10-Q 1 form10q.htm COLONY BANKCORP INC 10-Q 9-30-2013

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

FOR QUARTER ENDED SEPTEMBER 30, 2013
COMMISSION FILE NUMBER 0-12436

COLONY BANKCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

GEORGIA
58-1492391
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

115 SOUTH GRANT STREET, FITZGERALD, GEORGIA 31750
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES

229/426-6000
REGISTRANT’S TELEPHONE NUMBER INCLUDING AREA CODE

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED REPORTS REQUIRED TO BE FILED BY SECTIONS 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 (§232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).

YES    x
NO    o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER OR A SMALLER REPORTING COMPANY.   SEE DEFINITIONS OF “ACCELERATED FILER”, “LARGE ACCELERATED FILER” AND “SMALLER REPORTING COMPANY” IN RULE 12b-2 OF THE EXCHANGE ACT.

LARGE ACCELERATED FILER
ACCELERATED FILER
NON-ACCELERATED FILER
SMALLER REPORTING COMPANY    x
(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

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 NOVEMBER 4, 2013
COMMON STOCK, $1 PAR VALUE
8,439,258

TABLE OF CONTENTS
 
Page
PART I – Financial Information
 
 
 
 
 
 
3
 
 
 
 
 
Item 1.
5
 
Item 2.
39
 
Item 3.
54
 
Item 4.
55
 
 
 
 
PART II – Other Information
 
 
 
 
 
 
Item 1.
56
 
Item 1A.
56
 
Item 2.
56
 
Item 3.
56
 
Item 4.
56
 
Item 5.
56
 
Item 6.
57
 
 
59

Forward Looking Statement Disclosure
 
Certain statements contained in this Quarterly Report that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act), not withstanding that such statements are not specifically identified.  In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act.  Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of Colony Bankcorp, Inc. or its management or Board of Directors, including those relating to products or services; (ii) statements of future economic performance; and (iv) statements of assumptions underlying such statements.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements.  Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

· Loss and regional economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

· Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

· The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board.

· Inflation, interest rate, market and monetary fluctuations.

· Political instability.

· Acts of war or terrorism.

· The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

· Changes in consumer spending, borrowings and savings habits.

· Technological changes.

· Acquisitions and integration of acquired businesses.

· The ability to increase market share and control expenses.

· The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiary must comply.

· The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters.

· Changes in the Company’s organization, compensation and benefit plans.

· The costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

· Greater than expected costs or difficulties related to the integration of new lines of business.

· The Company’s success at managing the risks involved in the foregoing items.

· Restrictions or conditions imposed by our regulators on our operations.
Forward-looking statements speak only as of the date on which such statements are made.  The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission (SEC).

PART 1. FINANCIAL INFORMATION
 
ITEM 1

FINANCIAL STATEMENTS

THE FOLLOWING FINANCIAL STATEMENTS ARE PROVIDED FOR COLONY BANKCORP, INC. AND ITS WHOLLY-OWNED SUBSIDIARY BANK, COLONY BANK

A. CONSOLIDATED BALANCE SHEETS – SEPTEMBER 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012 (AUDITED).

B. CONSOLIDATED STATEMENTS OF INCOME – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013
AND 2012 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED).

C. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – FOR THE THREE MONTHS  ENDED SEPTEMBER 30, 2013 AND 2012 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED).

D. CONSOLIDATED STATEMENTS OF CASH FLOWS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED).

THE CONSOLIDATED FINANCIAL STATEMENTS FURNISHED HAVE NOT BEEN AUDITED BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS, BUT REFLECT, IN THE OPINION OF MANAGEMENT, ALL ADJUSTMENTS (CONSISTING SOLELY OF NORMAL RECURRING ADJUSTMENTS) NECESSARY FOR A FAIR PRESENTATION OF THE RESULTS OF OPERATIONS FOR THE PERIODS PRESENTED.

THE RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2013 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED FOR THE FULL YEAR.

Part I (Continued)
Item 1 (Continued)

COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2013 AND DECEMBER 31, 2012
(DOLLARS IN THOUSANDS)

 
 
SEPTEMBER 30, 2013
   
December 31, 2012
 
ASSETS
 
(Unaudited)
   
(Audited)
 
 
 
   
 
Cash and Cash Equivalents
 
   
 
Cash and Due from Banks
 
$
19,033
   
$
29,244
 
Federal Funds Sold
   
18,526
     
20,002
 
 
   
37,559
     
49,246
 
Interest-Bearing Deposits
   
4,117
     
21,795
 
Investment Securities
               
Available for Sale, at Fair Value
   
257,354
     
268,301
 
Held to Maturity, at Cost (Fair Value of $39 and $42, as of September 30, 2013 and December 31, 2012, Respectively)
   
39
     
41
 
 
   
257,393
     
268,342
 
 
               
Federal Home Loan Bank Stock, at Cost
   
3,164
     
3,364
 
Loans
   
748,044
     
747,050
 
Allowance for Loan Losses
   
(12,951
)
   
(12,737
)
Unearned Interest and Fees
   
(301
)
   
(234
)
 
   
734,792
     
734,079
 
Premises and Equipment
   
24,833
     
24,916
 
Other Real Estate (Net of Allowance of $4,377 and $4,561 as of September 30, 2013 and December 31, 2012, Respectively)
   
16,106
     
15,941
 
Other Intangible Assets
   
197
     
224
 
Other Assets
   
34,980
     
21,490
 
Total Assets
 
$
1,113,141
   
$
1,139,397
 
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Deposits
               
Noninterest-Bearing
 
$
110,870
   
$
123,967
 
Interest-Bearing
   
838,593
     
855,718
 
 
   
949,463
     
979,685
 
Borrowed Money
               
Subordinated Debentures
   
24,229
     
24,229
 
Other Borrowed Money
   
40,000
     
35,000
 
 
   
64,229
     
59,229
 
 
               
Other Liabilities
   
8,634
     
4,724
 
Commitments and Contingencies
               
Stockholders' Equity
               
Preferred Stock, Stated Value $1,000 a Share; Authorized 10,000,000 Shares, Issued 28,000 Shares
   
27,956
     
27,827
 
Common Stock, Par Value $1 a Share; Authorized 20,000,000 Shares, Issued 8,439,258 and 8,439,258 Shares as of September 30, 2013 and December 31, 2012, Respectively
   
8,439
     
8,439
 
Paid-In Capital
   
29,145
     
29,145
 
Retained Earnings
   
32,248
     
30,498
 
Accumulated Other Comprehensive (Loss), Net of Tax
   
(6,973
)
   
(150
)
 
   
90,815
     
95,759
 
Total Liabilities and Stockholders' Equity
 
$
1,113,141
   
$
1,139,397
 

The accompanying notes are an integral part of these statements.
Part I (Continued)
Item 1 (Continued)

COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(UNAUDITED)
(DOLLARS IN THOUSANDS)

 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30, 2013
   
September 30, 2012
   
September 30, 2013
   
September 30, 2012
 
Interest Income
 
   
   
   
 
Loans, Including Fees
 
$
10,303
   
$
10,538
   
$
31,023
   
$
31,391
 
Federal Funds Sold
   
7
     
16
     
27
     
72
 
Deposits with Other Banks
   
5
     
4
     
21
     
34
 
Investment Securities
                               
U.S. Government Agencies
   
880
     
1,116
     
2,454
     
4,125
 
State, County and Municipal
   
30
     
42
     
94
     
173
 
Corporate Obligations and Asset-Backed Securities
   
14
     
14
     
42
     
62
 
Dividends on Other Investments
   
21
     
18
     
59
     
55
 
 
   
11,260
     
11,748
     
33,720
     
35,912
 
Interest Expense
                               
Deposits
   
1,361
     
2,110
     
4,452
     
6,833
 
Borrowed Money
   
405
     
416
     
1,273
     
1,882
 
 
   
1,766
     
2,526
     
5,725
     
8,715
 
 
                               
Net Interest Income
   
9,494
     
9,222
     
27,995
     
27,197
 
Provision for Loan Losses
   
1,500
     
1,742
     
4,200
     
5,627
 
Net Interest Income After Provision for Loan Losses
   
7,994
     
7,480
     
23,795
     
21,570
 
 
                               
Noninterest Income
                               
Service Charges on Deposits
   
1,236
     
917
     
3,484
     
2,527
 
Other Service Charges, Commissions and Fees
   
442
     
372
     
1,289
     
1,119
 
Mortgage Fee Income
   
117
     
103
     
377
     
296
 
Securities Gains (Losses)
   
--
     
1,187
     
(2
)
   
2,067
 
Other
   
314
     
324
     
1,211
     
1,082
 
 
   
2,109
     
2,903
     
6,359
     
7,091
 
Noninterest Expenses
                               
Salaries and Employee Benefits
   
4,178
     
3,833
     
12,496
     
11,486
 
Occupancy and Equipment
   
974
     
1,000
     
2,842
     
2,901
 
Other
   
3,336
     
4,414
     
10,281
     
11,248
 
 
   
8,488
     
9,247
     
25,619
     
25,635
 
 
                               
Income Before Income Taxes
   
1,615
     
1,136
     
4,535
     
3,026
 
Income Taxes
   
535
     
364
     
1,532
     
953
 
Net Income
   
1,080
     
772
     
3,003
     
2,073
 
Preferred Stock Dividends
   
379
     
361
     
1,124
     
1,070
 
Net Income Available to Common Stockholders
 
$
701
   
$
411
   
$
1,879
   
$
1,003
 
Net Income Per Share of Common Stock
                               
Basic
 
$
0.08
   
$
0.05
   
$
0.22
   
$
0.12
 
Diluted
 
$
0.08
   
$
0.05
   
$
0.22
   
$
0.12
 
Cash Dividends Declared Per Share of Common Stock
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.00
 
Weighted Average Basic Shares Outstanding
   
8,439,258
     
8,439,258
     
8,439,258
     
8,439,258
 
Weighted Average Diluted Shares Outstanding
   
8,439,258
     
8,439,258
     
8,439,258
     
8,439,258
 

The accompanying notes are an integral part of these statements.
Part I (Continued)
Item 1 (Continued)
 
COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(UNAUDITED)
(DOLLARS IN THOUSANDS)
 
 
 
Three Months Ended
   
Nine Months Ended
 
 
 
September 30, 2013
   
September 30, 2012
   
September 30, 2013
   
September 30, 2012
 
 
 
   
   
   
 
Net Income
 
$
1,080
   
$
772
   
$
3,003
   
$
2,073
 
 
                               
Other Comprehensive Income (Loss), Net of Tax
                               
Gains (Losses) on Securities Arising During the Year
   
(1,627
)
   
(268
)
   
(6,824
)
   
117
 
Reclassification Adjustment
   
--
     
(783
)
   
1
     
(1,364
)
 
                               
Change in Net Unrealized Gains (Losses)on Securities Available for Sale, Net of Reclassification Adjustment and Tax Effect
   
(1,627
)
   
(1051
)
   
(6,823
)
   
(1,247
)
 
                               
Comprehensive Income (Loss)
 
$
(547
)
 
$
(279
)
 
$
(3,820
)
 
$
826
 

The accompanying notes are an integral part of these statements.
Part I (Continued)
Item 1 (Continued)

COLONY BANKCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(UNAUDITED)
(DOLLARS IN THOUSANDS)

 
 
Nine Months Ended
 
 
 
September 30, 2013
   
September 30, 2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
   
 
Net Income
 
$
3,003
   
$
2,073
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
               
Depreciation
   
1,172
     
1,261
 
Provision for Loan Losses
   
4,200
     
5,627
 
Securities Gains (Losses)
   
2
     
(2,067
)
Amortization and Accretion
   
2,277
     
3,191
 
Loss on Sale of Other Real Estate and Repossessions
   
796
     
1,313
 
Provision for Losses on Other Real Estate
   
1,049
     
1,259
 
Increase in Cash Surrender Value of Life Insurance
   
(178
)
   
(122
)
Other Prepaids, Deferrals and Accruals, Net
   
2,939
     
4,877
 
 
   
15,260
   
17,412
 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of Investment Securities Available for Sale
   
(78,604
)
   
(140,618
)
Proceeds from Maturities, Calls, and Paydowns of Investment Securities:
               
Available for Sale
   
40,794
     
37,685
 
Held for Maturity
   
8
     
7
 
Proceeds from Sale of Investment Securities Available for Sale
   
36,217
     
161,811
 
Decrease in Interest-Bearing Deposits in Other Banks
   
17,678
     
19,747
 
Net Loans to Customers
   
(13,442
)
   
(22,853
)
Purchase of Premises and Equipment
   
(1,089
)
   
(723
)
Proceeds from Sale of Other Real Estate and Repossessions
   
6,514
     
6,691
 
Proceeds from Sale of Federal Home Loan Bank Stock
   
200
     
2,259
 
Purchase of Bank Owned Life Insurance (10,000 )
--
Transfer of Subsidiary
   
--
     
14
 
 
   
(1,724
)     
64,020
 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Noninterest-Bearing Customer Deposits
   
(13,097
)
   
7,583
 
Interest-Bearing Customer Deposits
   
(17,126
)
   
(66,364
)
Principal Payments on Other Borrowed Money
   
(16,500
)
   
(41,000
)
Proceeds from Other Borrowed Money
   
21,500
     
--
 
 
   
(25,223
)
   
(99,781
)
 
               
Net Decrease in Cash and Cash Equivalents
   
(11,687
)
   
(18,349
)
Cash and Cash Equivalents at Beginning of Period
   
49,246
     
83,372
 
Cash and Cash Equivalents at End of Period
 
$
37,559
   
$
65,023
 

The accompanying notes are an integral part of these statements.
Part I (Continued)
Item 1 (Continued)

COLONY BANKCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Presentation

Colony Bankcorp, Inc. (the Company) is a bank holding company located in Fitzgerald, Georgia. The consolidated financial statements include the accounts of Colony Bankcorp, Inc. and its wholly-owned subsidiary, Colony Bank, Fitzgerald, Georgia.  All significant intercompany accounts have been eliminated in consolidation. The accounting and reporting policies of Colony Bankcorp, Inc. conform to generally accepted accounting principles and practices utilized in the commercial banking industry.

All dollars in notes to consolidated financial statements are rounded to the nearest thousand.

The consolidated financial statements in this report are unaudited, except for the December 31, 2012 consolidated balance sheet.  All adjustments consisting of normal recurring accruals which are, in the opinion of management, necessary for fair presentation of the interim consolidated financial statements have been included and fairly and accurately present the financial position, results of operations and cash flows of the Company.  The results of operations for the nine months ended September 30, 2013, are not necessarily indicative of the results which may be expected for the entire year.

Nature of Operations

The Bank provides a full range of retail and commercial banking services for consumers and small- to medium-size businesses located primarily in central, south and coastal Georgia. Colony Bank is headquartered in Fitzgerald, Georgia with banking offices in Albany, Ashburn, Broxton, Centerville, Chester, Columbus, Cordele, Douglas, Eastman, Fitzgerald, Leesburg, Moultrie, Pitts, Quitman, Rochelle, Savannah, Soperton, Sylvester, Thomaston, Tifton, Valdosta and Warner Robins.  Lending and investing activities are funded primarily by deposits gathered through its retail banking office network.

Use of Estimates

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and the valuation of deferred tax assets.

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to statement presentations selected for 2013.   Such reclassifications had no effect on previously reported stockholders’ equity or net income.

Concentrations of Credit Risk

Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, or certain geographic regions.  The Company has a concentration in real estate loans as well as a geographic concentration that could pose an adverse credit risk, particularly with the current economic downturn in the real estate market.  At September 30, 2013, approximately 86 percent of the Company’s loan portfolio was concentrated in loans secured by real estate.  A substantial portion of borrowers’ ability to honor their contractual obligations is dependent upon the viability of the real estate economic sector.  The downturn of the housing and real estate market that began in 2007 resulted in an increase of problem loans secured by real estate, of which most are centered in the Company’s larger MSA markets.  Declining collateral real estate values that secure land development, construction and speculative real estate loans in the Company’s larger MSA markets have resulted in high loan loss provisions in recent years.  In addition, a large portion of the Company’s foreclosed assets are also located in these same geographic markets, making the recovery of the carrying amount of foreclosed assets susceptible to changes in market conditions.  Management continues to monitor these concentrations and has considered these concentrations in its allowance for loan loss analysis.
Part I (Continued)
Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Concentrations of Credit Risk (Continued)

The success of the Company is dependent, to a certain extent, upon the economic conditions in the geographic markets it serves. Adverse changes in the economic conditions in these geographic markets would likely have a material adverse effect on the Company’s results of operations and financial condition. The operating results of Colony depend primarily on its net interest income. Accordingly, operations are subject to risks and uncertainties surrounding the exposure to changes in the interest rate environment.

At times, the Company may have cash and cash equivalents at financial institutions in excess of federal deposit insurance limits.  The Company places its cash and cash equivalents with high credit quality financial institutions whose credit rating is monitored by management to minimize credit risk.

Investment Securities

The Company classifies its investment securities as trading, available for sale or held to maturity.  Securities that are held principally for resale in the near term are classified as trading.  Trading securities are carried at fair value, with realized and unrealized gains and losses included in noninterest income.  Currently, no securities are classified as trading.  Securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at amortized cost.  All securities not classified as trading or held to maturity are considered available for sale.  Securities available for sale are reported at estimated fair value. Unrealized gains and losses on securities available for sale are excluded from earnings and are reported, net of deferred taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity.  Gains and losses from sales of securities available for sale are computed using the specific identification method. Securities available for sale includes securities, which may be sold to meet liquidity needs arising from unanticipated deposit and loan fluctuations, changes in regulatory capital requirements, or unforeseen changes in market conditions.

The Company evaluates each held to maturity and available for sale security in a loss position for other-than-temporary impairment (OTTI).  In estimating other-than-temporary impairment losses, management considers such factors as the length of time and the extent to which the market value has been below cost, the financial condition of the issuer and the Company’s intent to sell and whether it is more likely than not that the Company will be required to sell the security before anticipated recovery of the amortized cost basis.  If the Company intends to sell or if it is more likely than not that the Company will be required to sell the security before recovery, the OTTI write-down is recognized in earnings.  If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings and an amount related to all other factors, which is recognized in other comprehensive income (loss).

Federal Home Loan Bank Stock

Investment in stock of a Federal Home Loan Bank (FHLB) is required for every federally insured institution that utilizes its services. FHLB stock is considered restricted, as defined in the accounting standards.  The FHLB stock is reported in the consolidated financial statements at cost. Dividend income is recognized when earned.

Loans

Loans that the Company has the ability and intent to hold for the foreseeable future or until maturity are recorded at their principal amount outstanding, net of unearned interest and fees.  Loan origination fees, net of certain direct origination costs, are deferred and amortized over the estimated terms of the loans using the straight-line method.  Interest income on loans is recognized using the effective interest method.

A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date.

When management believes there is sufficient doubt as to the collectibility of principal or interest on any loan or generally when loans are 90 days or more past due, the accrual of applicable interest is discontinued and the loan is designated as nonaccrual, unless the loan is well secured and in the process of collection. Interest payments received on nonaccrual loans are either applied against principal or reported as income, according to management’s judgment as to the collectibility of principal. Loans are returned to an accrual status when factors indicating doubtful collectibility on a timely basis no longer exist.
Part I (Continued)
Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Loans Modified in a Troubled Debt Restructuring (TDR)

Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulty, the Company makes certain concessions to the borrower that it would not otherwise consider for new debt with similar risk characteristics.  Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of the collateral.  Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of 6 months to demonstrate that the borrower is able to meet the terms of the modified loan.  However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period.  If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.  Once a loan is modified in a troubled debt restructuring it is accounted for as an impaired loan, regardless of its accrual status, until the loan is paid in full, sold or charged off.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.

The allowance consists of specific, historical and general components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The historical component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. A general component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and historical losses in the portfolio.  General valuation allowances are based on internal and external qualitative risk factors such as (i) changes in the composition of the loan portfolio, (ii) the extent of loan concentrations within the portfolio, (iii) the effectiveness of the Company’s lending policies, procedures and internal controls, (iv) the experience, ability and effectiveness of the Company’s lending management and staff, and (v) national and local economics and business conditions.

Loans identified as losses by management, internal loan review and/or regulatory agencies are charged off.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

A significant portion of the Company’s impaired loans are deemed to be collateral dependent.  Management therefore measures impairment on these loans based on the fair value of the collateral.  Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company or by senior members of the Company’s credit administration staff.  The decision whether or not to obtain an external third-party appraisal usually depends on the type of property being evaluated.  External appraisals are usually obtained on more complex, income producing properties such as hotels, shopping centers and businesses.  Less complex properties such as residential lots, farm land and single family houses may be evaluated internally by senior credit administration staff.
Part I (Continued)
Item 1 (Continued)

(1) Summary of Significant Accounting Policies  (Continued)

Allowance for Loan Losses (Continued)

When the Company does obtain appraisals from external third-parties, the values utilized in the impairment calculation are “as is” or current market values.  The appraisals, whether prepared internally or externally, may utilize a single valuation approach or a combination of approaches including the comparable sales, income and cost approach.  Appraised amounts used in the impairment calculation are typically discounted 10 percent to account for selling and marketing costs, if the repayment of the loan is to come from the sale of the collateral.  Although appraisals are not obtained each year on all impaired loans, the collateral values used in the impairment calculations are evaluated quarterly by management.  Based on management’s knowledge of the collateral and the current real estate market conditions, appraised values may be further discounted to reflect facts and circumstances known to management since the initial appraisal was performed.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a level 3 classification of the inputs for determining fair value.  Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans and because of the relationship between fair value and general economic conditions, we consider the fair value of impaired loans to be highly sensitive to changes in market conditions.

Premises and Equipment

Premises and equipment are recorded at acquisition cost net of accumulated depreciation.

Depreciation is charged to operations over the estimated useful lives of the assets. The estimated useful lives and methods of depreciation are as follows:

Description
 
Life in Years
 
Method
Banking Premises
   
15-40
 
Straight-Line and Accelerated
Furniture and Equipment
   
5-10
 
Straight-Line and Accelerated

Expenditures for major renewals and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. When property and equipment are retired or sold, the cost and accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in other income or expense.

Intangible Assets

Intangible assets consist of core deposit intangibles acquired in connection with a business combination.  The core deposit intangible is initially recognized based on a valuation performed as of the consummation date.  The core deposit intangible is amortized by the straight-line method over the average remaining life of the acquired customer deposits.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Statement of Cash Flows

For reporting cash flows, cash and cash equivalents include cash on hand, noninterest-bearing amounts due from banks and federal funds sold. Cash flows from demand deposits, NOW accounts, savings accounts, loans and certificates of deposit are reported net.

Advertising Costs

The Company expenses the cost of advertising in the periods in which those costs are incurred.
Part I (Continued)
Item 1 (Continued)

(1) Summary of Significant Accounting Policies (Continued)

Income Taxes

The provision for income taxes is based upon income for financial statement purposes, adjusted for nontaxable income and nondeductible expenses. Deferred income taxes have been provided when different accounting methods have been used in determining income for income tax purposes and for financial reporting purposes.

Deferred tax assets and liabilities are recognized based on future tax consequences attributable to differences arising from the financial statement carrying values of assets and liabilities and their tax bases. The differences relate primarily to depreciable assets (use of different depreciation methods for financial statement and income tax purposes) and allowance for loan losses (use of the allowance method for financial statement purposes and the direct write-off method for tax purposes). In the event of changes in the tax laws, deferred tax assets and liabilities are adjusted in the period of the enactment of those changes, with effects included in the income tax provision. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The Company and its subsidiary file a consolidated federal income tax return. The subsidiary pays its proportional share of federal income taxes to the Company based on its taxable income.

Positions taken in the Company’s tax returns may be subject to challenge by the taxing authorities upon examination.  Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.  Such tax positions are both initially and subsequently measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with the tax authority, assuming full knowledge of the position and all relevant facts.  The Company provides for interest and, in some cases, penalties on tax positions that may be challenged by the taxing authorities.  Interest expense is recognized beginning in the first period that such interest would begin accruing.  Penalties are recognized in the period that the Company claims the position in the tax return.  Interest and penalties on income tax uncertainties are classified within income tax expense in the consolidated statement of income.

Other Real Estate

Other real estate generally represents real estate acquired through foreclosure and is initially recorded at estimated fair value at the date of acquisition less the cost of disposal.  Losses from the acquisition of property in full or partial satisfaction of debt are recorded as loan losses. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and valuation allowances are recorded as necessary to reduce the carrying amount to fair value less estimated cost of disposal.  Routine holding costs and gains or losses upon disposition are included in other noninterest expense.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, represent equity changes from economic events of the period other than transactions with owners and are not reported in the consolidated statements of operations but as a separate component of the equity section of the consolidated balance sheets. Such items are considered components of other comprehensive income (loss).  Accounting standards codification requires the presentation in the consolidated financial statements of net income and all items of other comprehensive income (loss) as total comprehensive income (loss).

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded.
Part I (Continued)
Item 1 (Continued)

(2) Investment Securities

Investment securities as of September 30, 2013 and December 31, 2012 are summarized as follows:

September 30, 2013
 
   
Gross
   
Gross
   
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
Securities Available for Sale:
 
   
   
   
 
U.S. Government Agencies Mortgage-Backed
 
$
262,423
   
$
199
   
$
(10,556
)
 
$
252,066
 
State, County & Municipal
   
4,129
     
17
     
(72
)
   
4,074
 
Corporate Obligations
   
1,000
     
82
     
--
     
1,082
 
Asset-Backed Securities
   
367
     
--
     
(235
)
   
132
 
 
 
$
267,919
   
$
298
   
$
(10,863
)
 
$
257,354
 
Securities Held to Maturity:
                               
State, County and Municipal
 
$
39
   
$
--
   
$
--
   
$
39
 

December 31, 2012
 
   
Gross
   
Gross
   
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
 
 
Cost
   
Gains
   
Losses
   
Value
 
Securities Available for Sale:
 
   
   
   
 
U.S. Government Agencies Mortgage-Backed
 
$
263,187
   
$
835
   
$
(962
)
 
$
263,060
 
State, County & Municipal
   
3,974
     
34
     
(4
)
   
4,004
 
Corporate Obligations
   
1,000
     
105
     
--
     
1,105
 
Asset-Backed Securities
   
366
     
--
     
(234
)
   
132
 
 
 
$
268,527
   
$
974
   
$
(1,200
)
 
$
268,301
 
Securities Held to Maturity:
                               
State, County and Municipal
 
$
41
   
$
1
   
$
--
   
$
42
 

The amortized cost and fair value of investment securities as of September 30, 2013, by contractual maturity, are shown hereafter.  Expected maturities will differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.  This is often the case with mortgage-backed securities, which are disclosed separately in the table below.

 
 
Securities
 
 
 
Available for Sale
   
Held to Maturity
 
 
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
 
Due In One Year or Less
 
$
273
   
$
276
   
$
--
   
$
--
 
Due After One Year Through Five Years
   
2,599
     
2,694
     
39
     
39
 
Due After Five Years Through Ten Years
   
1,604
     
1,582
     
--
     
--
 
Due After Ten Years
   
1,020
     
736
     
--
     
--
 
 
   
5,496
     
5,288
     
39
     
39
 
 
                               
Mortgage-Backed Securities
   
262,423
     
252,066
     
--
     
--
 
 
 
$
267,919
   
$
257,354
   
$
39
   
$
39
 

Proceeds from the sale of investments available for sale during the first nine months of 2013 totaled $36,217 compared to $161,811 for the first nine months of 2012.  The sale of investments available for sale during the first nine months of 2013 resulted in gross realized gains of $191 and losses of $(193).  The sale of investments available for sale during the first nine months of 2012 resulted in gross realized gains of $2,204 and losses of $(137).  This was offset by other than temporary impairment charges of $(60).
Part I (Continued)
Item 1 (Continued)

(2) Investment Securities (Continued)

Nonaccrual securities are securities for which principal and interest are doubtful of collection in accordance with original terms and for which accruals of interest have been discontinued due to payment delinquency.  Fair value of securities on nonaccrual status totaled $132 and $132 as of September 30, 2013 and December 31, 2012, respectively.

Investment securities having a carry value approximating $93,350 and $117,451 as of September 30, 2013 and December 31, 2012, respectively, were pledged to secure public deposits and for other purposes.

Information pertaining to securities with gross unrealized losses at September 30, 2013 and December 31, 2012 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 
 
Less Than 12 Months
   
12 Months or Greater
   
Total
 
 
 
   
   
   
   
   
 
 
 
   
Gross
   
   
Gross
   
   
Gross
 
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
 
 
   
   
   
   
   
 
September 30, 2013
 
   
   
   
   
   
 
U.S. Government Agencies Mortgage-Backed
 
$
221,584
   
$
(10,456
)
 
$
5,453
   
(100
)
 
$
227,037
   
$
(10,556
)
State, County and Municipal
   
1,669
     
(72
)
   
--
     
--
     
1,669
     
(72
)
Asset-Backed Securities
   
--
     
--
     
132
     
(235
)
   
132
     
(235
)
 
 
$
223,253
   
$
(10,528
)
 
$
5,585
   
$
(335
)
 
$
228,838
   
$
(10,863
)
 
                                               
December 31, 2012
                                               
U.S. Government Agencies Mortgage-Backed
 
$
142,104
   
$
(962
)
 
$
--
   
$
--
   
$
142,104
   
$
(962
)
State, County and Municipal
   
1,431
     
(4
)
   
--
     
--
     
1,431
     
(4
)
Asset-Backed Securities
   
--
     
--
     
132
     
(234
)
   
132
     
(234
)
 
 
$
143,535
   
$
(966
)
 
$
132
   
$
(234
)
 
$
143,667
   
$
(1,200
)
 
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

At September 30, 2013, the debt securities with unrealized losses have depreciated 4.53 percent from the Company’s amortized cost basis.  These securities are guaranteed by either the U.S. Government, other governments or U.S. corporations, except for asset-backed securities.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred and the results of reviews of the issuer’s financial condition.  The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The company believes the unrealized losses on investments in municipal obligations, collateralized mortgage obligations and mortgage-backed securities as of September 30, 2013, were due to market conditions, not reduced estimated cash flows.  There was a significant increase in market interest rates in June 2013 and rates continued to rise slightly during the third quarter of 2013, particularly in the longer part of the interest rate curve.  This caused a measurable decline in the fair market value of the bond portfolio.  The Company does not intend to sell these securities, does not anticipate that these securities will be required to be sold before anticipated recovery, and expects full principal and interest to be collected.  Therefore, the Company did not consider these investments to have OTTI at September 30, 2013.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, no declines are deemed to be other than temporary.  However, the Company did own one asset-backed security at September 30, 2013 which has been in a continuous unrealized loss position for more than twelve months.  This investment is comprised of one issuance of a trust preferred security, has a book value of $367 and an unrealized loss of $235.  Management evaluates this investment on a quarterly basis utilizing a third-party valuation model.  The Company does not intend to sell this investment, nor does the Company consider it likely that it will be required to sell the investment prior to recovery of the remaining fair value.
Part I (Continued)
Item 1 (Continued)

(3) Loans

The following table presents the composition of loans segregated by class of loans, as of September 30, 2013 and December 31, 2012.

 
 
September 30, 2013
   
December 31, 2012
 
Commercial and Agricultural
 
   
 
Commercial
 
$
49,162
   
$
55,684
 
Agricultural
   
17,613
     
6,211
 
 
               
Real Estate
               
Commercial Construction
   
44,950
     
53,808
 
Residential Construction
   
4,680
     
5,852
 
Commercial
   
335,444
     
334,386
 
Residential
   
207,758
     
203,845
 
Farmland
   
49,288
     
49,057
 
 
               
Consumer and Other
               
Consumer
   
26,235
     
29,778
 
Other
   
12,914
     
8,429
 
 
               
Total Loans
 
$
748,044
   
$
747,050
 

Commercial and industrial loans are extended to a diverse group of businesses within the Company’s market area.  These loans are often underwritten based on the borrower’s ability to service the debt from income from the business.  Real estate construction loans often require loan funds to be advanced prior to completion of the project.  Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans.  Consumer loans are originated at the bank level.  These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

Credit Quality Indicators.  As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade assigned to commercial and consumer loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the Company’s geographic markets.

The Company uses a risk grading matrix to assign a risk grade to each of its loans.  Loans are graded on a scale of 1 to 8.  A description of the general characteristics of the grades is as follows:

· Grades 1 and 2 – Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk.  Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds.  Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans.  Loans in this category fall into the “pass” classification.

· Grades 3 and 4 – Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk.  The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

· Grade 5 – This grade includes “special mention” loans on management’s watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

· Grade 6 – This grade includes “substandard” loans in accordance with regulatory guidelines.  This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms.  Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses.  Generally, loans on which interest accrual has been stopped would be included in this grade.
Part I (Continued)
Item 1 (Continued)

(3) Loans (Continued)

· Grades 7 and 8 – These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively.  In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades.  Management manages the Company’s problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

The following table presents the loan portfolio by credit quality indicator (risk grade) as of September 30, 2013 and December 31, 2012.  Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

September 30, 2013
 
   
   
   
 
 
 
Pass
   
Special Mention
   
Substandard
   
Total Loans
 
Commercial and Agricultural
 
   
   
   
 
Commercial
 
$
44,155
   
$
1,780
   
$
3,227
   
$
49,162
 
Agricultural
   
17,584
     
17
     
12
     
17,613
 
 
                               
Real Estate
                               
Commercial Construction
   
33,924
     
2,274
     
8,752
     
44,950
 
Residential Construction
   
4,473
     
207
     
--
     
4,680
 
Commercial
   
312,492
     
11,487
     
11,465
     
335,444
 
Residential
   
184,368
     
12,517
     
10,873
     
207,758
 
Farmland
   
45,078
     
480
     
3,730
     
49,288
 
 
                               
Consumer and Other
                               
Consumer
   
25,133
     
326
     
776
     
26,235
 
Other
   
12,860
     
2
     
52
     
12,914
 
 
                               
Total Loans
 
$
680,067
   
$
29,090
   
$
38,887
   
$
748,044
 

December 31, 2012
 
   
   
   
 
 
 
Pass
   
Special Mention
   
Substandard
   
Total Loans
 
Commercial and Agricultural
 
   
   
   
 
Commercial
 
$
49,947
   
$
1,418
   
$
4,319
   
$
55,684
 
Agricultural
   
6,156
     
--
     
55
     
6,211
 
 
                               
Real Estate
                               
Commercial Construction
   
37,256
     
1,664
     
14,888
     
53,808
 
Residential Construction
   
5,749
     
103
     
--
     
5,852
 
Commercial
   
298,222
     
9,759
     
26,405
     
334,386
 
Residential
   
183,222
     
11,413
     
9,210
     
203,845
 
Farmland
   
45,495
     
914
     
2,648
     
49,057
 
 
                               
Consumer and Other
                               
Consumer
   
28,840
     
293
     
645
     
29,778
 
Other
   
8,351
     
9
     
69
     
8,429
 
 
                               
Total Loans
 
$
663,238
   
$
25,573
   
$
58,239
   
$
747,050
 
 
A loan’s risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral.  Loan risk grades are subject to reassessment at various times throughout the year as part of the Company’s ongoing loan review process. Loans with an assigned risk grade of 6 or below and an outstanding balance of $250,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.
Part I (Continued)
Item 1 (Continued)

(3) Loans (Continued)
 
In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas.  The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision.  Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.  Nonaccrual loans totaled $24,163 and $29,851 as of September 30, 2013 and December 31, 2012, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest approximated $2 and $4, respectively.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of September 30, 2013 and December 31, 2012:

September 30, 2013
 
   
   
   
   
   
 
 
Accruing Loans    
   
   
 
 
 
   
90 Days
   
   
   
   
 
 
 
30-89 Days
   
or More
   
Total Accruing
   
Nonaccrual
   
   
 
 
 
Past Due
   
Past Due
   
Loans Past Due
   
Loans
   
Current Loans
   
Total Loans
 
Commercial and Agricultural
 
   
   
   
   
   
 
Commercial
 
$
689
   
$
--
   
$
689
   
$
1,616
   
$
46,857
   
$
49,162
 
Agricultural
   
11
     
--
     
11
     
--
     
17,602
     
17,613
 
 
                                               
Real Estate
                                               
Commercial Construction
   
686
     
--
     
686
     
8,483
     
35,781
     
44,950
 
Residential Construction
   
--
     
--
     
--
     
--
     
4,680
     
4,680
 
Commercial
   
6,127
     
--
     
6,127
     
5,325
     
323,992
     
335,444
 
Residential
   
4,543
     
--
     
4,543
     
4,852
     
198,363
     
207,758
 
Farmland
   
137
     
--
     
137
     
3,606
     
45,545
     
49,288
 
 
                                               
Consumer and Other
                                               
Consumer
   
489
     
2
     
491
     
272
     
25,472
     
26,235
 
Other
   
--
     
--
     
--
     
9
     
12,905
     
12,914
 
 
                                               
Total Loans
 
$
12,682
   
$
2
   
$
12,684
   
$
24,163
   
$
711,197
   
$
748,044
 

Part I (Continued)
Item 1 (Continued)

(3) Loans (Continued)

December 31, 2012
 
   
   
   
   
   
 
 
 
Accruing Loans
   
   
   
 
 
 
   
90 Days
   
   
   
   
 
 
 
30-89 Days
   
or More
   
Total Accruing
   
Nonaccrual
   
   
 
 
 
Past Due
   
Past Due
   
Loans Past Due
   
Loans
   
Current Loans
   
Total Loans
 
Commercial and Agricultural
 
   
   
   
   
   
 
Commercial
 
$
798
   
$
--
   
$
798
   
$
1,033
   
$
53,853
   
$
55,684
 
Agricultural
   
28
     
--
     
28
     
39
     
6,144
     
6,211
 
 
                                               
Real Estate
                                               
Commercial Construction
   
1,310
     
--
     
1,310
     
14,032
     
38,466
     
53,808
 
Residential Construction
   
--
     
--
     
--
     
--
     
5,852
     
5,852
 
Commercial
   
3,771
     
--
     
3,771
     
6,630
     
323,985
     
334,386
 
Residential
   
8,223
     
--
     
8,223
     
5,430
     
190,192
     
203,845
 
Farmland
   
140
     
--
     
140
     
2,413
     
46,504
     
49,057
 
 
                                               
Consumer and Other
                                               
Consumer
   
637
     
4
     
641
     
256
     
28,881
     
29,778
 
Other
   
5
     
--
     
5
     
18
     
8,406
     
8,429
 
 
                                               
Total Loans
 
$
14,912
   
$
4
   
$
14,916
   
$
29,851
   
$
702,283
   
$
747,050
 

Part I (Continued)
Item 1 (Continued)

(3) Loans (Continued)

The following table details impaired loan data as of September 30, 2013:

September 30, 2013
 
   
   
   
   
   
 
 
 
Unpaid
   
   
   
   
   
 
 
 
Contractual
   
   
   
Average
   
Interest
   
Interest
 
 
 
Principal
   
Impaired
   
Related
   
Recorded
   
Income
   
Income
 
 
 
Balance
   
Balance
   
Allowance
   
Investment
   
Recognized
   
Collected
 
 
 
   
   
   
   
   
 
With No Related Allowance Recorded
 
   
   
   
   
   
 
Commercial
 
$
266
   
$
265
   
$
--
   
$
98
   
$
11
   
$
14
 
Agricultural
   
--
     
--
     
--
     
13
     
--
     
--
 
Commercial Construction
   
8,335
     
5,010
     
--
     
2,220
     
17
     
23
 
Residential Construction
   
--
     
--
     
--
     
--
     
--
     
--
 
Commercial Real Estate
   
8,559
     
8,064
     
--
     
8,493
     
95
     
113
 
Residential Real Estate
   
7,378
     
5,830
     
--
     
2,022
     
157
     
152
 
Farmland
   
2,277
     
2,277
     
--
     
1,618
     
--
     
--
 
Consumer
   
295
     
281
     
--
     
141
     
12
     
14
 
Other
   
--
     
--
     
--
     
--
     
--
     
--
 
 
                                               
 
   
27,110
     
21,727
     
--
     
14,605
     
292
     
316
 
 
                                               
With An Allowance Recorded
                                               
Commercial
   
1,465
     
1,465
     
108
     
1,280
     
14
     
19
 
Agricultural
   
--
     
--
     
--
     
--
     
--
     
--
 
Commercial Construction
   
5,924
     
3,473
     
573
     
4,386
     
--
     
--
 
Residential Construction
   
--
     
--
     
--
     
--
     
--
     
--
 
Commercial Real Estate
   
15,061
     
15,061
     
1,559
     
7,785
     
287
     
285
 
Residential Real Estate
   
2,804
     
2,804
     
774
     
3,331
     
65
     
64
 
Farmland
   
1,329
     
1,329
     
202
     
--
     
44
     
47
 
Consumer
   
--
     
--
     
--
     
--
     
--
     
--
 
Other
   
--
     
--
     
--
     
--
     
--
     
--
 
 
                                               
 
   
26,583
     
24,132
     
3,216
     
16,782
     
410
     
415
 
 
                                               
Total
                                               
Commercial
   
1,731
     
1,730
     
108
     
1,378
     
25
     
33
 
Agricultural
   
--
     
--
     
--
     
13
     
--
     
--
 
Commercial Construction
   
14,259
     
8,483
     
573
     
6,606
     
17
     
23
 
Residential Construction
   
--
     
--
     
--
     
--
     
--
     
--
 
Commercial Real Estate
   
23,620
     
23,125
     
1,559
     
16,278
     
382
     
398
 
Residential Real Estate
   
10,182
     
8,634
     
774
     
5,353
     
222
     
216
 
Farmland
   
3,606
     
3,606
     
202
     
1,618
     
44
     
47
 
Consumer
   
295
     
281
     
--
     
141
     
12
     
14
 
Other
   
--
     
--
     
--
     
--
     
--
     
--
 
 
                                               
 
 
$
53,693
   
$
45,859
   
$
3,216
   
$
31,387
   
$
702
   
$
731
 

Part I (Continued)
Item 1 (Continued)

(3) Loans (Continued)

The following table details impaired loan data as of December 31, 2012:

December 31, 2012
 
   
   
   
   
   
 
 
 
Unpaid
   
   
   
   
   
 
 
 
Contractual
   
   
   
Average
   
Interest
   
Interest
 
 
 
Principal
   
Impaired
   
Related
   
Recorded
   
Income
   
Income
 
 
 
Balance
   
Balance
   
Allowance
   
Investment
   
Recognized
   
Collected
 
 
 
   
   
   
   
   
 
With No Related Allowance Recorded
 
   
   
   
   
   
 
Commercial
 
$
1,508
   
$
1,042
   
$
--
   
$
1,053
   
$
27
   
$
28
 
Agricultural
   
39
     
39
     
--
     
58
     
--
     
--
 
Commercial Construction
   
10,625
     
6,415
     
--
     
9,194
     
27
     
52
 
Residential Construction
   
--
     
--
     
--
     
--
     
--
     
--
 
Commercial Real Estate
   
16,566
     
15,506
     
--
     
26,482
     
430
     
421
 
Residential Real Estate
   
4,450
     
4,132
     
--
     
3,096
     
89
     
123
 
Farmland
   
2,829
     
2,413
     
--
     
2,326
     
43
     
55
 
Consumer
   
297
     
255
     
--
     
228
     
10
     
13
 
Other
   
18
     
18
     
--
     
24
     
1
     
1
 
 
                                               
 
   
36,332
     
29,820
     
--
     
42,461
     
627
     
693
 
 
                                               
With An Allowance Recorded
                                               
Commercial
   
1,493
     
1,493
     
463
     
943
     
92
     
88
 
Agricultural
   
--
     
--
     
--
     
--
     
--
     
--
 
Commercial Construction
   
8,267
     
7,618
     
1,733
     
10,534
     
--
     
--
 
Residential Construction
   
--
     
--
     
--
     
--
     
--
     
--
 
Commercial Real Estate
   
12,759
     
12,745
     
1,236
     
6,399
     
384
     
366
 
Residential Real Estate
   
5,515
     
4,422
     
840
     
4,288
     
145
     
117
 
Farmland
   
--
     
--
     
--
     
65
     
--
     
--
 
Consumer
   
--
     
--
     
--
     
--
     
--
     
--
 
Other
   
--
     
--
     
--
     
--
     
--
     
--
 
 
                                               
 
   
28,034
     
26,278
     
4,272
     
22,229
     
621
     
571
 
 
                                               
Total
                                               
Commercial
   
3,001
     
2,535
     
463
     
1,996
     
119
     
116
 
Agricultural
   
39
     
39
     
--
     
58
     
--
     
--
 
Commercial Construction
   
18,892
     
14,033
     
1,733
     
19,728
     
27
     
52
 
Residential Construction
   
--
     
--
     
--
     
--
     
--
     
--
 
Commercial Real Estate
   
29,325
     
28,251
     
1,236
     
32,881
     
814
     
787
 
Residential Real Estate
   
9,965
     
8,554
     
840
     
7,384
     
234
     
240
 
Farmland
   
2,829
     
2,413
     
--
     
2,391
     
43
     
55
 
Consumer
   
297
     
255
     
--
     
228
     
10
     
13
 
Other
   
18
     
18
     
--
     
24
     
1
     
1
 
 
                                               
 
 
$
64,366
   
$
56,098
   
$
4,272
   
$
64,690
   
$
1,248
   
$
1,264
 

Part I (Continued)
Item 1 (Continued)

(3) Loans (Continued)

The following table details impaired loan data as of September 30, 2012:

September 30, 2012
 
   
   
   
   
   
 
 
 
Unpaid
   
   
   
   
   
 
 
 
Contractual
   
   
   
Average
   
Interest
   
Interest
 
 
 
Principal
   
Impaired
   
Related
   
Recorded
   
Income
   
Income
 
 
 
Balance
   
Balance
   
Allowance
   
Investment
   
Recognized
   
Collected
 
 
 
   
   
   
   
   
 
With No Related Allowance Recorded
 
   
   
   
   
   
 
Commercial
 
$
85
   
$
34
   
$
--
   
$
1,056
   
$
4
   
$
2
 
Agricultural
   
109
     
109
     
--
     
64
     
8
     
18