10-Q 1 form10q.htm FARMERS & MERCHANTS BANCORP 10-Q 9-30-2013

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

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

Commission File Number:  000-26099

FARMERS & MERCHANTS BANCORP
(Exact name of registrant as specified in its charter)

Delaware
 
94-3327828
(State or other jurisdiction of incorporation or organization)
 
(I.R.S.  Employer Identification No.)
 
 
 
 
 
 
111 W. Pine Street, Lodi, California
 
95240
(Address of principal Executive offices)
 
(Zip Code)

Registrant's telephone number, including area code (209) 367-2300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
Smaller Reporting Company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Yes o  No x
 
Number of shares of common stock of the registrant:  Par value $0.01, authorized 7,500,000 shares; issued and outstanding 777,882 as of October 31, 2013.
 


FARMERS & MERCHANTS BANCORP

FORM 10-Q
TABLE OF CONTENTS
 

                                                      

PART I. -
FINANCIAL INFORMATION
Page
 
 
 
 
 
Item 1 -
 
 
 
 
 
 
 
3
 
 
 
 
 
 
4
 
 
 
 
 
 
5
 
 
 
 
 
 
6
 
 
 
 
 
 
7
 
 
 
 
 
 
8
 
 
 
 
 
Item 2 -
33
 
 
 
 
 
Item 3 -
55
 
 
 
 
 
Item 4 -
57
 
 
 
 
PART II. -
OTHER INFORMATION
 
 
 
 
 
 
Item 1 -
58
 
 
 
 
 
Item 1A –
58
 
 
 
 
 
Item 2 -
58
 
 
 
 
 
Item 3 -
58
 
 
 
 
 
Item 4 –
58
 
 
 
 
 
Item 5 -
58
 
 
 
 
 
Item 6 -
58
 
 
 
 
 
 
59
 
 
 
 
59

31(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FARMERS & MERCHANTS BANCORP
Consolidated Balance Sheets
  
  
     
     
 
(in thousands)
 
Sept. 30,
   
December 31,
   
Sept. 30,
 
 
 
2013
   
2012
   
2012
 
Assets
 
(Unaudited)
     
  
     
(Unadited)
 
Cash and Cash Equivalents:
 
   
   
 
Cash and Due From Banks
 
$
46,234
   
$
47,366
   
$
29,863
 
Interest Bearing Deposits with Banks
   
1,391
     
82,060
     
3,601
 
Total Cash and Cash Equivalents
   
47,625
     
129,426
     
33,464
 
 
                       
Investment Securities:
                       
Available-for-Sale
   
421,765
     
417,991
     
463,177
 
Held-to-Maturity
   
70,961
     
68,392
     
68,960
 
Total Investment Securities
   
492,726
     
486,383
     
532,137
 
 
                       
Loans & Leases
   
1,297,811
     
1,246,902
     
1,210,027
 
Less: Allowance for Credit Losses
   
34,111
     
34,217
     
33,604
 
Loans & Leases, Net
   
1,263,700
     
1,212,685
     
1,176,423
 
 
                       
Premises and Equipment, Net
   
21,814
     
22,901
     
22,945
 
Bank Owned Life Insurance
   
51,652
     
50,253
     
48,799
 
Interest Receivable and Other Assets
   
87,259
     
73,038
     
70,633
 
Total Assets
 
$
1,964,776
   
$
1,974,686
   
$
1,884,401
 
 
                       
Liabilities
                       
Deposits:
                       
Demand
 
$
435,778
   
$
462,251
   
$
369,635
 
Interest Bearing Transaction
   
257,650
     
259,141
     
238,223
 
Savings and Money Market
   
561,277
     
541,526
     
540,690
 
Time
   
439,081
     
459,108
     
482,957
 
Total Deposits
   
1,693,786
     
1,722,026
     
1,631,505
 
 
                       
Federal Home Loan Bank Advances
   
5,900
     
-
     
482
 
Subordinated Debentures
   
10,310
     
10,310
     
10,310
 
Interest Payable and Other Liabilities
   
43,739
     
37,317
     
35,773
 
Total Liabilities
   
1,753,735
     
1,769,653
     
1,678,070
 
 
                       
Shareholders' Equity
                       
Preferred Stock:  No Par Value.  1,000,000 Shares Authorized, None Issued or Outstanding
   
-
     
-
     
-
 
Common Stock:  Par Value $0.01, 7,500,000 Shares Authorized, 777,882 Shares Issued and
                       
Outstanding at Sept. 30, 2013, December 31, 2012 and Sept. 30, 2012, respectively
   
8
     
8
     
8
 
Additional Paid-In Capital
   
75,014
     
75,014
     
75,014
 
Retained Earnings
   
136,357
     
123,012
     
122,170
 
Accumulated Other Comprehensive (Loss) Income, Net
   
(338
)
   
6,999
     
9,139
 
Total Shareholders' Equity
   
211,041
     
205,033
     
206,331
 
Total Liabilities & Shareholders' Equity
 
$
1,964,776
   
$
1,974,686
   
$
1,884,401
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Income (Unaudited)
 
(in thousands except per share data)
 
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Interest Income
 
   
   
   
 
Interest and Fees on Loans & Leases
 
$
16,679
   
$
16,505
   
$
48,030
   
$
49,283
 
Interest on Deposits with Banks
   
2
     
8
     
49
     
76
 
Interest on Investment Securities:
                               
Taxable
   
2,297
     
2,315
     
6,785
     
7,958
 
Exempt from Federal Tax
   
637
     
671
     
1,951
     
1,961
 
Total Interest Income
   
19,615
     
19,499
     
56,815
     
59,278
 
 
                               
Interest Expense
                               
Deposits
   
632
     
935
     
1,943
     
2,967
 
Borrowed Funds
   
7
     
11
     
16
     
1,047
 
Subordinated Debentures
   
82
     
87
     
245
     
262
 
Total Interest Expense
   
721
     
1,033
     
2,204
     
4,276
 
 
                               
Net Interest Income
   
18,894
     
18,466
     
54,611
     
55,002
 
Provision for Credit Losses
   
-
     
600
     
250
     
1,100
 
Net Interest Income After Provision for Credit Losses
   
18,894
     
17,866
     
54,361
     
53,902
 
 
                               
Non-Interest Income
                               
Service Charges on Deposit Accounts
   
1,139
     
1,248
     
3,312
     
3,662
 
Net (Loss) Gain on Sale of Investment Securities
   
(1,137
)
   
149
     
(248
)
   
149
 
Increase in Cash Surrender Value of Life Insurance
   
473
     
500
     
1,399
     
1,412
 
Debit Card and ATM Fees
   
774
     
732
     
2,295
     
2,197
 
Net Gain on Deferred Compensation Investments
   
875
     
762
     
2,279
     
1,381
 
Other
   
1,324
     
662
     
2,872
     
1,986
 
Total Non-Interest Income
   
3,448
     
4,053
     
11,909
     
10,787
 
 
                               
Non-Interest Expense
                               
Salaries and Employee Benefits
   
8,244
     
7,850
     
25,184
     
23,792
 
Net Gain on Deferred Compensation Investments
   
875
     
762
     
2,279
     
1,381
 
Occupancy
   
649
     
656
     
1,899
     
1,925
 
Equipment
   
705
     
686
     
2,078
     
2,282
 
Legal Fees
   
(69
)
   
204
     
391
     
629
 
FDIC Insurance
   
246
     
243
     
732
     
728
 
Other
   
1,535
     
1,359
     
4,683
     
5,816
 
Total Non-Interest Expense
   
12,185
     
11,760
     
37,246
     
36,553
 
 
                               
Income Before Income Taxes
   
10,157
     
10,159
     
29,024
     
28,136
 
Provision for Income Taxes
   
3,805
     
3,827
     
10,856
     
10,452
 
Net Income
 
$
6,352
   
$
6,332
   
$
18,168
   
$
17,684
 
Basic Earnings Per Common Share
 
$
8.17
   
$
8.13
   
$
23.36
   
$
22.70
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Comprehensive Income (Unaudited)
 
(in thousands)
 
Three Months
Ended September 30,
   
Nine Months
Ended September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Net Income
 
$
6,352
   
$
6,332
   
$
18,168
   
$
17,684
 
 
                               
Other Comprehensive Income (Loss)
                               
Increase (Decrease) in Net Unrealized  Gains (Losses) on Available-for-Sale Securities
   
1,681
     
2,944
     
(12,907
)
   
7,865
 
Reclassification Adjustment for Realized Losses (Gains) on Available-for-Sale Securities Included in Net Income
   
1,137
     
(149
)
   
248
     
(149
)
Deferred Tax (Expense) Benefit
   
(1,185
)
   
(1,175
)
   
5,322
     
(3,244
)
Change in Net Unrealized Gains (Losses) on Available-for-Sale Securities, Net of Tax
   
1,633
     
1,620
     
(7,337
)
   
4,472
 
 
                               
Total Other Comprehensive Income (Loss)
   
1,633
     
1,620
     
(7,337
)
   
4,472
 
 
                               
Comprehensive Income
 
$
7,985
   
$
7,952
   
$
10,831
   
$
22,156
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
   
  
     
 
(in thousands except share data) 
 
   
   
   
Accumulated
   
 
 
 
Common
   
   
Additional
   
   
Other
   
Total
 
 
 
Shares
   
Common
   
Paid-In
   
Retained
   
Comprehensive
   
Shareholders'
 
 
 
Outstanding
   
Stock
   
Capital
   
Earnings
   
Income (Loss), Net
   
Equity
 
Balance, January 1, 2012
   
779,424
   
$
8
   
$
75,590
   
$
109,081
   
$
4,667
   
$
189,346
 
Net Income
           
-
     
-
     
17,684
     
-
     
17,684
 
Cash Dividends Declared on Common Stock ($5.90 per share)
           
-
     
-
     
(4,595
)
   
-
     
(4,595
)
Repurchase of Stock
   
(1,542
)
   
-
     
(576
)
   
-
     
-
     
(576
)
Change in Net Unrealized Gain on Securities Available for Sale, Net of Tax
           
-
     
-
     
-
     
4,472
     
4,472
 
Balance, September 30, 2012
   
777,882
   
$
8
   
$
75,014
   
$
122,170
   
$
9,139
   
$
206,331
 
 
                                               
Balance, January 1, 2013
   
777,882
   
$
8
   
$
75,014
   
$
123,012
   
$
6,999
   
$
205,033
 
Net Income
           
-
     
-
     
18,168
     
-
     
18,168
 
Cash Dividends Declared on Common Stock ($6.20 per share)
           
-
     
-
     
(4,823
)
   
-
     
(4,823
)
Change in Net Unrealized Loss on Securities Available for Sale, Net of Tax
           
-
     
-
     
-
     
(7,337
)
   
(7,337
)
Balance, September 30, 2013
   
777,882
   
$
8
   
$
75,014
   
$
136,357
   
$
(338
)
 
$
211,041
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
FARMERS & MERCHANTS BANCORP
Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended
 
(in thousands)
 
Sept 30,
   
Sept 30,
 
 
 
2013
   
2012
 
Operating Activities:
 
   
 
Net Income
 
$
18,168
   
$
17,684
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
               
Provision for Credit Losses
   
250
     
1,100
 
Depreciation and Amortization
   
1,152
     
1,293
 
Net Amortization of Investment Security Discounts & Premium
   
2,543
     
2,852
 
Net Loss (Gain) on Sale of Investment Securities
   
248
     
(149
)
Net Gain on Sale of Property & Equipment
   
(705
)
   
-
 
Net Change in Operating Assets & Liabilities:
               
Net Increase in Interest Receivable and Other Assets
   
(10,253
)
   
(1,418
)
Net Increase in Interest Payable and Other Liabilities
   
6,422
     
2,472
 
Net Cash Provided by Operating Activities
   
17,825
     
23,834
 
Investing Activities:
               
Purchase of Investment Securities Available-for-Sale
   
(221,100
)
   
(122,966
)
Proceeds from Sold, Matured, or Called Securities Available-for-Sale
   
195,339
     
144,383
 
Purchase of Investment Securities Held-to-Maturity
   
(355
)
   
(10,569
)
Proceeds from Matured or Called Securities Held-to-Maturity
   
4,278
     
4,675
 
Net Loans & Leases Paid, Originated or Acquired
   
(51,649
)
   
(47,728
)
Principal Collected on Loans & Leases Previously Charged Off
   
384
     
266
 
Additions to Premises and Equipment
   
(187
)
   
(180
)
Proceeds from Disposition of Property & Equipment
   
827
     
-
 
Net Cash Used by Investing Activities
   
(72,463
)
   
(32,119
)
Financing Activities:
               
Net (Decrease) Increase in Deposits
   
(28,240
)
   
5,308
 
Net Decrease in Securities Sold Under Agreement to Repurchase
   
-
     
(60,000
)
Net Change in Other Borrowings
   
5,900
     
(48
)
Common Stock Repurchases
   
-
     
(576
)
Cash Dividends
   
(4,823
)
   
(4,595
)
Net Cash Used By Financing Activities
   
(27,163
)
   
(59,911
)
Decrease in Cash and Cash Equivalents
   
(81,801
)
   
(68,196
)
Cash and Cash Equivalents at Beginning of Period
   
129,426
     
101,660
 
Cash and Cash Equivalents at End of Period
 
$
47,625
   
$
33,464
 
Supplementary Data
               
Loans Transferred to Foreclosed Assets (ORE)
 
$
3,458
   
$
58
 
Cash Payments Made for Income Taxes
 
$
13,886
   
$
11,568
 
Interest Paid
 
$
2,346
   
$
4,661
 
The accompanying notes are an integral part of these unaudited consolidated financial statements
FARMERS & MERCHANTS BANCORP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Significant Accounting Policies

Farmers & Merchants Bancorp (the “Company”) was organized March 10, 1999. Primary operations are related to traditional banking activities through its subsidiary Farmers & Merchants Bank of Central California (the “Bank”) which was established in 1916. The Bank’s wholly owned subsidiaries include Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Farmers & Merchants Investment Corporation has been dormant since 1991. Farmers/Merchants Corp. acts as trustee on deeds of trust originated by the Bank.

The Company’s other subsidiaries include F & M Bancorp, Inc. and FMCB Statutory Trust I. F & M Bancorp, Inc. was created in March 2002 to protect the name F & M Bank. During 2002 the Company completed a fictitious name filing in California to begin using the streamlined name “F & M Bank” as part of a larger effort to enhance the Company’s image and build brand name recognition. In December 2003, the Company formed a wholly owned subsidiary, FMCB Statutory Trust I. FMCB Statutory Trust I is a non-consolidated subsidiary per Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) and was formed for the sole purpose of issuing Trust Preferred Securities.

The accounting and reporting policies of the Company conform to U.S. GAAP and prevailing practice within the banking industry. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.

Basis of Presentation
The accompanying consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America for financial information.

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three-month and nine-month periods ended September 30, 2013 may not necessarily be indicative of future operating results.

The accompanying consolidated financial statements include the accounts of the Company and the Company’s wholly owned subsidiaries, F & M Bancorp, Inc. and the Bank, along with the Bank’s wholly owned subsidiaries, Farmers & Merchants Investment Corporation and Farmers/Merchants Corp. Significant inter-company transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of 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 these estimates.

Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current-year presentation. These reclassifications had no effect on previously reported net income or total shareholders’ equity. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the periods presented.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company has defined cash and cash equivalents as those amounts included in the balance sheet captions Cash and Due from Banks, Interest Bearing Deposits with Banks, Federal Funds Sold and Securities Purchased Under Agreements to Resell. Generally, these transactions are for one-day periods. For these instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities
Investment securities are classified at the time of purchase as held-to-maturity if it is management’s intent and the Company has the ability to hold the securities until maturity. These securities are carried at cost, adjusted for amortization of premium and accretion of discount using a level yield of interest over the estimated remaining period until maturity. Losses, reflecting a decline in value judged by the Company to be other than temporary, are recognized in the period in which they occur.

Securities are classified as available-for-sale if it is management’s intent, at the time of purchase, to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. These securities are reported at fair value with aggregate unrealized gains or losses excluded from income and included as a separate component of shareholders’ equity, net of related income taxes. Fair values are based on quoted market prices or broker/dealer price quotations on a specific identification basis. Gains or losses on the sale of these securities are computed using the specific identification method.

Trading securities, if any, are acquired for short-term appreciation and are recorded in a trading portfolio and are carried at fair value, with unrealized gains and losses recorded in non-interest income.
 
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. 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. 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.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

Loans & Leases
Loans & leases are reported at the principal amount outstanding net of unearned discounts and deferred loan & lease fees and costs. Interest income on loans & leases is accrued daily on the outstanding balances using the simple interest method. Loan & lease origination fees are deferred and recognized over the contractual life of the loan or lease as an adjustment to the yield. Loans & leases are placed on non-accrual status when the collection of principal or interest is in doubt or when they become past due for 90 days or more unless they are both well-secured and in the process of collection. For this purpose a loan or lease is considered well-secured if it is collateralized by property having a net realizable value in excess of the amount of the loan or lease or is guaranteed by a financially capable party. When a loan or lease is placed on non-accrual status, the accrued and unpaid interest receivable is reversed and charged against current income; thereafter, interest income is recognized only as it is collected in cash. Additionally, cash would be applied to principal if all principal was not expected to be collected. Loans & leases placed on non-accrual status are returned to accrual status when the loans or leases are paid current as to principal and interest and future payments are expected to be made in accordance with the contractual terms of the loan or lease.
A loan or lease is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement. Impaired loans & leases are either: (1) non-accrual loans & leases; or (2) restructured loans & leases that are still accruing interest. Loans or leases determined to be impaired are individually evaluated for impairment. When a loan or lease is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan or lease's effective interest rate, except that as a practical expedient, it may measure impairment based on a loan or lease's observable market price, or the fair value of the collateral if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral.

A restructuring of a loan or lease constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. Restructured loans & leases typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans & leases that are reported as TDRs are considered impaired and measured for impairment as described above.

Generally, the Company will not restructure loans or leases for customers unless: (i) the existing loan or lease is brought current as to principal and interest payments; and (ii) the restructured loan or lease can be underwritten to reasonable underwriting standards. If these standards are not met other actions will be pursued (e.g., foreclosure) to collect outstanding loan or lease amounts. After restructure a determination is made whether the loan or lease will be kept on accrual status based upon the underwriting and historical performance of the restructured credit.

Allowance for Credit Losses
The allowance for credit losses is an estimate of probable incurred credit losses inherent in the Company's loan & lease portfolio as of the balance-sheet date. The allowance is established through a provision for credit losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan & lease growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary components, specific reserves related to impaired loans & leases and general reserves for inherent losses related to loans & leases that are not impaired.

The determination of the general reserve for loans & leases that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, qualitative factors to include economic trends in the Company's service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company's underwriting policies, the character of the loan & lease portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan & lease type). These portfolio segments include: (1) commercial real estate; (2) agricultural real estate; (3) real estate construction (including land and development loans); (4) residential 1st mortgages; (5) home equity lines and loans; (6) agricultural; (7) commercial; (8) consumer and other; and (9) leases. The allowance for credit losses attributable to each portfolio segment, which includes both individually evaluated impaired loans & leases and loans & leases that are collectively evaluated for impairment, is combined to determine the Company's overall allowance, which is included on the consolidated balance sheet.

The Company assigns a risk rating to all loans & leases and periodically performs detailed reviews of all such loans & leases over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. A credit grade is established at inception for smaller balance loans, such as consumer and residential real estate, and then updated only when the loan becomes contractually delinquent or when the borrower requests a modification. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans & leases. These credit quality indicators are used to assign a risk rating to each individual loan or lease. These risk ratings are also subject to examination by independent specialists engaged by the Company. The risk ratings can be grouped into five major categories, defined as follows:

Pass – A pass loan or lease is a strong credit with no existing or known potential weaknesses deserving of management's close attention.
Special Mention – A special mention loan or lease has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company's credit position at some future date. Special Mention loans & leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard – A substandard loan or lease is not adequately protected by the current financial condition and paying capacity of the borrower or the value of the collateral pledged, if any. Loans or leases classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans or leases classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently known facts, conditions and values, highly questionable or improbable.

Loss – Loans or leases classified as loss are considered uncollectible. Once a loan or lease becomes delinquent and repayment becomes questionable, the Company will address collateral shortfalls with the borrower and attempt to obtain additional collateral. If this is not forthcoming and payment in full is unlikely, the Company will estimate its probable loss and immediately charge-off some or all of the balance.

The general reserve component of the allowance for credit losses also consists of reserve factors that are based on management's assessment of the following for each portfolio segment: (1) inherent credit risk; (2) historical losses; and (3) other qualitative factors. These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below:

Real Estate Construction – Real Estate Construction loans, including land loans, generally possess a higher inherent risk of loss than other real estate portfolio segments. A major risk arises from the necessity to complete projects within specified cost and time lines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects.

Commercial Real Estate – Commercial real estate mortgage loans generally possess a higher inherent risk of loss than other real estate portfolio segments, except land and construction loans. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Commercial – Commercial loans generally possess a lower inherent risk of loss than real estate portfolio segments because these loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Agricultural Real Estate and Agricultural – Loans secured by crop production, livestock and related real estate are vulnerable to two risk factors that are largely outside the control of Company and borrowers: commodity prices and weather conditions.

Residential 1st Mortgages and Home Equity Lines and Loans – The degree of risk in residential real estate lending depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower's ability to repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than other real estate portfolio segments, although this is not always true as evidenced by the weakness in residential real estate values over the past five years. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.

Consumer & Other – A consumer installment loan portfolio is usually comprised of a large number of small loans scheduled to be amortized over a specific period. Most installment loans are made for consumer purchases. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans. Weak economic trends indicate that the borrowers' capacity to repay their obligations may be deteriorating.
Leases – Equipment leases subject the Company, as Lessor, to both the credit risk of the Lessee and the residual value risk of the equipment.  Credit risks are underwritten using the same credit criteria the Company would make an equipment term loan under.  Residual value risk is managed through the use of qualified, independent appraisers that establish the residual values the Company uses in structuring a lease.

At least quarterly, the Board of Directors reviews the adequacy of the allowance, including consideration of the relative risks in the portfolio, current economic conditions and other factors. If the Board of Directors and management determine that changes are warranted based on those reviews, the allowance is adjusted. In addition, the Company's and Bank's regulators, including the FRB, DFI and FDIC, as an integral part of their examination process, review the adequacy of the allowance. These regulatory agencies may require additions to the allowance based on their judgment about information available at the time of their examinations.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in Interest Payable and Other Liabilities on the Company’s Consolidated Balance Sheet.

Premises and Equipment
Premises, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation is computed principally by the straight line method over the estimated useful lives of the assets. Estimated useful lives of buildings range from 30 to 40 years, and for furniture and equipment from 3 to 7 years. Leasehold improvements are amortized over the lesser of the terms of the respective leases, or their useful lives, which are generally 5 to 10 years. Remodeling and capital improvements are capitalized while maintenance and repairs are charged directly to occupancy expense.

Other Real Estate
Other real estate, which is included in other assets, is expected to be sold and is comprised of properties acquired through foreclosure in satisfaction of indebtedness. Upon acquisition, these properties are recorded at fair value less estimated selling costs. Revised estimates to the fair value less cost to sell are reported as adjustments to the carrying amount of the asset, provided that such adjusted value is not in excess of the carrying amount at acquisition. Initial losses on properties acquired through full or partial satisfaction of debt are treated as credit losses and charged to the allowance for credit losses at the time of acquisition. Subsequent declines in value from the recorded amounts, routine holding costs, and gains or losses upon disposition, if any, are included in non-interest expense as incurred.

Income Taxes
The Company uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount, combined with the current taxes payable or refundable, results in the income tax expense for the current year.
 
The Company follows the standards set forth in the “Income Taxes” topic of the FASB Accounting Standard Codification (“ASC”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits, if any, are included in the provision for income taxes in the Consolidated Statements of Income.

Dividends and Basic Earnings Per Common Share
The Company’s common stock is not traded on any exchange. The shares are primarily held by local residents and are not actively traded. Basic earnings per common share amounts are computed by dividing net income by the weighted average number of common shares outstanding for the period. There are no common stock equivalent shares. Therefore, there is no presentation of diluted basic earnings per common share. See Note 6.

Segment Reporting
The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company only reports one segment.

Derivative Instruments and Hedging Activities
The “Derivatives and Hedging” topic of the FASB ASC establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Changes in the fair value of those derivatives are accounted for depending on the intended use of the derivative and the resulting designation under specified criteria. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, designed to minimize interest rate risk, the effective portions of the change in the fair value of the derivative are recorded in other comprehensive income (loss), net of related income taxes. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

From time to time, the Company utilizes derivative financial instruments such as interest rate caps, floors, swaps, and collars. These instruments are purchased and/or sold to reduce the Company’s exposure to changing interest rates. The Company marks to market the value of its derivative financial instruments and reflects gain or loss in earnings in the period of change or in other comprehensive income (loss). The Company was not utilizing any derivative instruments as of or for the period ended September 30, 2013, December 31, 2012 or September 30, 2012.

Comprehensive Income
The “Comprehensive Income” topic of the FASB ASC establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income (loss) refers to revenues, expenses, gains, and losses that generally accepted accounting principles recognize as changes in value to an enterprise but are excluded from net income. For the Company, comprehensive income includes net income and changes in fair value of its available-for-sale investment securities.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

2. Investment Securities

The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows
(in thousands):

 
 
Amortized
   
Gross Unrealized
   
Fair/Book
 
September 30, 2013
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
28,404
   
$
239
   
$
-
   
$
28,643
 
Mortgage Backed Securities (1)
   
342,963
     
4,928
     
5,814
     
342,077
 
Corporate Securities
   
49,696
     
250
     
185
     
49,761
 
Other
   
1,284
     
-
     
-
     
1,284
 
Total
 
$
422,347
   
$
5,417
   
$
5,999
   
$
421,765
 
 
                               
 
 
Amortized
   
Gross Unrealized
   
Fair/Book
 
December 31, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
26,546
   
$
277
   
$
-
   
$
26,823
 
Obligations of States and Political Subdivisions
   
5,665
     
-
     
-
     
5,665
 
Mortgage Backed Securities (1)
   
341,212
     
11,570
     
10
     
352,772
 
Corporate Securities
   
22,318
     
252
     
12
     
22,558
 
Other
   
10,173
     
-
     
-
     
10,173
 
Total
 
$
405,914
   
$
12,099
   
$
22
   
$
417,991
 
 
                               
 
 
Amortized
   
Gross Unrealized
   
Fair/Book
 
September 30, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
Government Agency & Government-Sponsored Entities
 
$
46,655
   
$
316
   
$
-
   
$
46,971
 
Obligations of States and Political Subdivisions
   
5,704
     
-
     
-
     
5,704
 
Mortgage Backed Securities (1)
   
374,582
     
15,230
     
-
     
389,812
 
Corporate Securities
   
14,641
     
223
     
-
     
14,864
 
Other
   
5,826
     
-
     
-
     
5,826
 
Total
 
$
447,408
   
$
15,769
   
$
-
   
$
463,177
 

(1) All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.
The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows (in thousands):

 
 
Book
   
Gross Unrealized
   
Fair
 
September 30, 2013
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
67,717
   
$
965
   
$
741
   
$
67,941
 
Mortgage Backed Securities (1)
   
121
     
1
     
-
     
122
 
Other
   
3,123
     
-
     
-
     
3,123
 
Total
 
$
70,961
   
$
966
   
$
741
   
$
71,186
 
 
                               
 
 
Book
   
Gross Unrealized
   
Fair
 
December 31, 2012
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
65,694
   
$
2,296
   
$
3
   
$
67,987
 
Mortgage Backed Securities (1)
   
484
     
12
     
-
     
496
 
Other
   
2,214
     
-
     
-
     
2,214
 
Total
 
$
68,392
   
$
2,308
   
$
3
   
$
70,697
 
 
                               
 
 
Book
   
Gross Unrealized
   
Fair
 
September 30, 2012
 
Value
   
Gains
   
Losses
   
Value
 
Obligations of States and Political Subdivisions
 
$
66,098
   
$
2,623
   
$
-
   
$
68,721
 
Mortgage Backed Securities (1)
   
640
     
20
     
-
     
660
 
Other
   
2,222
     
-
     
-
     
2,222
 
Total
 
$
68,960
   
$
2,643
   
$
-
   
$
71,603
 

(1) All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

The amortized cost and estimated fair values of investment securities at September 30, 2013 by contractual maturity are shown in the following tables (in thousands):

 
 
Available-for-Sale
   
Held-to-Maturity
 
 
 
Amortized
   
Fair/Book
   
Book
   
Fair
 
September 30, 2013
 
Cost
   
Value
   
Value
   
Value
 
Within One Year
 
$
19,689
   
$
19,756
   
$
1,625
   
$
1,630
 
After One Year Through Five Years
   
56,416
     
56,526
     
18,543
     
18,876
 
After Five Years Through Ten Years
   
3,279
     
3,406
     
31,911
     
32,538
 
After Ten Years
   
-
     
-
     
18,761
     
18,020
 
 
   
79,384
     
79,688
     
70,840
     
71,064
 
 
                               
Investment Securities Not Due at a Single Maturity Date:
                               
Mortgage Backed Securities
   
342,963
     
342,077
     
121
     
122
 
Total
 
$
422,347
   
$
421,765
   
$
70,961
   
$
71,186
 

Expected maturities of mortgage backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The following tables show those investments with gross unrealized losses and their market value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

 
 
Less Than 12 Months
   
12 Months or More
   
Total
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
September 30, 2013
 
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
 
 
   
   
   
   
   
 
Securities Available-for-Sale
 
   
   
   
   
   
 
Mortgage Backed Securities
 
$
129,198
   
$
5,814
   
$
-
   
$
-
   
$
129,198
   
$
5,814
 
Corporate Securities
   
19,881
     
185
     
-
     
-
     
19,881
     
185
 
Total
 
$
149,079
   
$
5,999
   
$
-
   
$
-
   
$
149,079
   
$
5,999
 
 
                                               
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
9,411
   
$
741
   
$
-
   
$
-
   
$
9,411
   
$
741
 
Total
 
$
9,411
   
$
741
   
$
-
   
$
-
   
$
9,411
   
$
741
 
 
                                               
 
 
Less Than 12 Months
   
12 Months or More
   
Total
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
December 31, 2012
 
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
 
                                               
Securities Available-for-Sale
                                               
Mortgage Backed Securities
 
$
4,542
   
$
10
   
$
-
   
$
-
   
$
4,542
   
$
10
 
Corporate Securities
   
3,442
     
12
     
-
     
-
     
3,442
     
12
 
Total
 
$
7,984
   
$
22
   
$
-
   
$
-
   
$
7,984
   
$
22
 
 
                                               
Securities Held-to-Maturity
                                               
Obligations of States and Political Subdivisions
 
$
528
   
$
3
   
$
-
   
$
-
   
$
528
   
$
3
 
Total
 
$
528
   
$
3
   
$
-
   
$
-
   
$
528
   
$
3
 
 
No securities were in a continuous unrealized loss position at September 30, 2012.

As of September 30, 2013, the Company held 352 investment securities of which 60 were in a loss position for less than twelve months. No securities were in a loss position for twelve months or more. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.

Securities of Government Agency and Government Sponsored Entities – There were no unrealized losses on the Company’s investments in securities of government agency and government sponsored entities at September 30, 2013, December 31, 2012 and September 30, 2012.

Mortgage Backed Securities - The unrealized losses on the Company's investment in mortgage backed securities were $5.8 million, $10,000, and $0 at September 30, 2013, December 31, 2012, and September 30, 2012, respectively. The unrealized losses on the Company’s investment in mortgage backed securities were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. 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 securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2013 and December 31, 2012, respectively.

Obligations of States and Political Subdivisions - The financial problems experienced by certain municipalities over the past five years, along with the financial stresses exhibited by some of the large monoline bond insurers have increased the overall risk associated with bank-qualified municipal bonds. As of September 30, 2013, over ninety-four percent of the Company’s bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are “investment grade.” The Company monitors the status of the six percent of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.
The unrealized losses on the Company’s investment in obligation of states and political subdivision were $741,000, $3,000, and $0 at September 30, 2013, December 31, 2012 and September 30, 2012, respectively. Management believes that any unrealized losses on the Company's investments in obligations of states and political subdivisions were primarily caused by interest rate fluctuations. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2013 and December 31, 2012.

Corporate Securities - The unrealized losses on the Company’s investment in corporate securities were $185,000, $12,000, and $0 at September 30, 2013, December 31, 2012, and September 30, 2012, respectively. Changes in the prices of corporate securities are primarily influenced by: (1) changes in market interest rates; (2) changes in perceived credit risk in the general economy or in particular industries; (3) changes in the perceived credit risk of a particular company; and (4) day to day trading supply, demand and liquidity. Because the Company does not intend to sell the securities and it is more likely than not that the Company will not have to sell the securities before recovery of their cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2013 and December 31, 2012.

Proceeds from sales and calls of securities available-for-sale were as follows:

 
 
Three Months
   
Nine Months
 
 
 
Ended September 30,
   
Ended September 30,
 
(in thousands
 
2013
   
2012
   
2013
   
2012
 
Proceeds
 
$
28,297
   
$
17,766
   
$
77,912
   
$
44,296
 
Gains
 
$
285
     
149
     
1,189
     
149
 
Losses
 
$
1,422
     
-
     
1,437
     
-
 

Pledged Securities
As of September 30, 2013, securities carried at $310.5 million were pledged to secure public deposits, FHLB borrowings, and other government agency deposits as required by law. This amount was $296.9 million at December 31, 2012, and $307.2 million at September 30, 2012.
3. Allowance for Credit Losses

The following tables show the allocation of the allowance for credit losses by portfolio segment and by impairment methodology at the dates indicated (in thousands):

September 30, 2013
 
Commercial Real Estate
   
Agricultural Real Estate
   
Real Estate Construction
   
Residential 1st Mortgages
   
Home Equity Lines &
Loans
   
Agricultural
   
Commercial
   
Consumer & Other
   
Leases
   
Unallocated
   
Total
 
 
 
   
   
   
   
   
   
   
   
   
   
 
Year-To-Date Allowance for Credit Losses:
   
   
   
   
   
   
   
   
   
 
Beginning Balance- January 1, 2013
 
$
6,464
   
$
2,877
   
$
986
   
$
1,219
   
$
3,235
   
$
10,437
   
$
7,963
   
$
182
   
$
-
   
$
854
   
$
34,217
 
Charge-Offs
   
(6
)
   
(575
)
   
-
     
(16
)
   
(23
)
   
(23
)
   
(4
)
   
(93
)
   
-
     
-
     
(740
)
Recoveries
   
-
     
-
     
-
     
-
     
30
     
36
     
281
     
37
     
-
     
-
     
384
 
Provision
   
(382
)
   
911
     
(48
)
   
(130
)
   
(492
)
   
(1,190
)
   
1,551
     
42
     
-
     
(12
)
   
250
 
Ending Balance- September 30, 2013
 
$
6,076
   
$
3,213
   
$
938
   
$
1,073
   
$
2,750
   
$
9,260
   
$
9,791
   
$
168
   
$
-
   
$
842
   
$
34,111
 
Third Quarter Allowance for Credit Losses:
                                                                         
Beginning Balance- July 1, 2013
 
$
5,732
   
$
3,481
   
$
977
   
$
1,037
   
$
2,984
   
$
10,557
   
$
9,075
   
$
168
   
$
-
   
$
224
   
$
34,235
 
Charge-Offs
   
(6
)
   
(175
)
   
-
     
-
     
(1
)
   
-
     
-
     
(29
)
   
-
     
-
     
(211
)
Recoveries
   
-
     
-
     
-
     
-
     
10
     
16
     
45
     
16
     
-
     
-
     
87
 
Provision
   
350
     
(93
)
   
(39
)
   
36
     
(243
)
   
(1,313
)
   
671
     
13
     
-
     
618
     
-
 
Ending Balance- September 30, 2013
 
$
6,076
   
$
3,213
   
$
938
   
$
1,073
   
$
2,750
   
$
9,260
   
$
9,791
   
$
168
   
$
-
   
$
842
   
$
34,111
 
Ending Balance Individually Evaluated for Impairment
   
-
     
-
     
-
     
50
     
132
     
122
     
1,856
     
53
     
-
     
-
     
2,213
 
Ending Balance Collectively Evaluated for Impairment
   
6,076
     
3,213
     
938
     
1,023
     
2,618
     
9,138
     
7,935
     
115
     
-
     
842
     
31,898
 
Loans:
                                                                                       
Ending Balance
 
$
401,626
   
$
311,401
   
$
27,099
   
$
143,577
   
$
37,160
   
$
221,569
   
$
145,793
   
$
5,063
   
$
4,523
   
$
-
   
$
1,297,811
 
Ending Balance Individually Evaluated for Impairment
   
278
     
849
     
-
     
781
     
529
     
586
     
2,169
     
53
     
-
     
-
     
5,245
 
Ending Balance Collectively Evaluated for Impairment
   
401,348
     
310,552
     
27,099
     
142,796
     
36,631
     
220,983
     
143,624
     
5,010
     
4,523
     
-
     
1,292,566
 
 
                                                                                       
 
                                                                                       
December 31, 2012
 
Commercial Real Estate
   
Agricultural Real Estate
   
Real Estate Construction
   
Residential 1st Mortgages
   
Home Equity Lines & Loans
   
Agricultural
   
Commercial
   
Consumer & Other
   
Leases
   
Unallocated
   
Total
 
 
                                                                                       
Year-To-Date Allowance for Credit Losses:
                                                                         
Beginning Balance- January 1, 2012
 
$
5,823
   
$
2,583
   
$
1,933
   
$
1,251
   
$
3,746
   
$
8,127
   
$
8,733
   
$
207
   
$
-
   
$
614
   
$
33,017
 
Charge-Offs
   
-
     
-
     
-
     
(152
)
   
(259
)
   
(294
)
   
(198
)
   
(145
)
   
-
     
-
     
(1,048
)
Recoveries
   
-
     
90
     
-
     
53
     
14
     
61
     
117
     
63
     
-
     
-
     
398
 
Provision
   
641
     
204
     
(947
)
   
67
     
(266
)
   
2,543
     
(689
)
   
57
     
-
     
240
     
1,850
 
Ending Balance- December 31, 2012
 
$
6,464
   
$
2,877
   
$
986
   
$
1,219
   
$
3,235
   
$
10,437
   
$
7,963
   
$
182
   
$
-
   
$
854
   
$
34,217
 
Ending Balance Individually Evaluated for Impairment
   
-
     
-
     
-
     
-
     
173
     
996
     
144
     
61
     
-
     
-
     
1,374
 
Ending Balance Collectively Evaluated for Impairment
   
6,464
     
2,877
     
986
     
1,219
     
3,062
     
9,441
     
7,819
     
121
     
-
     
854
     
32,843
 
Loans:
                                                                                       
Ending Balance
 
$
350,548
   
$
311,992
   
$
32,680
   
$
140,257
   
$
42,042
   
$
221,032
   
$
143,293
   
$
5,058
   
$
-
   
$
-
   
$
1,246,902
 
Ending Balance Individually Evaluated for Impairment
   
289
     
5,423
     
-
     
657
     
980
     
3,937
     
250
     
61
     
-
     
-
     
11,597
 
Ending Balance Collectively Evaluated for Impairment
   
350,259
     
306,569
     
32,680
     
139,600
     
41,062
     
217,095
     
143,043
     
4,997
     
-
     
-
     
1,235,305
 

September 30, 2012
 
Commercial Real Estate
   
Agricultural Real Estate
   
Real Estate Construction
   
Residential 1st Mortgages
   
Home Equity Lines &
Loans
   
Agricultural
   
Commercial
   
Consumer & Other
   
Leases
   
Unallocated
   
Total
 
 
 
   
   
   
   
   
   
   
   
   
   
 
Year-To-Date Allowance for Loan Losses:
   
   
   
   
   
   
   
   
   
 
Beginning Balance- January 1, 2012
 
$
5,823
   
$
2,583
   
$
1,933
   
$
1,251
   
$
3,746
   
$
8,127
   
$
8,733
   
$
207
   
$
-
   
$
614
   
$
33,017
 
Charge-Offs
   
-
     
-
     
-
     
(81
)
   
(138
)
   
(240
)
   
(198
)
   
(122
)
   
-
     
-
     
(779
)
Recoveries
   
-
     
89
     
-
     
16
     
12
     
61
     
41
     
47
     
-
     
-
     
266
 
Provision
   
(1,490
)
   
990
     
(72
)
   
356
     
(105
)
   
311
     
1,084
     
12
     
-
     
14
     
1,100
 
Ending Balance- September 30, 2012
 
$
4,333
   
$
3,662
   
$
1,861
   
$
1,542
   
$
3,515
   
$
8,259
   
$
9,660
   
$
144
           
$
628
   
$
33,604
 
 
                                                                                       
Third Quarter Allowance for Loan Losses:
                                                                         
Beginning Balance- July 1, 2012
 
$
4,377
   
$
2,633
   
$
1,900
   
$
1,451
   
$
3,514
   
$
7,834
   
$
9,538
   
$
140
   
$
-
   
$
1,711
   
$
33,098
 
Charge-Offs
   
-
     
-
     
-
     
(80
)
   
(22
)
   
-
     
-
     
(34
)
   
-
     
-
     
(136
)
Recoveries
   
-
     
-
     
-
     
16
     
2
     
-
     
9
     
15
     
-
     
-
     
42
 
Provision
   
(44
)
   
1,029
     
(39
)
   
155
     
21
     
425
     
113
     
23
     
-
     
(1,083
)