Table of Contents

 

 

 

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 June 30, 2013

 

OR

 

o         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-34142

 

OAK VALLEY BANCORP

(Exact name of registrant as specified in its charter)

 

California

26-2326676

State or other jurisdiction of

I.R.S. Employer

incorporation or organization

Identification No.

 

125 N. Third Ave., Oakdale, CA 95361

(Address of principal executive offices)

 

(209) 848-2265

Issuer’s telephone number

 

Not applicable

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

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer o

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  7,929,730 shares of common stock outstanding as of July 31, 2013.

 

 

 



Table of Contents

 

Oak Valley Bancorp

June 30, 2013

 

Table of Contents

 

 

Page

PART I — FINANCIAL INFORMATION

2

 

 

Item 1. Consolidated Financial Statements

2

 

 

Condensed Consolidated Balance Sheets at June 30, 2013 (Unaudited), and December 31, 2012

2

 

 

Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Month Periods Ended June 30, 2013 and June 30, 2012

3

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the Three and Six Month Periods Ended June 30, 2013 and June 30, 2012

4

 

 

Condensed Consolidated Statements of Changes of Shareholders’ Equity for the Six-Month Period Ended June 30, 2013 (Unaudited) and the Year Ended December 31, 2012

5

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six-Month Periods Ended June 30, 2013 and June 30, 2012

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

Item 2.

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

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 4.

Controls and Procedures

43

 

 

PART II – OTHER INFORMATION

44

 

 

Item 1.

Legal Proceedings

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3.

Defaults Upon Senior Securities

44

Item 4.

Mine Safety Disclosures

44

Item 5.

Other Information

44

Item 6.

Exhibits

45

 



Table of Contents

 

PART I — FINANCIAL STATEMENTS

 

Item 1. Consolidated Financial Statements (Unaudited)

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS

AT JUNE 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012 (AUDITED)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

102,217,183

 

$

130,799,998

 

Federal funds sold

 

3,500,000

 

10,535,000

 

Cash and cash equivalents

 

105,717,183

 

141,334,998

 

 

 

 

 

 

 

Securities available for sale

 

119,327,539

 

103,865,881

 

Loans, net of allowance for loan loss of $7,570,310 and $7,974,975 at June 30, 2013 and December 31, 2012, respectively

 

382,512,487

 

382,411,361

 

Bank premises and equipment, net

 

12,600,334

 

13,182,451

 

Other real estate owned

 

1,827,203

 

0

 

Interest receivable and other assets

 

22,245,124

 

19,786,065

 

 

 

 

 

 

 

 

 

$

644,229,870

 

$

660,580,756

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

577,129,084

 

$

586,992,650

 

Interest payable and other liabilities

 

3,644,204

 

3,619,382

 

Total liabilities

 

580,773,288

 

590,612,032

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Series B Preferred stock, no par value; $1,000 per share liquidation preference, 10,000,000 shares authorized, 6,750 shares issued and outstanding at December 31, 2012

 

0

 

6,750,000

 

Common stock, no par value; 50,000,000 shares authorized, 7,924,730 and 7,907,780 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

 

23,758,210

 

23,673,210

 

Additional paid-in capital

 

2,430,202

 

2,341,814

 

Retained earnings

 

36,565,059

 

33,958,737

 

Accumulated other comprehensive income, net of tax

 

703,111

 

3,244,963

 

 

 

 

 

 

 

Total shareholders’ equity

 

63,456,582

 

69,968,724

 

 

 

 

 

 

 

 

 

$

644,229,870

 

$

660,580,756

 

 

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

 

2



Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2013 AND JUNE 30, 2012

 

 

 

THREE MONTHS ENDED
JUNE 30,

 

SIX MONTHS ENDED
JUNE 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

5,310,782

 

$

5,585,589

 

$

10,542,922

 

$

11,300,632

 

Interest on securities available for sale

 

870,165

 

877,846

 

1,656,940

 

1,711,531

 

Interest on federal funds sold

 

4,941

 

4,557

 

11,697

 

9,624

 

Interest on deposits with banks

 

54,167

 

24,981

 

111,541

 

54,787

 

Total interest income

 

6,240,055

 

6,492,973

 

12,323,100

 

13,076,574

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

215,959

 

280,745

 

449,772

 

595,962

 

FHLB advances

 

 

 

 

4,707

 

Total interest expense

 

215,959

 

280,745

 

449,772

 

600,669

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

6,024,096

 

6,212,228

 

11,873,328

 

12,475,905

 

PROVISION FOR LOAN LOSSES

 

100,000

 

300,000

 

200,000

 

600,000

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

5,924,096

 

5,912,228

 

11,673,328

 

11,875,905

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposits

 

298,817

 

300,498

 

585,535

 

581,576

 

Earnings on cash surrender value of life insurance

 

105,000

 

105,000

 

205,547

 

210,000

 

Mortgage commissions

 

86,188

 

60,378

 

136,702

 

107,787

 

Gains on called securities

 

16,213

 

13,456

 

34,565

 

35,003

 

Other

 

311,492

 

192,828

 

639,995

 

569,020

 

Total non-interest income

 

817,710

 

672,160

 

1,602,344

 

1,503,386

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

2,595,222

 

2,514,183

 

5,139,141

 

5,089,746

 

Occupancy expenses

 

741,376

 

743,208

 

1,481,383

 

1,494,082

 

Data processing fees

 

303,085

 

278,003

 

607,603

 

555,864

 

OREO expenses

 

784

 

(1,716

)

784

 

18,358

 

Regulatory assessments (FDIC & DFI)

 

120,000

 

116,000

 

240,000

 

233,000

 

Other operating expenses

 

973,401

 

962,341

 

1,904,042

 

1,817,733

 

Total non-interest expense

 

4,733,868

 

4,612,019

 

9,372,953

 

9,208,783

 

 

 

 

 

 

 

 

 

 

 

Net income before provision for income taxes

 

2,007,938

 

1,972,369

 

3,902,719

 

4,170,508

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

633,547

 

620,409

 

1,228,897

 

1,357,643

 

NET INCOME

 

$

1,374,391

 

$

1,351,960

 

$

2,673,822

 

$

2,812,865

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

114,375

 

67,500

 

283,125

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

 

$

1,374,391

 

$

1,237,585

 

$

2,606,322

 

$

2,529,740

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER COMMON SHARE

 

$

0.18

 

$

0.16

 

$

0.33

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER DILUTED COMMON SHARE

 

$

0.18

 

$

0.16

 

$

0.33

 

$

0.33

 

 

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

 

3



Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2013 AND JUNE 30, 2012

 

 

 

THREE MONTHS ENDED
JUNE 30,

 

SIX MONTHS ENDED JUNE 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,374,391

 

$

1,351,960

 

$

2,673,822

 

$

2,812,865

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

Gross unrealized loss (gain) arising during the period

 

(3,498,051

)

1,300,708

 

(4,284,638

)

866,676

 

Reclassification adjustment for gains realized in net income (net of income tax of $6,672 and $14,223 for the three and six months ended June 30, 2013, respectively, and $5,537 and $14,404 for the comparable 2012 periods)

 

(9,541

)

(7,919

)

(20,342

)

(20,599

)

Income tax benefit (expense) related to unrealized gains/losses

 

1,439,448

 

(535,241

)

1,763,128

 

(356,636

)

Other comprehensive (loss) income

 

(2,068,144

)

757,548

 

(2,541,852

)

489,441

 

Comprehensive (loss) income

 

$

(693,753

)

$

2,109,508

 

$

131,970

 

$

3,302,306

 

 

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

 

4



Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2012 AND THE SIX-MONTH PERIOD ENDED JUNE 30, 2013 (UNAUDITED)

 

 

 

YEAR ENDED DECEMBER 31, 2012 AND SIX MONTHS ENDED JUNE 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Preferred Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Shareholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2012

 

7,718,469

 

$

23,453,443

 

13,500

 

$

13,500,000

 

$

2,128,700

 

$

28,629,757

 

$

2,690,106

 

$

70,402,006

 

Stock options exercised

 

54,436

 

219,767

 

 

 

 

 

 

 

 

 

 

 

219,767

 

Tax benefit on stock options exercised

 

 

 

 

 

 

 

 

 

37,218

 

 

 

 

 

37,218

 

Restricted stock issued

 

134,875

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Series B preferred stock

 

 

 

 

 

(6,750

)

$

(6,750,000

)

 

 

 

 

 

 

(6,750,000

)

Preferred stock dividend payments

 

 

 

 

 

 

 

 

 

 

 

(451,875

)

 

 

(451,875

)

Stock based compensation

 

 

 

 

 

 

 

 

 

175,896

 

 

 

 

 

175,896

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

554,857

 

554,857

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,780,855

 

 

 

5,780,855

 

Balances, December 31, 2012

 

7,907,780

 

$

23,673,210

 

6,750

 

$

6,750,000

 

$

2,341,814

 

$

33,958,737

 

$

3,244,963

 

$

69,968,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

11,250

 

85,000

 

 

 

 

 

 

 

 

 

 

 

85,000

 

Restricted stock issued

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock cancelled

 

(4,300

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of Series B preferred stock

 

 

 

 

 

(6,750

)

$

(6,750,000

)

 

 

 

 

 

 

(6,750,000

)

Preferred stock dividend payments

 

 

 

 

 

 

 

 

 

 

 

(67,500

)

 

 

(67,500

)

Stock based compensation

 

 

 

 

 

 

 

 

 

88,388

 

 

 

 

 

88,388

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,541,852

)

(2,541,852

)

Net income

 

 

 

 

 

 

 

 

 

 

 

2,673,822

 

 

 

2,673,822

 

Balances, June 30, 2013

 

7,924,730

 

$

23,758,210

 

0

 

$

0

 

$

2,430,202

 

$

36,565,059

 

$

703,111

 

$

63,456,582

 

 

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

 

5



Table of Contents

 

OAK VALLEY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2013 AND JUNE 30, 2012

 

 

 

SIX MONTHS ENDED JUNE 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

2,673,822

 

$

2,812,865

 

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

 

 

 

 

 

Provision for loan losses

 

200,000

 

600,000

 

Decrease in deferred fees/costs, net

 

(35,620

)

(85,119

)

Depreciation

 

577,365

 

564,615

 

Amortization of investment securities, net

 

136,650

 

93,116

 

Stock based compensation

 

88,388

 

76,988

 

Excess tax benefits from stock-based payment arrangements

 

0

 

(37,218

)

Loss (gain) on sale of premises and equipment

 

31,650

 

(21,875

)

OREO write downs and loss/(gain) on sale

 

784

 

(3,548

)

Gain on called available for sale securities

 

(34,565

)

(35,003

)

Earnings on cash surrender value of life insurance

 

(205,547

)

(210,000

)

Increase in interest payable and other liabilities

 

24,822

 

593,591

 

Increase in interest receivable

 

(250,882

)

(86,512

)

Increase in other assets

 

(225,278

)

(690,101

)

Net cash from operating activities

 

2,981,589

 

3,571,799

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of available for sale securities

 

(30,332,949

)

(31,682,295

)

Proceeds from maturities, calls, and principal paydowns of securities available for sale

 

10,450,002

 

13,903,276

 

Net (increase) decrease in loans

 

(2,147,136

)

4,485,412

 

Purchase of FRB Stock

 

0

 

(1,450

)

Redemption of FHLB stock

 

0

 

268,300

 

Proceeds from sale of OREO

 

53,643

 

247,923

 

Proceeds from sales of premises and equipment

 

5,625

 

21,875

 

Net purchases of premises and equipment

 

(32,523

)

(294,234

)

Net cash (used in) investing activities

 

(22,003,338

)

(13,051,193

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

FHLB payments

 

0

 

(3,000,000

)

Preferred stock dividend payment

 

(67,500

)

(367,500

)

Repurchase of Series B preferred stock

 

(6,750,000

)

(6,750,000

)

Net decrease in demand deposits and savings accounts

 

(5,915,619

)

(8,258,458

)

Net decrease in time deposits

 

(3,947,947

)

(1,538,730

)

Excess tax benefits from stock-based payment arrangements

 

0

 

37,218

 

Proceeds from sale of common stock and exercise of stock options

 

85,000

 

150,017

 

Net cash used in financing activities

 

(16,596,066

)

(19,727,453

)

 

 

 

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

(35,617,815

)

(29,206,847

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

141,334,998

 

101,084,775

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

 

$

105,717,183

 

$

71,877,928

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

465,091

 

$

659,147

 

Income taxes

 

$

1,190,000

 

$

885,000

 

 

 

 

 

 

 

NON-CASH INVESTING ACTIVITIES:

 

 

 

 

 

Real estate acquired through foreclosure

 

$

1,881,630

 

$

0

 

Change in unrealized gain on available-for-sale securities

 

$

(4,319,204

)

$

831,673

 

 

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

 

6



Table of Contents

 

OAK VALLEY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

On July 3, 2008 (the “Effective Date”), a bank holding company reorganization was completed whereby Oak Valley Bancorp (the “Company”) became the parent holding company for Oak Valley Community Bank ( the “Bank”).  On the Effective Date, each outstanding share of the Bank was converted into one share of Oak Valley Bancorp and the Bank became a wholly-owned subsidiary of the holding company.

 

The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP) and with general practices within the banking industry. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from those estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses, the estimation of compensation expense related to stock options granted to employees and directors, and valuation allowances associated with deferred tax assets, the recognition of which are based on future taxable income.

 

The interim consolidated financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results of a full year’s operations.  Certain prior year amounts have been reclassified to conform to the current year presentation. There was no effect on net income or shareholders’ equity.  For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Form 10-K for the year ended December 31, 2012.

 

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The update requires an entity to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013 and did not have a material impact on the Company’s consolidated financial statements.

 

In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The Update clarifies that ASU. 2011-11 applies only to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement are no longer subject to the disclosure requirements in ASU. 2011-11.  The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013 and did not have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The Update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012 and did not have a material impact on the Company’s consolidated financial statements.

 

In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.  The Update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: 1) The amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and 2) Any additional amount the reporting entity expects to pay on behalf of its co-obligors.  The guidance in this Update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations.  The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and are applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability arrangements within the Update’s scope that exist at the beginning of an entity’s fiscal year of adoption.  The adoption of ASU No. 2013-04 is not expected to have a material impact on the Company’s consolidated financial statements.

 

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In July 2013, the FASB issued ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU No. 2013-10 permits the use of the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge account purposes. The amendment is effective prospectively for qualifying new or redesiginated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 is not expected to have a material impact on the Company’s consolidated financial statements.

 

NOTE 3 — PREFERRED STOCK REPURCHASE AND WARRANT REDEMPTION

 

In August 2011, the Company repurchased the $13,500,000 of Series A Preferred Stock originally issued to the U.S. Treasury in December 2008 in connection with the Company’s participation in the Capital Purchase Program (“CPP”).  The Company simultaneously issued $13,500,000 in Series B Preferred Stock to the U.S. Treasury under the Small Business Lending Funding (“SBLF”) program.  Subsequently, the Company fully redeemed a warrant to purchase 350,346 shares of its Common Stock, at the exercise price of $5.78 per share that the Company had granted to the U.S. Treasury pursuant to the CPP, for a purchase price of $560,000, which settled in September 2011.

 

In May 2012, the Company repurchased from the U.S. Treasury 6,750 shares of Series B Preferred Stock for aggregate consideration of $6.75 million.  In March 2013, the Company repurchased the remaining 6,750 shares of Series B Preferred Stock for aggregate consideration of $6.75 million plus $67,500 for accrued interest.  As of June 30, 2013, there are no outstanding shares of Series B Preferred Stock.

 

NOTE 4 — SECURITIES

 

The amortized cost and estimated fair values of debt securities as of June 30, 2013 are as follows:

 

 

 

Amortized 
Cost

 

Gross 
Unrealized 
Gains

 

Gross 
Unrealized 
Losses

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

51,815,525

 

$

1,838,059

 

$

(551,580

)

$

53,102,004

 

Collateralized mortgage obligations

 

10,543,297

 

325,130

 

 

10,868,427

 

Municipalities

 

42,173,104

 

1,182,217

 

(1,643,980

)

41,711,341

 

SBA Pools

 

1,149,049

 

 

(1,759

)

1,147,290

 

Corporate debt

 

4,683,272

 

115,939

 

(2,405

)

4,796,806

 

Asset Backed Securities

 

4,843,348

 

51,442

 

 

4,894,790

 

Mutual Fund

 

2,924,719

 

 

(117,838

)

2,806,881

 

 

 

$

118,132,314

 

$

3,512,787

 

$

(2,317,562

)

$

119,327,539

 

 

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities

 

Fair Value

 

Unrealized 
Loss

 

Fair 
Value

 

Unrealized 
Loss

 

Fair Value

 

Unrealized 
Loss

 

U.S. agencies

 

$

20,824,567

 

$

(551,580

)

$

 

$

 

$

20,824,567

 

$

(551,580

)

Collateralized mortgage obligations

 

 

 

 

 

 

 

Municipalities

 

27,118,905

 

(1,562,438

)

1,071,124

 

(81,542

)

28,190,029

 

(1,643,980

)

SBA Pools

 

859,191

 

(1,241

)

288,099

 

(518

)

1,147,290

 

(1,759

)

Corporate debt

 

747,594

 

(2,405

)

 

 

747,594

 

(2,405

)

Asset Backed Securities

 

 

 

 

 

 

 

Mutual Fund

 

2,806,881

 

(117,838

)

 

 

2,806,881

 

(117,838

)

Total temporarily impaired securities

 

$

52,357,138

 

$

(2,235,502

)

$

1,359,223

 

$

(82,060

)

$

53,716,361

 

$

(2,317,562

)

 

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At June 30, 2013, there were two municipalities and one SBA pool that comprised the total securities in an unrealized loss position for greater than 12 months and 13 agencies, 32 municipalities, one corporate bond, one mutual fund and one SBA pools that make up the total securities in a loss position for less than 12 months. Management periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary.  This evaluation encompasses various factors including, the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third party guarantees and volatility of the security’s fair value.  Management has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes and the Company does not intend to sell the securities and it is not likely that we will be required to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying investment security.

 

The amortized cost and estimated fair value of debt securities at June 30, 2013, by contractual maturity or call date, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Available-for-sale securities:

 

 

 

 

 

Due in one year or less

 

$

12,524,989

 

$

12,163,735

 

Due after one year through five years

 

19,964,821

 

21,016,343

 

Due after five years through ten years

 

40,111,468

 

40,151,515

 

Due after ten years

 

45,531,036

 

45,995,946

 

 

 

$

118,132,314

 

$

119,327,539

 

 

The amortized cost and estimated fair values of debt securities as of December 31, 2012, are as follows:

 

 

 

Amortized 
Cost

 

Gross 
Unrealized 
Gains

 

Gross 
Unrealized 
Losses

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

U.S. agencies

 

$

52,607,537

 

$

2,949,355

 

$

(39,833

)

$

55,517,059

 

Collateralized mortgage obligations

 

11,698,399

 

905,985

 

 

12,604,384

 

Municipalities

 

25,323,157

 

1,727,206

 

(58,075

)

26,992,288

 

SBA Pools

 

1,178,242

 

86

 

(20

)

1,178,308

 

Corporate debt

 

4,669,390

 

37,048

 

(836

)

4,705,602

 

Mutual Fund

 

2,874,727

 

 

(6,487

)

2,868,240

 

 

 

$

98,351,452

 

$

5,619,680

 

$

(105,251

)

$

103,865,881

 

 

The following tables detail the gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2012.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

Description of Securities

 

Fair
Value

 

Unrealized 
Loss

 

Fair 
Value

 

Unrealized 
Loss

 

Fair 
Value

 

Unrealized 
Loss

 

U.S. agencies

 

$

1,954,005

 

$

(39,833

)

$

 

$

 

$

1,954,005

 

$

(39,833

)

Collateralized mortgage obligations

 

 

 

 

 

 

 

Municipalities

 

3,088,970

 

(58,075

)

 

 

3,088,970

 

(58,075

)

SBA Pools

 

 

 

294,889

 

(20

)

294,889

 

(20

)

Corporate debt

 

749,164

 

(836

)

 

 

749,164

 

(836

)

Mutual Fund

 

2,493,512

 

(6,487

)

 

 

2,493,512

 

(6,487

)

Total temporarily impaired securities

 

$

8,285,651

 

$

(105,231

)

$

294,889

 

$

(20

)

$

8,580,540

 

$

(105,251

)

 

We recognized a gain of approximately $16,000 and $35,000 for the three and six month periods ended June 30, 2013, respectively, on certain available-for-sale securities that were partially called, which compares to approximately $13,000 and $35,000 in the same periods of 2012.  There were no sales of available-for-sale securities during the first six months of 2013 and 2012.

 

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Table of Contents

 

Securities carried at $57,172,000 and $56,484,000 at June 30, 2013 and December 31, 2012, respectively, were pledged to secure deposits of public funds.

 

NOTE 5 — LOANS

 

Our customers are primarily located in Stanislaus, San Joaquin, Tuolumne, Inyo, and Mono Counties. As of June 30, 2013, approximately 82% of the Company’s loans are commercial real estate loans which include construction loans. Approximately 9% of the Company’s loans are for general commercial uses including professional, retail, and small business. Additionally, 7% of the Company’s loans are for residential real estate and other consumer loans. The remaining 2% are agriculture loans.   Loan totals were as follows:

 

 

 

June 30, 2013

 

December 31, 2012

 

Commercial real estate:

 

 

 

 

 

Commercial real estate- construction

 

$

8,517,759

 

$

6,581,854

 

Commercial real estate- mortgages

 

280,050,806

 

278,766,279

 

Land

 

12,161,185

 

14,269,477

 

Farmland

 

20,607,231

 

16,456,921

 

Commercial and industrial

 

35,232,466

 

36,528,505

 

Consumer

 

919,064

 

1,095,801

 

Consumer residential

 

23,566,788

 

25,659,090

 

Agriculture

 

9,591,729

 

11,628,260

 

Total loans

 

390,647,028

 

390,986,187

 

 

 

 

 

 

 

Less:

 

 

 

 

 

Deferred loan fees and costs, net

 

(564,231

)

(599,851

)

Allowance for loan losses

 

(7,570,310

)

(7,974,975

)

Net loans

 

$

382,512,487

 

$

382,411,361

 

 

Loan Origination/Risk Management.  The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

 

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, our management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single-purpose projects unless other underwriting factors are present to help mitigate risk. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At June 30, 2013, commercial real estate loans equal to approximately 36.2% of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties.

 

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Table of Contents

 

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

The Company originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans follow bank policy, which include, but are not limited to, a maximum loan-to-value percentage of 80%, a maximum housing and total debt ratio of 36% and 42%, respectively and other specified credit and documentation requirements.

 

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

 

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status 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 provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Non-accrual loans, segregated by class of loans, were as follows:

 

 

 

June 30, 2013

 

December 31, 2012

 

Commercial real estate:

 

 

 

 

 

Commercial real estate- construction

 

$

0

 

$

126,427

 

Commercial real estate- mortgages

 

1,046,483

 

3,345,098

 

Land

 

1,193,100

 

2,419,223

 

Farmland

 

102,511

 

0

 

Commercial and industrial

 

19,791

 

21,311

 

Consumer

 

0

 

0

 

Consumer residential

 

0

 

1,010,998

 

Agriculture

 

0

 

0

 

Total non-accrual loans

 

$

2,361,885

 

$

6,923,057

 

 

Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income of approximately $129,000 and $306,000 in three and six month periods ended June 30, 2013, respectively, as compared to $173,000 and $334,000 in the same periods of 2012.

 

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Table of Contents

 

The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of June 30, 2013:

 

June 30, 2013

 

30-59 
Days Past 
Due

 

60-89 
Days Past 
Due

 

Greater 
Than 90 
Days Past 
Due

 

Total Past 
Due

 

Current

 

Total

 

Greater 
Than 90 
Days Past 
Due and 
Still 
Accruing

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

$

0

 

$

0

 

$

0

 

$

0

 

$

8,517,759

 

$

8,517,759

 

$

0

 

Commercial R.E. - mortgages

 

0

 

0

 

1,046,483

 

1,046,483

 

279,004,323

 

280,050,806

 

0

 

Land

 

0

 

2,755,187

 

658,232

 

3,413,419

 

8,747,766

 

12,161,185

 

0

 

Farmland

 

0

 

0

 

102,511

 

102,511

 

20,504,720

 

20,607,231

 

0

 

Commercial and industrial

 

0

 

339,587

 

0

 

339,587

 

34,892,879

 

35,232,466

 

0

 

Consumer

 

1,935

 

0

 

0

 

1,935

 

917,129

 

919,064

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

23,566,788

 

23,566,788

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

9,591,729

 

9,591,729

 

0

 

Total

 

$

1,935

 

$

3,094,774

 

$

1,807,226

 

$

4,903,935

 

$

385,743,093

 

$

390,647,028

 

$

0

 

 

The following table analyzes past due loans including the non-accrual loans in the above table, segregated by class of loans, as of December 31, 2012:

 

December 31, 2012

 

30-59 
Days Past 
Due

 

60-89 
Days Past 
Due

 

Greater 
Than 90 
Days Past 
Due

 

Total Past 
Due

 

Current

 

Total

 

Greater 
Than 90 
Days Past 
Due and 
Still 
Accruing

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

$

0

 

$

0

 

$

126,427

 

$

126,427

 

$

6,455,427

 

$

6,581,854

 

$

0

 

Commercial R.E. - mortgages

 

55,089

 

623,118

 

2,386,688

 

3,064,895

 

275,701,384

 

278,766,279

 

0

 

Land

 

0

 

54,427

 

2,364,797

 

2,419,224

 

11,850,253

 

14,269,477

 

0

 

Farmland

 

0

 

0

 

0

 

0

 

16,456,921

 

16,456,921

 

0

 

Commercial and industrial

 

16,138

 

0

 

0

 

16,138

 

36,512,367

 

36,528,505

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

1,095,801

 

1,095,801

 

0

 

Consumer residential

 

0

 

0

 

1,010,998

 

1,010,998

 

24,648,092

 

25,659,090

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

11,628,260

 

11,628,260

 

0

 

Total

 

$

71,227

 

$

677,545

 

$

5,888,910

 

$

6,637,682

 

$

384,348,505

 

$

390,986,187

 

$

0

 

 

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. There was no interest income realized on impaired loans for the three and six months ended June 30, 2013 and 2012. Average recorded investment in impaired loans was $3,915,000 and $5,240,000 for the three and six months ended June 30, 2013, respectively, as compared to $6,325,000 and $6,641,000 for the same periods of 2012.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

12



Table of Contents

 

Impaired loans as of June 30, 2013 and December 31, 2012 are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.

 

 

 

Unpaid 
Contractual 
Principal 
Balance

 

Recorded 
Investment 
With No 
Allowance

 

Recorded 
Investment 
With 
Allowance

 

Total 
Recorded 
Investment

 

Related 
Allowance

 

Average 
Recorded 
Investment

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

$

0

 

$

0

 

$

0

 

$

0

 

$

0

 

$

102,904

 

Commercial R.E. - mortgages

 

3,049,170

 

1,046,483

 

0

 

1,046,483

 

0

 

2,299,473

 

Land

 

1,319,519

 

0

 

1,193,100

 

1,193,100

 

352,628

 

2,083,370

 

Farmland

 

102,511

 

102,511

 

0

 

102,511

 

0

 

25,628

 

Commercial and Industrial

 

27,473

 

19,791

 

0

 

19,791

 

0

 

20,621

 

Consumer

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

0

 

708,249

 

Agriculture

 

0

 

0

 

0

 

0

 

0

 

 

 

Total

 

$

4,498,673

 

$

1,168,785

 

$

1,193,100

 

$

2,361,885

 

$

352,628

 

$

5,240,245

 

 

 

 

Unpaid 
Contractual 
Principal 
Balance

 

Recorded 
Investment 
With No 
Allowance

 

Recorded 
Investment 
With 
Allowance

 

Total 
Recorded 
Investment

 

Related 
Allowance

 

Average 
Recorded 
Investment

 

December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

$

193,027

 

$

0

 

$

126,427

 

$

126,427

 

$

2,872

 

$

222,757

 

Commercial R.E. - mortgages

 

5,728,716

 

1,875,320

 

1,469,777

 

3,345,097

 

136,015

 

3,093,523

 

Land

 

6,866,869

 

663,232

 

1,755,991

 

2,419,223

 

409,656

 

2,833,250

 

Farmland

 

0

 

0

 

0

 

0

 

0

 

0

 

Commercial and Industrial

 

27,812

 

21,311

 

0

 

21,311

 

0

 

52,822

 

Consumer

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer residential

 

1,034,884

 

1,010,999

 

0

 

1,010,999

 

0

 

534,578

 

Agriculture

 

0

 

0

 

0

 

0

 

0

 

0

 

Total

 

$

13,851,308

 

$

3,570,862

 

$

3,352,195

 

$

6,923,057

 

$

548,543

 

$

6,736,930

 

 

Troubled Debt Restructurings —  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

At June 30, 2013, there were 3 loans and leases that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $1,213,000.  At December 31, 2012, there were 6 loans and leases that were considered to be troubled debt restructurings, all of which are considered non-accrual totaling $2,567,000.  The decrease of three TDR loans during the first six months of 2013 is due to a foreclosure on a loan totaling $54,000 that was subsequently sold.  At December 31, 2012 there were unfunded commitments of $1,697,000, respectively, on one loan classified as a troubled debt restructure because of an agreement with a borrower to continue advancing funds and covering overhead costs on a residential development project.  This loan and one other loan made to the same borrower totaling $1,303,000 were paid off during the second quarter of 2013.  There were no unfunded commitments on TDR loans at June 30, 2013.  We have allocated $353,000 and $413,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of June 30, 2013 and December 31, 2012, respectively.

 

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During the three month periods ended June 30, 2013 and 2012, there were no loans modified as troubled debt restructuring.  During the six month period ended June 30, 2013, the terms of one loan were modified as troubled debt restructurings, and there were no loans modified as troubled debt restructuring in the comparable period of 2012. The modification of the terms of such loans typically includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date; or a temporary payment modification in which the payment amount allocated towards principal was reduced. In some cases, a permanent reduction of the accrued interest on the loan is conceded.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ended June 30, 2013 and 2012:

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

 

 

Number 
of 
Loans

 

Pre-
 Modification 
Outstanding 
Recorded 
Investment

 

Post-
 Modification
Outstanding 
Recorded 
Investment

 

Number 
of 
Loans

 

Pre-
 Modification 
Outstanding 
Recorded 
Investment

 

Post-
 Modification 
Outstanding 
Recorded 
Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

0

 

$

0

 

$

0

 

0

 

$

0

 

$

0

 

Commercial R.E. - mortgages

 

0

 

0

 

0

 

0

 

0

 

0

 

Land

 

1

 

541,594

 

541,594

 

0

 

0

 

0

 

Farmland

 

0

 

0

 

0

 

0

 

0

 

0

 

Commercial and Industrial

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

0

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

0

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

0

 

0

 

Total

 

1

 

$

541,594

 

$

541,594

 

0

 

$

0

 

$

0

 

 

The troubled debt restructuring during the six months ended June 30, 2013 did not increase the allowance for loan losses as a result of loan modifications because the loans are evaluated as an impaired loan and a specific valuation allowance would have already been allocated, if necessary, prior to the loan modification.  There were no charge-offs as a result of loan modifications, as the contractual balances outstanding were determined to be collectible.

 

The following table presents loans by class modified as troubled debt restructurings within the previous twelve months and for which there was a payment default during the three and six month periods ended June 30, 2013 and 2012.

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

 

 

Number 
of Loans

 

Recorded 
Investment

 

Number 
of Loans

 

Recorded 
Investment

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

0

 

0

 

1

 

$

275,502

 

Commercial R.E. - mortgages

 

0

 

0

 

0

 

0

 

Land

 

0

 

0

 

1

 

1,473,696

 

Farmland

 

0

 

0

 

0

 

0

 

Commercial and Industrial

 

0

 

0

 

0

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

Total

 

0

 

$

0

 

1

 

$

1,749,188

 

 

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Table of Contents

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30, 2013

 

June 30, 2012

 

 

 

Number 
of Loans

 

Recorded 
Investment

 

Number 
of Loans

 

Recorded 
Investment

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Commercial R.E. - construction

 

0

 

0

 

1

 

$

275,502

 

Commercial R.E. - mortgages

 

0

 

0

 

0

 

0

 

Land

 

0

 

0

 

1

 

1,473,696

 

Farmland

 

0

 

0

 

0

 

0

 

Commercial and Industrial

 

0

 

0

 

0

 

0

 

Consumer

 

0

 

0

 

0

 

0

 

Consumer residential

 

0

 

0

 

0

 

0

 

Agriculture

 

0

 

0

 

0

 

0

 

Total

 

0

 

$

0

 

1

 

$

1,749,188

 

 

A loan is considered to be in payment default once it is ninety days contractually past due under the modified terms.

 

Quality ratings (Risk Grades) are assigned to all commitments and stand-alone notes. Risk grades define the basic characteristics of commitments or stand-alone note in relation to their risk. All loans are graded using a system that maximizes the loan quality information contained in loan review grades, while ensuring that the system is compatible with the grades used by bank examiners.

 

We grade loans using the following letter system:

 

1 Exceptional Loan

2 Quality Loan

3A Better Than Acceptable Loan

3B Acceptable Loan

3C Marginally Acceptable Loan

4 (W) Watch Acceptable Loan

5 Other Loans Especially Mentioned

6 Substandard Loan

7 Doubtful Loan

8 Loss

 

1. Exceptional Loan - Loans with A+ credits that contain very little, if any, risk. Grade 1 loans are considered Pass.  To qualify for this rating, the following characteristics must be present:

 

·A high level of liquidity and whose debt-servicing capacity exceeds expected obligations by a substantial margin.

·Where leverage is below average for the industry and earnings are consistent or growing without severe vulnerability to economic cycles.

·Also included in this rating (but not mandatory unless one or more of the preceding characteristics are missing) are loans that are fully secured and properly margined by our own time instruments or U.S. blue chip securities. To be properly margined cash collateral must be equal to, or greater than, 110% of the loan amount.

 

2. Quality Loan - Loans with excellent sources of repayment that conform in all respects to bank policy and regulatory requirements. These are also loans for which little repayment risk has been identified. No credit or collateral exceptions. Grade 2 loans are considered Pass.  Other factors include:

 

·Unquestionable debt-servicing capacity to cover all obligations in the ordinary course of business from well-defined primary and secondary sources.

·Consistent strong earnings.

·A solid equity base.

 

3A. Better than Acceptable Loan - In the interest of better delineating the loan portfolio’s true credit risk for reserve allocation, further granularity has been sought by splitting the grade 3 category into three classifications. The distinction between the three are bank-defined guidelines and represent a further refinement of the regulatory definition of a pass, or grade 3 loan. Grade 3A is the stronger third of the pass category, but is not strong enough to be a grade 2 and is characterized by:

 

·Strong earnings with no loss in last three years and ample cash flow to service all debt well above policy guidelines.

·Long term experienced management with depth and defined management succession.

·The loan has no exceptions to policy.

·Loan-to-value on real estate secured transactions is 10% to 20% less than policy guidelines.

·Very liquid balance sheet that may have cash available to pay off our loan completely.

·Little to no debt on balance sheet.

 

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Table of Contents

 

3B. Acceptable Loan - 3B loans are simply defined as all loans that are less qualified than 3A loans and are stronger than 3C loans. These loans are characterized by acceptable sources of repayment that conform to bank policy and regulatory requirements. Repayment risks are acceptable for these loans. Credit or collateral exceptions are minimal, are in the process of correction, and do not represent repayment risk. These loans:

 

·Are those where the borrower has average financial strengths, a history of profitable operations and experienced management.

·Are those where the borrower can be expected to handle normal credit needs in a satisfactory manner.

 

3C. Marginally Acceptable - 3C loans have similar characteristics as that of 3Bs with the following additional characteristics:

 

Requires collateral. A credit facility where the borrower has average financial strengths, but usually lacks reliable secondary sources of repayment other than the subject collateral.  Other common characteristics can include some or all of the following: minimal background experience of management, lacking continuity of management, a start-up operation, erratic historical profitability (acceptable reasons-well identified), lack of or marginal sponsorship of guarantor, and government guaranteed loans.

 

4W Watch Acceptable - Watch grade will be assigned to any credit that is adequately secured and performing but monitored for a number of indicators. These characteristics may include any unexpected short-term adverse financial performance from budgeted projections or prior period’s results (i.e., declining profits, sales, margins, cash flow, or increased reliance on leverage, including adverse balance sheet ratios, trade debt issues, etc.). Additionally, any managerial or personal problems of company management, decline in the entire industry or local economic conditions failure to provide financial information or other documentation as requested; issues regarding delinquency, overdrafts, or renewals; and any other issues that cause concern for the company. Loans to individuals or loans supported by guarantors with marginal net worth and/or marginal collateral. Weakness identified  in a Watch credit is short-term in nature.  Loans in this category are usually accounts the Bank would want to retain providing a positive turnaround can be expected within a reasonable time frame.  Grade 4 loans are considered Pass.

 

5 Other Loans Especially Mentioned (Special Mention) - A special mention extension of credit is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date result in the deterioration of the repayment prospects for the credit or the institution’s credit position. Extensions of credit that might be detailed in this category include the following:

 

·The lending officer may be unable to properly supervise the credit because of an inadequate loan or credit agreement.

·Questions exist regarding the condition of and/or control over collateral.

·Economic or market conditions may unfavorably affect the obligor in the future.

·A declining trend in the obligor’s operations or an imbalanced position in the balance sheet exists, but not to the point that repayment is jeopardized.

 

6 Substandard Loan - A “substandard” extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.

 

7 Doubtful Loan - An extension of credit classified “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral or refinancing plans. The entire loan need not be classified doubtful when collection of a specific portion appears highly probable. An example of proper use of the doubtful category is the case of a company being liquidated, with the trustee-in-bankruptcy indicating a minimum disbursement of 40 percent and a maximum of 65 percent to unsecured creditors, including the Bank. In this situation, estimates are based on liquidation value appraisals with actual values yet to be realized. By definition, the only portion of the credit that is doubtful is the 25 percent difference between 40 and 65 percent.

 

A proper classification of such a credit would show 40 percent substandard, 25 percent doubtful, and 35 percent loss. A credit classified as doubtful should be resolved within a ‘reasonable’ period of time. Reasonable is generally defined as the period between examinations. In other words, a credit classified doubtful at an examination should be cleared up before the next exam. However, there may be situations that warrant continuation of the doubtful classification a while longer.

 

8. Loss - Extensions of credit classified “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off, even though partial recovery may be affected in the future. It should not be the Company’s practice to attempt long-term recoveries while the credit remains on the books. Losses should be taken in the period in which they surface as uncollectible.

 

As of June 30, 2013, there are no loans that are classified with a risk grade of 8- Loss.

 

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Table of Contents

 

The following table presents weighted average risk grades of our loan portfolio:

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Weighted Average 
Risk Grade

 

Weighted Average 
Risk Grade

 

Commercial real estate:

 

 

 

 

 

Commercial real estate - construction

 

3.67

 

3.23

 

Commercial real estate - mortgages

 

3.17

 

3.22

 

Land

 

4.49

 

4.56

 

Farmland

 

3.49

 

3.04

 

Commercial and Industrial

 

2.04

 

3.09

 

Consumer

 

2.40

 

2.55

 

Consumer residential

 

3.05

 

3.17

 

Agriculture

 

3.32

 

3.50

 

Total gross loans

 

3.13

 

3.25

 

 

The following table presents risk grade totals by class of loans as of June 30, 2013 and December 31, 2012.  Risk grades 1 through 4 have been aggregated in the “Pass” line.

 

Dollars in thousands

 

Commercial R.E.
Construction

 

Commercial R.E.
Mortgages

 

Land

 

Farmland

 

Commercial and
Industrial

 

Consumer

 

Consumer 
Residential

 

Agriculture

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

8,517,759

 

268,956,242

 

8,212,899

 

20,504,720

 

34,183,990

 

903,143

 

23,178,517

 

9,591,729

 

$

374,048,999

 

Special mention

 

 

6,900,350

 

 

 

264,382