|
|
30 days to one year
|
|
Mortgage loans in the process of origination represent amounts that the Bank plans to fund within a
normal period of 60 to 90 days, some of which are intended for sale to investors in the secondary market. Forward commitments to sell mortgage loans are obligations to deliver loans at a specified price on or before a specified future date. The Bank
acquires such commitments to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale.
At December 31, 2013 and 2012, total mortgage loans in the process of origination amounted to (thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Commitments to originate mortgage loans
|
|
$
|
410
|
|
|
$
|
2,276
|
|
Commitments at fixed rates of interest
|
|
|
410
|
|
|
|
2,056
|
|
Commitments to sell mortgage loans
|
|
|
0
|
|
|
|
255
|
|
Lines of credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customers
creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on managements credit evaluation of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.
At December 31, 2013 and 2012, the Bank had the following lines of credit outstanding (thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Commercial lines
|
|
$
|
33,670
|
|
|
$
|
29,700
|
|
Consumer lines
|
|
|
41,617
|
|
|
|
40,886
|
|
71
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
At December 31, 2013, the Bank had $443,000 in Federal Funds sold invested at U.S.
Bank.
Note 21: Fair Value Measurements
The Company accounts for fair values in accordance with accounting guidance for
Fair Value Measurements
prescribed under the FASB Accounting Standards Codification. The ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
The ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The ASC also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair value:
|
|
|
|
|
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or liabilities
|
|
|
|
|
|
Level 2
|
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
|
|
|
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
|
The following is a description of the valuation methodologies used for assets measured at fair value on a
recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy:
Available-for-Sale Securities
The fair value of available-for-sale
securities are determined by various valuation methodologies. The Company has no securities classified as Level 1 or Level 3. Level 2 securities include U.S. Government agencies, mortgage-backed securities, and obligations of political and state
subdivisions. Level 2 inputs do not include quoted prices for individual securities in active markets; however, they do include inputs that are either directly or indirectly observable for the individual security being valued. Such observable inputs
include interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, credit risks and default rates. Also included are inputs derived principally from or corroborated by observable market data by correlation or
other means.
The following table presents the fair value measurements of assets measured at fair value on a recurring basis
and the level within the ASC fair value hierarchy in which the fair value measurements fall at December 31, 2013 and December 31, 2012. (See fair values by type of security in Note 2) (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
138,098
|
|
|
$
|
0
|
|
|
$
|
138,098
|
|
|
$
|
0
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
133,020
|
|
|
$
|
0
|
|
|
$
|
133,020
|
|
|
$
|
0
|
|
72
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The following is a description of the valuation methodologies used for assets measured
at fair value on a non-recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy:
Impaired Loans (Collateral Dependent)
At December 31, 2013 and 2012,
impaired loans consisted primarily of loans secured by commercial real estate. Management has determined fair value measurements on impaired loans secured by real estate primarily through evaluations of appraisals performed, less estimated cost to
sell. Appraisals are reviewed for accuracy and consistency by the Banks Credit Administration area, and appraisers are selected from the list of approved appraisers maintained by management. Collateral-dependent impaired loans are classified
within Level 3 of the fair value hierarchy. The Bank also has some impaired loans secured by accounts receivable, inventory or equipment. Management has determined fair value measurements based on review of recent financial statements or research of
current equipment values.
Other Real Estate Owned
Real estate acquired through, or in lieu of, loan foreclosure (OREO) is held for sale and initially recorded at fair value based on current appraised value at the date of foreclosure, establishing a new
cost basis. Subsequent to foreclosure, new appraisals are periodically obtained by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Appraisals are reviewed for accuracy and consistency
by the Banks Credit Administration area, and appraisers are selected from the list of approved appraisers maintained by management. OREO is classified within Level 3 of the fair value hierarchy.
The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within
the ASC fair value hierarchy in which the fair value measurements fall at December 31, 2013 and December 31, 2012. The values below only represent those assets with a change in their fair value estimate since the previous year end
(thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
Other real estate owned
|
|
$
|
2,907
140
|
|
|
$
|
0
0
|
|
|
$
|
0
0
|
|
|
$
|
2,907
140
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,047
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,047
|
|
Other real estate owned
|
|
|
613
|
|
|
|
0
|
|
|
|
0
|
|
|
|
613
|
|
73
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
Unobservable (Level 3) Inputs
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value
measurements other than goodwill (thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Fair
Value
|
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Estimated
Cost
|
|
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,907
|
|
|
Market comparable
properties
|
|
Estimated costs to
sell
|
|
|
10
|
%
|
Other real estate owned
|
|
$
|
140
|
|
|
Market comparable
properties
|
|
Comparability
adjustments
|
|
|
10
|
%
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
2,047
|
|
|
Market comparable
properties
|
|
Estimated costs to
sell
|
|
|
10
|
%
|
Other real estate owned
|
|
$
|
613
|
|
|
Market comparable
properties
|
|
Comparability
adjustments
|
|
|
10
|
%
|
The following table presents estimated fair values of the Companys financial instruments and the
level within the fair value hierarchy in which the fair value measurements fall. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and
uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these
financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually
or in the aggregate (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,499
|
|
|
$
|
51,499
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Loans including loans held for sale, net
|
|
|
395,443
|
|
|
|
0
|
|
|
|
0
|
|
|
|
398,491
|
|
Stock in FRB and FHLB
|
|
|
10,035
|
|
|
|
0
|
|
|
|
10,035
|
|
|
|
0
|
|
Earned income receivable
|
|
|
2,546
|
|
|
|
0
|
|
|
|
2,546
|
|
|
|
0
|
|
FDIC loss share receivable
|
|
|
525
|
|
|
|
0
|
|
|
|
0
|
|
|
|
525
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
550,800
|
|
|
|
0
|
|
|
|
552,467
|
|
|
|
0
|
|
Long-term debt
|
|
|
14,310
|
|
|
|
0
|
|
|
|
8,250
|
|
|
|
0
|
|
Interest payable
|
|
|
74
|
|
|
|
0
|
|
|
|
74
|
|
|
|
0
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
64,509
|
|
|
$
|
64,509
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Loans including loans held for sale, net
|
|
|
397,424
|
|
|
|
0
|
|
|
|
0
|
|
|
|
407,145
|
|
Stock in FRB and FHLB
|
|
|
10,030
|
|
|
|
0
|
|
|
|
10,030
|
|
|
|
0
|
|
Earned income receivable
|
|
|
2,732
|
|
|
|
0
|
|
|
|
2,732
|
|
|
|
0
|
|
FDIC loss share receivable
|
|
|
1,340
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,340
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
559,568
|
|
|
|
0
|
|
|
|
561,871
|
|
|
|
0
|
|
Long-term debt
|
|
|
15,310
|
|
|
|
0
|
|
|
|
9,165
|
|
|
|
0
|
|
Interest payable
|
|
|
108
|
|
|
|
0
|
|
|
|
108
|
|
|
|
0
|
|
74
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
The following methods were used to estimate the fair value of all other financial
instruments recognized in the accompanying balance sheets at amounts other than fair value.
Cash and Cash Equivalents
The carrying amount approximates fair value.
Loans, Including Loans Held for Sale, Net
Fair value is estimated by
discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities. The market rates used are based on current rates the Bank would impose for
similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions.
Stock in FRB and FHLB
Fair value is estimated at book value due to restrictions that limit the sale or transfer of such stock.
FDIC Loss Share Receivable
The carrying amount approximates fair value. The carrying amount is based on future expected losses on loans covered under the loss share agreement with the FDIC.
Earned Income Receivable and Interest Payable
The carrying amount approximates fair value. The carrying amount for interest receivable and interest payable is determined using the interest rate, balance and last payment date. Trust income and
commissions receivable is based on trust fee schedules, market value of trust assets and brokerage commission schedules.
Deposits
Fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar
maturities. The market rates used were based on current rates the Bank would offer on similar term deposits. The estimated fair value of demand, NOW, savings and money market deposits is the book value since rates are regularly adjusted to market
rates and amounts are payable on demand at the reporting date.
Long-term Debt
Fair value of Federal Home Loan debt is estimated by discounting the future cash flows using rates of similar advances with similar
maturities. These rates were obtained from current rates offered by FHLB. Fair value of trust preferred debt is estimated by discounting the future cash flows using rates of similar trust preferred debt issuances. These rates were obtained from a
knowledgeable independent third party and reviewed by the Company.
Commitments to Originate Loans, Forward Sale Commitments, Letters of
Credit, and Lines of Credit
The fair value of commitments to originate loans is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of forward sale commitments is estimated based on
75
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
current market prices for loans of similar terms and credit quality. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the
estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2013 and 2012, the fair value of commitments was not material.
Note 22: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations and cash flows of
the Company at and for the years ended December 31 (thousands):
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
7,414
|
|
|
$
|
7,167
|
|
Investment in common stock of banking subsidiary
|
|
|
69,723
|
|
|
|
72,745
|
|
Investment in nonbanking subsidiary
|
|
|
303
|
|
|
|
302
|
|
Other assets
|
|
|
941
|
|
|
|
929
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
78,381
|
|
|
$
|
81,143
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
9,310
|
|
|
$
|
10,310
|
|
Other liabilities
|
|
|
1,036
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
10,346
|
|
|
|
10,323
|
|
Stockholders Equity
|
|
|
68,035
|
|
|
|
70,820
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
78,381
|
|
|
$
|
81,143
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from banking subsidiary
|
|
$
|
4,100
|
|
|
$
|
4,200
|
|
|
$
|
4,000
|
|
Dividends from non-banking subsidiary
|
|
|
5
|
|
|
|
45
|
|
|
|
0
|
|
Gain on extinguishment of long-term debt
|
|
|
300
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
4,405
|
|
|
|
4,245
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
176
|
|
|
|
558
|
|
|
|
730
|
|
Directors fees
|
|
|
60
|
|
|
|
70
|
|
|
|
66
|
|
Other expenses
|
|
|
82
|
|
|
|
83
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
318
|
|
|
|
711
|
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax and Equity in Undistributed Income of Subsidiaries
|
|
|
4,087
|
|
|
|
3,534
|
|
|
|
3,116
|
|
Income Tax Benefit
|
|
|
(135
|
)
|
|
|
(379
|
)
|
|
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Equity in Undistributed Income of Subsidiaries
|
|
|
4,222
|
|
|
|
3,913
|
|
|
|
3,567
|
|
Equity in Undistributed Income (Excess Distributions) of Banking Subsidiary
|
|
|
20
|
|
|
|
(9
|
)
|
|
|
212
|
|
Equity in Undistributed Income (Loss) of Nonbanking Subsidiary
|
|
|
1
|
|
|
|
(27
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,243
|
|
|
$
|
3,877
|
|
|
$
|
3,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
1,010
|
|
|
$
|
4,002
|
|
|
$
|
3,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2013, 2012 and 2011
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,243
|
|
|
$
|
3,877
|
|
|
$
|
3,801
|
|
Items providing (using) cash
|
|
|
(338
|
)
|
|
|
895
|
|
|
|
(685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,905
|
|
|
|
4,772
|
|
|
|
3,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(3,077
|
)
|
|
|
(5,134
|
)
|
|
|
(4,109
|
)
|
Proceeds from stock options exercised
|
|
|
283
|
|
|
|
52
|
|
|
|
0
|
|
Purchase of treasury stock
|
|
|
(198
|
)
|
|
|
(276
|
)
|
|
|
(16
|
)
|
Sale of treasury stock
|
|
|
34
|
|
|
|
185
|
|
|
|
0
|
|
Repayment of long-term debt
|
|
|
(700
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,658
|
)
|
|
|
(5,173
|
)
|
|
|
(4,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents
|
|
|
247
|
|
|
|
(401
|
)
|
|
|
(1,009
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
7,167
|
|
|
|
7,568
|
|
|
|
8,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
7,414
|
|
|
$
|
7,167
|
|
|
$
|
7,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77