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Table of Contents

 

 

 

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 THE QUARTERLY PERIOD ENDED MARCH 31, 2011

 

COMMISSION FILE NUMBER 0-12422

 

MAINSOURCE FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

INDIANA

 

35-1562245

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

2105 NORTH STATE ROAD 3 BYPASS, GREENSBURG,
INDIANA

 

47240

(Address of principal executive offices)

 

(Zip Code)

 

(812) 663-6734

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 o 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 x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of May 10, 2011 there were outstanding 20,136,188 shares of common stock, without par value, of the registrant.

 

 

 




Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

 

Item 1.  Financial Statements

 

 

 

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

75,525

 

$

40,423

 

Money market and federal funds sold

 

6,593

 

19,700

 

Cash and cash equivalents

 

82,118

 

60,123

 

Securities available for sale

 

817,235

 

806,071

 

Loans held for sale

 

1,859

 

5,845

 

Loans, net of allowance for loan losses of $43,255 and $42,605

 

1,599,445

 

1,638,366

 

Restricted stock, at cost

 

19,298

 

19,502

 

Premises and equipment, net

 

49,454

 

48,861

 

Goodwill

 

61,919

 

61,919

 

Purchased intangible assets

 

8,610

 

9,102

 

Cash surrender value of life insurance

 

48,047

 

47,756

 

Interest receivable and other assets

 

80,000

 

71,767

 

Total assets

 

$

2,767,985

 

$

2,769,312

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest bearing

 

$

293,648

 

$

268,390

 

Interest bearing

 

1,915,713

 

1,943,174

 

Total deposits

 

2,209,361

 

2,211,564

 

Securities sold under agreement to repurchase

 

30,957

 

33,181

 

Federal Home Loan Bank (FHLB) advances

 

145,981

 

152,065

 

Subordinated debentures

 

50,155

 

50,117

 

Other liabilities

 

22,473

 

19,815

 

Total liabilities

 

2,458,927

 

2,466,742

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, no par value
Authorized shares - 400,000
Issued and outstanding shares — 57,000
Aggregate liquidation preference — $57,000

 

56,233

 

56,183

 

Common stock $.50 stated value:
Authorized shares - 100,000,000
Issued shares — 20,710,590 and 20,710,764
Outstanding shares — 20,136,188 and 20,136,362

 

10,394

 

10,394

 

Treasury stock — 574,402 at cost

 

(9,367

)

(9,367

)

Additional paid-in capital

 

223,151

 

223,134

 

Retained earnings

 

16,350

 

12,768

 

Accumulated other comprehensive income

 

12,297

 

9,458

 

Total shareholders’ equity

 

309,058

 

302,570

 

Total liabilities and shareholders’ equity

 

$

2,767,985

 

$

2,769,312

 

 

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

 

3



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Dollar amounts in thousands except per share data)

 

 

 

(Unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

Interest income

 

 

 

 

 

Loans, including fees

 

$

23,970

 

$

26,633

 

Securities

 

7,184

 

7,615

 

Deposits with financial institutions

 

23

 

23

 

Total interest income

 

31,177

 

34,271

 

Interest expense

 

 

 

 

 

Deposits

 

4,286

 

6,232

 

Federal Home Loan Bank advances

 

1,460

 

2,301

 

Subordinated debentures

 

429

 

422

 

Other borrowings

 

52

 

85

 

Total interest expense

 

6,227

 

9,040

 

Net interest income

 

24,950

 

25,231

 

Provision for loan losses

 

5,600

 

9,500

 

Net interest income after provision for loan losses

 

19,350

 

15,731

 

Non-interest income

 

 

 

 

 

Insurance commissions

 

 

518

 

Mortgage banking

 

1,318

 

1,524

 

Trust and investment product fees

 

940

 

565

 

Service charges on deposit accounts

 

3,898

 

3,869

 

Net realized gains on securities

 

1,133

 

1,053

 

Increase in cash surrender value of life insurance

 

291

 

294

 

Interchange income

 

1,416

 

1,264

 

Other income

 

323

 

744

 

Total non-interest income

 

9,319

 

9,831

 

Non-interest expense

 

 

 

 

 

Salaries and employee benefits

 

12,833

 

12,445

 

Net occupancy

 

1,767

 

1,855

 

Equipment

 

1,980

 

1,898

 

Intangibles amortization

 

492

 

516

 

Telecommunications

 

472

 

464

 

Stationery, printing and supplies

 

414

 

333

 

FDIC assessment

 

1,261

 

1,263

 

Marketing

 

1,081

 

593

 

Collection expenses

 

1,014

 

575

 

Other expenses

 

2,506

 

2,543

 

Total non-interest expense

 

23,820

 

22,485

 

Income before income tax

 

4,849

 

3,077

 

Income tax expense/(benefit)

 

303

 

(172

)

Net income

 

$

4,546

 

$

3,249

 

Preferred dividends and discount accretion

 

(763

)

(763

)

Net income available to common shareholders

 

$

3,783

 

$

2,486

 

 

 

 

 

 

 

Comprehensive income

 

$

7,385

 

$

4,210

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.01

 

$

0.01

 

 

 

 

 

 

 

Net income per common share - basic and diluted

 

$

0.19

 

$

0.12

 

 

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

 

4



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Dollar amounts in thousands)

 

 

 

(Unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

Operating Activities

 

 

 

 

 

Net income

 

$

4,546

 

$

3,249

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

5,600

 

9,500

 

Depreciation expense

 

1,272

 

1,370

 

Securities amortization, net

 

607

 

180

 

Stock based compensation expense

 

17

 

28

 

Amortization of purchased intangible assets

 

492

 

516

 

Increase in cash surrender value of life insurance policies

 

(291

)

(294

)

Gain on life insurance benefit

 

 

(67

)

Securities gains

 

(1,133

)

(1,053

)

Gain on loans sold

 

(906

)

(838

)

Loans originated for sale

 

(40,931

)

(39,939

)

Proceeds from loan sales

 

45,823

 

42,991

 

Change in other assets and liabilities

 

3,881

 

4,500

 

Net cash provided by operating activities

 

18,977

 

20,143

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Purchases of securities available for sale

 

(90,062

)

(77,186

)

Proceeds from calls, maturities, and payments on securities available for sale

 

40,365

 

26,840

 

Proceeds from sales of securities available for sale

 

43,428

 

40,028

 

Proceeds from life insurance benefit

 

 

124

 

Loan originations and payments, net

 

22,372

 

46,570

 

Purchases of premises and equipment

 

(1,865

)

(1,174

)

Proceeds from redemption of restricted stock

 

204

 

5,603

 

Net cash provided by investing activities

 

14,442

 

40,805

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in deposits

 

(2,203

)

(51,287

)

Net change in other borrowings

 

(2,224

)

2,682

 

Repayment of FHLB advances

 

(6,084

)

(3,266

)

Cash dividends on preferred stock

 

(712

)

(712

)

Cash dividends

 

(201

)

(201

)

Net cash (used) by financing activities

 

(11,424

)

(52,784

)

Net change in cash and cash equivalents

 

21,995

 

8,164

 

Cash and cash equivalents, beginning of year

 

60,123

 

71,689

 

Cash and cash equivalents, end of period

 

$

82,118

 

$

79,853

 

 

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

 

5



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands except per share data)

 

NOTE 1 - BASIS OF PRESENTATION

 

The significant accounting policies followed by MainSource Financial Group, Inc. (“Company”) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The consolidated interim financial statements have been prepared according to accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q. The interim statements do not include all information and footnotes normally included in the annual financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. Some items in prior period financial statements were reclassified to conform to current presentation. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

Adoption of New Accounting Standards

 

In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring.  The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties.  This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to restructurings occurring on or after the beginning of the annual period of adoption.  For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011.  The Company is currently evaluating the impact this guidance will have on its financial statements.

 

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Table of Contents

 

NOTE 2 - STOCK PLANS AND STOCK BASED COMPENSATION

 

From time to time, common stock and options to buy common stock are granted to directors and officers of the Company under the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (the “2007 Stock Incentive Plan”), which was adopted and approved by the Board of Directors of the Company on January 16, 2007. The plan was effective upon the approval of the plan by the Company’s shareholders, which occurred on April 26, 2007 at the Company’s annual meeting of shareholders. The 2007 Stock Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards. Incentive stock options may be granted only to employees. An aggregate of 650,000 shares of common stock are reserved for issuance under the 2007 Stock Incentive Plan. Shares issuable under the 2007 Stock Incentive Plan will be authorized and unissued shares of common stock or treasury shares. The 2007 Stock Incentive Plan is in addition to, and not in replacement of, the MainSource Financial Group, Inc. 2003 Stock Option Plan the (“2003 Option Plan”), which was approved by the Company’s Board of Directors on January 21, 2003, and was effective upon approval by the Company’s shareholders on April 23, 2003. The 2003 Option Plan provided for the grant of up to 607,754 incentive and nonstatutory stock options. Upon the approval of the 2007 Stock Incentive Plan, no further awards of options may be made under the 2003 Option Plan. Unexercised options which were previously issued under the 2003 Option Plan have not been terminated, but will otherwise continue in accordance with the 2003 Option Plan and the agreements pursuant to which the options were issued. All stock options granted under either the 2003 Option Plan or the 2007 Stock Incentive Plan have an exercise price that is at least equal to the fair market value of the Company’s common stock on the date the options were granted. The maximum option term is ten years, and options vest immediately for the directors’ grant and over four years for the officers’ grant, except as otherwise determined by the Executive Compensation Committee of the Board of Directors.

 

All share-based payments to employees, including grants of employee stock options, are recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values.  For options with graded vesting, we value the stock option grants and recognize compensation expense as if each vesting portion of the award was a single award.

 

The following table summarizes stock option activity:

 

 

 

Three Months Ended
March 31, 2011

 

 

 

Shares

 

Weighted
Average
Exercise Price

 

Outstanding, beginning of year

 

409,783

 

$

13.30

 

Granted

 

 

 

Exercised

 

 

 

Forfeited or expired

 

5,000

 

6.76

 

Outstanding, period end

 

404,783

 

$

13.38

 

Options exercisable at period end

 

301,466

 

$

15.25

 

 

7



Table of Contents

 

The following table details stock options outstanding:

 

 

 

March 31,
2011

 

December 31,
2010

 

Stock options vested and currently exercisable:

 

 

 

 

 

Number

 

301,466

 

301,466

 

Weighted average exercise price

 

$

15.25

 

$

15.25

 

Aggregate intrinsic value

 

$

267

 

$

320

 

Weighted average remaining life (in years)

 

5.1

 

5.3

 

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The Company recorded $17 and $28 in stock compensation expense during the three months ended March 31, 2011 and 2010 to salaries and employee benefits. There were 1,500 options granted in the first quarter of 2010.  The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of the Company’s stock, and other factors. Expected dividends are based on dividend trends and the market price of the Company’s stock price at grant. The Company uses historical data to estimate option exercises within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

Unrecognized stock option compensation expense related to unvested awards for the remainder of 2011 and beyond is estimated as follows:

 

Year

 

(in thousands)

 

April 2011 - December 2011

 

$

49

 

2012

 

45

 

2013

 

11

 

2014

 

 

2015

 

 

 

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Table of Contents

 

NOTE 3 - SECURITIES

 

The amortized cost and fair value of securities available for sale and related unrealized gains/losses recognized in accumulated other comprehensive income/(loss) was as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

As of March 31, 2011

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

State and municipal

 

$

299,256

 

$

11,216

 

$

(680

)

$

309,792

 

Mortgage-backed securities-residential (GSE’s)

 

299,506

 

8,602

 

(1,055

)

307,053

 

Collateralized mortgage obligations

 

191,636

 

2,041

 

(1,224

)

192,453

 

Equity securities

 

4,405

 

 

 

4,405

 

Other securities

 

3,513

 

19

 

 

3,532

 

Total available for sale

 

$

798,316

 

$

21,878

 

$

(2,959

)

$

817,235

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2010

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

State and municipal

 

$

294,706

 

$

7,193

 

$

(1,755

)

$

300,144

 

Mortgage-backed securities-residential (GSE’s)

 

304,347

 

9,513

 

(1,029

)

312,831

 

Collateralized mortgage obligations

 

184,549

 

3,129

 

(1,681

)

185,997

 

Equity securities

 

4,405

 

 

 

4,405

 

Other securities

 

3,514

 

 

(820

)

2,694

 

Total available for sale

 

$

791,521

 

$

19,835

 

$

(5,285

)

$

806,071

 

 

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity or with no maturity are shown separately.

 

 

 

Available
for Sale

 

 

 

Amortized Cost

 

Fair Value

 

Within one year

 

$

1,035

 

$

1,051

 

One through five years

 

34,180

 

35,709

 

Six through ten years

 

89,398

 

92,778

 

After ten years

 

178,156

 

183,786

 

Mortgage-backed securities-residential (GSE’s)

 

299,506

 

307,053

 

Collateralized mortgage obligations

 

191,636

 

192,453

 

Equity securities

 

4,405

 

4,405

 

Total available for sale securities

 

$

798,316

 

$

817,235

 

 

Proceeds from sales of securities available for sale were $43,428 and $40,028 for the three months ended March 31, 2011 and 2010, respectively. Gross gains of $1,216 and $1,092 and gross losses of $83 and $39 were realized on these sales during 2011 and 2010, respectively.

 

Below is a summary of securities with unrealized losses as of March 31, 2011 and December 31, 2010 presented by length of time the securities have been in a continuous unrealized loss position.

 

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Table of Contents

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

March 31, 2011
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

State and municipal

 

30,574

 

(586

)

653

 

(94

)

31,227

 

(680

)

Mortgage-backed securities-residential (GSE’s)

 

40,276

 

(1,055

)

 

 

40,276

 

(1,055

)

Collateralized mortgage obligations

 

89,242

 

(1,224

)

3

 

 

89,245

 

(1,224

)

Total temporarily impaired

 

$

160,092

 

$

(2,865

)

$

656

 

$

(94

)

$

160,748

 

$

(2,959

)

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

December 31, 2010
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

State and municipal

 

69,009

 

(1,664

)

406

 

(91

)

69,415

 

(1,755

)

Mortgage-backed securities-residential (GSE’s)

 

42,926

 

(1,029

)

 

 

42,926

 

(1,029

)

Collateralized mortgage obligations

 

70,656

 

(1,681

)

 

 

70,656

 

(1,681

)

Other securities

 

1,010

 

(2

)

1,684

 

(818

)

2,694

 

(820

)

Total temporarily impaired

 

$

183,601

 

$

(4,376

)

$

2,090

 

$

(909

)

$

185,691

 

$

(5,285

)

 

Other-Than-Temporary-Impairment

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under ASC 320. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325-10 .

 

In determining OTTI under ASC 320, management considers many factors, including: (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, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

As of March 31, 2011, the Company’s security portfolio consisted of 953 securities, 91 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the securities before their anticipated recovery. The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. The Company monitors  the financial condition of these issuers. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

 

At March 31, 2011, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, which are institutions which the government has affirmed its commitment to support. Because the decline in fair value of approximately $1.1 million is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.

 

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $192 million which had unrealized losses of approximately $1.2 million at March 31, 2011. The Company monitors to insure it has adequate credit support and as of March 31, 2011, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. All securities are investment grade.

 

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Table of Contents

 

NOTE 4 - LOANS AND ALLOWANCE

 

Loans were as follows:

 

 

 

March 31,
2011

 

December 31,
2010

 

Commercial

 

 

 

 

 

Commercial and industrial

 

$

136,107

 

$

138,291

 

Agricultural

 

23,173

 

27,178

 

Commercial Real Estate

 

 

 

 

 

Farm

 

52,081

 

48,307

 

Hotel

 

151,819

 

152,416

 

Construction and development

 

40,763

 

59,319

 

Other

 

583,803

 

589,192

 

Residential

 

 

 

 

 

1-4 family

 

380,267

 

380,987

 

Home equity

 

209,518

 

213,607

 

Consumer

 

 

 

 

 

Direct

 

54,668

 

59,139

 

Indirect

 

10,501

 

12,535

 

Total loans

 

1,642,700

 

1,680,971

 

Allowance for loan losses

 

(43,255

)

(42,605

)

Net loans

 

$

1,599,445

 

$

1,638,366

 

 

Activity in the allowance for loan losses was as follows:

 

 

 

March 31,

 

 

 

2011

 

2010

 

Allowance for loan losses

 

 

 

 

 

Balances, January 1

 

$

42,605

 

$

46,648

 

Provision for losses

 

5,600

 

9,500

 

Recoveries on loans

 

1,043

 

629

 

Loans charged off

 

(5,993

)

(13,752

)

Balances, March 31

 

$

43,255

 

$

43,025

 

 

Activity in the allowance for loan losses for the three months ended March 31, 2011 and the recorded investment of loans and allowances by portfolio segment and impairment method as of March 31, 2011 were as follows:

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2011

 

$

6,386

 

$

32,653

 

$

2,281

 

$

1,285

 

$

42,605

 

Provision charged to expense

 

(206

)

4,366

 

1,047

 

393

 

5,600

 

Losses charged off

 

(259

)

(4,262

)

(922

)

(550

)

(5,993

)

Recoveries

 

28

 

472

 

201

 

342

 

1,043

 

Balance, March 31, 2011

 

$

5,949

 

$

33,229

 

$

2,607

 

$

1,470

 

$

43,255

 

Ending Balance individually evaluated for impairment

 

$

1,953

 

$

6,674

 

$

 

$

 

$

8,627

 

Ending Balance collectively evaluated for impairment

 

3,996

 

26,555

 

2,607

 

1,470

 

34,628

 

Total ending allowance balance

 

$

5,949

 

$

33,229

 

$

2,607

 

$

1,470

 

$

43,255

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

7,518

 

$

44,298

 

$

13,244

 

$

997

 

$

66,057

 

Ending Balance collectively evaluated for impairment

 

152,259

 

787,377

 

579,131

 

64,424

 

1,583,191

 

Total ending loan balance includes $ 6,548 of accrued interest

 

$

159,777

 

$

831,675

 

$

592,375

 

$

65,421

 

$

1,649,248

 

 

The balance of recorded investment of loans and allowance for loan losses by portfolio segment and impairment method as of December 31, 2010 were as follows:

 

Balance, December 31, 2010

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Ending Balance individually evaluated for impairment

 

$

1,753

 

$

8,571

 

$

 

$

 

$

10,324

 

Ending Balance collectively evaluated for impairment

 

4,633

 

24,082

 

2,281

 

1,285

 

32,281

 

Total ending allowance balance

 

$

6,386

 

$

32,653

 

$

2,281

 

$

1,285

 

$

42,605

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

8,223

 

$

64,048

 

$

16,801

 

$

1,504

 

$

90,576

 

Ending Balance collectively evaluated for impairment

 

157,804

 

788,474

 

580,412

 

70,484

 

1,597,174

 

Total ending loan balance includes $6,779 of accrued interest

 

$

166,027

 

$

852,522

 

$

597,213

 

$

71,988

 

$

1,687,750

 

 

11



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011:

 

 

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

5,437

 

$

5,372

 

$

1,930

 

Agricultural

 

68

 

67

 

23

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

461

 

465

 

71

 

Hotel

 

6,242

 

5,923

 

565

 

Construction and development

 

16,261

 

5,823

 

1,442

 

Other

 

18,708

 

17,192

 

4,596

 

Total

 

$

47,177

 

$

34,842

 

$

8,627

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

2,473

 

$

2,018

 

$

 

Agricultural

 

353

 

61

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

762

 

721

 

 

 

Hotel

 

654

 

384

 

 

 

Construction and development

 

502

 

501

 

 

 

Other

 

16,084

 

13,289

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

11,927

 

11,621

 

 

 

Home Equity

 

1,706

 

1,623

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

944

 

932

 

 

 

Indirect

 

70

 

65

 

 

 

Total

 

$

35,475

 

$

31,215

 

$

 

 

The following table presents the average balance of  impaired loans by class and interest income recognized on impaired loans and cash basis interest at March 31, 2011

 

 

 

Average
Balance

 

Interest Income
Recognized / Cash
Basic Interest

 

Commercial

 

 

 

 

 

Commercial and industrial

 

$

7,742

 

$

15

 

Agricultural

 

129

 

 

 

Commercial Real Estate

 

 

 

 

 

Farm

 

1,193

 

 

 

Hotel

 

9,485

 

 

 

Construction and development

 

12,663

 

 

 

Other

 

30,798

 

18

 

Residential

 

 

 

 

 

1-4 Family

 

13,255

 

4

 

Home Equity

 

1,767

 

5

 

Consumer

 

 

 

 

 

Direct

 

1,181

 

1

 

Indirect

 

70

 

5

 

Total

 

$

78,283

 

$

48

 

 

 

 

 

 

 

The amounts at March 31, 2010 were as follows:

 

$

94,821

 

$

24

 

 

12



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

 

 

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,935

 

$

4,902

 

$

1,753

 

Agricultural

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

461

 

465

 

71

 

Hotel

 

13,178

 

12,603

 

1,151

 

Construction and development

 

41,924

 

17,613

 

3,110

 

Other

 

22,580

 

20,458

 

4,239

 

Total

 

$

83,078

 

$

56,041

 

$

10,324

 

 

 

 

 

 

 

 

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,966

 

$

3,191

 

$

 

Agricultural

 

422

 

130

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

766

 

735

 

 

 

Hotel

 

59

 

60

 

 

 

Construction and development

 

1,677

 

1,390

 

 

 

Other

 

14,120

 

10,724

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

15,171

 

14,889

 

 

 

Home Equity

 

2,000

 

1,912

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

1,431

 

1,430

 

 

 

Indirect

 

78

 

74

 

 

 

Total

 

$

39,690

 

$

34,535

 

$

 

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2011 and December 31, 2010

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Non-accrual

 

Past due over
90 days and
still accruing

 

Non-accrual

 

Past due over
90 days and
still accruing

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,745

 

$

 

$

4,587

 

$

 

Agricultural

 

128

 

 

 

130

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

Farm

 

721

 

 

 

736

 

 

 

Hotel

 

6,307

 

 

 

6,533

 

 

 

Construction and development

 

6,324

 

4,334

 

19,003

 

 

 

Other

 

24,558

 

59

 

24,530

 

42

 

Residential

 

 

 

 

 

 

 

 

 

1-4 Family

 

9,819

 

684

 

10,681

 

869

 

Home Equity

 

1,509

 

200

 

1,688

 

86

 

Consumer

 

 

 

 

 

 

 

 

 

Direct

 

313

 

22

 

261

 

9

 

Indirect

 

65

 

 

 

74

 

 

 

Total

 

$

54,489

 

$

5,299

 

$

68,223

 

$

1,006

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 by class of loans:

 

13



Table of Contents

 

 

 

Total
Loans

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

Greater than
90 Days
Past Due

 

Total
Past Due

 

Loans Not
Past Due

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

136,497

 

$

867

 

$

524

 

$

3,035

 

$

4,426

 

$

132,071

 

Agricultural

 

23,280

 

 

 

 

 

128

 

128

 

23,152

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Farm

 

52,476

 

79

 

14

 

577

 

670

 

51,806

 

Hotel

 

152,403

 

3,196

 

 

 

384

 

3,580

 

148,823

 

Construction and development

 

40,930

 

514

 

 

 

10,657

 

11,171

 

29,759

 

Other

 

585,866

 

6,093

 

2,962

 

14,541

 

23,596

 

562,270

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family

 

381,902

 

6,648

 

763

 

6,546

 

13,957

 

367,945

 

Home Equity

 

210,473

 

158

 

245

 

1,299

 

1,702

 

208,771

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

54,879

 

274

 

30

 

128

 

432

 

54,447

 

Indirect

 

10,542

 

49

 

64

 

19

 

132

 

10,410

 

Total — includes $6,548 of accrued interest

 

$

1,649,248

 

$

17,878

 

$

4,602

 

$

37,314

 

$

59,794

 

$

1,589,454

 

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

 

 

 

Total
Loans

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

Greater than
90 Days
Past Due

 

Total
Past Due

 

Loans Not
Past Due

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

138,760

 

$

1,214

 

$

235

 

$

3,151

 

$

4,600

 

$

134,160

 

Agricultural

 

27,267

 

 

 

 

 

130

 

130

 

27,137

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Farm

 

48,721

 

 

 

 

 

528

 

528

 

48,193

 

Hotel

 

152,964

 

 

 

 

 

512

 

512

 

152,452

 

Construction and development

 

59,442

 

 

 

728

 

18,275

 

19,003

 

40,439

 

Other

 

591,395

 

4,267

 

2,732

 

17,647

 

24,646

 

566,749

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family

 

382,634

 

7,028

 

2,673

 

8,032

 

17,733

 

364,901

 

Home Equity

 

214,579

 

654

 

266

 

1,376

 

2,296

 

212,283

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

59,398

 

513

 

155

 

138

 

806

 

58,592

 

Indirect

 

12,590

 

115

 

6

 

36

 

157

 

12,433

 

Total — includes $6,779 of accrued interest

 

$

1,687,750

 

$

13,791

 

$

6,795

 

$

49,825

 

$

70,411

 

$

1,617,339

 

 

At March 31, 2011, the Company had $11,503 of troubled debt restructurings compared to $22,250 at December 31, 2010.  The Company has allocated $1,860 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011. The Company has committed to lend additional amounts totaling $462 to customers with outstanding loans that are classified as troubled debt restructurings.  At December 31, 2010, the comparable numbers were $2,599 of specific reserves and $517 of commitments.

 

Credit Quality Indicators:

 

The Company categorizes loans into risk categories based on relevant information about the ability of the borrower to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial and commercial real estate loans individually by classifying the loans as to credit risk. This analysis includes credit relationships with an outstanding balance greater than $1 million on an annual basis. The Company uses the following definitions for risk ratings:

 

Special Mention — Loans classified as special mention have above average risk that requires management’s ongoing attention. The borrower may demonstrated inability to generate profits or to maintain net worth, chronic delinquency and/or a demonstrated lack of willingness or capacity to meet obligations.

 

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are classified by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

14



Table of Contents

 

Non-accrual — Loans classified as non-accrual are loans where the further accrual of interest is stopped because payment in full of principal and interest is not expected. In most cases, the principal and interest has been in default for a period of 90 days or more.

 

As of March 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

 

 

Pass

 

Special
Mention

 

Substandard

 

Non-accrual

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

115,455

 

$

10,107

 

$

6,190

 

$

4,745

 

Agricultural

 

22,311

 

663

 

178

 

128

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

Farm

 

46,987

 

2,503

 

2,265

 

721

 

Hotel

 

78,733

 

64,043

 

3,320

 

6,307

 

Construction and development

 

14,330

 

6,903

 

13,373

 

6,324

 

Other

 

467,736

 

51,940

 

41,633

 

24,558

 

Total

 

$

745,552

 

$

136,159

 

$

66,959

 

$

42,783

 

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be performing or non performing. These loans are primarily residential mortgage and consumer loans. Performing loans are loans risk graded 1-4 and nonperforming loans are loans risk graded 5, 6, or 9. As of March 31, 2011, the performing/non performing loans by class of loans are as follows:

 

 

 

Performing

 

Non-
performing

 

Residential

 

 

 

 

 

1-4 Family

 

$

349,833

 

$

32,069

 

Home Equity

 

204,514

 

5,959

 

Consumer

 

 

 

 

 

Direct

 

53,052

 

1,827

 

Indirect

 

10,292

 

250

 

Total

 

$

617,691

 

$

40,105

 

 

As of December 31, 2010, the risk category of loans by class of loans is as follows:

 

 

 

Pass

 

Special
Mention

 

Substandard

 

Non-accrual

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

113,744

 

$

14,050

 

$

6,379

 

$

4,587

 

Agricultural

 

25,198

 

1,769

 

170

 

130

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

Farm

 

38,581

 

7,611

 

1,793

 

736

 

Hotel

 

87,205

 

55,878

 

3,348

 

6,533

 

Construction and development

 

16,124

 

10,721

 

13,594

 

19,003

 

Other

 

481,646

 

45,705

 

39,514

 

24,530

 

Total

 

$

762,498

 

$

135,734

 

$

64,798

 

$

55,519

 

 

As of December 31, 2010, the performing/non performing loans by class of loans are as follows:

 

 

 

Performing

 

Non-
performing

 

Residential

 

 

 

 

 

1-4 Family

 

$

352,592

 

$

30,042

 

Home Equity

 

208,763

 

5,816

 

Consumer

 

 

 

 

 

Direct

 

57,489

 

1,909

 

Indirect

 

12,302

 

288

 

Total

 

$

631,146

 

$

38,055

 

 

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NOTE 5 — OTHER REAL ESTATE OWNED

 

Other real estate owned is recorded in other assets on the balance sheet.  Activity in other real estate owned was as follows:

 

 

 

2011

 

2010

 

Beginning Balance — January 1

 

$

11,453

 

$

10,363

 

Transfer to other real estate owned

 

10,949

 

930

 

Sales

 

(1,292

)

(1,210

)

Write down

 

(532

)

 

Ending Balance — March 31

 

$

20,578

 

$

10,083

 

 

Expenses related to foreclosed assets include:

 

 

 

Three Months Ended

 

 

 

March 31, 2011

 

March 31, 2010

 

Net loss (gain) on sales

 

$

365

 

$

(23

)

Operating expenses

 

168

 

39

 

 

NOTE 6 - DEPOSITS

 

 

 

March 31,
2011

 

December 31,
2010

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

293,648

 

$

268,390

 

Interest-bearing demand

 

799,730

 

798,897

 

Savings

 

447,102

 

430,367

 

Certificates of deposit of $100 or more

 

217,164

 

231,019

 

Other certificates and time deposits

 

451,717

 

482,891

 

Total deposits

 

$

2,209,361

 

$

2,211,564

 

 

NOTE 7 - EARNINGS PER SHARE

 

Earnings per share (EPS) were computed as follows:

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

Weighted

 

Per

 

 

 

Weighted

 

Per

 

 

 

Net

 

Average

 

Share

 

Net

 

Average

 

Share

 

For the three months ended

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,546

 

20,136,188

 

$

 

 

$

3,249

 

20,136,362

 

$

 

 

Preferred dividends and accretion

 

(763

)

 

 

 

 

(763

)

 

 

 

 

Net income available to common shareholders

 

3,783

 

20,136,188

 

0.19

 

2,486

 

20,136,362

 

0.12

 

Effect of dilutive shares

 

 

 

47,292

 

 

 

 

 

1,503

 

 

 

Net income available to common shareholders and assumed conversions

 

$

3,783

 

20,183,480

 

$

0.19

 

$

2,486

 

20,137,865

 

$

0.12

 

 

Stock options for 251,116 common shares and stock warrants for 571,906 common shares in 2011 and stock options for 312,941 common shares and stock warrants for 571,906 in 2010 were not considered in computing diluted earnings per share because they were antidilutive.

 

NOTE 8 — FAIR VALUE

 

ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access

 

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as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or using market data utilizing pricing models, primarily Interactive Data Corporation (IDC), that vary based upon asset class and include available trade, bid, and other market information. Matrix pricing is used for most municipals, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. The grouping of securities is done according to insurer, credit support, state of issuance, and rating to incorporate additional spreads and municipal curves. For the general market municipals, the Thomson Municipal Market Data curve is used to determine the initial curve for determining the price, movement, and yield relationships with the municipal market (Level 2 inputs). Level 3 securities are largely comprised of small, local municipality issuances and Community Reinvestment Act (CRA) qualified credits. Fair values are derived through consideration of funding type, maturity and other features of the issuance, and include reviewing financial statements, earnings forecasts, industry trends and the valuation of comparative issuers.

 

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a sing