UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

Securities Exchange Act of 1934

For the Quarterly period ended June 30, 2014

Commission file number 001-35296

 

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

 

 

OHIO

 

34-1371693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No)

 

 

 

20 South Broad Street Canfield, OH

 

44406

(Address of principal executive offices)

 

(Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

¨            

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

 

Class

 

Outstanding at July 31, 2014

Common Stock, No Par Value

 

18,780,980 shares

 

 

 

 

 

 

 


 

Page Number

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (Unaudited)

 

 

 

 

 

Included in Part I of this report:

 

 

 

 

 

Farmers National Banc Corp. and Subsidiaries

 

 

 

 

 

Consolidated Balance Sheets

2

 

Consolidated Statements of Income

3

 

Consolidated Statements of Comprehensive Income (Loss)

4

 

Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

Item 2

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

30

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

Item 4

Controls and Procedures

39

 

 

 

PART II - OTHER INFORMATION

41

 

 

 

Item 1

Legal Proceedings

41

 

 

 

Item 1A

Risk Factors

41

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 3

Defaults Upon Senior Securities

41

 

 

 

Item 4

Mine Safety Disclosures

41

 

 

 

Item 5

Other Information

41

 

 

 

Item 6

Exhibits

42

 

 

SIGNATURES

43

 

 

10-Q Certifications

 

 

 

Section 906 Certifications

 

 

 

 

1

 


CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

(Unaudited)

(In Thousands of Dollars)

 

 

June 30,

2014

 

 

December 31,

2013

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

$

14,715

 

 

$

12,957

 

Federal funds sold and other

 

13,355

 

 

 

14,556

 

TOTAL CASH AND CASH EQUIVALENTS

 

28,070

 

 

 

27,513

 

Securities available for sale

 

409,285

 

 

 

422,985

 

Loans held for sale

 

275

 

 

 

158

 

Loans

 

637,774

 

 

 

630,684

 

Less allowance for loan losses

 

7,356

 

 

 

7,568

 

NET LOANS

 

630,418

 

 

 

623,116

 

Premises and equipment, net

 

17,410

 

 

 

17,187

 

Goodwill

 

6,354

 

 

 

6,354

 

Other intangibles

 

3,606

 

 

 

3,989

 

Bank owned life insurance

 

16,135

 

 

 

15,908

 

Other assets

 

21,733

 

 

 

20,116

 

TOTAL ASSETS

$

1,133,286

 

 

$

1,137,326

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

$

159,626

 

 

$

155,893

 

Interest-bearing

 

747,817

 

 

 

759,323

 

TOTAL DEPOSITS

 

907,443

 

 

 

915,216

 

Short-term borrowings

 

74,492

 

 

 

81,617

 

Long-term borrowings

 

19,315

 

 

 

19,822

 

Other liabilities

 

11,016

 

 

 

7,664

 

TOTAL LIABILITIES

 

1,012,266

 

 

 

1,024,319

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

Common Stock - Authorized 35,000,000 shares; issued 19,031,059

 

105,963

 

 

 

105,905

 

Retained earnings

 

17,630

 

 

 

14,215

 

Accumulated other comprehensive income (loss)

 

(957

)

 

 

(5,465

)

Treasury stock, at cost; 250,079 shares in 2014 and 255,079 shares in 2013

 

(1,616

)

 

 

(1,648

)

TOTAL STOCKHOLDERS' EQUITY

 

121,020

 

 

 

113,007

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

1,133,286

 

 

$

1,137,326

 

 

See accompanying notes

 

 

 

2

 


CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands except Per Share Data)

 

(Unaudited)

For the Three Months Ended

 

 

For the Six Months Ended

 

 

June 30,

2014

 

 

June 30,

2013

 

 

June 30,

2014

 

 

June 30,

2013

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

$

7,589

 

 

$

7,739

 

 

$

15,073

 

 

$

15,307

 

Taxable securities

 

1,838

 

 

 

1,734

 

 

 

3,709

 

 

 

3,642

 

Tax exempt securities

 

639

 

 

 

744

 

 

 

1,295

 

 

 

1,471

 

Dividends

 

48

 

 

 

48

 

 

 

95

 

 

 

101

 

Federal funds sold and other interest income

 

4

 

 

 

8

 

 

 

9

 

 

 

18

 

TOTAL INTEREST AND DIVIDEND INCOME

 

10,118

 

 

 

10,273

 

 

 

20,181

 

 

 

20,539

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,022

 

 

 

1,127

 

 

 

2,083

 

 

 

2,314

 

Short-term borrowings

 

13

 

 

 

13

 

 

 

24

 

 

 

25

 

Long-term borrowings

 

131

 

 

 

94

 

 

 

266

 

 

 

193

 

TOTAL INTEREST EXPENSE

 

1,166

 

 

 

1,234

 

 

 

2,373

 

 

 

2,532

 

NET INTEREST INCOME

 

8,952

 

 

 

9,039

 

 

 

17,808

 

 

 

18,007

 

Provision for loan losses

 

300

 

 

 

170

 

 

 

630

 

 

 

425

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

8,652

 

 

 

8,869

 

 

 

17,178

 

 

 

17,582

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

614

 

 

 

524

 

 

 

1,204

 

 

 

1,015

 

Bank owned life insurance income

 

120

 

 

 

116

 

 

 

227

 

 

 

233

 

Trust fees

 

1,552

 

 

 

1,391

 

 

 

3,049

 

 

 

2,737

 

Insurance agency commissions

 

75

 

 

 

41

 

 

 

170

 

 

 

83

 

Security gains

 

84

 

 

 

242

 

 

 

84

 

 

 

256

 

Retirement plan consulting fees

 

272

 

 

 

0

 

 

 

636

 

 

 

0

 

Investment commissions

 

243

 

 

 

251

 

 

 

437

 

 

 

513

 

Net gains on sale of loans

 

71

 

 

 

188

 

 

 

136

 

 

 

302

 

Other operating income

 

766

 

 

 

472

 

 

 

1,287

 

 

 

961

 

TOTAL NONINTEREST INCOME

 

3,797

 

 

 

3,225

 

 

 

7,230

 

 

 

6,100

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,096

 

 

 

5,400

 

 

 

10,118

 

 

 

10,605

 

Occupancy and equipment

 

1,097

 

 

 

1,088

 

 

 

2,250

 

 

 

2,114

 

State and local taxes

 

230

 

 

 

328

 

 

 

463

 

 

 

657

 

Professional fees

 

574

 

 

 

509

 

 

 

1,166

 

 

 

949

 

Merger related cost

 

0

 

 

 

217

 

 

 

0

 

 

 

261

 

Advertising

 

274

 

 

 

233

 

 

 

477

 

 

 

413

 

FDIC insurance

 

187

 

 

 

180

 

 

 

371

 

 

 

357

 

Intangible amortization

 

191

 

 

 

98

 

 

 

383

 

 

 

196

 

Core processing charges

 

389

 

 

 

336

 

 

 

750

 

 

 

682

 

Other operating expenses

 

1,340

 

 

 

1,433

 

 

 

2,541

 

 

 

2,676

 

TOTAL NONINTEREST EXPENSES

 

9,378

 

 

 

9,822

 

 

 

18,519

 

 

 

18,910

 

INCOME BEFORE INCOME TAXES

 

3,071

 

 

 

2,272

 

 

 

5,889

 

 

 

4,772

 

INCOME TAXES

 

720

 

 

 

404

 

 

 

1,347

 

 

 

899

 

NET INCOME

$

2,351

 

 

$

1,868

 

 

$

4,542

 

 

$

3,873

 

EARNINGS PER SHARE - basic and diluted

$

0.13

 

 

$

0.10

 

 

$

0.24

 

 

$

0.21

 

 

 

See accompanying notes

 

 

 

3

 


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

(Unaudited)

 

 

 

 

(In Thousands of Dollars)

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

June 30,

2014

 

 

June 30,

2013

 

 

June 30,

2014

 

 

June 30,

2013

 

NET INCOME

$

2,351

 

 

$

1,868

 

 

$

4,542

 

 

$

3,873

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2,934

 

 

 

(8,924

)

 

 

7,021

 

 

 

(11,458

)

Reclassification adjustment for (gains) losses realized in income

 

(84

)

 

 

(242

)

 

 

(84

)

 

 

(256

)

Net unrealized holding gains (losses)

 

2,850

 

 

 

(9,166

)

 

 

6,937

 

 

 

(11,714

)

Income tax effect

 

(997

)

 

 

3,208

 

 

 

(2,429

)

 

 

4,100

 

Other comprehensive income (loss), net of tax

 

1,853

 

 

 

(5,958

)

 

 

4,508

 

 

 

(7,614

)

TOTAL COMPREHENSIVE INCOME (LOSS)

$

4,204

 

 

$

(4,090

)

 

$

9,050

 

 

$

(3,741

)

 

See accompanying notes

 

 

 

4

 


CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

(In Thousands of Dollars)

 

(Unaudited)

Six Months Ended

 

 

June 30,

2014

 

 

June 30,

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income

$

4,542

 

 

$

3,873

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

630

 

 

 

425

 

Depreciation and amortization

 

1,003

 

 

 

879

 

Net amortization of securities

 

719

 

 

 

1,402

 

Security gains

 

(84

)

 

 

(256

)

Loss on sale of other real estate owned

 

2

 

 

 

16

 

Bank owned life insurance income

 

(227

)

 

 

(233

)

Origination of loans held for sale

 

(6,989

)

 

 

(17,384

)

Proceeds from loans held for sale

 

7,008

 

 

 

16,698

 

Net gains on sale of loans

 

(136

)

 

 

(302

)

Net change in other assets and liabilities

 

(512

)

 

 

(4,323

)

NET CASH FROM OPERATING ACTIVITIES

 

5,956

 

 

 

795

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from maturities and repayments of securities available for sale

 

25,313

 

 

 

42,920

 

Proceeds from sales of securities available for sale

 

33,254

 

 

 

904

 

Purchases of securities available for sale

 

(38,564

)

 

 

(36,431

)

Loan originations and payments, net

 

(8,150

)

 

 

(10,813

)

Proceeds from sale of other real estate owned

 

35

 

 

 

127

 

Additions to premises and equipment

 

(787

)

 

 

(96

)

NET CASH FROM INVESTING ACTIVITIES

 

11,101

 

 

 

(3,389

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Net change in deposits

 

(7,773

)

 

 

(17,123

)

Net change in short-term borrowings

 

(7,125

)

 

 

11,482

 

Repayment of long-term borrowings

 

(507

)

 

 

(202

)

Cash dividends paid

 

(1,127

)

 

 

(1,129

)

Net proceeds from issuance of treasury stock

 

32

 

 

 

0

 

Acquisition of treasury shares

 

0

 

 

 

(1,606

)

NET CASH FROM FINANCING ACTIVITIES

 

(16,500

)

 

 

(8,578

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

557

 

 

 

(11,172

)

Beginning cash and cash equivalents

 

27,513

 

 

 

37,759

 

Ending cash and cash equivalents

$

28,070

 

 

$

26,587

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

$

2,391

 

 

$

2,566

 

Income taxes paid

$

875

 

 

$

790

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

Transfer of loans to other real estate

$

218

 

 

$

103

 

 

See accompanying notes

 

 

 

5

 


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (“Company”) is a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”). The Company provides trust services through its subsidiary, Farmers Trust Company (“Trust”), and insurance services through the Bank’s subsidiary, Farmers National Insurance (“Insurance”).  In addition to the Insurance subsidiary, the Bank has created Farmers of Canfield Investment Co. (“Investments”), a new subsidiary with the primary purpose of investing in municipal securities. On July 1, 2013 the Company acquired National Associates, Inc. (“NAI”), a retirement plan consulting firm located in Cleveland, Ohio.  As a result of the acquisition the Company now provides retirement consulting services through NAI.    The consolidated financial statements include the accounts of the Company, the Bank and its subsidiary, along with the Trust and NAI. All significant intercompany balances and transactions have been eliminated in the consolidation.

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2013 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.

Estimates:

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

Segments:

The Company provides a broad range of financial services to individuals and companies in northeastern Ohio. Operations are managed and financial performance is primarily aggregated and reported in three lines of business, the Bank segment, the Trust segment and the Retirement Consulting segment.  

Comprehensive Income (Loss):

Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on securities available for sale and changes in the funded status of the post-retirement health plan, which are recognized as separate components of equity, net of tax effects. For the three and six month periods ended June 30, 2014, there was no change in the funded status of the post-retirement health plan.

Newly Issued but Not Yet Effective Accounting Standards:

In May 2014, FASB issued Accounting Standards Update 2014-04, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Corporation’s financial statements.

6

 


In January 2014, the FASB issued ASU 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in ASU 2014-04 to Topic 310, “Receivables - Troubled Debt Restructurings by Creditors,” is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

Securities:

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at  June 30, 2014 and December 31, 2013 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In Thousands of Dollars)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

27,678

 

 

$

582

 

 

$

(167

)

 

$

28,093

 

State and political subdivisions

 

88,247

 

 

 

1,931

 

 

 

(1,289

)

 

 

88,889

 

Corporate bonds

 

1,842

 

 

 

5

 

 

 

(7

)

 

 

1,840

 

Mortgage-backed securities - residential

 

240,359

 

 

 

2,008

 

 

 

(2,294

)

 

 

240,073

 

Collateralized mortgage obligations

 

28,205

 

 

 

162

 

 

 

(1,293

)

 

 

27,074

 

Small business administration

 

24,436

 

 

 

1

 

 

 

(1,325

)

 

 

23,112

 

Equity securities

 

118

 

 

 

86

 

 

 

0

 

 

 

204

 

Totals

$

410,885

 

 

$

4,775

 

 

$

(6,375

)

 

$

409,285

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In Thousands of Dollars)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

50,942

 

 

$

755

 

 

$

(387

)

 

$

51,310

 

State and political subdivisions

 

96,239

 

 

 

1,302

 

 

 

(2,807

)

 

 

94,734

 

Corporate bonds

 

1,540

 

 

 

0

 

 

 

(15

)

 

 

1,525

 

Mortgage-backed securities - residential

 

226,865

 

 

 

1,199

 

 

 

(5,084

)

 

 

222,980

 

Collateralized mortgage obligations

 

30,227

 

 

 

162

 

 

 

(1,713

)

 

 

28,676

 

Small business administration

 

25,592

 

 

 

1

 

 

 

(2,020

)

 

 

23,573

 

Equity securities

 

117

 

 

 

70

 

 

 

0

 

 

 

187

 

Totals

$

431,522

 

 

$

3,489

 

 

$

(12,026

)

 

$

422,985

 

 

Proceeds from the sale of portfolio securities were $33.3 million during the three and six month period ended June 30, 2014. Gross gains of $333 thousand along with gross losses of $249 thousand were realized on these sales during the three and six month periods ended June 30, 2014. Proceeds from the sales of equity securities were $872 thousand and $904 thousand during the three and six month period ended June 30, 2013.  Gross gains of $242 thousand and $256 thousand were realized on these sales during the three and six month period ended June 30, 2013.  

7

 


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

 

 

 

June 30, 2014

 

(In Thousands of Dollars)

 

Amortized Cost

 

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

Within one year

 

$

9,241

 

 

$

9,379

 

One to five years

 

 

56,737

 

 

 

57,497

 

Five to ten years

 

 

41,471

 

 

 

41,795

 

Beyond ten years

 

 

10,318

 

 

 

10,151

 

Mortgage-backed, collateralized mortgage obligations and small business administration securities

 

 

 

 

 

 

 

 

 

 

 

293,000

 

 

 

290,259

 

Total

 

$

410,767

 

 

$

409,081

 

 

The following table summarizes the investment securities with unrealized losses at June 30, 2014 and December 31, 2013, aggregated by major security type and length of time in a continuous unrealized loss position.  Unrealized losses for equity securities rounded to less than $1 thousand in 2014 and 2013.    

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

(In Thousands of Dollars)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

0

 

 

$

0

 

 

$

10,812

 

 

$

(167

)

 

$

10,812

 

 

$

(167

)

State and political subdivisions

 

1,338

 

 

 

(9

)

 

 

25,348

 

 

 

(1,280

)

 

 

26,686

 

 

 

(1,289

)

Corporate bonds

 

199

 

 

 

(1

)

 

 

479

 

 

 

(6

)

 

 

678

 

 

 

(7

)

Mortgage-backed securities - residential

 

54,702

 

 

 

(255

)

 

 

72,225

 

 

 

(2,039

)

 

 

126,927

 

 

 

(2,294

)

Collateralized mortgage obligations

 

0

 

 

 

0

 

 

 

20,394

 

 

 

(1,293

)

 

 

20,394

 

 

 

(1,293

)

Small business administration

 

0

 

 

 

0

 

 

 

23,003

 

 

 

(1,325

)

 

 

23,003

 

 

 

(1,325

)

Equity securities

 

10

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

10

 

 

 

0

 

Total

$

56,249

 

 

$

(265

)

 

$

152,261

 

 

$

(6,110

)

 

$

208,510

 

 

$

(6,375

)

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

(In Thousands of Dollars)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

20,776

 

 

$

(387

)

 

$

0

 

 

$

0

 

 

$

20,776

 

 

$

(387

)

State and political subdivisions

 

34,851

 

 

 

(1,855

)

 

 

7,492

 

 

 

(952

)

 

 

42,343

 

 

 

(2,807

)

Corporate bonds

 

1,052

 

 

 

(2

)

 

 

473

 

 

 

(13

)

 

 

1,525

 

 

 

(15

)

Mortgage-backed securities - residential

 

141,024

 

 

 

(3,735

)

 

 

27,026

 

 

 

(1,349

)

 

 

168,050

 

 

 

(5,084

)

Collateralized mortgage obligations

 

5,283

 

 

 

(450

)

 

 

15,726

 

 

 

(1,263

)

 

 

21,009

 

 

 

(1,713

)

Small business administration

 

6,927

 

 

 

(491

)

 

 

16,520

 

 

 

(1,529

)

 

 

23,447

 

 

 

(2,020

)

Equity securities

 

7

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

7

 

 

 

0

 

Total

$

209,920

 

 

$

(6,920

)

 

$

67,237

 

 

$

(5,106

)

 

$

277,157

 

 

$

(12,026

)

 

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt

8

 


security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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

As of June 30, 2014, the Company’s security portfolio consisted of 393 securities, 92 of which were in an unrealized loss position. The majority of the unrealized losses on the Company’s securities are related to its holdings of mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities, and small business administration securities as discussed below.

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

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

Management does not believe any unrealized losses on small business administration securities represent an other-than-temporary impairment. The securities are issued and backed by the full faith and credit of the U.S. government and the Company does not have the intent to sell these securities before their anticipated recovery. The fair value of these securities is expected to recover as they approach their maturity.

 

 

9

 


Loans:

Loan balances were as follows:

 

(In Thousands of Dollars)

 

June 30,

2014

 

 

December 31,

2013

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

79,938

 

 

$

86,286

 

Non-owner occupied

 

 

117,127

 

 

 

107,625

 

Other

 

 

22,866

 

 

 

24,381

 

Commercial

 

 

110,539

 

 

 

105,023

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

145,894

 

 

 

144,225

 

Home equity lines of credit

 

 

26,748

 

 

 

26,448

 

Consumer

 

 

 

 

 

 

 

 

Indirect

 

 

120,402

 

 

 

121,446

 

Direct

 

 

9,258

 

 

 

10,237

 

Other

 

 

3,034

 

 

 

3,031

 

Subtotal

 

$

635,806

 

 

$

628,702

 

Net deferred loan costs

 

 

1,968

 

 

 

1,982

 

Allowance for loan losses

 

 

(7,356

)

 

 

(7,568

)

Net loans

 

$

630,418

 

 

$

623,116

 

 

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2014 and 2013:

Three Months Ended June 30, 2014

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,751

 

 

$

1,065

 

 

$

1,681

 

 

$

1,496

 

 

$

394

 

 

$

7,387

 

Provision for loan losses

 

 

(36

)

 

 

25

 

 

 

305

 

 

 

144

 

 

 

(138

)

 

 

300

 

Loans charged off

 

 

(33

)

 

 

(19

)

 

 

(210

)

 

 

(388

)

 

 

0

 

 

 

(650

)

Recoveries

 

 

40

 

 

 

5

 

 

 

8

 

 

 

266

 

 

 

0

 

 

 

319

 

Total ending allowance balance

 

$

2,722

 

 

$

1,076

 

 

$

1,784

 

 

$

1,518

 

 

$

256

 

 

$

7,356

 

 

Six Months Ended June 30, 2014

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,752

 

 

$

1,219

 

 

$

1,964

 

 

$

1,419

 

 

$

214

 

 

$

7,568

 

Provision for loan losses

 

 

(14

)

 

 

(137

)

 

 

77

 

 

 

662

 

 

 

42

 

 

 

630

 

Loans charged off

 

 

(90

)