Exhibit 99.2

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF FC BANC CORP. AND ITS SUBSIDIARIES

 

Unaudited Financial Statements of FC Banc Corp. and its subsidiaries
Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012			1
Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012			2
Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012			3
Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2013 and 2012			4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012			5
Notes to Consolidated Financial Statements (unaudited)			6

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FC BANC CORP.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

(Dollars in thousands)

 

		September 30, 2013				December 31, 2012
ASSETS
Cash and due from banks		$	10,914			$	15,250
Federal funds sold			—				3,860
Cash and cash equivalents			10,914				19,110
Investment securities available for sale			89,935				96,835
Loans held for sale			370				1,016
Loans			257,749				239,923
Less allowance for loan losses			2,799				3,252
Net loans			254,950				236,671
Premises and equipment, net			5,706				5,833
Bank-owned life insurance			3,955				3,880
Regulatory stock			1,463				1,463
Accrued interest and other assets			5,168				2,532
TOTAL ASSETS		$	372,461			$	367,340
LIABILITIES
Deposits:
Noninterest-bearing		$	11,847			$	9,942
Interest-bearing demand			19,595				17,841
Savings			212,469				210,607
Money market			7,240				7,781
Time			83,157				77,266
Total deposits			334,308				323,437
Short-term borrowings			496				—
Other borrowings			5,000				7,500
Accrued interest and other liabilities			1,740				2,199
TOTAL LIABILITIES			341,544				333,136
STOCKHOLDERS’ EQUITY
Preferred stock of $100 par value; 100,000 shares authorized, 500 shares issued and outstanding			—				50
Additional paid-in capital-preferred stock			—				136
Common stock, no par value; 3,945,390 shares authorized, 1,431,930 and 1,422,736 shares issued			18,647				18,453
Retained earnings			17,061				16,595
Accumulated other comprehensive income (loss)			(2,328	)			1,476
Treasury stock, at cost (96,423 and 98,123 shares)			(2,463	)			(2,506	)
TOTAL STOCKHOLDERS’ EQUITY			30,917				34,204
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	372,461			$	367,340

See accompanying notes to the unaudited consolidated financial statements.

 

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FC BANC CORP.

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2013				2012				2013				2012
INTEREST INCOME
Interest and fees on loans		$	3,286			$	3,252			$	9,626			$	9,411
Federal funds sold			—				1				2				1
Investment securities:
Taxable			408				462				1,350				1,609
Exempt from federal income tax			182				210				566				630
Total interest income			3,876				3,925				11,544				11,651
INTEREST EXPENSE
Deposits			659				761				1,969				2,296
Other borrowings			51				74				163				221
Total interest expense			710				835				2,132				2,517
NET INTEREST INCOME			3,166				3,090				9,412				9,134
Provision for loan losses			—				38				425				313
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			3,166				3,052				8,987				8,821
NONINTEREST INCOME
Service charges on deposit accounts			160				163				441				474
Investment securities gains, net			—				80				824				320
Gain on loan sales, net			97				319				454				650
Bank-owned life insurance earnings			26				25				75				75
Other income			287				244				851				835
Total noninterest income			570				831				2,645				2,354
NONINTEREST EXPENSE
Salaries and employee benefits			1,458				1,468				4,622				4,354
Net occupancy and equipment expenses			349				287				970				879
Professional fees			122				112				318				308
State franchise tax			105				102				318				291
Federal deposit insurance			48				48				155				155
Data processing			105				98				320				297
Advertising			134				101				437				332
Other expense			1,398				445				2,281				1,230
Total noninterest expense			3,719				2,661				9,421				7,846
Income before income taxes			17				1,222				2,211				3,329
Income taxes			18				314				620				876
NET INCOME (LOSS)			(1	)			908				1,591				2,453
Less: Preferred stock dividends			5				—				8				161
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS		$	(6	)		$	908			$	1,583			$	2,292
EARNINGS PER SHARE
Basic		$	0.00			$	0.69			$	1.20			$	2.07
Diluted			0.00				0.69				1.20				2.07

See accompanying notes to the unaudited consolidated financial statements.

 

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FC BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(Dollars in thousands)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2013				2012				2013				2012
Net income (loss)		$	(1	)		$	908			$	1,591			$	2,453
Other comprehensive income (loss):
Increase (decrease) in unrealized gains on available-for-sale securities			443				772				(4,953	)			2,223
Income tax effect related to unrealized gains (losses) on available-for-sale securities			(151	)			(262	)			1,684				(756	)
Reclassification adjustment for investment security gains included in net income			—				(80	)			(824	)			(320	)
Income tax effect related to the reclassification adjustment for investment security gains			—				27				280				109
Change in unrealized loss on pension costs			2				2				13				6
Income tax effect related to change in unrealized loss on pension costs			(1	)			(1	)			(4	)			(2	)
Other comprehensive income (loss), net of tax			293				458				(3,804	)			1,260
Comprehensive income (loss)		$	292			$	1,366			$	(2,213	)		$	3,713

See accompanying notes to the unaudited consolidated financial statements.

 

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FC BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)

 

		Preferred Shares Outstanding				Preferred Stock				Additional Paid-in Capital- Preferred Stock				Common Shares Outstanding				Common Stock				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Total Stockholders’ Equity
Balance, December 31, 2012			500			$	50			$	136				1,324,613			$	18,453			$	16,595			$	1,476			$	(2,506	)		$	34,204
Net income																							1,591												1,591
Other comprehensive loss																											(3,804	)							(3,804	)
Cash dividends declared on preferred stock (5.25%)																							(8	)											(8	)
Cash dividends declared on common stock ($.84 per share)																							(1,117	)											(1,117	)
Conversion of preferred stock			(500	)			(50	)			(136	)			9,194				186																—
Restricted stock awards															1,700				(3	)											43				40
Compensation expense related to stock options																			11																11
Balance, September 30, 2013			—			$	—			$	—				1,335,507			$	18,647			$	17,061			$	(2,328	)		$	(2,463	)		$	30,917

See accompanying notes to the unaudited consolidated financial statements.

 

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FC BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

 

		Nine Months Ended
		September 30,
		2013				2012
OPERATING ACTIVITIES
Net income		$	1,591			$	2,453
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			425				313
Investment securities gains, net			(824	)			(320	)
Depreciation, amortization, and accretion			1,086				1,510
Gain on loan sales, net			(454	)			(650	)
Decrease in accrued interest receivable			27				28
Decrease in accrued interest payable			(19	)			(47	)
Earnings on bank-owned life insurance			(75	)			(75	)
Other, net			(1,044	)			114
Net cash provided by operating activities			713				3,326
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities			9,556				42,228
Proceeds from sales			37,529				19,965
Purchases			(45,820	)			(24,665	)
Increase in loans, net			(17,592	)			(39,013	)
Purchases of premises and equipment			(324	)			(296	)
Net cash used for investing activities			(16,651	)			(1,781	)
FINANCING ACTIVITIES
Increase in deposits, net			10,871				2,532
Increase (decrease) in short-term borrowings, net			496				(128	)
Repayments of other borrowings			(2,500	)			—
Cash dividends paid on preferred stock			(8	)			(161	)
Cash dividends paid on common stock			(1,117	)			(857	)
Net cash provided by financing activities			7,742				1,386
(Decrease) increase in cash and cash equivalents			(8,196	)			2,931
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			19,110				8,795
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	10,914			$	11,726
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings		$	2,151			$	2,564
Income taxes		$	940,000			$	814,318

See accompanying notes to the unaudited consolidated financial statements.

 

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FC BANC CORP.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:

Nature of Operations and Basis of Presentation

FC Banc Corp. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Farmers Citizens Bank (the “Bank”). The Bank generates commercial (including agricultural), mortgage, and consumer loans and receives deposits from customers located primarily in Crawford, Knox, Franklin, Morrow, and Richland counties in Ohio and the surrounding areas. The Bank operates under a state bank charter and provides full banking services. As a state bank, the Bank is subject to regulations by the state of Ohio Division of Financial Institutions and the Company is subject to regulations by the Federal Reserve System through the Federal Reserve Bank of Cleveland.

The consolidated financial statements include the accounts of FC Banc Corp. and its wholly owned subsidiary, Farmers Citizens Bank, after elimination of all intercompany transactions and balances.

The accounting principles followed by the Company and the methods of applying these principles conform to U.S. generally accepted accounting principles and to general practice within the banking industry. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the Consolidated Balance Sheet date and reported amounts of revenues and expenses for that period. Actual results could differ from those estimates.

The interim financial statements are unaudited, but in the opinion of management reflect all adjustments necessary for the fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year.

 

2.	EARNINGS PER SHARE

Basic earnings per share represents net income available to common stockholders divided by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and nonvested restricted stock.

 

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2.	EARNINGS PER SHARE (CONTINUED)

 

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(Dollars in thousands, except share and per share data)		2013				2012				2013				2012
Net income (loss)		$	(1	)		$	908			$	1,591			$	2,453
Less: preferred stock dividends			5				—				8				161
Net income (loss) available to common stockholders		$	(6	)		$	908			$	1,583			$	2,292
Weighted-average common shares outstanding			1,425,634				1,419,255				1,423,713				1,210,023
Average treasury stock shares			(96,423	)			(98,123	)			(96,691	)			(98,123	)
Average unearned nonvested shares			(3,411	)			(4,215	)			(2,693	)			(5,086	)
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share			1,325,800				1,316,917				1,324,329				1,106,814
Additional common stock equivalents (nonvested stock and stock options) used to calculate diluted earnings per share			5,963				2,349				1,624				291
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share			1,331,763				1,319,266				1,325,953				1,107,105
Per share information:
Basic earnings per share		$	—			$	0.69			$	1.20			$	2.07
Diluted earnings per share		$	—			$	0.69			$	1.19			$	2.07

For the nine months ended September 30, 2013 and 2012, options to purchase 18,500 shares and 56,980 shares of common stock at a price of $29.00 and prices ranging from $22.90 to $29.00, respectively, were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. For the three months ended September 30, 2013, options to purchase 73,080 shares of common stock were not included in the computation of diluted earnings per share because to do so would have been antidilutive. For the three months ended September 30, 2012, options to purchase 54,480 shares of common stock at a prices ranging from $24.07 to $29.00 were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

 

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3.	INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)

 

The Company’s investment securities portfolio is classified as available for sale. The portfolio serves principally as a source of liquidity and is carried at fair value with unrealized holding gains and losses for available-for-sale securities reported as a separate component of stockholders’ equity, net of tax, until realized. Securities are adjusted for amortization of premium and accretion of discount, which are computed using the interest method and recognized as adjustments of interest income. Realized security gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned.

The amortized cost and fair values of securities available for sale are as follows:

 

		September 30, 2013
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands)
Obligations of states and political subdivisions		$	23,618			$	376			$	(723	)		$	23,271
Mortgage-backed securities in government-sponsored entities			69,592				75				(3,076	)			66,591
Total debt securities			93,210				451				(3,799	)			89,862
Equity securities in financial institutions			121				—				(48	)			73
Total		$	93,331			$	451			$	(3,847	)		$	89,935
		December 31, 2012
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(Dollars in thousands)
U.S. government agency securities		$	3,001			$	12			$	—			$	3,013
Obligations of states and political subdivisions			28,100				1,877				(73	)			29,904
Mortgage-backed securities in government-sponsored entities			63,231				923				(302	)			63,852
Total debt securities			94,332				2,812				(375	)			96,769
Equity securities in financial institutions			121				—				(55	)			66
Total		$	94,453			$	2,812			$	(430	)		$	96,835

 

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3.	INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)

 

The amortized cost and fair value of debt securities at September 30, 2013, by contractual maturity, 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.

 

(Dollars in thousands)		Amortized Cost				Fair Value
Due within one year		$	504			$	514
Due after one year through five years			1,052				1,088
Due after five years through ten years			2,595				2,535
Due after ten years			89,059				85,725
Total		$	93,210			$	89,862

Investment securities with a carrying value of $37,384,000 and $47,481,000 at September 30, 2013 and December 31, 2012, respectively, were pledged to secure deposits and other purposes as required by law.

The following table is a summary of proceeds received, gross gains, and gross losses realized on the sale of investment securities available for sale for the nine months ended September 30:

 

(Dollars in thousands)		2013				2012
Proceeds from sales		$	37,529			$	19,965
Gross gains			997				320
Gross losses			173				—

There were no sales of investment securities available for sale during the three months ended September 30, 2013. Proceeds from the sale of investment securities available for sale totaled $2,532,000, resulting in gross gains of $79,000 for the three months ended September 30, 2012.

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012:

 

		September 30, 2013
		Less than Twelve Months								Twelve Months or Greater								Total
(Dollars in thousands)		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Obligations of states and political subdivisions		$	13,303			$	(723	)		$	—			$	—			$	13,303			$	(723	)
Mortgage-backed securities in government-sponsored entities			63,578				(3,076	)			—				—				63,578				(3,076	)
Equity securities in financial institutions			—				—				73				(48	)			73				(48	)
Total		$	76,881			$	(3,799	)		$	73			$	(48	)		$	76,954			$	(3,847	)

 

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3.	INVESTMENT SECURITIES AVAILABLE FOR SALE (CONTINUED)

 

		December 31, 2012
		Less than Twelve Months								Twelve Months or Greater								Total
(Dollars in thousands)		Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
Obligations of states and political subdivisions		$	2,053			$	(58	)		$	536			$	(15	)		$	2,589			$	(73	)
Mortgage-backed securities in government-sponsored entities			38,297				(302	)			—				—				38,297				(302	)
Equity securities in financial institutions			—				—				65				(55	)			65				(55	)
Total		$	40,350			$	(360	)		$	601			$	(70	)		$	40,951			$	(430	)

There were 50 positions that were temporarily impaired at September 30, 2013. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial condition and near-term prospects of the issuer; and (iii) whether or not the Company is more likely than not to sell the security before recovery of its cost basis.

As of September 30, 2013, management does not have the intent to sell any of the securities in the table on the previous page and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes, sector credit ratings changes, or Company-specific ratings changes that are not expected to result in the noncollection of principal and interest during the period. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of September 30, 2013, management believes the impairments detailed in the table on the previous page are temporary and no impairment loss has been realized in the Company’s Consolidated Statement of Income.

 

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4.

LOANS

Major classifications of loans are summarized as follows:

 

(Dollars in thousands)		September 30, 2013				December 31, 2012
Loans secured by real estate:
Residential		$	40,002			$	29,873
Commercial			197,004				192,451
Construction			629				699
Commercial, industrial, and agricultural			19,315				16,282
Consumer			799				618
			257,749				239,923
Less allowance for loan losses			2,799				3,252
Net loans		$	254,950			$	236,671

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their principal amount net of the allowance for loan losses. Interest income is recognized as income when earned on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Loans are returned to accrual status when past-due interest is collected and the collection of principal is probable.

Loan origination fees and certain direct loan origination costs are being deferred and the net amount is amortized as an adjustment of the related loans yield. Management is amortizing these amounts over the contractual life of the related loans.

 

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5.	ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses by loan portfolio segment for the nine months ended September 30, 2013 and 2012 are as follows:

 

		For the Nine Months Ended September 30, 2013
(Dollars in thousands)		Residential Real Estate				Commercial Real Estate				Construction Real Estate				Commercial, Industrial, and Agricultural				Consumer				Total
Beginning balance		$	329			$	2,777			$	6			$	107			$	33			$	3,252
Charge-offs			(62	)			(608	)			—				(209	)			(16	)			(895	)
Recoveries			1				4				—				—				12				17
Provision			33				162				—				240				(10	)			425
Ending balance		$	301			$	2,335			$	6			$	138			$	19			$	2,799
		For the Nine Months Ended September 30, 2012
(Dollars in thousands)		Residential Real Estate				Commercial Real Estate				Construction Real Estate				Commercial, Industrial, and Agricultural				Consumer				Total
Beginning balance		$	349			$	2,085			$	25			$	117			$	57			$	2,633
Charge-offs			(94	)			(56	)			—				—				(17	)			(167	)
Recoveries			1				436				—				—				15				452
Provision			71				294				(19	)			(11	)			(22	)			313
Ending balance		$	327			$	2,759			$	6			$	106			$	33			$	3,231

 

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5.	ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

Changes in the allowance for loan losses by loan portfolio segment for the three months ended September 30, 2013 and 2012 are as follows:

 

		For the Three Months Ended September 30, 2013
(Dollars in thousands)		Residential Real Estate				Commercial Real Estate				Construction Real Estate				Commercial, Industrial, and Agricultural				Consumer				Total
Beginning balance		$	287			$	2,372			$	6			$	134			$	5			$	2,804
Charge-offs			—				—				—				—				(9	)			(9	)
Recoveries			—				—				—				—				4				4
Provision			14				(37	)			—				4				19				—
Ending balance		$	301			$	2,335			$	6			$	138			$	19			$	2,799
		For the Three Months Ended September 30, 2012
(Dollars in thousands)		Residential Real Estate				Commercial Real Estate				Construction Real Estate				Commercial, Industrial, and Agricultural				Consumer				Total
Beginning balance		$	341			$	2,764			$	6			$	111			$	16			$	3,238
Charge-offs			(39	)			(6	)			—				—				(3	)			(48	)
Recoveries			—				—				—				—				3				3
Provision			25				1				—				(5	)			17				38
Ending balance		$	327			$	2,759			$	6			$	106			$	33			$	3,231

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based on management’s periodic evaluation of the adequacy of the allowance for loan losses which encompasses the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant change in the near term.

Management establishes the allowance for loan losses based upon its evaluation of the pertinent factors underlying the types and quality of loans in the portfolio. Commercial loans and commercial real estate loans are reviewed on a regular basis, with a focus on larger loans along with loans that have experienced past payment or financial deficiencies. Larger commercial loans and commercial real estate loans which are 90 days or more past due are selected for impairment testing. These loans are analyzed to determine whether they are “impaired,” which means that it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. All commercial loans that are delinquent 90 days and residential mortgage loans that are 120 days delinquent and are placed on nonaccrual status are classified on an individual basis. The remaining loans are evaluated and classified as groups of loans with similar risk characteristics. The

 

13

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5.	ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

Company allocates allowances based on the factors described below, which conform to the Company’s asset classification policy. In reviewing risk within the Bank’s loan portfolio, management has determined there to be several different risk categories within the loan portfolio. The allowance for loan losses consists of amounts applicable to: (i) the commercial, industrial, and agricultural loan portfolio; (ii) the commercial real estate portfolio; (iii) the consumer loan portfolio; (iv) the construction loan portfolio, (v) and the loans secured by residential real estate portfolio. Factors considered in this process included general loan terms, collateral, and availability of historical data to support the analysis. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. Certain qualitative factors are then added to the historical allocation percentage to get the total factor to be applied to nonclassified loans. The following qualitative factors are analyzed:

 

•

Levels of and trends in delinquencies

 

•

Trends in volume and terms

 

•

Trends in credit quality ratings

 

•

Changes in management and lending staff

 

•

Economic trends

 

•

Concentrations of credit

The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $2,799,000 and $3,252,000 adequate to cover loan losses inherent in the loan portfolio, at September 30, 2013 and December 31, 2012. The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2013 and December 31, 2012.

 

		September 30, 2013
		Residential Real Estate				Commercial Real Estate				Construction Real Estate				Commercial, Industrial, and Agricultural				Consumer				Total
		(Dollars in thousands)
Allowance for loan losses:
Individually evaluated for impairment		$	—			$	165			$	—			$	—			$	—			$	165
Collectively evaluated for impairment			301				2,170				6				138				19				2,634
Total		$	301			$	2,335			$	6			$	138			$	19			$	2,799
Loans:
Individually evaluated for impairment		$	—			$	5,259			$	—			$	—			$	—			$	5,259
Collectively evaluated for impairment			40,002				191,745				629				19,315				799				252,490
Total		$	40,002			$	197,004			$	629			$	19,315			$	799			$	257,749

 

14

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5.	ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

		December 31, 2012
		Residential Real Estate				Commercial Real Estate				Construction Real Estate				Commercial, Industrial, and Agricultural				Consumer				Total
		(Dollars in thousands)
Allowance for loan losses:
Individually evaluated for impairment		$	49			$	735			$	—			$	—			$	—			$	784
Collectively evaluated for impairment			280				2,042				6				107				33				2,468
Total		$	329			$	2,777			$	6			$	107			$	33			$	3,252
Loans:
Individually evaluated for impairment		$	245			$	5,736			$	—			$	—			$	—			$	5,981
Collectively evaluated for impairment			29,628				186,715				699				16,282				618				233,942
Total		$	29,873			$	192,451			$	699			$	16,282			$	618			$	239,923

Credit Quality Information

The following tables represent credit exposures by internally assigned grades. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

Pass loans – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. There are three sub-grades within the Pass category to further distinguish the loan.

Special Mention loans – loans for which a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard loans – have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful loans – have all the weaknesses inherent in a Substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a Loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

 

15

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5.	ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

Credit Quality Information (Continued)

 

Credit quality indicators as of September 30, 2013, were as follows:

 

		September 30, 2013
(Dollars in thousands)		Commercial Real Estate				Construction Real Estate				Commercial, Industrial, and Agricultural				Total
Pass		$	189,529			$	629			$	18,835			$	208,993
Special Mention			2,216				—				480				2,696
Substandard			5,259				—				—				5,259
Doubtful			—				—				—				—
Ending balance		$	197,004			$	629			$	19,315			$	216,948

Credit quality indicators as of December 31, 2012, were as follows:

 

		December 31, 2012
(Dollars in thousands)		Commercial Real Estate				Construction Real Estate				Commercial, Industrial, and Agricultural				Total
Pass		$	183,721			$	699			$	15,786			$	200,206
Special Mention			2,994				—				496				3,490
Substandard			5,736				—				—				5,736
Doubtful			—				—				—				—
Ending balance		$	192,451			$	699			$	16,282			$	209,432

The following tables present performing and nonperforming residential real estate and consumer loans based on payment activity as of September 30, 2013 and December 31, 2012. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due.

 

		September 30, 2013
(Dollars in thousands)		Residential Real Estate				Consumer				Total
Nonperforming loans		$	60			$	—			$	60
Performing loans			39,942				799				40,741
		$	40,002			$	799			$	40,801
		December 31, 2012
(Dollars in thousands)		Residential Real Estate				Consumer				Total
Nonperforming loans		$	98			$	—			$	98
Performing loans			29,775				618				30,393
		$	29,873			$	618			$	30,491

 

16

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5.	ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

Credit Quality Information (Continued)

 

Following is a table which includes an aging analysis of the recorded investment of past-due loans.

 

		September 30, 2013
(Dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				90 Days or Greater				Total Past Due				Current				Total Loans
Loans secured by real estate:
Residential		$	148			$	212			$	60			$	420			$	39,582			$	40,002
Commercial			—				—				1,575				1,575				195,429				197,004
Construction			—				—				—				—				629				629
Commercial, industrial, and agricultural			—				—				—				—				19,315				19,315
Consumer			—				—				—				—				799				799
Total		$	148			$	212			$	1,635			$	1,995			$	255,754			$	257,749
		December 31, 2012
(Dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				90 Days or Greater				Total Past Due				Current				Total Loans
Loans secured by real estate:
Residential		$	235			$	—			$	98			$	333			$	29,540			$	29,873
Commercial			9				1,007				1,711				2,727				189,724				192,451
Construction			—				—				—				—				699				699
Commercial, industrial, and agricultural			—				—				—				—				16,282				16,282
Consumer			—				—				—				—				618				618
Total		$	244			$	1,007			$	1,809			$	3,060			$	236,863			$	239,923

Impaired Loans

Management evaluates commercial loans and commercial real estate loans which are 90 days or more past due and considers them to be impaired. Loans rated Substandard or Doubtful are also evaluated for impairment. These loans are analyzed to determine whether it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees, or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

 

17

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5.	ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

Impaired Loans (Continued)

 

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary:

 

		September 30, 2013												December 31, 2012
(Dollars in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Recorded Investment				Unpaid Principal Balance				Related Allowance
With no related allowance recorded:
Loans secured by real estate:
Residential		$	—			$	—			$	—			$	147			$	147			$	—
Commercial			4,340				4,340				—				3,399				3,399				—
Construction			—				—				—				—				—				—
Commercial, industrial, and agricultural			—				—				—				—				—				—
Consumer			—				—				—				—				—				—
With an allowance recorded:
Loans secured by real estate:
Residential			—				—				—				98				98				49
Commercial			919				919				165				2,337				2,337				735
Construction			—				—				—				—				—				—
Commercial, industrial, and agricultural			—				—				—				—				—				—
Consumer			—				—				—				—				—				—
Total		$	5,259			$	5,259			$	165			$	5,981			$	5,981			$	784

The following table presents the average balances of impaired loans and interest income by class, recognized on impaired loans for the nine months ended September 30, 2013:

 

		September 30, 2013								September 30, 2012
(Dollars in thousands)		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
Loans secured by real estate:
Residential		$	—			$	—			$	239			$	8
Commercial			5,449				132				5,768				85
Construction			—				—								—
Commercial, industrial, and agricultural			—				—				—				—
Consumer			—				—				—				—
Total		$	5,449			$	132			$	6,007			$	93

Loans are considered for nonaccrual status upon 90 days delinquency. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

 

18

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5.	ALLOWANCE FOR LOAN LOSSES (CONTINUED)

 

The following table presents the average balances of impaired loans and interest income by class, recognized on impaired loans for the three months ended September 30, 2013:

 

		September 30, 2013								September 30, 2012
(Dollars in thousands)		Average Recorded Investment				Interest Income Recognized				Average Recorded Investment				Interest Income Recognized
Loans secured by real estate:
Residential		$	—			$	—			$	—			$	—
Commercial			5,299				44				5,889				28
Construction			—				—								—
Commercial, industrial, and agricultural			—				—				—				—
Consumer			—				—				—				—
Total		$	5,299			$	44			$	5,889			$	28

Nonaccrual Loans

The following table presents loans that are on nonaccrual status and that are 90 days delinquent and still accruing interest by portfolio segment as of September 30, 2013 and December 31, 2012.

 

		September 30, 2013								December 31, 2012
(Dollars in thousands)		Nonaccrual				Past Due 90 Days or More and Still Accruing				Nonaccrual				Past Due 90 Days or More and Still Accruing
Loans secured by real estate:
Residential		$	—			$	60			$	98			$	—
Commercial			1,575				—				2,718				—
Construction			—				—				—				—
Commercial, industrial, and agricultural			—				—				—				—
Consumer			—				—				—				—
Total		$	1,575			$	60			$	2,816			$	—

Troubled Debt Restructuring

As of September 30, 2013 and December 31, 2012, there were three troubled debt restructurings within one loan relationship, all of which are classified as impaired and on nonaccrual status, totaling $1,392,000 and $2,243,000, respectively. These loans were restructured in the fourth quarter of 2012. There was a specific allocation in the allowance for loan losses associated with the loan relationship totaling $490,000. Management has subsequently charged off $500,000 against the specific allocation related to one of the loans in the first quarter of 2013. All three loans are in default as of September 30, 2013.

 

19

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6.	ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in accumulated other comprehensive income by component net of tax for the nine months ended September 30, 2013:

 

(Dollars in thousands)		Unrealized Gains on Available-For-Sale Securities (a)				Defined Benefit Pension Items (a)				Total
Balance as of December 31, 2012		$	1,572			$	(96	)		$	1,476
Other comprehensive income (loss) before reclassification			(3,269	)			9				(3,260	)
Amount reclassified from accumulated other comprehensive income (loss)			(544	)			—				(544	)
Total other comprehensive income (loss)			(3,813	)			9				(3,804	)
Balance as of September 30, 2013		$	(2,241	)		$	(87	)		$	(2,328	)

 

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

The following table presents the changes in accumulated other comprehensive income by component net of tax for the three months ended September 30, 2013:

 

(Dollars in thousands)		Unrealized Gains on Available-For-Sale Securities (a)				Defined Benefit Pension Items (a)				Total
Balance as of June 30, 2013		$	(2,533	)		$	(88	)		$	(2,621	)
Other comprehensive income before reclassification			292				1				293
Amount reclassified from accumulated other comprehensive income			—				—				—
Total other comprehensive income			292				1				293
Balance as of September 30, 2013		$	(2,241	)		$	(87	)		$	(2,328	)

 

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

 

20

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6.	ACCUMULATED OTHER COMPREHENSIVE INCOME (Continued)

 

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income for the nine months ended September 30, 2013:

 

(Dollars in thousands)		Amount Reclassified from Accumulated Other				Affected Line Item in the Consolidated
Details about other comprehensive income		Comprehensive Income (a)				Statement of Income
Unrealized gains on available-for-sale securities
		$	824			Investment securities gains, net
			(280	)		Income taxes
		$	544			Net of tax

 

(a)	Amounts in parentheses indicate debits to net income.

 

7.	FAIR VALUE MEASUREMENTS

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels of pricing observations are as follows:

 

This hierarchy requires the use of observable market data when available.

 

21

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7.	FAIR VALUE MEASUREMENTS (CONTINUED)

 

The following table presents the assets reported on the Consolidated Balance Sheet at their fair value as of September 30, 2013 and December 31, 2012, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

		September 30, 2013
		Level I				Level II				Level III				Total
		(Dollars in thousands)
Fair value measurements on a recurring basis:
Securities available for sale:
Obligations of states and political subdivisions		$	—			$	23,271			$	—			$	23,271
Mortgage-backed securities in government-sponsored entities			—				66,591				—				66,591
Equity securities in financial institutions			73				—				—				73
Total		$	73			$	89,862			$	—			$	89,935
		December 31, 2012
		Level I				Level II				Level III				Total
		(Dollars in thousands)
Fair value measurements on a recurring basis:
Securities available for sale:
U.S. government agency securities		$	—			$	3,013			$	—			$	3,013
Obligations of states and political subdivisions			—				29,904				—				29,904
Mortgage-backed securities in government-sponsored entities			—				63,852				—				63,852
Equity securities in financial institutions			66				—				—				66
Total		$	66			$	96,769			$	—			$	96,835

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value as of September 30, 2013 and December 31, 2012, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. These assets are included below as Level II fair values. The fair value of assets included below as Level III fair values is management’s estimate based on the best information available which include unobservable inputs. The fair value consists of the loan balances of $5,259,000 and $5,981,000 less their valuation allowances of $165,000 and $784,000 at September 30, 2013 and December 31, 2012, respectively.

 

22

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7.	FAIR VALUE MEASUREMENTS (CONTINUED)

 

		September 30, 2013
		Level I				Level II				Level III				Total
		(Dollars in thousands)
Fair value measurements on a nonrecurring basis:
Impaired loans		$	—			$	—			$	5,094			$	5,094
Other real estate owned			—				—				35				35
Total		$	—			$	—			$	5,129			$	5,129
		December 31, 2012
		Level I				Level II				Level III				Total
		(Dollars in thousands)
Fair value measurements on a nonrecurring basis:
Impaired loans		$	—			$	—			$	5,197			$	5,197

The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which the Company uses Level III inputs to determine fair value:

 

		September 30, 2013
		Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)		Fair Value				Valuation Techniques		Unobservable Input		Range (Weighted Average)
Impaired loans		$	5,094			Appraisal of collateral (1)		Appraisal adjustments (2)		8% - 30% (11%)
Other real estate owned			35			Appraisal of collateral (1)		N/A		N/A
		December 31, 2012
		Quantitative Information about Level III Fair Value Measurements
(Dollars in thousands)		Fair Value				Valuation Techniques		Unobservable Input		Range (Weighted Average)
Impaired loans		$	5,197			Appraisal of collateral (1)		Appraisal adjustments (2)		25% - 50% (35%)

 

(1)	Fair value is generally determined through appraisals if the underlying collateral, which generally include various Level III inputs, are not identifiable.

(2)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

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8.	FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company’s financial instruments at September 30, 2013 and December 31, 2012, is as follows:

 

		September 30, 2013
(Dollars in thousands)		Carrying Value				Level I				Level II				Level III				Fair Value
Financial assets:
Cash and cash equivalents		$	10,914			$	10,914			$	—			$	—			$	10,914
Investment securities available for sale			89,935				73				89,862				—				89,935
Net loans			254,950				—				—				264,437				264,437
Bank-owned life insurance			3,955				3,955				—				—				3,955
Regulatory stock			1,463				1,463				—				—				1,463
Accrued interest receivable			1,376				1,376				—				—				1,376
Mortgage servicing rights			179				—				—				169				169
Financial liabilities:
Deposits		$	334,308			$	251,151			$	—			$	83,886			$	335,037
Short-term borrowings			496				496				—				—				496
Other borrowings			5,000				—				—				5,448				5,448
Accrued interest payable			68				68				—				—				68
		December 31, 2012
(Dollars in thousands)		Carrying Value				Level I				Level II				Level III				Fair Value
Financial assets:
Cash and cash equivalents		$	19,110			$	19,110			$	—			$	—			$	19,110
Investment securities available for sale			96,835				66				96,769				—				96,835
Net loans			237,688				—				—				251,369				251,369
Bank-owned life insurance			3,880				3,880				—				—				3,880
Regulatory stock			1,463				1,463				—				—				1,463
Accrued interest receivable			1,403				1,403				—				—				1,403
Mortgage servicing rights			216				—				—				169				169
Financial liabilities:
Deposits		$	323,437			$	246,171			$	—			$	78,318			$	324,489
Other borrowings			7,500				—				—				8,159				8,159
Accrued interest payable			87				87				—				—				87

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

 

24

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8.	FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)

 

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Cash Equivalents, Regulatory Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings

The fair value is equal to the current carrying value.

Investment Securities

The fair value of investment securities available for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities.

Loans

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies.

Mortgage Servicing Rights

The fair value for mortgage servicing rights is estimated by discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based upon rates generally charged for such loans with similar characteristics.

Deposits and Other Borrowings

The fair value of certificates of deposit and other borrowings is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and constructs discount rates that consider reinvestment opportunities, operating expenses, noninterest income, credit quality, and prepayment risk.

 

25

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8.	FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (CONTINUED)

 

Deposits and Other Borrowings (Continued)

 

Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end.

Commitments to Extend Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.

 

9.	STOCK-BASED COMPENSATION

Stock Options Plan

The Company maintains a fixed director and employee stock-based compensation plan. The plan authorizes the granting of options to purchase shares of the Company’s stock, which may be nonqualified stock options or incentive stock options which are subject to vesting conditions and other restrictions. Under the plan, the Company may grant options for up to 83,060 shares of common stock.

During the nine months ended September 30, 2013 and 2012, the Company recorded approximately $11,000 and $11,000, respectively, in compensation expense related to the Company’s stock option awards. As of September 30, 2013, there was approximately $15,000 of unrecognized compensation cost related to unvested stock option awards granted. That cost is expected to be recognized over the next three years.

Stock Incentive Plan

The shareholders of the Company approved the Stock Incentive Plan (the “Plan”). Directors, Officers, and all other key employees of the Company are eligible to receive awards of restricted stock based upon the Board of Directors’ sole discretion. There were 24,000 shares authorized under the Plan. Awards granted under the Plan are in the form of the Company’s common stock and are subject to certain vesting requirements, including continuous employment or service with the Company.

During the nine months ended September 30, 2013 and 2012, the Company recorded approximately $16,000 and $59,000, respectively, in compensation expense related to our restricted stock awards. As of September 30, 2013, there was approximately $48,000 of unrecognized compensation cost related to unvested restricted stock awards granted. That cost is expected to be recognized over the next three years.

 

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