UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
or
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition from to
Commission file number: 0-13814
Cortland Bancorp
(Exact name of registrant as specified in its charter)
Ohio |
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34-1451118 |
(State or other jurisdiction of Incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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194 West Main Street, Cortland, Ohio |
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44410 |
(Address of principal executive offices) |
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(Zip code) |
330- 637-8040
( Registrants 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer and large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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¨ |
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Accelerated filer |
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¨ |
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Non-accelerated filer |
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¨ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
TITLE OF CLASS |
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SHARES OUTSTANDING |
Common Stock, No Par Value |
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4,527,848 Shares August 7, 2013 |
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Item 1. |
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Financial Statements |
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Cortland Bancorp and Subsidiaries: |
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Consolidated Balance Sheets (unaudited) June 30, 2013 and December 31, 2012 |
2 |
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Consolidated Statements of Income (unaudited) Three and six months ended June 30, 2013 and 2012 |
3 |
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4 |
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5 |
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Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 2013 and 2012 |
6 |
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Notes to Consolidated Financial Statements (unaudited) June 30, 2013 |
7-32 |
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Item 2. |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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33 |
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34 |
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35 |
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36-49 |
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Item 3. |
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50 |
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Item 4. |
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51 |
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PART II OTHER INFORMATION |
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Item 1. |
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52 |
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Item 1A. |
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52 |
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Item 2. |
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52 |
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Item 3. |
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52 |
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Item 4. |
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52 |
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Item 5. |
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52 |
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Item 6. |
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53 |
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57 |
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED BALAN CE SHEETS (UNAUDITED)
(Amounts in thousands, except share data)
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June 30,
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December 31,
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ASSETS |
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Cash and due from banks |
$ |
7,046 |
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$ |
18,538 |
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Interest-earning deposits and other earning assets |
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11,121 |
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9,039 |
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Total cash and cash equivalents |
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18,167 |
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27,577 |
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Investment securities available-for-sale (Note 3) |
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165,875 |
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184,646 |
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Trading securities (Note 3) |
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6,952 |
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Loans held for sale |
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14,458 |
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24,756 |
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Total loans (Note 4) |
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301,912 |
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317,282 |
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Less allowance for loan losses (Note 4) |
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(4,145 |
) |
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(3,825 |
) |
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Net loans |
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297,767 |
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313,457 |
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Premises and equipment |
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6,845 |
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6,565 |
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Bank-owned life insurance |
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14,908 |
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14,009 |
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Other assets |
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12,837 |
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11,230 |
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Total assets |
$ |
537,809 |
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$ |
582,240 |
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LIABILITIES |
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Noninterest-bearing deposits |
$ |
84,086 |
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$ |
91,675 |
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Interest-bearing deposits |
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346,884 |
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385,226 |
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Total deposits |
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430,970 |
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476,901 |
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Short-term borrowings |
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3,683 |
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4,051 |
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Federal Home Loan Bank advancesshort term |
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7,500 |
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7,500 |
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Federal Home Loan Bank advanceslong term |
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34,500 |
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34,500 |
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Subordinated debt (Note 7) |
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5,155 |
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5,155 |
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Other liabilities |
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7,115 |
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4,681 |
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Total liabilities |
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488,923 |
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532,788 |
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SHAREHOLDERS EQUITY |
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Common stock$5.00 stated valueauthorized 20,000,000 shares; issued 4,728,267 shares in 2013 and 2012; outstanding shares, 4,527,847 in 2013 and 4,525,518 in 2012 |
|
23,641 |
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23,641 |
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Additional paid-in capital |
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20,833 |
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20,850 |
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Retained earnings |
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11,619 |
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10,262 |
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Accumulated other comprehensive loss |
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(3,654 |
) |
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(1,707 |
) |
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Treasury stock, at cost, 200,420 shares in 2013 and 202,749 shares in 2012 |
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(3,553 |
) |
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(3,594 |
) |
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Total shareholders equity |
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48,886 |
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49,452 |
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Total liabilities and shareholders equity |
$ |
537,809 |
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$ |
582,240 |
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See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
2
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Amounts in thousands, except share data)
|
THREE MONTHS ENDED
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SIX MONTHS ENDED
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2013 |
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2012 |
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2013 |
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2012 |
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INTEREST INCOME |
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Interest and fees on loans |
$ |
3,925 |
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$ |
3,926 |
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$ |
7,984 |
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$ |
7,893 |
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Interest and dividends on investment securities: |
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Taxable interest |
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617 |
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882 |
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1,265 |
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1,833 |
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Nontaxable interest |
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350 |
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375 |
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652 |
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725 |
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Dividends |
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36 |
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37 |
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66 |
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69 |
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Other interest income |
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10 |
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7 |
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16 |
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12 |
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Total interest income |
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4,938 |
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5,227 |
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9,983 |
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10,532 |
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INTEREST EXPENSE |
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Deposits |
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527 |
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683 |
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1,110 |
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1,403 |
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Other short-term borrowings |
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1 |
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1 |
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2 |
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2 |
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Federal Home Loan Bank advancesshort term |
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20 |
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19 |
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35 |
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38 |
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Federal Home Loan Bank advanceslong term |
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288 |
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299 |
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577 |
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597 |
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Subordinated debt |
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22 |
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25 |
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45 |
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51 |
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Total interest expense |
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858 |
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1,027 |
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1,769 |
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2,091 |
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Net interest income |
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4,080 |
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4,200 |
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8,214 |
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8,441 |
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PROVISION FOR LOAN LOSSES |
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150 |
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330 |
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350 |
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600 |
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
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3,930 |
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3,870 |
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7,864 |
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7,841 |
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NON-INTEREST INCOME |
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Fees for customer services |
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444 |
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518 |
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912 |
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1,038 |
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Investment securities gainsnet |
|
152 |
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28 |
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|
152 |
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35 |
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Impairment losses on investment securities: |
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Total other-than-temporary impairment losses |
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(35 |
) |
Portion of gains recognized in other comprehensive income (before tax) |
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(136 |
) |
Net impairment losses recognized in earnings |
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(171 |
) |
Mortgage banking gains |
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638 |
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266 |
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1,326 |
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|
420 |
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Other real estate gainsnet |
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13 |
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2 |
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13 |
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2 |
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Earnings on bank-owned life insurance |
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135 |
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|
130 |
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|
255 |
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|
253 |
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Other non-interest income |
|
34 |
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|
84 |
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|
|
64 |
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|
146 |
|
Total non-interest income |
|
1,416 |
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|
1,028 |
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2,722 |
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|
1,723 |
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NON-INTEREST EXPENSES |
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|
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Salaries and employee benefits |
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2,545 |
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2,071 |
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5,023 |
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4,080 |
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Net occupancy and equipment expense |
|
478 |
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|
443 |
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|
928 |
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|
873 |
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State and local taxes |
|
140 |
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|
|
126 |
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|
279 |
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|
|
251 |
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FDIC insurance expense |
|
110 |
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|
71 |
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|
|
198 |
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|
|
141 |
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Professional fees |
|
199 |
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236 |
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|
|
414 |
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|
402 |
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Loss on partnership |
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|
444 |
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Other operating expenses |
|
871 |
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|
747 |
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1,676 |
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|
1,367 |
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Total non-interest expenses |
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4,343 |
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|
3,694 |
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8,518 |
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7,558 |
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INCOME BEFORE FEDERAL INCOME TAX EXPENSE (BENEFIT) |
|
1,003 |
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|
|
1,204 |
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|
2,068 |
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|
2,006 |
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Federal income tax expense (benefit) |
|
204 |
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|
|
252 |
|
|
|
439 |
|
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(105 |
) |
NET INCOME |
$ |
799 |
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|
$ |
952 |
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|
$ |
1,629 |
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|
$ |
2,111 |
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EARNINGS PER SHARE, BOTH BASIC AND DILUTED (Note 6) |
$ |
0.18 |
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|
$ |
0.21 |
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$ |
0.36 |
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$ |
0.47 |
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CASH DIVIDENDS DECLARED PER SHARE |
$ |
0.03 |
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|
$ |
|
|
|
$ |
0.06 |
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|
$ |
|
|
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
3
CORTLAND BAN CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in thousands)
|
THREE MONTHS ENDED JUNE 30, |
|
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SIX MONTHS ENDED JUNE 30, |
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|||||||||
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2013 |
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2012 |
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2013 |
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|
2012 |
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Net income |
$ |
799 |
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|
$ |
952 |
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|
$ |
1,629 |
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$ |
2,111 |
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Other comprehensive (loss) income: |
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|
|
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|
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Securities available-for-sale: |
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|
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|
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|
|
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Unrealized holding (losses) gains on available-for-sale securities |
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(3,368 |
) |
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|
(652 |
) |
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(2,763 |
) |
|
|
329 |
|
Tax effect |
|
1,144 |
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|
|
222 |
|
|
|
939 |
|
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(112 |
) |
Reclassification adjustment for other-than-temporary impairment losses on debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
171 |
|
Tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
(58 |
) |
Reclassification adjustment for net gains realized in net income |
|
(152 |
) |
|
|
(28 |
) |
|
|
(152 |
) |
|
|
(35 |
) |
Tax effect |
|
52 |
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|
|
10 |
|
|
|
52 |
|
|
|
12 |
|
Total securities available-for-sale |
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(2,324 |
) |
|
|
(448 |
) |
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(1,924 |
) |
|
|
307 |
|
Change in pension and post retirement obligations |
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(23 |
) |
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|
|
|
|
(23 |
) |
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|
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Total other comprehensive (loss) income |
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(2,347 |
) |
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|
(448 |
) |
|
|
(1,947 |
) |
|
|
307 |
|
Total comprehensive (loss) income |
$ |
(1,548 |
) |
|
$ |
504 |
|
|
$ |
(318 |
) |
|
$ |
2,418 |
|
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
4
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)
(Amounts in thousands)
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Common
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|
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Additional
|
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Retained
|
|
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Accumulated
|
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Treasury Stock |
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Total
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||||||
SIX MONTHS ENDED JUNE 30, 2012 |
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Balance at December 31, 2011 |
$ |
23,641 |
|
|
$ |
20,850 |
|
|
$ |
7,485 |
|
|
$ |
(2,663 |
) |
|
$ |
(3,594 |
) |
|
$ |
45,719 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income |
|
|
|
|
|
|
|
|
|
2,111 |
|
|
|
|
|
|
|
|
|
|
|
2,111 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
307 |
|
|
|
|
|
|
|
307 |
|
Balance at June 30, 2012 |
$ |
23,641 |
|
|
$ |
20,850 |
|
|
$ |
9,596 |
|
|
$ |
(2,356 |
) |
|
$ |
(3,594 |
) |
|
$ |
48,137 |
|
SIX MONTHS ENDED JUNE 30, 2013 |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
$ |
23,641 |
|
|
$ |
20,850 |
|
|
$ |
10,262 |
|
|
$ |
(1,707 |
) |
|
$ |
(3,594 |
) |
|
$ |
49,452 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
1,629 |
|
|
|
|
|
|
|
|
|
|
|
1,629 |
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,947 |
) |
|
|
|
|
|
|
(1,947 |
) |
Common stock transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared ($0.06 per share) |
|
|
|
|
|
|
|
|
|
(272 |
) |
|
|
|
|
|
|
|
|
|
|
(272 |
) |
Treasury shares reissued |
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
24 |
|
Balance at June 30, 2013 |
$ |
23,641 |
|
|
$ |
20,833 |
|
|
$ |
11,619 |
|
|
$ |
(3,654 |
) |
|
$ |
(3,553 |
) |
|
$ |
48,886 |
|
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
5
CORTLAND BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts in thousands)
See accompanying notes to the unaudited consolidated financial statements of Cortland Bancorp and Subsidiaries
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. These interim unaudited consolidated financial statements should be read in conjunction with our annual audited financial statements as of December 31, 2012, included in our Form 10-K for the year ended December 31, 2012, filed with the United States Securities and Exchange Commission. The accompanying consolidated balance sheet at December 31, 2012, has been derived from the audited consolidated balance sheet but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
2.) Reclassifications:
Certain items contained in the 2012 financial statements have been reclassified to conform to the presentation for 2013. Such reclassifications had no effect on the net results of operations or equity.
3.) Investment Securities:
Investments in debt and equity securities are classified as held-to-maturity, available-for-sale or trading. Securities classified as held-to-maturity are those that management has the positive intent and ability to hold to maturity. Securities classified as available-for-sale are those that could be sold for liquidity, investment management, or similar reasons, even though management has no present intentions to do so. Securities classified as trading are those that management has bought principally for the purpose of selling in the near term. The Company currently has no securities classified as held-to-maturity.
Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a separate component of shareholders equity, net of tax effects. Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying amount of securities sold, using the specific identification method. Interest income includes amortization of purchase premium or discount and is amortized on the level-yield method without anticipating payments, except for both U.S. Government and private-label mortgage-backed and related securities where twelve months of historical prepayments are taken into consideration. Trading securities are carried at fair value with valuation adjustments included in other non-interest income.
Available-for-sale securities are evaluated periodically to determine whether a decline in value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, along with the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term other-than-temporary is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable and that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Unrealized losses on investments have not been recognized into income. However, once a decline in value is determined to be other-than-temporary, the credit related other-than-temporary impairment (OTTI) is recognized in earnings while the non-credit related OTTI on securities not expected to be sold is recognized in other comprehensive loss.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table is a summary of investment securities available-for-sale:
|
(Amounts in thousands) |
|
|||||||||||||
June 30, 2013 |
Amortized Cost |
|
|
Gross
|
|
|
Gross
|
|
|
Fair Value |
|
||||
U.S. Treasury securities |
$ |
110 |
|
|
$ |
8 |
|
|
$ |
|
|
|
$ |
118 |
|
U.S. Government agencies and corporations |
|
2,986 |
|
|
|
|
|
|
|
137 |
|
|
|
2,849 |
|
Obligations of states and political subdivisions |
|
41,814 |
|
|
|
702 |
|
|
|
1,124 |
|
|
|
41,392 |
|
U.S. Government-sponsored mortgage-backed securities |
|
87,882 |
|
|
|
1,280 |
|
|
|
1,865 |
|
|
|
87,297 |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
21,648 |
|
|
|
45 |
|
|
|
209 |
|
|
|
21,484 |
|
Trust preferred securities |
|
13,887 |
|
|
|
|
|
|
|
4,201 |
|
|
|
9,686 |
|
Total debt securities |
|
168,327 |
|
|
|
2,035 |
|
|
|
7,536 |
|
|
|
162,826 |
|
Federal Home Loan Bank (FHLB) stock |
|
2,823 |
|
|
|
|
|
|
|
|
|
|
|
2,823 |
|
Federal Reserve Bank (FRB) stock |
|
226 |
|
|
|
|
|
|
|
|
|
|
|
226 |
|
Total regulatory stock |
|
3,049 |
|
|
|
|
|
|
|
|
|
|
|
3,049 |
|
Total investment securities available-for-sale |
$ |
171,376 |
|
|
$ |
2,035 |
|
|
$ |
7,536 |
|
|
$ |
165,875 |
|
|
(Amounts in thousands) |
|
|||||||||||||
December 31, 2012 |
Amortized Cost |
|
|
Gross
|
|
|
Gross
|
|
|
Fair Value |
|
||||
U.S. Treasury securities |
$ |
113 |
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
123 |
|
U.S. Government agencies and corporations |
|
8,038 |
|
|
|
27 |
|
|
|
|
|
|
|
8,065 |
|
Obligations of states and political subdivisions |
|
40,374 |
|
|
|
1,973 |
|
|
|
31 |
|
|
|
42,316 |
|
U.S. Government-sponsored mortgage-backed securities |
|
90,858 |
|
|
|
2,071 |
|
|
|
590 |
|
|
|
92,339 |
|
0U.S. Government-sponsored collateralized mortgage obligations |
|
30,917 |
|
|
|
300 |
|
|
|
75 |
|
|
|
31,142 |
|
Trust preferred securities |
|
13,883 |
|
|
|
|
|
|
|
6,271 |
|
|
|
7,612 |
|
Total debt securities |
|
184,183 |
|
|
|
4,381 |
|
|
|
6,967 |
|
|
|
181,597 |
|
Federal Home Loan Bank (FHLB) stock |
|
2,823 |
|
|
|
|
|
|
|
|
|
|
|
2,823 |
|
Federal Reserve Bank (FRB) stock |
|
226 |
|
|
|
|
|
|
|
|
|
|
|
226 |
|
Total regulatory stock |
|
3,049 |
|
|
|
|
|
|
|
|
|
|
|
3,049 |
|
Total investment securities available-for-sale |
$ |
187,232 |
|
|
$ |
4,381 |
|
|
$ |
6,967 |
|
|
$ |
184,646 |
|
FHLB and FRB stock are carried at cost and the Company is required to hold such investments as a condition of membership in order to transact business with the FHLB and the FRB. While the FHLBs have been negatively impacted by the recent economic conditions, the FHLB of Cincinnati has reported profits for 2012 and year-to-date 2013, remains in compliance with regulatory capital and liquidity requirements, continues to pay dividends on stock and makes redemptions at par value. With consideration given to these factors, management concluded that the stock was not impaired at June 30, 2013 or December 31, 2012.
Trading securities of $7.0 million are an investment in a pooled fund consisting of obligations of states and political subdivisions.
The amortized cost and fair value of debt securities at June 30, 2013, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
(Amounts in thousands) |
|
|||||
|
Amortized Cost |
|
|
Fair Value |
|
||
Due in one year or less |
$ |
172 |
|
|
$ |
175 |
|
Due after one year through five years |
|
3,192 |
|
|
|
3,248 |
|
Due after five years through ten years |
|
7,077 |
|
|
|
7,120 |
|
Due after ten years |
|
48,357 |
|
|
|
43,503 |
|
Total |
|
58,798 |
|
|
|
54,046 |
|
U.S. Government-sponsored mortgage-backed and related securities |
|
109,529 |
|
|
|
108,780 |
|
Total debt securities |
$ |
168,327 |
|
|
$ |
162,826 |
|
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The table below sets forth the proceeds and gains or losses realized on securities sold or called for the periods presented:
Investment securities with a carrying value of approximately $99.4 million and $107.6 million were pledged to secure deposits and for other purposes at June 30, 2013 and December 31, 2012. The remaining securities provide an adequate level of liquidity.
The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at June 30, 2013:
|
(Amounts in thousands) |
|
|||||||||||||||||||||
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
|
Fair Value |
|
|
Unrealized
|
|
|
Fair Value |
|
|
Unrealized
|
|
|
Fair Value |
|
|
Unrealized
|
|
||||||
U.S. Government-sponsored mortgage-backed and related securities |
$ |
22,075 |
|
|
$ |
814 |
|
|
$ |
36,949 |
|
|
$ |
1,051 |
|
|
$ |
59,024 |
|
|
$ |
1,865 |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
11,708 |
|
|
|
149 |
|
|
|
2,672 |
|
|
|
60 |
|
|
|
14,380 |
|
|
|
209 |
|
Obligations of states and political subdivisions |
|
16,807 |
|
|
|
1,124 |
|
|
|
|
|
|
|
|
|
|
|
16,807 |
|
|
|
1,124 |
|
U.S. Government agencies and corporations |
|
2,849 |
|
|
|
137 |
|
|
|
|
|
|
|
|
|
|
|
2,849 |
|
|
|
137 |
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
9,686 |
|
|
|
4,201 |
|
|
|
9,686 |
|
|
|
4,201 |
|
Total |
$ |
53,439 |
|
|
$ |
2,224 |
|
|
$ |
49,307 |
|
|
$ |
5,312 |
|
|
$ |
102,746 |
|
|
$ |
7,536 |
|
The above table comprises 79 investment securities where the fair value is less than the related amortized cost.
The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at December 31, 2012:
|
(Amounts in thousands) |
|
|||||||||||||||||||||
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|||||||||||||||
|
Fair Value |
|
|
Unrealized
|
|
|
Fair Value |
|
|
Unrealized
|
|
|
Fair Value |
|
|
Unrealized
|
|
||||||
U.S. Government-sponsored mortgage-backed and related securities |
$ |
|
|
|
$ |
|
|
|
$ |
47,358 |
|
|
$ |
590 |
|
|
$ |
47,358 |
|
|
$ |
590 |
|
U.S. Government-sponsored collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
4,825 |
|
|
|
75 |
|
|
|
4,825 |
|
|
|
75 |
|
Obligations of states and political subdivisions |
|
4,176 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
4,176 |
|
|
|
31 |
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
7,612 |
|
|
|
6,271 |
|
|
|
7,612 |
|
|
|
6,271 |
|
Total |
$ |
4,176 |
|
|
$ |
31 |
|
|
$ |
59,795 |
|
|
$ |
6,936 |
|
|
$ |
63,971 |
|
|
$ |
6,967 |
|
The above table comprises 46 investment securities where the fair value is less than the related amortized cost.
The trust preferred securities with an unrealized loss represent pools of trust preferred debt primarily issued by bank holding companies and insurance companies. The unrealized losses on the Companys investment in U.S. Government-sponsored-mortgage-backed securities, U.S. Government-sponsored collateralized mortgage obligations and obligations of states and political subdivisions were caused by changes in market rates and related spreads, as well as reflecting current distressed conditions in the credit markets and the markets on-going reassessment of appropriate liquidity and risk premiums. It is expected that the securities would not be
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
settled at less than the amortized cost of the Companys investment because the decline in fair value is attributable to changes in interest rates and relative spreads and not credit quality. Also, the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its amortized cost basis less any current period credit loss. The Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013.
Securities Deemed to be Other-Than-Temporarily Impaired
The Company reviews investment debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI) with formal reviews performed quarterly.
For debt securities in an unrealized loss position, management assesses whether (a) it has the intent to sell the debt security or (b) it is more-likely-than-not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an OTTI on the security must be recognized.
In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more-likely-than-not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), the Company presents the amount of the OTTI recognized in the income statement.
In these instances, the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in comprehensive income. The total other-than-temporary impairment is presented in the income statement with an offset for the amount of the total other-than-temporary impairment that is recognized in comprehensive income.
As more fully disclosed in Note 9, the Company assessed the impairment of certain securities currently in an illiquid market. Through the impairment assessment process, the Company determined that the investments discussed in the following table were other-than-temporarily impaired at June 30, 2013 and 2012. No investments were determined to be other-than-temporarily impaired in the quarters ended June 30, 2013 and 2012. The Company records impairment credit losses in earnings (before tax) and non-credit impairment losses in other comprehensive income (before tax) as indicated in the following table:
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following provides a cumulative rollforward of credit losses recognized in earnings for trust preferred securities held for the three and six months ended:
During the third quarter of 2012, the Company was able to sell 19 of the 22 bank collateralized positions. All of these securities exhibited evidence of significant deterioration in issuers creditworthiness. The 3 remaining bank collateralized positions, as well as the 9 positions collateralized by insurance companies, have historically not exhibited material other-than-temporary impairment, thus were excluded from sale considerations. The Company continues to have both the intent and ability to hold these securities until recovery of their cost basis.
At June 30, 2013, there was $1,009,500 of investment securities considered to be in non-accrual status. This balance is comprised of 3 of its 12 investments in trust preferred securities. As a result of the delay in the collection of interest payments, management placed these securities in non-accrual status. Current estimates indicate that the interest payment delays may exceed ten years. All other trust preferred securities remain in accrual status.
4.) Loans and Allowance for Loan Losses:
The Company, through the Bank, grants residential, consumer and commercial loans to customers located primarily in Northeastern Ohio and Western Pennsylvania.
The following represents the composition of the loan portfolio for the period ending:
|
(Amounts in thousands) |
|||||||||||||
|
June 30, 2013 |
|
|
December 31, 2012 |
||||||||||
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
||||
Commercial real estate |
$ |
199,252 |
|
|
|
66.0 |
|
|
$ |
193,417 |
|
|
|
61.1 |
Commercial |
|
42,916 |
|
|
|
14.2 |
|
|
|
62,312 |
|
|
|
19.6 |
Residential real estate |
|
36,779 |
|
|
|
12.2 |
|
|
|
39,091 |
|
|
|
12.3 |
Consumerother |
|
4,419 |
|
|
|
1.5 |
|
|
|
4,552 |
|
|
|
1.4 |
Consumerhome equity |
|
18,546 |
|
|
|
6.1 |
|
|
|
17,910 |
|
|
|
5.6 |
Total loans |
$ |
301,912 |
|
|
|
|
|
|
$ |
317,282 |
|
|
|
|
Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented loans in the portfolio by product type. Loans are segmented into the following pools: commercial loans, commercial real estate loans, residential real estate loans and consumer loans. The Company also sub-segments the consumer loan portfolio into the following two classes: other consumer loans and home equity loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over multiple periods for all portfolio segments. Management evaluates these results and utilizes the most reflective period in the calculation. Certain qualitative factors are then added to the historical allocation percentage to get the adjusted factor.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
These factors include, but are not limited to, the following:
Factor Considered: |
Risk Trend: |
Levels of and trends in charge-offs, classifications and non-accruals |
Increasing |
Trends in volume and terms |
Increasing |
Changes in lending policies and procedures |
Stable |
Experience, depth and ability of management |
Stable |
Economic trends |
Stable |
Concentrations of credit |
Stable |
The following factors are analyzed and applied to loans internally graded with higher credit risk in addition to the above factors for non-classified loans:
Factor Considered: |
Risk Trend: |
Levels and trends in classification |
Stable |
Declining trends in financial performance Commercial real estate and Commercial |
Increasing |
Structure and lack of performance measures Commercial real estate and Commercial |
Increasing |
Migration between risk categories |
Decreasing |
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following is an analysis of changes in the allowance for loan losses for the periods ended:
June 30, 2012 |
Commercial |
|
|
Commercial
|
|
|
Consumer -
|
|
|
Consumer -
|
|
|
Residential
|
|
|
Total |
|
||||||
Balance at beginning of period |
$ |
534 |
|
|
$ |
1,655 |
|
|
$ |
121 |
|
|
$ |
191 |
|
|
$ |
638 |
|
|
$ |
3,139 |
|
Loan charge-offs |
|
|
|
|
|
(16 |
) |
|
|
(26 |
) |
|
|
(7 |
) |
|
|
(119 |
) |
|
|
(168 |
) |
Recoveries |
|
3 |
|
|
|
16 |
|
|
|
14 |
|
|
|
3 |
|
|
|
1 |
|
|
|
37 |
|
Net loan charge-offs |
|
3 |
|
|
|
|
|
|
|
(12 |
) |
|
|
(4 |
) |
|
|
(118 |
) |
|
|
(131 |
) |
Provision charged to operations |
|
63 |
|
|
|
445 |
|
|
|
(19 |
) |
|
|
(35 |
) |
|
|
(124 |
) |
|
|
330 |
|
Balance at end of period |
$ |
600 |
|
|
$ |
2,100 |
|
|
$ |
90 |
|
|
$ |
152 |
|
|
$ |
396 |
|
|
$ |
3,338 |
|
June 30, 2012 |
Commercial |
|
|
Commercial
|
|
|
Consumer -
|
|
|
Consumer -
|
|
|
Residential
|
|
|
Total |
|
||||||
Balance at beginning of period |
$ |
565 |
|
|
$ |
1,803 |
|
|
$ |
92 |
|
|
$ |
128 |
|
|
$ |
470 |
|
|
$ |
3,058 |
|
Loan charge-offs |
|
(17 |
) |
|
|
(16 |
) |
|
|
(72 |
) |
|
|
(58 |
) |
|
|
(219 |
) |
|
|
(382 |
) |
Recoveries |
|
5 |
|
|
|
16 |
|
|
|
29 |
|
|
|
5 |
|
|
|
7 |
|
|
|
62 |
|
Net loan charge-offs |
|
(12 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
(53 |
) |
|
|
(212 |
) |
|
|
(320 |
) |
Provision charged to operations |
|
47 |
|
|
|
297 |
|
|
|
41 |
|
|
|
77 |
|
|
|
138 |
|
|
|
600 |
|
Balance at end of period |
$ |
600 |
|
|
$ |
2,100 |
|
|
$ |
90 |
|
|
$ |
152 |
|
|
$ |
396 |
|
|
$ |
3,338 |
|
The total allowance reflects managements estimate of loan losses inherent in the loan portfolio at the consolidated balance sheet date.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables present a full breakdown by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods ended June 30, 2013 and December 31, 2012:
June 30, 2013 |
Commercial |
|
|
Commercial
|
|
|
Consumer -
|
|
|
Consumer -
|
|
|
Residential
|
|
|
Total |
|
||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
40 |
|
|
$ |
668 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
708 |
|
Collectively evaluated for impairment |
|
511 |
|
|
|
2,367 |
|
|
|
92 |
|
|
|
127 |
|
|
|
340 |
|
|
|
3,437 |
|
Total ending allowance balance |
$ |
551 |
|
|
$ |
3,035 |
|
|
$ |
92 |
|
|
$ |
127 |
|
|
$ |
340 |
|
|
$ |
4,145 |
|
Loan Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
105 |
|
|
$ |
4,415 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,520 |
|
Collectively evaluated for impairment |
|
42,811 |
|
|
|
194,837 |
|
|
|
4,419 |
|
|
|
18,546 |
|
|
|
36,779 |
|
|
|
297,392 |
|
Total ending loans balance |
$ |
42,916 |
|
|
$ |
199,252 |
|
|
$ |
4,419 |
|
|
$ |
18,546 |
|
|
$ |
36,779 |
|
|
$ |
301,912 |
|
December 31, 2012 |
Commercial |
|
|
Commercial
|
|
|
Consumer -
|
|
|
Consumer -
|
|
|
Residential
|
|
|
Total |
|
||||||
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
49 |
|
|
$ |
423 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
472 |
|
Collectively evaluated for impairment |
|
590 |
|
|
|
2,193 |
|
|
|
104 |
|
|
|
123 |
|
|
|
343 |
|
|
|
3,353 |
|
Total ending allowance balance |
$ |
639 |
|
|
$ |
2,616 |
|
|
$ |
104 |
|
|
$ |
123 |
|
|
$ |
343 |
|
|
$ |
3,825 |
|
Loan Portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
49 |
|
|
$ |
5,031 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,080 |
|
Collectively evaluated for impairment |
|
62,263 |
|
|
|
188,386 |
|
|
|
4,552 |
|
|
|
17,910 |
|
|
|
39,091 |
|
|
|
312,202 |
|
Total ending loans balance |
$ |
62,312 |
|
|
$ |
193,417 |
|
|
$ |
4,552 |
|
|
$ |
17,910 |
|
|
$ |
39,091 |
|
|
$ |
317,282 |
|
The following tables represent credit exposures by internally assigned grades for June 30, 2013 and December 31, 2012. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Companys internal credit risk grading system is based on experiences with similarly graded loans.
The Companys internally assigned grades are as follows:
· | Pass loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Within this category, there are grades of exceptional, quality, acceptable and pass monitor. |
· | Special Mention loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. |
· | Substandard loans that 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 classified as doubtful have all the weaknesses inherent in a substandard asset but with the severity which makes collection 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. This rating does not mean that the assets have no recovery or salvage value but rather that the assets should be charged off now, even though partial or full recovery may be possible in the future. |
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table is a summary of credit quality indicators by internally assigned grade as of June 30, 2013 and December 31, 2012:
|
(Amounts in thousands) |
|
|||||
|
Commercial |
|
|
Commercial
|
|
||
June 30, 2013 |
|
|
|
|
|
|
|
Pass |
$ |
41,582 |
|
|
$ |
184,241 |
|
Special Mention |
|
602 |
|
|
|
8,311 |
|
Substandard |
|
732 |
|
|
|
6,700 |
|
Doubtful |
|
|
|
|
|
|
|
Ending Balance |
$ |
42,916 |
|
|
$ |
199,252 |
|
|
Commercial |
|
|
Commercial
|
|
||
December 31, 2012 |
|
|
|
|
|
|
|
Pass |
$ |
60,387 |
|
|
$ |
175,367 |
|
Special Mention |
|
1,182 |
|
|
|
11,135 |
|
Substandard |
|
743 |
|
|
|
6,915 |
|
Doubtful |
|
|
|
|
|
|
|
Ending Balance |
$ |
62,312 |
|
|
$ |
193,417 |
|
The Company evaluates the classification of consumer, home equity and residential loans primarily on a pooled basis. If the Company becomes aware that adverse or distressed conditions exist that may affect a particular loan, the loan is downgraded following the above definitions of special mention and substandard.
The following table is a summary of consumer credit exposure as of June 30, 2013 and December 31, 2012:
|
(Amounts in thousands) |
|
|||||||||
|
Consumer-
|
|
|
Consumer -
|
|
|
Residential
|
|
|||
June 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
Performing |
$ |
4,397 |
|
|
$ |
18,462 |
|
|
$ |
36,477 |
|
Nonperforming |
|
22 |
|
|
|
84 |
|
|
|
302 |
|
Total |
$ |
4,419 |
|
|
$ |
18,546 |
|
|
$ |
36,779 |
|
|
Consumer-
|
|
|
Consumer -
|
|
|
Residential
|
|
|||
December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
Performing |
$ |
4,525 |
|
|
$ |
17,838 |
|
|
$ |
38,602 |
|
Nonperforming |
|
27 |
|
|
|
72 |
|
|
|
489 |
|
Total |
$ |
4,552 |
|
|
$ |
17,910 |
|
|
$ |
39,091 |
|
Loans are considered to be nonperforming when they become 90 days past due or on nonaccrual status, though the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in non-accrual status, previously accrued but unpaid interest is deducted from interest income. Loans in foreclosure are considered nonperforming.
Troubled Debt Restructuring
Nonperforming loans also include certain loans that have been modified in trouble debt restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Companys loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrowers sustained repayment performance for a reasonable period, generally six months.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table shows the amounts of contractual interest income and interest income actually reflected in income on TDRs for the periods indicated.
The following table presents, by class, information related to loans modified in a TDR during the three and six months ended June 30, 2013 and June 30, 2012 (1):
|
(Amounts in thousands) |
|
|||||||||||||||||||||||||||||
|
Three Months Ended June 30, 2013 |
|
|
Six Months Ended June 30, 2013 |
|
||||||||||||||||||||||||||
|
Number of
|
|
|
Pre-modification
|
|
|
Post-modification
|
|
|
Increase in the
|
|
|
Number of
|
|
|
Pre-modification
|
|
|
Post-modification
|
|
|
Increase in the
|
|
||||||||
Commercial |
|
1 |
|
|
$ |
44 |
|
|
$ |
44 |
|
|
$ |
|
|
|
|
1 |
|
|
$ |
44 |
|
|
$ |
44 |
|
|
$ |
|
|
Commercial real estate |
|
2 |
|
|
|
650 |
|
|
|
650 |
|
|
|
|
|
|
|
2 |
|
|
|
650 |
|
|
|
650 |
|
|
|
|
|
Total restructured loans |
|
3 |
|
|
$ |
694 |
|
|
$ |
694 |
|
|
$ |
|
|
|
|
3 |
|
|
$ |
694 |
|
|
$ |
694 |
|
|
$ |
|
|
Subsequently defaulted |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands) |
|
|||||||||||||||||||||||||||||
|
Three Months Ended June 30, 2012 |
|
|
Six Months Ended June 30, 2012 |
|
||||||||||||||||||||||||||
|
Number of
|
|
|
Pre-modification
|
|
|
Post-modification
|
|
|
Increase in the
|
|
|
Number of
|
|
|
Pre-modification
|
|
|
Post-modification
|
|
|
Increase in the
|
|
||||||||
Commercial real estate |
|
2 |
|
|
$ |
1,340 |
|
|
$ |
1,340 |
|
|
$ |
148 |
|
|
|
3 |
|
|
$ |
1,609 |
|
|
$ |
1,609 |
|
|
$ |
148 |
|
Total restructured loans |
|
2 |
|
|
$ |
1,340 |
|
|
$ |
1,340 |
|
|
$ |
148 |
|
|
|
3 |
|
|
$ |
1,609 |
|
|
$ |
1,609 |
|
|
$ |
148 |
|
Subsequently defaulted |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
(1) |
The period end balances are inclusive of all partial paydowns and charge offs since the modification date. Loans modified in a TDR that were fully paid down, charged off, or foreclosed upon by period end are not reported. |
The two new commercial real estate loans had either the rate unchanged or blended with no rate impact. Both loans had loan term changes. The commercial loan had a rate increase and a loan term change. This loan was paid off after June 30, 2013.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table is an aging analysis of the recorded investment of past due loans as of June 30, 2013 and December 31, 2012:
|
(Amounts in thousands) |
|
|||||||||||||||||||||||||
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days Or
|
|
|
Total Past
|
|
|
Current |
|
|
Total
|
|
|
Recorded
|
|
|||||||
June 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
$ |
125 |
|
|
$ |
|
|
|
$ |
2,053 |
|
|
$ |
2,178 |
|
|
$ |
197,074 |
|
|
$ |
199,252 |
|
|
$ |
|
|
Commercial |
|
30 |
|
|
|
93 |
|
|
|
61 |
|
|
|
184 |
|
|
|
42,732 |
|
|
|
42,916 |
|
|
|
|
|
Residential real estate |
|
69 |
|
|
|
58 |
|
|
|
159 |
|
|
|
286 |
|
|
|
36,493 |
|
|
|
36,779 |
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumerhome equity |
|
18 |
|
|
|
|
|
|
|
66 |
|
|
|
84 |
|
|
|
18,462 |
|
|
|
18,546 |
|
|
|
|
|
Consumerother |
|
26 |
|
|
|
|
|
|
|
22 |
|
|
|
48 |
|
|
|
4,371 |
|
|
|
4,419 |
|
|
|
|
|
Total |
$ |
268 |
|
|
$ |
151 |
|
|
$ |
2,361 |
|
|
$ |
2,780 |
|
|
$ |
299,132 |
|
|
$ |
301,912 |
|
|
$ |
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
90 Days Or
|
|
|
Total Past
|
|
|
Current |
|
|
Total
|
|
|
Recorded
|
|
|||||||
December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
$ |
32 |
|
|
$ |
|
|
|
$ |
2,182 |
|
|
$ |
2,214 |
|
|
$ |
191,203 |
|
|
$ |
193,417 |
|
|
$ |
|
|
Commercial |
|
|
|
|
|
|
|
|
|
49 |
|
|
|
49 |
|
|
|
62,263 |
|
|
|
62,312 |
|
|
|
|
|
Residential real estate |
|
72 |
|
|
|
158 |
|
|
|
384 |
|
|
|
614 |
|
|
|
38,477 |
|
|
|
39,091 |
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumerhome equity |
|
|
|
|
|
|
|
|
|
62 |
|
|
|
62 |
|
|
|
17,848 |
|
|
|
17,910 |
|
|
|
|
|
Consumerother |
|
14 |
|
|
|
|
|
|
|
27 |
|
|
|
41 |
|
|
|
4,511 |
|
|
|
4,552 |
|
|
|
|
|
Total |
$ |
118 |
|
|
$ |
158 |
|
|
$ |
2,704 |
|
|
$ |
2,980 |
|
|
$ |
314,302 |
|
|
$ |
317,282 |
|
|
$ |
|
|
An impaired loan is a loan on which, based on current information and events, it is probable that a creditor will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. However, an insignificant delay or insignificant shortfall in amount of payments on a loan does not indicate that the loan is impaired.
When a loan is determined to be impaired, impairment should be measured based on the present value of expected future cash flows discounted at the loans effective interest rate. However, as a practical expedient, the Company will measure impairment based on a loans observable market price, or the fair value of the collateral if the loan is collateral dependent.
The following are the criteria for selecting individual loans / relationships for impairment analysis. Non-homogenous loans which meet the criteria below are evaluated quarterly.
· | All borrowers whose loans are classified doubtful by examiners and internal loan review |
· | All loans on non-accrual status |
· | Any loan in foreclosure |
· | Any loan with a specific reserve |
· | Any loan determined to be collateral dependent for repayment |
· | Loans classified as troubled debt restructuring |
Any loan evaluated for impairment is excluded from the general pool of loans in the ALLL calculation regardless if a specific reserve was determined. 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.
The following table presents the recorded investment and unpaid principal balances for impaired loans, excluding homogenous loans for which impaired analyses are not necessarily performed, with the associated allowance amount, if applicable, at June 30, 2013 and
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2012. Also presented are the average recorded investments in the impaired balances and interest income recognized after impairment for the six months ended June 30, 2013 and June 30, 2012.
|
(Amounts in thousands) |
|
|||||||||
|
Recorded
|
|
|
Unpaid
|
|
|
Related
|
|
|||
June 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
$ |
1,562 |
|
|
$ |
1,562 |
|
|
$ |
|
|
Commercial |
|
65 |
|
|
|
65 |
|
|
|
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
2,853 |
|
|
|
2,853 |
|
|
|
668 |
|
Commercial |
|
40 |
|
|
|
40 |
|
|
|
40 |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
$ |
4,415 |
|
|
$ |
4,415 |
|
|
$ |
668 |
|
Commercial |
|
105 |
|
|
|
105 |
|
|
|
40 |
|
|
Recorded
|
|
|
Unpaid
|
|
|
Related
|
|
|||
December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
$ |
789 |
|
|
$ |
789 |
|
|
$ |
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
4,242 |
|
|
|
4,242 |
|
|
|
423 |
|
Commercial |
|
49 |
|
|
|
49 |
|
|
|
49 |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
$ |
5,031 |
|
|
$ |
5,031 |
|
|
$ |
423 |
|
Commercial |
|
49 |
|
|
|
49 |
|
|
|
49 |
|
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table is a summary of classes of loans on non-accrual status as of June 30, 2013 and December 31, 2012:
|
(Amounts in thousands) |
|||||
|
June 30,
|
|
|
December 31,
|
||
Commercial real estate |
$ |
2,202 |
|
|
$ |
2,336 |
Commercial |
|
105 |
|
|
|
49 |
Residential real estate |
|
302 |
|
|
|
489 |
Consumer: |
|
|
|
|
|
|
Consumerother |
|
22 |
|
|
|
27 |
Consumerhome equity |
|
84 |
|
|
|
72 |
Total |
$ |
2,715 |
|
|
$ |
2,973 |
As of June 30, 2013 and December 31, 2012, there were $3.0 million and $2.7 million, respectively, in loans that were neither classified as non-accrual nor considered impaired, but which can be considered potential problem loans.
5.) Legal Proceedings:
The Company is involved in legal actions arising in the ordinary course of business. In the opinion of management, the outcomes from these matters, either individually or in the aggregate, are not expected to have any material effect on the Company.
6.) Earnings Per Share and Capital Transactions:
The following table sets forth the computation of basic earnings per common share and diluted earnings per common share. Basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding during the applicable period.
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
||||||||||
|
2013 |
|
|
2012 |
|
|
2013 |
|
|
2012 |
|
||||
Net income (amounts in thousands) |
$ |
799 |
|
|
$ |
952 |
|
|
$ |
1,629 |
|
|
$ |
2,111 |
|
Weighted average common shares outstanding |
|
4,527,847 |
|
|
|
4,525,524 |
|
|
|
4,526,844 |
|
|
|
4,525,527 |
|
Basic earnings per share |
$ |
0.18 |
|
|
$ |
0.21 |
|
|
$ |
0.36 |
|
|
|
0.47 |
|
Diluted earnings per share |
$ |
0.18 |
|
|
$ |
0.21 |
|
|
$ |
0.36 |
|
|
|
0.47 |
|
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7.) Subordinated Debt:
In July 2007, a trust formed by the Company issued $5.0 million of floating rate trust preferred securities as part of a pooled offering of such securities due December 2037. The Company owns all $155,000 of the common securities issued by the trust. The securities bear interest at the 3-month LIBOR rate plus 1.45%. The rates at June 30, 2013 and December 31, 2012 were 1.72% and 1.76%, respectively. The Company issued subordinated debentures to the trust in exchange for the proceeds of the trust preferred offering. The debentures represent the sole assets of this trust. The Company may redeem the subordinated debentures, in whole or in part, at par.
The trust is not consolidated with the Companys financial statements. Accordingly, the Company does not report the securities issued by the trust as liabilities, but instead reports as liabilities the subordinated debentures issued by the Company and held by the trust. The subordinated debentures qualify as Tier 1 capital for regulatory purposes in determining and evaluating the Companys capital adequacy.
8.) Commitments:
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market, forward contracts for the future purchase of mortgage-backed securities and forward contracts for the future delivery of these mortgage loans are considered derivatives. It is the Companys practice to enter into the forward contracts for the future purchase of mortgage-backed securities when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not formally designated in hedge relationships. The Company reports the derivative assets and liabilities in other assets and other liabilities; associated income and expense is reported in mortgage banking gains.
Although residential mortgage loans originated and sold are without recourse as to performance, third parties to which the loans are sold can require repurchase of loans in the event noncompliance with the representations and warranties included in the sales agreements exists. These repurchases are typically those for which the borrower is in a nonperforming status, diminishing the prospects for future collection on the loan. The Company historically has not been required to repurchase any loans; however, provision is made for the contingent probability of this occurrence.
The following table is a summary of mortgage banking derivative commitments and the related balance sheet accounts:
|
(Amounts in thousands) |
|
|||||
|
June 30,
|
|
|
December 31,
|
|
||
Mortgage banking derivative commitments: |
|
|
|
|
|
|
|
Interest rate lock commitments |
$ |
24,516 |
|
|
$ |
65,536 |
|
Forward contracts for the future delivery of mortgage loans |
|
12,574 |
|
|
|
15,731 |
|
Forward contracts for the future purchase of mortgage-backed securities |
|
27,000 |
|
|
|
52,000 |
|
Corresponding recorded balances: |
|
|
|
|
|
|
|
Derivative asset |
$ |
1,415 |
|
|
$ |
531 |
|
Derivative liability |
|
236 |
|
|
|
199 |
|
Reserve for loan repurchases |
|
613 |
|
|
|
430 |
|
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheets. The contract or notional amounts for those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
In the event of nonperformance by the other party, the Companys exposure to credit loss on these financial instruments is represented by the contract or notional amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. The amount and nature of collateral obtained, if any, is based on managements credit evaluation.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table is a summary of such contractual commitments:
|
(Amounts in thousands) |
|||||
|
June 30,
|
|
|
December 31,
|
||
Commitments to extend credit: |
|
|
|
|
|
|
Fixed rate |
$ |
9,407 |
|
|
$ |
14,551 |
Variable rate |
|
48,027 |
|
|
|
48,184 |
Standby letters of credit |
|
450 |
|
|
|
477 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Generally these financial arrangements have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.
The Company also offers limited overdraft protection as a non-contractual courtesy which is available to businesses as well as individually/jointly owned accounts in good standing for personal or household use. The Company reserves the right to discontinue this service without prior notice.
The following table is a summary of overdraft protection for the periods indicated:
|
(Amounts in thousands) |
|
|||||
|
June 30,
|
|
|
December 31,
|
|
||
Overdraft protection available on depositors accounts |
$ |
9,785 |
|
|
$ |
9,814 |
|
Balance of overdrafts included in loans |
|
135 |
|
|
|
167 |
|
Average daily balance of overdrafts |
|
110 |
|
|
|
112 |
|
Average daily balance of overdrafts as a percentage of available |
|
1.12 |
% |
|
|
1.14 |
% |
9.) Fair Value of Assets and Liabilities:
Measurements
Accounting guidance affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence.
The Company groups assets and liabilities recorded at fair value into three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instruments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:
|
|
|
|
Level 1: |
Quoted prices are available in active markets for identical assets or liabilities as of the reported date. |
|
Level 2: |
Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but which trade less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed. |
|
Level 3: |
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using managements best estimate of fair value, where inputs into the determination of fair value require significant management judgment or estimation. |
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables present the assets reported on the consolidated balance sheets at their fair value as of June 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.
|
|
June 30,
|
|
|
(Amounts in thousands)
|
|
||||||||||
Description |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
118 |
|
|
$ |
|
|
|
$ |
118 |
|
|
$ |
|
|
U.S. Government agencies and corporations |
|
|
2,849 |
|
|
|
|
|
|
|
2,849 |
|
|
|
|
|
Obligations of states and political subdivisions |
|
|
41,392 |
|
|
|
|
|
|
|
41,392 |
|
|
|
|
|
U.S. Government-sponsored mortgage-backed and CMO securities |
|
|
108,781 |
|
|
|
|
|
|
|
108,781 |
|
|
|
|
|
Trust preferred securities |
|
|
9,686 |
|
|
|
|
|
|
|
|
|
|
|
9,686 |
|
Trading securities |
|
|
6,952 |
|
|
|
|
|
|
|
6,952 |
|
|
|
|
|
Loans held for sale |
|
|
14,458 |
|
|
|
|
|
|
|
14,458 |
|
|
|
|
|
Mortgage banking derivatives |
|
|
1,415 |
|
|
|
|
|
|
|
1,415 |
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking derivatives |
|
$ |
236 |
|
|
$ |
|
|
|
$ |
236 |
|
|
$ |
|
|
|
|
December 31,
|
|
|
Fair Value Measurements at 12/31/12 Using |
|
||||||||||
Description |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
123 |
|
|
$ |
|
|
|
$ |
123 |
|
|
$ |
|
|
U.S. Government agencies and corporations |
|
|
8,065 |
|
|
|
|
|
|
|
8,065 |
|
|
|
|
|
Obligations of states and political subdivisions |
|
|
42,316 |
|
|
|
|
|
|
|
42,316 |
|
|
|
|
|
U.S. Government-sponsored mortgage-backed and CMO securities |
|
|
123,481 |
|
|
|
|
|
|
|
123,481 |
|
|
|
|
|
Trust preferred securities |
|
|
7,612 |
|
|
|
|
|
|
|
|
|
|
|
7,612 |
|
Loans held for sale |
|
|
24,756 |
|
|
|
|
|
|
|
24,756 |
|
|
|
|
|
Mortgage banking derivatives |
|
|
531 |
|
|
|
|
|
|
|
531 |
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking derivatives |
|
$ |
199 |
|
|
$ |
|
|
|
$ |
199 |
|
|
$ |
|
|
The following table presents the changes in the Level 3 fair value category for the three and six months ended June 30, 2013 and 2012. The Company classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.
|
(Amounts in thousands) |
|
|||||||||||||
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
June 30, 2013 |
|
|
June 30, 2012 |
|
|
June 30, 2013 |
|
|
June 30, 2012 |
|
||||
|
Trust preferred
|
|
|
Trust preferred
|
|
|
Trust preferred
|
|
|
Trust preferred
|
|
||||
Beginning balance |
$ |
8,686 |
|
|
$ |
9,930 |
|
|
$ |
7,612 |
|
|
$ |
9,145 |
|
Net realized/unrealized gains/(losses) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
(171 |
) |
Other comprehensive income |
|
998 |
|
|
|
(507 |
) |
|
|
2,070 |
|
|
|
463 |
|
Discount accretion (premium amortization) |
|
2 |
|
|
|
(2 |
) |
|
|
4 |
|
|
|
(2 |
) |
Settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
Ending balance |
$ |
9,686 |
|
|
$ |
9,421 |
|
|
$ |
9,686 |
|
|
$ |
9,421 |
|
Losses included in net income for the period relating to assets held at period end |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(171 |
) |
The Company conducts OTTI analyses on a quarterly basis. The initial indication of other-than-temporary impairment for both debt and equity securities is a decline in the fair value below the amount recorded for an investment. A decline in value that is considered
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
to be other-than-temporary is recorded as a loss within non-interest income in the consolidated statements of income. In determining whether an impairment is other than temporary, the Company considers a number of factors, including, but not limited to, the length of time and extent to which the market value has been less than cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, and a determination that the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its amortized cost basis less any current period credit loss. Among the factors that are considered in determining the Companys intent and ability is a review of its capital adequacy, interest rate risk position and liquidity.
The Company also considers the issuers financial condition, capital strength and near-term prospects. In addition, for debt securities the Company considers the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), current ability to make future payments in a timely manner and the issuers ability to service debt, the assessment of a securitys ability to recover any decline in market value, the ability of the issuer to meet contractual obligations and the Companys intent and ability to retain the security. All of the foregoing require considerable judgment.
Trust Preferred Securities
The Company evaluates current available information in estimating the future cash flows of securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Company considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various note classes. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information.
The Company holds trust preferred securities that are backed by pooled trust preferred debt issued by banks, thrifts, insurance companies and real estate investment trusts. These securities were all rated investment grade at inception. Beginning during the second half of 2008 and into 2013, factors outside the Companys control impacted the fair value of these securities and will likely continue to do so for the foreseeable future. These factors include, but are not limited to, the following: guidance on fair value accounting, issuer credit deterioration, issuer deferral and default rates, potential failure or government seizure of underlying financial institutions or insurance companies, ratings agency actions, or regulatory actions. As a result of changes in these and various other factors during 2009 and into 2013, Moodys Investors Service, Fitch Ratings and Standards and Poors downgraded multiple trust preferred securities, including securities held by the Company. All of the trust preferred securities held by the Company are now considered to be below investment grade. The deteriorating economic, credit and financial conditions experienced in 2008 and through 2012 have resulted in illiquid and inactive financial markets and severely depressed prices for these securities. The Company analyzed the cash flow characteristics of the securities to determine which investments the Company does not consider to be OTTI at June 30, 2013. The Company does not intend to sell the securities and it is more-likely-than-not that the Company will not be required to sell the securities before recovery of its amortized cost basis. There was no adverse change in the cash flows. Although the Company did not identify additional OTTI in these investments at June 30, 2013, there is a risk that subsequent evaluations could result in recognition of OTTI charges in the future. The remaining securities had life-to-date impairment losses as presented below.
The following table details the breakdown of trust preferred securities for the periods indicated:
|
(Dollar amounts in thousands) |
|
|||||
|
June 30, 2013 |
|
|
December 31, 2012 |
|
||
Total number of trust preferred securities |
|
12 |
|
|
|
12 |
|
Par value |
$ |
14,449 |
|
|
$ |
14,449 |
|
Number not considered OTTI |
|
10 |
|
|
|
10 |
|
Par value |
$ |
11,491 |
|
|
$ |
11,491 |
|
Number considered OTTI |
|
2 |
|
|
|
2 |
|
Par value |
$ |
2,958 |
|
|
$ |
2,958 |
|
Life-to-date impairment recognized in earnings |
$ |
351 |
|
|
$ |
351 |
|
Life-to-date impairment recognized in other comprehensive income |
|
1,443 |
|
|
|
1,868 |
|
Total life-to-date impairment |
$ |
1,794 |
|
|
$ |
2,219 |
|
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table details the 2 debt securities with other-than-temporary impairment, their credit ratings at June 30, 2013 and the related losses recognized in earnings:
|
(Amounts in thousands) |
|
|||||||||||||||
|
Moodys/Fitch
|
|
|
Amount of OTTI
|
|
|
|
Additions in
|
|
|
|
Additions in
|
|
|
|
Amount of OTTI
|
|
PreTSL XXIII Class C-FP |
Ca/C |
|
$ |
211 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
211 |
|
Trapeza IX B-1 |
Ca/CC |
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
140 |
|
Total |
|
|
$ |
351 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
351 |
|
The following table details the 18 debt securities with other-than-temporary impairment, their credit ratings at June 30, 2012 and the related losses recognized in earnings:
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides additional information related to the Companys trust preferred securities as of June 30, 2013 used to evaluate other-than-temporary impairments:
|
|
(Amounts in thousands) |
|
|||||||||||||||||||||||||
Deal |
|
Class |
|
Amortized Cost |
|
|
Fair Value |
|
|
Unrealized
|
|
|
Moodys/
|
|
Number of
|
|
|
Deferrals and
|
|
|
Excess
|
|
||||||
PreTSL XXIII |
|
C-2 |
|
$ |
1,011 |
|
|
$ |
344 |
|
|
$ |
(667) |
|
|
Ca/C |
|
|
93 |
|
|
|
25.30 |
% |
|
|
|
% |
PreTSL XXIII |
|
C-FP |
|
|
1,559 |
|
|
|
666 |
|
|
|
(893) |
|
|
Ca/C |
|
|
93 |
|
|
|
25.30 |
|
|
|
|
|
I-PreTSL I |
|
B-1 |
|
|
986 |
|
|
|
750 |
|
|
|
(236) |
|
|
NR/CCC |
|
|
14 |
|
|
|
17.20 |
|
|
|
2.50 |
|
I-PreTSL I |
|
B-2 |
|
|
1,000 |
|
|
|
750 |
|
|
|
(250) |
|
|
NR/CCC |
|
|
14 |
|
|
|
17.20 |
|
|
|
2.50 |
|
I-PreTSL I |
|
B-3 |
|
|
1,000 |
|
|
|
750 |
|
|
|
(250) |
|
|
NR/CCC |
|
|
14 |
|
|
|
17.20 |
|
|
|
2.50 |
|
I-PreTSL II |
|
B-3 |
|
|
2,991 |
|
|
|
2,730 |
|
|
|
(261) |
|
|
NR/B |
|
|
22 |
|
|
|
7.50 |
|
|
|
13.60 |
|
I-PreTSL III |
|
B-2 |
|
|
1,000 |
|
|
|
780 |
|
|
|
(220) |
|
|
Ba3/CCC |
|
|
21 |
|
|
|
13.20 |
|
|
|
9.40 |
|
I-PreTSL III |
|
C |
|
|
1,000 |
|
|
|
500 |
|
|
|
(500) |
|
|
NR/CCC |
|
|
21 |
|
|
|
13.20 |
|
|
|
|
|
I-PreTSL IV |
|
B-1 |
|
|
1,000 |
|
|
|
950 |
|
|
|
(50) |
|
|
Ba2/CCC |
|
|
33 |
|
|
|
10.40 |
|
|
|
7.60 |
|
I-PreTSL IV |
|
B-2 |
|
|
1,000 |
|
|
|
950 |
|
|
|
(50) |
|
|
Ba2/CCC |
|
|
33 |
|
|
|
10.40 |
|
|
|
7.60 |
|
I-PreTSL IV |
|
C |
|
|
480 |
|
|
|
206 |
|
|
|
(274) |
|
|
Caa1/CC |
|
|
33 |
|
|
|
10.40 |
|
|
|
2.50 |
|
Trapeza IX |
|
B-1 |
|
|
860 |
|
|
|
310 |
|
|
|
(550) |
|
|
Ca/CC |
|
|
33 |
|
|
|
20.20 |
|
|
|
|
|
Total |
|
|
|
$ |
13,887 |
|
|
$ |
9,686 |
|
|
$ |
(4,201) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides additional information related to the Companys trust preferred securities as of December 31, 2012 used to evaluate other-than-temporary impairments:
|
|
(Amounts in thousands) |
|
|||||||||||||||||||||||||
Deal |
|
Class |
|
Amortized Cost |
|
|
Fair Value |
|
|
Unrealized
|
|
|
Moodys/
|
|
Number of
|
|
|
Deferrals and
|
|
|
Excess
|
|
||||||
PreTSL XXIII |
|
C-2 |
|
$ |
1,011 |
|
|
$ |
203 |
|
|
$ |
(808 |
) |
|
C/C |
|
|
88 |
|
|
|
26.28 |
% |
|
|
|
% |
PreTSL XXIII |
|
C-FP |
|
|
1,556 |
|
|
|
325 |
|
|
|
(1,231 |
) |
|
Ca/C |
|
|
88 |
|
|
|
26.28 |
|
|
|
|
|
I-PreTSL I |
|
B-1 |
|
|
986 |
|
|
|
368 |
|
|
|
(618 |
) |
|
NR/CCC |
|
|
15 |
|
|
|
7.96 |
|
|
|
13.60 |
|
I-PreTSL I |
|
B-2 |
|
|
1,000 |
|
|
|
757 |
|
|
|
(243 |
) |
|
NR/CCC |
|
|
15 |
|
|
|
7.96 |
|
|
|
13.60 |
|
I-PreTSL I |
|
B-3 |
|
|
1,000 |
|
|
|
758 |
|
|
|
(242 |
) |
|
NR/CCC |
|
|
15 |
|
|
|
7.96 |
|
|
|
13.60 |
|
I-PreTSL II |
|
B-3 |
|
|
2,990 |
|
|
|
1,810 |
|
|
|
(1,180 |
) |
|
NR/B |
|
|
23 |
|
|
|
7.20 |
|
|
|
11.00 |
|
I-PreTSL III |
|
B-2 |
|
|
1,000 |
|
|
|
765 |
|
|
|
(235 |
) |
|
Ba3/CCC |
|
|
23 |
|
|
|
6.37 |
|
|
|
15.60 |
|
I-PreTSL III |
|
C |
|
|
1,000 |
|
|
|
822 |
|
|
|
(178 |
) |
|
NR/CCC |
|
|
23 |
|
|
|
6.37 |
|
|
|
|
|
I-PreTSL IV |
|
B-1 |
|
|
1,000 |
|
|
|
614 |
|
|
|
(386 |
) |
|
Ba2/CCC |
|
|
23 |
|
|
|
14.16 |
|
|
|
5.60 |
|
I-PreTSL IV |
|
B-2 |
|
|
1,000 |
|
|
|
822 |
|
|
|
(178 |
) |
|
Ba2/CCC |
|
|
23 |
|
|
|
14.16 |
|
|
|
5.60 |
|
I-PreTSL IV |
|
C |
|
|
480 |
|
|
|
146 |
|
|
|
(334 |
) |
|
Caa1/CC |
|
|
23 |
|
|
|
14.16 |
|
|
|
1.20 |
|
Trapeza IX |
|
B-1 |
|
|
860 |
|
|
|
222 |
|
|
|
(638 |
) |
|
Ca/CC |
|
|
34 |
|
|
|
19.91 |
|
|
|
|
|
Total |
|
|
|
$ |
13,883 |
|
|
$ |
7,612 |
|
|
$ |
(6,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The market for these securities at June 30, 2013 and December 31, 2012 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as no new trust preferred securities have been issued since 2007. There are currently very few market participants who are willing and/or able to transact for these securities. The pooled market value for these securities remains very depressed relative to historical levels. Although there has been marked improvement in the credit spread premium in the corporate bond space, no such improvement has been noted in the market for trust preferred securities.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Given conditions in the debt markets today and the absence of observable transactions in the secondary and the new issue markets, the Company determined the following:
· | The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at June 30, 2013; |
· | An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at measurement dates prior to 2008; and |
· | The trust preferred securities will be classified within Level 3 of the fair value hierarchy because the Company determined that significant judgments are required to determine fair value at the measurement date. |
The Company enlisted the aid of an independent third party to perform the trust preferred security valuations. The approach to determining fair value involved the following process:
1. |
Estimate the credit quality of the collateral using average probability of default values for each issuer (adjusted for rating levels). |
2. |
Consider the potential for correlation among issuers within the same industry for default probabilities (e.g. banks with other banks). |
3. |
Forecast the cash flows for the underlying collateral and apply to each trust preferred security tranche to determine the resulting distribution among the securities, including prepayment and cures. |
4. |
Discount the expected cash flows to calculate the present value of the security. |
The effective discount rates on an overall basis generally range from 5.5% to 18.3% and are highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the trust preferred security and the prepayment assumptions.
With the passage of the Dodd-Frank Act, trust preferred securities issued by institutions with assets greater than $15.0 billion will no longer be included in Tier 1 capital after 2013. As a result, prepayment assumptions were adjusted to include early redemptions by all institutions meeting this criteria. As the vast majority of institutions in the trust preferred securities collateral base fall below this threshold, the revised assumption did not materially impact the valuation results.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables present the assets measured on a nonrecurring basis on the consolidated balance sheets at their fair value as of June 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 loans include: quoted market prices for identical assets, classified as Level 1 inputs; observable inputs employed by certified appraisers for similar assets, classified as Level 2 inputs. In cases where valuation techniques include 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 3 inputs.
|
(Amounts in thousands)
|
|
|||||||||||||
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets measured on a nonrecurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment |
$ |
|
|
|
$ |
|
|
|
$ |
4,520 |
|
|
$ |
4,520 |
|
Reserve |
|
|
|
|
|
|
|
|
|
(708 |
) |
|
|
(708 |
) |
Net balance |
$ |
|
|
|
$ |
|
|
|
$ |
3,812 |
|
|
$ |
3,812 |
|
Other real estate owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment |
$ |
|
|
|
$ |
|
|
|
$ |
87 |
|
|
$ |
87 |
|
Valuation allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance |
$ |
|
|
|
$ |
|
|
|
$ |
87 |
|
|
$ |
87 |
|
|
December 31, 2012 |
|
|||||||||||||
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets measured on a nonrecurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment |
$ |
|
|
|
$ |
|
|
|
$ |
5,080 |
|
|
$ |
5,080 |
|
Reserve |
|
|
|
|
|
|
|
|
|
(472 |
) |
|
|
(472 |
) |
Net balance |
$ |
|
|
|
$ |
|
|
|
$ |
4,608 |
|
|
$ |
4,608 |
|
Other real estate owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment |
$ |
|
|
|
$ |
|
|
|
$ |
216 |
|
|
$ |
216 |
|
Valuation allowance |
|
|
|
|
|
|
|
|
|
(71 |
) |
|
|
(71 |
) |
Net balance |
$ |
|
|
|
$ |
|
|
|
$ |
145 |
|
|
$ |
145 |
|
Impaired loans: A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured, as a practical expedient, at the loans observable market price or the fair market value of the collateral if the loan is collateral dependent.
Other real estate owned (OREO): Real estate acquired through foreclosure or deed-in-lieu of foreclosure is included in other assets. Such real estate is carried at fair value less estimated costs to sell. Any reduction from the carrying value of the related loan to fair value at the time of acquisition is charged to the allowance for loan losses. Any subsequent reduction in fair market value is reflected as a valuation allowance through a charge to income. Costs of significant property improvements are capitalized, whereas costs relating to holding and maintaining the property are charged to expense.
Financial Instruments
The Company disclosures fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.
Such techniques and assumptions, as they apply to individual categories of the financial instruments, are as follows:
Cash and cash equivalents The carrying amounts for cash and cash equivalents are a reasonable estimate of those assets fair value.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Investment securities Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Prices on trust preferred securities were calculated using a discounted cash-flow technique. Cash flows were estimated based on credit and prepayment assumptions. The present value of the projected cash flows was calculated using a discount rate equal to the current yield used to accrete the beneficial interest.
Loans held for sale Loans held for sale consist of residential mortgage loans originated for sale. Loans held for sale are recorded at fair value based on what the secondary markets are currently offering for loans with similar characteristics.
Loans, net of allowance for loan losses Market quotations are generally not available for loan portfolios. 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.
Bank-owned life insurance The fair value is based upon the cash surrender value of the underlying policies and matches the book value.
Accrued interest receivable The carrying amount is a reasonable estimate of these assets fair value.
Mortgage banking derivatives The Company enters into derivative financial instruments in the form of interest rate locks with potential mortgage loan borrowers, and likewise enters into contracts for the future delivery of residential mortgage loans into the secondary markets. These derivative instruments are recognized as either assets or liabilities at fair value on a recurring basis in the consolidated balance sheets as indicated in the ensuing table. Commitments to deliver mortgage loans are valued at the commitment price from the investor. Interest rate lock commitments are valued at best execution prices at June 30, 2013. Forward contracts to purchase mortgage-backed securities are valued at trading levels as of June 30, 2013. Fair value adjustments relating to these mortgage banking derivatives are recorded in current year earnings as a component of mortgage banking gains.
Demand, savings and money market deposits Demand, savings, and money market deposit accounts are valued at the amount payable on demand.
Time deposits The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rates are estimated using market rates currently offered for similar instruments with similar remaining maturities.
FHLB advances The fair value for fixed rate advances is estimated by discounting the future cash flows using rates at which advances would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value for the fixed rate advances that are convertible to quarterly LIBOR floating rate advances on or after certain specified dates at the option of the FHLB and the FHLB fixed rate advances that are putable on or after certain specified dates at the option of the FHLB are priced using the FHLB of Cincinnatis model.
Short-term borrowings Short-term borrowings generally have an original term to maturity of one year or less. Consequently, their carrying value is a reasonable estimate of fair value.
Subordinated debt The floating issuances curves to maturity are averaged to obtain an index. The spread between BBB-rated bank debt and 25-year swap rates is determined to calculate the spread on outstanding trust preferred securities. The discount margin is then added to the index to arrive at a discount rate, which determines the present value of projected cash flows.
Accrued interest payable The carrying amount is a reasonable estimate of these liabilities fair value. The fair value of unrecorded commitments at June 30, 2013 and December 31, 2012 is not material.
In addition, other assets and liabilities of the Company that are not defined as financial instruments are not included in the disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning power of core deposit accounts, the trained work force, customer goodwill and similar items. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The carrying amounts and estimated fair values of the Companys financial instruments are as follows:
|
(Amounts in thousands)
|
|
|||||||||||||||||
|
Carrying
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Estimated
|
|
|||||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
18,167 |
|
|
$ |
18,167 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,167 |
|
Investment securities available-for-sale |
|
165,875 |
|
|
|
|
|
|
|
156,189 |
|
|
|
9,686 |
|
|
|
165,875 |
|
Trading securities |
|
6,952 |
|
|
|
|
|
|
|
6,952 |
|
|
|
|
|
|
|
6,952 |
|
Loans held for sale |
|
14,458 |
|
|
|
|
|
|
|
14,458 |
|
|
|
|
|
|
|
14,458 |
|
Loans, net of allowance for loan losses |
|
297,767 |
|
|
|
|
|
|
|
303,780 |
|
|
|
|
|
|
|
303,780 |
|
Bank-owned life insurance |
|
14,908 |
|
|
|
14,908 |
|
|
|
|
|
|
|
|
|
|
|
14,908 |
|
Accrued interest receivable |
|
1,680 |
|
|
|
1,680 |
|
|
|
|
|
|
|
|
|
|
|
1,680 |
|
Mortgage banking derivatives |
|
1,415 |
|
|
|
|
|
|
|
1,415 |
|
|
|
|
|
|
|
1,415 |
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market deposits |
$ |
288,298 |
|
|
$ |
288,298 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
288,298 |
|
Time deposits |
|
142,672 |
|
|
|
|
|
|
|
146,802 |
|
|
|
|
|
|
|
146,802 |
|
FHLB advances |
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
44,503 |
|
|
|
44,503 |
|
Short-term borrowings |
|
3,683 |
|
|
|
3,683 |
|
|
|
|
|
|
|
|
|
|
|
3,683 |
|
Subordinated debt |
|
5,155 |
|
|
|
|
|
|
|
|
|
|
|
4,283 |
|
|
|
4,283 |
|
Accrued interest payable |
|
322 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
322 |
|
Mortgage banking derivatives |
|
236 |
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
236 |
|
|
(Amounts in thousands)
|
|
|||||||||||||||||
|
Carrying
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Estimated
|
|
|||||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
27,577 |
|
|
$ |
27,577 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
27,577 |
|
Investment securities available-for-sale |
|
184,646 |
|
|
|
|
|
|
|
177,034 |
|
|
|
7,612 |
|
|
|
184,646 |
|
Loans held for sale |
|
24,756 |
|
|
|
|
|
|
|
24,756 |
|
|
|
|
|
|
|
24,756 |
|
Loans, net of allowance for loan losses |
|
313,457 |
|
|
|
|
|
|
|
|
|
|
|
320,012 |
|
|
|
320,012 |
|
Bank-owned life insurance |
|
14,009 |
|
|
|
14,009 |
|
|
|
|
|
|
|
|
|
|
|
14,009 |
|
Accrued interest receivable |
|
1,765 |
|
|
|
1,765 |
|
|
|
|
|
|
|
|
|
|
|
1,765 |
|
Mortgage banking derivatives |
|
531 |
|
|
|
|
|
|
|
531 |
|
|
|
|
|
|
|
531 |
|
LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market deposits |
$ |
323,855 |
|
|
$ |
323,855 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
323,855 |
|
Time deposits |
|
153,046 |
|
|
|
|
|
|
|
157,406 |
|
|
|
|
|
|
|
157,406 |
|
FHLB advances |
|
42,000 |
|
|
|
|
|
|
|
|
|
|
|
45,113 |
|
|
|
45,113 |
|
Short-term borrowings |
|
4,051 |
|
|
|
4,051 |
|
|
|
|
|
|
|
|
|
|
|
4,051 |
|
Subordinated debt |
|
5,155 |
|
|
|
|
|
|
|
|
|
|
|
4,227 |
|
|
|
4,227 |
|
Accrued interest payable |
|
359 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
359 |
|
Mortgage banking derivatives |
|
199 |
|
|
|
|
|
|
|
199 |
|
|
|
|
|
|
|
199 |
|
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables present quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at June 30, 2013 and December 31, 2012:
(1) |
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which 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 are presented as a percent of the appraisal. The adjustment of appraised value is measured as the effect on fair value as a percentage of unpaid principal. |
(3) |
Includes qualitative adjustments by management and estimated liquidation expenses. |
|
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
(Amounts in thousands) |
|
|
|
|
|
|
|
|
|
Fair value at
|
|
|
Valuation Technique |
|
Significant
|
|
Description of Inputs |
Trust preferred securities |
|
$7,612 |
|
|
Discounted Cash Flow |
|
Projected Prepayments |
|
1) Trust preferred securities issued by banks subject to Dodd-Franks phase-out of trust preferred securities from Tier 1 Capital. 2) Trust preferred securities issued by healthy, well capitalized banks that have fixed rate coupons greater than 8% or floating rate spreads greater than 300 bps. 3) 5% every 5 years for all banks beginning in 2018. 4) Zero for collateral issued by REITs or insurance companies. |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
Projected
|
|
1) All deferring issuers that do not meet the criteria for curing, as described below, are projected to default immediately. 2) Banks with high, near team default risk are identified using a CAMELS model, and projected to default immediately. Healthy banks are projected to default at a rate of 2% annually for 2 years, and .36% annually thereafter. 3) Insurance and REIT defaults are projected according to the historical default rates exhibited by companies with the same credit ratings. Historical default rates are doubled in each of the first two years of the projection to account for current economic conditions. Unrated issuers are assumed to have CCC- ratings. |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
Projected Cures |
|
1) Deferring issuers that have definitive agreements to either be acquired or recapitalized. |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
Projected
|
|
1) Zero for insurance companies, REITs and insolvent banks, and 10% for projected bank deferrals. |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
Discount Rates |
|
1) Ranging from ~5.69% to ~21.76%, depending on each bonds seniority and remaining subordination after projected losses. |
|
|
|
|
|
|||||
Impaired loans |
|
3,503 |
|
|
Appraisal of
|
|
Appraisal
|
|
0% to (27)% |
|
|
|
|
|
|||||
|
|
|
|
|
|
|
Liquidation
|
|
0% to (15)% |
|
|
|
|
|
|||||
|
|
1,105 |
|
|
Discounted Cash Flow |
|
Discount Rate |
|
5.75% (only one loan) |
|
|
|
|
|
|||||
Other real estate owned |
|
145 |
|
|
Appraisal of
|
|
Sales
|
|
0% to (39)% |
(1) |
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which 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 are presented as a percent of the appraisal. The adjustment of appraised value is measured as the effect on fair value as a percentage of unpaid principal. |
(3) |
Includes qualitative adjustments by management and estimated liquidation expenses. |
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10.) Accumulated Other Comprehensive Income:
The following table presents the changes in accumulated other comprehensive loss by component net of tax for the three and six months ended June 30, 2013:
|
(Amounts in thousands) |
|
|||||
|
Unrealized gains on available-for-sale securities (a) |
|
|
Change in pension and postretirement obligations |
|
||
Balance as of December 31, 2012 |
$ |
(1,707 |
) |
|
$ |
|
|
Other comprehensive income before reclassification |
|
400 |
|
|
|
|
|
Amount reclassified from accumulated other comprehensive income |
|
|
|
|
|
|
|
Total other comprehensive income |
|
400 |
|
|
|
|
|
Balance as of March 31, 2013 |
|
(1,307 |
) |
|
|
|
|
Other comprehensive loss before reclassification |
|
(2,224 |
) |
|
|
(23 |
) |
Amount reclassified from accumulated other comprehensive income |
|
(100 |
) |
|
|
|
|
Total other comprehensive income |
|
(2,324 |
) |
|
|
(23 |
) |
Balance as of June 30, 2013 |
$ |
(3,631 |
) |
|
$ |
(23 |
) |
(a) All amounts are net of tax. Amounts in parentheses indicate debits.
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income for both the three and six months ended June 30, 2013:
|
(Amounts in thousands) |
|
||||
|
Amount reclassified from accumulated other comprehensive income |
|
|
Affected line item in the statement where net income is presented |
|
|
Details about other comprehensive income: |
|
|
|
|
|
|
Unrealized gains on available-for-sale securities |
$ |
(152 |
) |
|
Investment securities gains, net |
|
|
|
52 |
|
|
Federal income tax expense |
|
|
$ |
(100 |
) |
|
Net of tax |
|
32
CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)
|
|
||||||||||||||||||||||||||||||||||
|
YEAR-TO-DATE AS OF |
|
|||||||||||||||||||||||||||||||||
|
JUNE 30, 2013 |
|
|
DECEMBER 31, 2012 |
|
|
JUNE 30, 2012 |
|
|||||||||||||||||||||||||||
|
Average
|
|
|
Interest |
|
|
Average
|
|
|
Average
|
|
|
Interest |
|
|
Average
|
|
|
Average
|
|
|
Interest |
|
|
Average
|
|
|||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning deposits and other assets |
$ |
11,814 |
|
|
$ |
16 |
|
|
|
0.27 |
% |
|
$ |
10,369 |
|
|
$ |
31 |
|
|
|
0.29 |
% |
|
$ |
6,106 |
|
|
$ |
12 |
|
|
|
0.38 |
% |
Investment securities available-for-sale (1) (2) (3) |
|
182,057 |
|
|
|
2,245 |
|
|
|
2.47 |
% |
|
|
183,514 |
|
|
|
5,431 |
|
|
|
2.96 |
% |
|
|
186,134 |
|
|
|
2,984 |
|
|
|
3.21 |
% |
Trading securities (1) (2) (3) |
|
3,518 |
|
|
|
62 |
|
|
|
3.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
% |
Loans (1) (2) (3) |
|
321,406 |
|
|
|
8,002 |
|
|
|
5.00 |
% |
|
|
301,034 |
|
|
|
16,306 |
|
|
|
5.42 |
% |
|
|
287,338 |
|
|
|
7,916 |
|
|
|
5.52 |
% |
Total interest-earning assets |
|
518,795 |
|
|
$ |
10,325 |
|
|
|
3.99 |
% |
|
|
494,917 |
|
|
$ |
21,768 |
|
|
|
4.40 |
% |
|
|
479,578 |
|
|
$ |
10,912 |
|
|
|
4.55 |
% |
Cash and due from banks |
|
7,486 |
|
|
|
|
|
|
|
|
|
|
|
7,862 |
|
|
|
|
|
|
|
|
|
|
|
7,636 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment |
|
6,612 |
|
|
|
|
|
|
|
|
|
|
|
6,524 |
|
|
|
|
|
|
|
|
|
|
|
6,488 |
|
|
|
|
|
|
|
|
|
Other assets |
|
17,200 |
|
|
|
|
|
|
|
|
|
|
|
18,772 |
|
|
|
|
|
|
|
|
|
|
|
18,352 |
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets |
|
31,298 |
|
|
|
|
|
|
|
|
|
|
|
33,158 |
|
|
|
|
|
|
|
|
|
|
|
32,476 |
|
|
|
|
|
|
|
|
|
Total assets |
$ |
550,093 |
|
|
|
|
|
|
|
|
|
|
$ |
528,075 |
|
|
|
|
|
|
|
|
|
|
$ |
512,054 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
$ |
93,397 |
|
|
$ |
93 |
|
|
|
0.20 |
% |
|
$ |
83,129 |
|
|
$ |
151 |
|
|
|
0.18 |
% |
|
$ |
80,460 |
|
|
$ |
65 |
|
|
|
0.16 |
% |
Savings |
|
120,280 |
|
|
|
44 |
|
|
|
0.08 |
% |
|
|
107,147 |
|
|
|
106 |
|
|
|
0.10 |
% |
|
|
101,593 |
|
|
|
51 |
|
|
|
0.10 |
% |
Time |
|
145,733 |
|
|
|
973 |
|
|
|
1.35 |
% |
|
|
156,527 |
|
|
|
2,441 |
|
|
|
1.56 |
% |
|
|
157,522 |
|
|
|
1,287 |
|
|
|
1.64 |
% |
Total interest-bearing deposits |
|
359,410 |
|
|
|
1,110 |
|
|
|
0.62 |
% |
|
|
346,803 |
|
|
|
2,698 |
|
|
|
0.78 |
% |
|
|
339,575 |
|
|
|
1,403 |
|
|
|
0.83 |
% |
Other borrowings |
|
46,008 |
|
|
|
614 |
|
|
|
2.69 |
% |
|
|
44,054 |
|
|
|
1,273 |
|
|
|
2.89 |
% |
|
|
43,192 |
|
|
|
637 |
|
|
|
2.97 |
% |
Subordinated debt |
|
5,155 |
|
|
|
45 |
|
|
|
1.77 |
% |
|
|
5,155 |
|
|
|
100 |
|
|
|
1.94 |
% |
|
|
5,155 |
|
|
|
51 |
|
|
|
1.99 |
% |
Total interest-bearing liabilities |
|
410,573 |
|
|
$ |
1,769 |
|
|
|
0.87 |
% |
|
|
396,012 |
|
|
$ |
4,071 |
|
|
|
1.03 |
% |
|
|
387,922 |
|
|
$ |
2,091 |
|
|
|
1.08 |
% |
Demand deposits |
|
84,150 |
|
|
|
|
|
|
|
|
|
|
|
77,534 |
|
|
|
|
|
|
|
|
|
|
|
72,387 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
5,387 |
|
|
|
|
|
|
|
|
|
|
|
5,931 |
|
|
|
|
|
|
|
|
|
|
|
4,231 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
49,983 |
|
|
|
|
|
|
|
|
|
|
|
48,598 |
|
|
|
|
|
|
|
|
|
|
|
47,514 |
|
|
|
|
|
|
|
|
|
Total liabilities and Shareholders equity |
$ |
550,093 |
|
|
|
|
|
|
|
|
|
|
$ |
528,075 |
|
|
|
|
|
|
|
|
|
|
$ |
512,054 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
8,556 |
|
|
|
|
|
|
|
|
|
|
$ |
17,697 |
|
|
|
|
|
|
|
|
|
|
$ |
8,821 |
|
|
|
|
|
Net interest rate spread (4) |
|
|
|
|
|
|
|
|
|
3.12 |
% |
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
3.47 |
% |
Net interest margin (5) |
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
3.58 |
% |
|
|
|
|
|
|
|
|
|
|
3.68 |
% |
Ratio of interest-earning assets to interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
1.26 |
|
|
|
|
|
|
|
|
|
|
|
1.25 |
|
|
|
|
|
|
|
|
|
|
|
1.24 |
|
(1) |
Includes both taxable and tax exempt investment securities available-for-sale and loans and tax exempt trading securities. |
(2) |
The amounts are presented on a fully taxable equivalent basis using the statutory rate of 34%, and have been adjusted to reflect the effect of disallowed interest expenses related to carrying tax- exempt assets. The tax equivalent income adjustment for loans, investments available for sale and trading investments was $18,000, $303,000 and $21,000, respectively, for June 30, 2013; $46,000, $707,000 and $0, respectively, for December 31, 2012; and $23,000, $357,000 and $0, respectively, for June 30, 2012. |
(3) |
Average balance outstanding includes the average amount outstanding of all non- accrual investment securities and loans. Investment securities consist of average total principal adjusted for amortization of premium and accretion of discount and includes both taxable and tax-exempt securities. Loans consist of average total loans, including loans held for sale, less average deferred fees and costs. |
(4) |
Interest rate spread represents the difference between the yield on earning assets a nd the rate paid on interest-bearing liabilities. |
(5) |
Interest margin is calculated by dividing net interest income by total interest-earning assets. |
33
CONSOLIDATED AVERAGE BALANCE SHEETS, YIELDS AND RATES (UNAUDITED)
|
|
||||||||||||||||||||||||||||||||||
|
QUARTER-TO-DATE AS OF |
|
|||||||||||||||||||||||||||||||||
|
JUNE 30, 2013 |
|
|
MARCH 31, 2013 |
|
|
JUNE 30, 2012 |
|
|||||||||||||||||||||||||||
|
Average
|
|
|
Interest |
|
|
Average
|
|
|
Average
|
|
|
Interest |
|
|
Average
|
|
|
Average
|
|
|
Interest |
|
|
Average
|
|
|||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning deposits and other assets |
$ |
12,612 |
|
|
$ |
10 |
|
|
|
0.34 |
% |
|
$ |
11,006 |
|
|
$ |
6 |
|
|
|
0.19 |
% |
|
$ |
7,364 |
|
|
$ |
7 |
|
|
|
0.34 |
% |
Investment securities available-for-sale (1) (2) (3) |
|
179,021 |
|
|
|
1,115 |
|
|
|
2.48 |
% |
|
|
185,126 |
|
|
|
1,130 |
|
|
|
2.45 |
% |
|
|
185,034 |
|
|
|
1,479 |
|
|
|
3.19 |
% |
Trading securities (1) (2) (3) |
|
6,996 |
|
|
|
62 |
|
|
|
3.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
% |
Loans (1) (2) (3) |
|
311,408 |
|
|
|
3,933 |
|
|
|
5.06 |
% |
|
|
331,514 |
|
|
|
4,069 |
|
|
|
4.94 |
% |
|
|
287,960 |
|
|
|
3,937 |
|
|
|
5.48 |
% |
Total interest-earning assets |
|
510,037 |
|
|
$ |
5,120 |
|
|
|
4.02 |
% |
|
|
527,646 |
|
|
$ |
5,205 |
|
|
|
3.97 |
% |
|
|
480,358 |
|
|
$ |
5,423 |
|
|
|
4.52 |
% |
Cash and due from banks |
|
7,382 |
|
|
|
|
|
|
|
|
|
|
|
7,593 |
|
|
|
|
|
|
|
|
|
|
|
7,539 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment |
|
6,619 |
|
|
|
|
|
|
|
|
|
|
|
6,605 |
|
|
|
|
|
|
|
|
|
|
|
6,493 |
|
|
|
|
|
|
|
|
|
Other assets |
|
18,221 |
|
|
|
|
|
|
|
|
|
|
|
16,169 |
|
|
|
|
|
|
|
|
|
|
|
19,089 |
|
|
|
|
|
|
|
|
|
Total noninterest-earning assets |
|
32,222 |
|
|
|
|
|
|
|
|
|
|
|
30,367 |
|
|
|
|
|
|
|
|
|
|
|
33,121 |
|
|
|
|
|
|
|
|
|
Total assets |
$ |
542,259 |
|
|
|
|
|
|
|
|
|
|
$ |
558,013 |
|
|
|
|
|
|
|
|
|
|
$ |
513,479 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
$ |
89,862 |
|
|
$ |
41 |
|
|
|
0.18 |
% |
|
$ |
96,972 |
|
|
$ |
51 |
|
|
|
0.22 |
% |
|
$ |
78,554 |
|
|
$ |
32 |
|
|
|
0.16 |
% |
Savings |
|
119,136 |
|
|
|
22 |
|
|
|
0.07 |
% |
|
|
121,437 |
|
|
|
23 |
|
|
|
0.08 |
% |
|
|
103,130 |
|
|
|
25 |
|
|
|
0.09 |
% |
Time |
|
143,062 |
|
|
|
464 |
|
|
|
1.30 |
% |
|
|
148,433 |
|
|
|
509 |
|
|
|
1.39 |
% |
|
|
157,483 |
|
|
|
626 |
|
|
|
1.59 |
% |
Total interest-bearing deposits |
|
352,060 |
|
|
|
527 |
|
|
|
0.60 |
% |
|
|
366,842 |
|
|
|
583 |
|
|
|
0.64 |
% |
|
|
339,167 |
|
|
|
683 |
|
|
|
0.81 |
% |
Other borrowings |
|
44,307 |
|
|
|
309 |
|
|
|
2.80 |
% |
|
|
47,727 |
|
|
|
305 |
|
|
|
2.59 |
% |
|
|
42,760 |
|
|
|
319 |
|
|
|
2.99 |
% |
Subordinated debt |
|
5,155 |
|
|
|
22 |
|
|
|
1.73 |
% |
|
|
5,155 |
|
|
|
23 |
|
|
|
1.75 |
% |
|
|
5,155 |
|
|
|
25 |
|
|
|
1.92 |
% |
Total interest-bearing liabilities |
|
401,522 |
|
|
$ |
858 |
|
|
|
0.86 |
% |
|
|
419,724 |
|
|
$ |
911 |
|
|
|
0.88 |
% |
|
|
387,082 |
|
|
$ |
1,027 |
|
|
|
1.07 |
% |
Demand deposits |
|
83,877 |
|
|
|
|
|
|
|
|
|
|
|
84,427 |
|
|
|
|
|
|
|
|
|
|
|
73,787 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
6,382 |
|
|
|
|
|
|
|
|
|
|
|
4,382 |
|
|
|
|
|
|
|
|
|
|
|
4,350 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
50,478 |
|
|
|
|
|
|
|
|
|
|
|
49,480 |
|
|
|
|
|
|
|
|
|
|
|
48,260 |
|
|
|
|
|
|
|
|
|
Total liabilities and Shareholders equity |
$ |
542,259 |
|
|
|
|
|
|
|
|
|
|
$ |
558,013 |
|
|
|
|
|
|
|
|
|
|
$ |
513,479 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
4,262 |
|
|
|
|
|
|
|
|
|
|
$ |
4,294 |
|
|
|
|
|
|
|
|
|
|
$ |
4,396 |
|
|
|
|
|
Net interest rate spread (4) |
|
|
|
|
|
|
|
|
|
3.16 |
% |
|
|
|
|
|
|
|
|
|
|
3.09 |
% |
|
|
|
|
|
|
|
|
|
|
3.45 |
% |
Net interest margin (5) |
|
|
|
|
|
|
|
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
3.66 |
% |
Ratio of interest-earning assets to interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
1.27 |
|
|
|
|
|
|
|
|
|
|
|
1.26 |
|
|
|
|
|
|
|
|
|
|
|
1.24 |
|
(1) |
Includes both taxable and tax exempt investment securities available-for-sale and loans and tax exempt trading securities. |
(2) |
The amounts are presented on a fully taxable equivalent basis using the statutory rate of 34%, and have been adjusted to reflect the effect of disallowed interest expenses related to carrying tax- exempt assets. The tax equivalent income adjustment for loans, investments available for sale and trading securities was $8,000, $153,000 and $21,000, respectively, for June 30, 2013; $10,000, $150,000 and $0, respectively, for March 31, 2013; and $11,000, $185,000 and $0, respectively, for June 30, 2012. |
(3) |
Average balance outstanding includes the average amount outstanding of all non- accrual investment securities and loans. Investment securities consist of average total principal adjusted for amortization of premium and accretion of discount and includes both taxable and tax-exempt securities. Loans consist of average total loans, including loans held for sale, less average deferred fees and costs. |
(4) |
Interest rate spread represents the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. |
(5) |
Interest margin is calculated by dividing net interest income by total interest-earning assets. |
34
SELECTED FINANCIAL DATA FOR THE QUARTER ENDED
(In thousands of dollars, except for ratios and per share amounts)
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
||||||
SUMMARY OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
4,938 |
|
|
$ |
5,045 |
|
|
$ |
5,347 |
|
|
$ |
5,136 |
|
|
$ |
5,227 |
|
Total interest expense |
|
|
(858 |
) |
|
|
(911 |
) |
|
|
(968 |
) |
|
|
(1,012 |
) |
|
|
(1,027 |
) |
NET INTEREST INCOME (NII) |
|
|
4,080 |
|
|
|
4,134 |
|
|
|
4,379 |
|
|
|
4,124 |
|
|
|
4,200 |
|
Provision for loan losses |
|
|
(150 |
) |
|
|
(200 |
) |
|
|
(2,120 |
) |
|
|
(300 |
) |
|
|
(330 |
) |
NII after loss provision |
|
|
3,930 |
|
|
|
3,934 |
|
|
|
2,259 |
|
|
|
3,824 |
|
|
|
3,870 |
|
Investment security gains (losses) including impairment losses |
|
|
152 |
|
|
|
|
|
|
|
(46 |
) |
|
|
25 |
|
|
|
28 |
|
Mortgage banking gains |
|
|
638 |
|
|
|
688 |
|
|
|
335 |
|
|
|
1,017 |
|
|
|
266 |
|
Other income |
|
|
626 |
|
|
|
618 |
|
|
|
595 |
|
|
|
670 |
|
|
|
734 |
|
Total non-interest expense |
|
|
(4,343 |
) |
|
|
(4,175 |
) |
|
|
(4,082 |
) |
|
|
(3,848 |
) |
|
|
(3,694 |
) |
Income (loss) before tax expense (benefit) |
|
|
1,003 |
|
|
|
1,065 |
|
|
|
(939 |
) |
|
|
1,688 |
|
|
|
1,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
|
204 |
|
|
|
235 |
|
|
|
(475 |
) |
|
|
422 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
799 |
|
|
$ |
830 |
|
|
$ |
(464 |
) |
|
$ |
1,266 |
|
|
$ |
952 |
|
PER COMMON SHARE DATA (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), both basic and diluted |
|
$ |
0.18 |
|
|
$ |
0.18 |
|
|
$ |
(0.11 |
) |
|
$ |
0.28 |
|
|
$ |
0.21 |
|
Book value |
|
|
10.80 |
|
|
|
11.17 |
|
|
|
10.93 |
|
|
|
11.17 |
|
|
|
10.64 |
|
BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
537,809 |
|
|
$ |
546,467 |
|
|
$ |
582,240 |
|
|
$ |
554,508 |
|
|
$ |
522,699 |
|
Investments securities available-for-sale |
|
|
165,875 |
|
|
|
176,009 |
|
|
|
184,646 |
|
|
|
175,024 |
|
|
|
177,228 |
|
Trading securities |
|
|
6,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
301,912 |
|
|
|
297,463 |
|
|
|
317,282 |
|
|
|
293,194 |
|
|
|
284,257 |
|
Loans held for sale |
|
|
14,458 |
|
|
|
16,628 |
|
|
|
24,756 |
|
|
|
15,999 |
|
|
|
14,882 |
|
Deposits |
|
|
430,970 |
|
|
|
441,010 |
|
|
|
476,901 |
|
|
|
438,857 |
|
|
|
414,304 |
|
Borrowings |
|
|
45,683 |
|
|
|
45,015 |
|
|
|
46,051 |
|
|
|
41,737 |
|
|
|
50,559 |
|
Subordinated debt |
|
|
5,155 |
|
|
|
5,155 |
|
|
|
5,155 |
|
|
|
5,155 |
|
|
|
5,155 |
|
Shareholders equity |
|
|
48,886 |
|
|
|
50,570 |
|
|
|
49,452 |
|
|
|
50,560 |
|
|
|
48,137 |
|
AVERAGE BALANCES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
542,259 |
|
|
$ |
558,013 |
|
|
$ |
561,528 |
|
|
$ |
526,744 |
|
|
$ |
513,479 |
|
Investments |
|
|
179,021 |
|
|
|
185,126 |
|
|
|
186,304 |
|
|
|
175,539 |
|
|
|
185,034 |
|
Loans |
|
|
299,504 |
|
|
|
307,568 |
|
|
|
300,735 |
|
|
|
289,792 |
|
|
|
287,960 |
|
Loans held for sale |
|
|
11,904 |
|
|
|
23,946 |
|
|
|
21,439 |
|
|
|
17,195 |
|
|
|
9,356 |
|
Deposits |
|
|
435,937 |
|
|
|
451,269 |
|
|
|
453,678 |
|
|
|
419,482 |
|
|
|
412,954 |
|
Borrowings |
|
|
44,307 |
|
|
|
47,727 |
|
|
|
42,039 |
|
|
|
47,771 |
|
|
|
42,760 |
|
Subordinated debt |
|
|
5,155 |
|
|
|
5,155 |
|
|
|
5,155 |
|
|
|
5,155 |
|
|
|
5,155 |
|
Shareholders equity |
|
|
50,478 |
|
|
|
49,480 |
|
|
|
50,255 |
|
|
|
49,089 |
|
|
|
48,260 |
|
ASSET QUALITY RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan charge-offs |
|
$ |
(31 |
) |
|
$ |
(176 |
) |
|
$ |
(1,963 |
) |
|
$ |
(70 |
) |
|
$ |
(168 |
) |
Recoveries on loans |
|
|
135 |
|
|
|
42 |
|
|
|
51 |
|
|
|
49 |
|
|
|
37 |
|
Net charge-offs |
|
$ |
104 |
|
|
$ |
(134 |
) |
|
$ |
(1,912 |
) |
|
$ |
(21 |
) |
|
$ |
(131 |
) |
Net charge-offs as a percentage of average total loans |
|
|
(0.14 |
)% |
|
|
0.17 |
% |
|
|
2.54 |
% |
|
|
0.03 |
% |
|
|
0.19 |
% |
Loans 30 days or more beyond their contractual due date as a percent of total loans |
|
|
1.04 |
|
|
|
1.15 |
|
|
|
1.02 |
|
|
|
1.56 |
|
|
|
2.18 |
|
Nonperforming loans |
|
$ |
4,804 |
|
|
$ |
5,453 |
|
|
$ |
5,668 |
|
|
$ |
6,477 |
|
|
$ |
7,667 |
|
Nonperforming securities |
|
|
1,010 |
|
|
|
743 |
|
|
|
674 |
|
|
|
832 |
|
|
|
1,376 |
|
Other real estate owned |
|
|
87 |
|
|
|
324 |
|
|
|
145 |
|
|
|
242 |
|
|
|
316 |
|
Total nonperforming assets |
|
$ |
5,901 |
|
|
$ |
6,520 |
|
|
$ |
6,487 |
|
|
$ |
7,551 |
|
|
$ |
9,359 |
|
Nonperforming assets as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
1.10 |
% |
|
|
1.19 |
% |
|
|
1.11 |
% |
|
|
1.36 |
% |
|
|
1.79 |
% |
Equity plus allowance for loan losses |
|
|
11.11 |
|
|
|
11.95 |
|
|
|
12.16 |
|
|
|
13.92 |
|
|
|
18.15 |
|
Tier I capital |
|
|
10.40 |
|
|
|
11.68 |
|
|
|
12.01 |
|
|
|
13.70 |
|
|
|
17.54 |
|
FINANCIAL RATIOS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity |
|
|
6.33 |
% |
|
|
6.71 |
% |
|
|
(3.69 |
)% |
|
|
10.32 |
% |
|
|
7.89 |
% |
Return on average assets |
|
|
0.59 |
|
|
|
0.59 |
|
|
|
(0.33 |
) |
|
|
0.96 |
|
|
|
0.74 |
|
Efficiency ratio |
|
|
76.80 |
|
|
|
76.75 |
|
|
|
76.89 |
|
|
|
66.22 |
|
|
|
71.04 |
|
Effective tax rate |
|
|
20.34 |
|
|
|
22.07 |
|
|
|
(50.59 |
) |
|
|
25.00 |
|
|
|
20.93 |
|
Net interest margin |
|
|
3.34 |
|
|
|
3.27 |
|
|
|
3.44 |
|
|
|
3.51 |
|
|
|
3.59 |
|
(1) |
Basic and diluted earnings per share are based on weighted average shares outstanding. Book value per common share is based on shares outstanding at each period. |
35
ITEM 2. MANAGEMENTS DISCUSS ION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is managements discussion and analysis of the financial condition and results of operations of Cortland Bancorp (the Company). The discussion should be read in conjunction with the Consolidated Financial Statements and related notes and summary financial information included elsewhere in this quarterly report.
Note Regarding Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In addition to historical information, certain information included in this discussion and other material filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) may contain forward-looking statements that involve risks and uncertainties. The words believes, expects, may, will, should, projects, contemplates, anticipates, forecasts, intends, or similar terminology identify forward-looking statements. These statements reflect managements beliefs and assumptions, and are based on information currently available to management.
Economic circumstances, the Companys operations and actual results could differ significantly from those discussed in any forward-looking statements. Some of the factors that could cause or contribute to such differences are changes in the economy and interest rates either nationally or in the Companys market area, including the impact of the impairment of securities; political actions, including failure of the United States Congress to raise the federal debt ceiling or the imposition of changes in the federal budget; changes in customer preferences and consumer behavior; increased competitive pressures or changes in either the nature or composition of competitors; changes in the legal and regulatory environment; changes in factors influencing liquidity, such as expectations regarding the rate of inflation or deflation, currency exchange rates, and other factors influencing market volatility; changes in assumptions underlying the establishment of reserves for possible loan losses, reserves for repurchase of mortgage loans sold and other estimates; changes in operations of CSB Mortgage Company (CSB) as a result of the activity in the residential real estate market; and risks associated with other global economic, political and financial factors.
While actual results may differ significantly from the results discussed in the forward-looking statements, the Company undertakes no obligation to update publicly any forward-looking statement for any reason, even if new information becomes available.
Analysis of Assets and Liabilities for the First Six Months
Earning assets are comprised of investment securities, loans and deposits at financial institutions, including the Federal Reserve Bank. Earning assets were $500.3 million at June 30, 2013, an increase of 2.9% from the June 30, 2012 balance of $486.2 million, and a decrease of 6.6% from the December 31, 2012 balance of $535.7 million. The decrease from December 31 was the net result of the following: an increase in deposits at the Federal Reserve of $1.8 million, a decrease in investment securities available for sale of $18.8 million offset by an increase in trading securities of $7.0 million, $20.7 million of 60-day loans redeemed during the first quarter of 2013, and a $10.3 million decrease in loans held for sale as a result of CSB Mortgage Company activity. Total assets of $537.8 million at June 30, 2013 reflect an increase of 2.9% from the one year ago asset total of $522.7 million and a decrease of 7.6% from December 31, 2012 asset total of $582.2 million.
Total cash and cash equivalents decreased by $9.4 million from year-end and increased by $1.1 million from the balance at June 30, 2012.
At June 30, 2013, the investment securities available for sale portfolio was $165.9 million compared to $184.6 million at December 31, 2012, a decrease of $18.8 million, or 10.2%. These securities decreased $11.4 million compared to June 30, 2012, or 6.4%. Investment securities represented 33.2% of earning assets at June 30, 2013, compared to 36.5% at June 30, 2012 and 34.5% at December 31, 2012. The decrease from one year ago is partially due to the sale of $3.5 million in trust preferred securities in September 2012. As the Company manages its balance sheet for loan growth, asset mix, liquidity and current interest rates and interest rate forecasts, the investment portfolio is a primary source of liquidity. The investment securities available for sale portfolio represented 38.5% of each deposit dollar at June 30, 2013, down from 42.8 % a year ago and level with 38.7% of year-end levels.
The investment securities available-for-sale portfolio had net unrealized losses of $5.5 million at June 30, 2013, an increase of $1.9 million compared to net unrealized losses of $3.6 million at June 30, 2012, and an increase of $2.9 million compared to net unrealized
36
losses of $2.6 million at December 31, 2012. The second quarter rise in interest rates was the primary impetus for the valuation decline.
The Companys investment portfolio contains trust preferred securities, which have resulted in valuation charges against income of $13.7 million in 2009, $2.7 million in 2010, $202,000 in 2011, $171,000 in 2012 and none recorded in 2013. The Company continues to value these securities consistent with valuation techniques prescribed under accounting standards. The market for these securities and similar securities, which had been relatively active through 2003, became illiquid during the financial crisis of 2008 and is still currently not active. Since 2008, the Company has modeled and analyzed the cash flow characteristics and has concluded that a major portion of these devalued securities were not recoverable. In 2012, a portion of these securities were sold.
The Company has an investment in trading securities of $7.0 million at June 30, 2013, with none at December 31, 2012 or June 30, 2012. This modest allocation of the securities portfolio into a managed fund consisting of tax-free securities is intended to diversify the earnings of the portfolio.
Loans held for sale decreased to $14.5 million at June 30, 2013 compared to $24.8 million at December 31, 2012 and $14.9 million at June 30, 2012. The variance is reflective of the volume of mortgage banking activity, which most recently slowed with the increase in interest rates.
Total loans at June 30, 2013 were $301.9 million compared to $284.3 million a year ago, a 6.2% increase, and $317.3 million at December 31, 2012, a 4.8% decrease. The Company continues its objective of shifting its asset mix into in-market commercial loans with the intent of improving net interest margin.
Total loans net of the allowance for losses increased by $16.8 million during the twelve month period from June 30, 2012 to June 30, 2013, and decreased by $15.7 million from December 31, 2012. Total gross loans as a percentage of earning assets stood at 60.3% as of June 30, 2013, 58.5% at June 30, 2012 and 59.2% as of December 31, 2012. The total loan-to-deposit ratio was 70.1% at June 30, 2013, 68.6% at June 30, 2012 and 66.5% at December 31, 2012. The decrease in loans from year-end was, as stated previously, due in part to 60-day term commercial loans for a total of $20.7 million that closed in December 2012 and were fully secured by segregated deposit accounts with the Bank. The loans matured in the first quarter of 2013. Exclusive of these 60-day term loans, the growth in loans from December 2012 to June 2013 was 1.8%.
At June 30, 2013, the loan loss allowance of $4.1 million represented approximately1.37% of outstanding loans, and at June 30, 2012 the loan loss allowance of $3.3 million represented approximately 1.17% of outstanding loans. The loan loss allowance at December 31, 2012 of $3.8 million represented approximately 1.21% of outstanding loans, or 1.29% excluding the 60-day term loans to which none of the allowance is allocated.
During the first six months, loan charge-offs were $207,000 in 2013 compared to $382,000 for the same period in 2012, while the recovery of previously charged-off loans amounted to $177,000 in 2013 and $62,000 in 2012. The net charge-offs represent 0.02% of average loans for 2013 and 0.23% for the same period in 2012. Charge-offs of specific problem loans, as well as for smaller balance homogeneous loans, are recorded periodically during the year. The number of loan accounts and the amount of charge-off associated with account balances vary from period to period as loans are deemed uncollectible by management.
Despite less than favorable economic conditions over the past several years, the Company has been able to grow its loan portfolio without experiencing any substantive deterioration in credit quality. Nonaccrual loans declined to $2.7 million at June 30, 2013, or 0.90%, of loans, versus $3.0 million, or 0.94%, of loans at December 31, 2012 and $5.2 million, or 1.52%, of loans at June 30, 2012. The Companys allowance for loan losses now covers 153% of nonaccrual loans at June 30, 2013 compared to 129% at December 31, 2012 and 64% at June 30, 2012.
Bank-owned life insurance had a cash surrender value of $14.9 million at June 30, 2013, $14.0 million at December 31, 2012 and $13.8 million at June 30, 2012. In the second quarter of 2013, the Company purchased $714,000 in bank-owned life insurance contributing to the majority of the increase. Other assets increased to $12.8 million at June 30, 2013 from $11.2 million at December 31, 2012 and $12.2 million at June 30, 2012. Included in other assets in 2012 is a prepaid assessment paid to the FDIC in December of 2009. This prepayment was the estimate, based on projected assessment rates and assessment base, made by the FDIC of premiums due until December 31, 2012. On June 30, 2013, the unused portion of $1.1 million was returned to the Company. The balance was $1.2 million at December 31, 2012 and $1.3 million at June 30, 2012. Other real estate decreased to $87,000 at June 30, 2013 compared to $145,000 at December 31, 2012 and $316,000 at June 30, 2012. Also included in other assets is deferred taxes of $5.5 million, $5.0 million and $6.8 million for the periods ended June 30, 2013, December 31, 2012 and June 30, 2012, respectively, and Federal income tax receivable of $900,000, $1.9 million and $287,000 for the periods ended June 30, 2013, December 31, 2012 and June 30, 2012, respectively.
37
In 2013, a $2.0 million investment in a partnership fund is included in other assets with an offsetting $2.0 million in other liabilities, which is the commitment to fund this affordable housing investment. Also at June 30, 2013, the valuation gain related to the mortgage banking derivatives was a $1.4 million asset.
Noninterest-bearing deposits measured $84.1 million at June 30, 2013 compared to $91.7 million at December 31, 2012 and $74.4 million at June 30, 2012. Interest-bearing deposits decreased $38.3 million to $346.9 million at June 30, 2013 from $385.2 million at December 31, 2012 and increased $7.0 million from $339.9 million at June 30, 2012. The decrease in interest-bearing deposits from year end is due partly to segregated money market deposit accounts with the Bank which fully collateralized $20.7 million in 60-day term commercial loans that closed in December 2012. The loans matured and the deposits withdrew the first quarter of 2013. The remaining decrease is attributed to the ultimate investment of, and payment of taxes on, the shale bonus funds deposited during the third and fourth quarters of 2012.
Federal Home Loan Bank advances and short-term borrowings stayed consistent at $45.7 million at June 30, 2013 from $46.1 million at December 31, 2012 and decreased from $50.6 million at June 30, 2012. Future maturities of long-term notes are expected to be paid off. Management continues to use short-term borrowings to bridge its current cash flow needs.
Other liabilities measured $7.1 million at June 30, 2013, $4.7 million at December 31, 2012 and $4.5 million at June 30, 2012. The increase at June 30, 2013 is due to derivative valuations related to the mortgage banking operations and the $2.0 million commitment to fund the affordable housing partnership fund previously described.
The Company continued to maintain its capital levels in 2013. The Companys total shareholders equity measured $48.1 million at June 30, 2012 and $49.5 million on December 31, 2012 to $48.9 million at June 30, 2013. The Companys capital continues to meet the requirements for the Company to be deemed well capitalized under all regulatory measures. The Companys total risk-based capital is $19.9 million in excess of the 10% threshold for the Company to be well-capitalized.
In October 2012, the Company announced the reinstatement of a cash dividend reflecting the growing confidence supported by stable core earnings, increasing loan production, and restored capital levels. A dividend of $.06 per share was paid to shareholders of record to date in 2013.
Capital Resources
Regulatory standards for measuring capital adequacy require banks and bank holding companies to maintain capital based on risk-adjusted assets so that categories of assets with potentially higher credit risk require more capital backing than assets with lower risk. In addition, banks and bank holding companies are required to maintain capital to support, on a risk-adjusted basis, certain off-balance sheet activities such as standby letters of credit and interest rate swaps.
The risk-based standards classify capital into two tiers. Tier 1 capital consists of common shareholders equity, noncumulative and cumulative perpetual preferred stock, qualifying trust preferred securities and minority interests less intangibles, disallowed deferred tax assets and the unrealized market value adjustment of investment securities available-for-sale. Tier 2 capital consists of a limited amount of the allowance for loan and lease losses, perpetual preferred stock (not included in Tier 1), hybrid capital instruments, term subordinated debt, and intermediate-term preferred stock.
The FFIEC determines the risk weightings of direct credit substitutions that have been downgraded below investment grade. Included in the definition of a direct credit substitute are mezzanine and subordinated tranches of trust preferred securities and non-agency collateralized mortgage obligations. Following these guidelines results in an increase in total risk-weighted assets with an attendant decrease in the risk-based capital and Tier 1 risk-based capital ratios.
As a result of the decline in the value of the Banks trust preferred securities, the regulatory capital levels of the Bank are lower than otherwise would be. As a result of investment downgrades by the rating agencies, all of the 12 trust preferred securities were rated as highly speculative grade debt securities. As a consequence, the Bank is required to maintain higher levels of regulatory risk-based capital for these securities due to the greater perceived risk of default by the underlying bank and insurance company issuers. Specifically, regulatory guidance requires the Bank to apply a higher risk weighting formula for these securities to calculate its regulatory capital ratios. The result of that calculation increases the Banks risk-weighted assets for these securities to $53.5 million, well above the $13.9 million in amortized cost of these securities as of June 30, 2013, thereby significantly diluting the risk-based capital ratios by approximately 1.59% for June 30, 2013 compared to 1.58% for December 31, 2012.
Regardless of the trust preferred securities risk weighting, the Company met all capital adequacy requirements to which it was subject as of June 30, 2013 and December 31, 2012, as supported by the data in the following table. As of those dates, the Company met the capital requirements to be deemed well capitalized under regulatory prompt corrective action provisions.
38
|
Actual Regulatory Capital
|
|
|
Regulatory Capital Ratio
|
|
|||||||||
|
June 30,
|
|
|
December 31,
|
|
|
Well
|
|
|
Adequately
|
|
|||
Tier I capital to risk-weighted assets |
13.81 |
% |
|
|
13.15 |
% |
|
|
6.00 |
% |
|
|
4.00 |
% |
Total risk-based capital to risk-weighted assets |
14.84 |
% |
|
|
14.10 |
% |
|
|
10.00 |
% |
|
|
8.00 |
% |
Tier I capital to average assets |
10.29 |
% |
|
|
9.63 |
% |
|
|
5.00 |
% |
|
|
4.00 |
% |
Risk-based capital standards require a minimum ratio of 8.00% of qualifying total capital to risk-adjusted total assets with at least 4.00% constituting Tier 1 capital. Capital qualifying as Tier 2 capital is limited to 100.00% of Tier 1 capital. All banks and bank holding companies are also required to maintain a minimum leverage capital ratio (Tier 1 capital to total average assets) in the range of 3.00% to 4.00%, subject to regulatory guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires banking regulatory agencies to revise risk-based capital standards to ensure that they adequately account for the following additional risks: interest rate, concentration of credit, and non-traditional activities. Accordingly, regulators will subjectively consider an institutions exposure to declines in the economic value of its capital due to changes in interest rates in evaluating capital adequacy. The following table illustrates the Companys components of risk weighted capital ratios and the excess over amounts considered well-capitalized at June 30, 2013 and December 31, 2012. Management considers these excesses to be adequate with regard to the risks inherent in the balance sheet.
|
(Amounts in thousands) |
|
|||||
|
June 30,
|
|
|
December 31,
|
|
||
Tier 1 Capital |
$ |
56,732 |
|
|
$ |
53,996 |
|
Tier 2 Capital |
|
4,229 |
|
|
|
3,909 |
|
QUALIFYING CAPITAL |
$ |
60,961 |
|
|
$ |
57,905 |
|
Risk-Adjusted Total Assets (*) |
$ |
410,657 |
|
|
$ |
410,773 |
|
Tier 1 Risk- Based Capital Excess |
$ |
32,093 |
|
|
$ |
29,350 |
|
Total Risk- Based Capital Excess |
|
19,895 |
|
|
|
16,828 |
|
Total Leverage Capital Excess |
|
29,178 |
|
|
|
25,966 |
|
(*) |
Includes off- balance sheet exposures |
Total assets for leverage capital purposes is calculated as average assets less disallowed deferred tax assets and the net unrealized market value adjustment of investment securities available-for-sale, which averaged $551.0 million for the six months ended June 30, 2013 and $560.6 million for the year ended December 31, 2012.
Regulations require that investments designated as available-for-sale are marked-to-market with corresponding entries to the deferred tax account and shareholders equity. Regulatory agencies, however, exclude these adjustments in computing risk-based capital, as their inclusion would tend to increase the volatility of this important measure of capital adequacy.
In early June 2013, the regulatory bodies agreed on the provisions of Basel III which substantially revises the capital requirements for all banks, varying with the size of the institution. The new requirements are to be phased in over four years beginning in 2015. The Company is awaiting further clarification and interpretation of the rules before it can assess the future effect on capital.
Certain Non-GAAP Measures
Certain financial information has been determined by methods other than Generally Accepted Accounting Principles (GAAP). Specifically, certain financial measures are based on core earnings rather than net income. Core earnings exclude income, expense, gains and losses that either are not reflective of ongoing operations or that are not expected to reoccur with any regularity or reoccur with a high degree of uncertainty and volatility. Such information may be useful to both investors and management and can aid them in understanding the Companys current performance trends and financial condition. Core earnings are a supplemental tool for analysis and not a substitute for GAAP net income. Reconciliation from GAAP net income to the non-GAAP measure of core earnings is referenced as part of managements discussion and analysis of financial condition and results of operations.
Core earnings, which exclude the OTTI charge and certain other non-recurring items, decreased for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. Core earnings for the first six months of 2013 were $1.8 million, or $0.39 per share, compared to $2.0 million, or $0.45 per share for the first six months of 2012.
39
The following is reconciliation between core earnings and earnings under GAAP.
|
(Amounts in thousands, except per share amounts) |
|
|||||||||||||
|
|
THREE MONTHS ENDED |
|
|
|
SIX MONTHS ENDED |
|
||||||||
|
|
June 30, |
|
|
|
June 30, |
|
||||||||
|
2013 |
|
|
|
2012 |
|
|
|
2013 |
|
|
|
2012 |
|
|
GAAP earnings |
$ |
799 |
|
|
$ |
952 |
|
|
$ |
1,629 |
|
|
$ |
2,111 |
|
Impairment losses on investment securities (net of tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
113 |
|
Investment gains not in the ordinary course of business (net of tax)* |
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
(20 |
) |
Expenses related to reorganizationnet |
|
84 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
Net impact of historic tax credit investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
(190 |
) |
Core earnings |
$ |
883 |
|
|
$ |
932 |
|
|
$ |
1,760 |
|
|
$ |
2,014 |
|
Core earnings per share |
$ |
0.20 |
|
|
$ |
0.21 |
|
|
$ |
0.39 |
|
|
$ |
0.45 |
|
* Gains in 2012 are due to the settlement on General Motors Corporation bonds.
Analysis of Net Interest Income Six months ended June 30, 2013 and 2012
|
(Amounts in thousands) |
|
|||||||||||||||||||||
|
June 30, 2013 |
|
|
June 30, 2012 |
|
||||||||||||||||||
|
Average
|
|
|
Interest |
|
|
Average
|
|
|
Average
|
|
|
Interest |
|
|
Average
|
|
||||||
INTEREST-EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits and other earning assets |
$ |
11,814 |
|
|
$ |
16 |
|
|
|
0.27 |
% |
|
$ |
6,106 |
|
|
$ |
12 |
|
|
|
0.38 |
% |
Investment securities(1)(2)(3) |
|
182,057 |
|
|
|
2,245 |
|
|
|
2.47 |
% |
|
|
186,134 |
|
|
|
2,984 |
|
|
|
3.21 |
% |
Trading securities(1)(2)(3) |
|
3,518 |
|
|
|
62 |
|
|
|
3.56 |
% |
|
|
|
|
|
|
|
|
|
|
|
% |
Loans(1)(2)(3) |
|
321,406 |
|
|
|
8,002 |
|
|
|
5.00 |
% |
|
|
287,338 |
|
|
|
7,916 |
|
|
|
5.52 |
% |
Total interest-earning assets |
$ |
518,795 |
|
|
$ |
10,325 |
|
|
|
3.99 |
% |
|
$ |
479,578 |
|
|
$ |
10,912 |
|
|
|
4.55 |
% |
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and money market deposits |
$ |
93,397 |
|
|
$ |
93 |
|
|
|
0.20 |
% |
|
$ |
80,460 |
|
|
$ |
65 |
|
|
|
0.16 |
% |
Savings |
|
120,280 |
|
|
|
44 |
|
|
|
0.08 |
% |
|
|
101,593 |
|
|
|
51 |
|
|
|
0.10 |
% |
Time |
|
145,733 |
|
|
|
973 |
|
|
|
1.35 |
% |
|
|
157,522 |
|
|
|
1,287 |
|
|
|
1.64 |
% |
Total interest-bearing deposits |
|
359,410 |
|
|
|
1,110 |
|
|
|
0.62 |
% |
|
|
339,575 |
|
|
|
1,403 |
|
|
|
0.83 |
% |
Other borrowings |
|
46,008 |
|
|
|
614 |
|
|
|
2.69 |
% |
|
|
43,192 |
|
|
|
637 |
|
|
|
2.97 |
% |
Subordinated debt |
|
5,155 |
|
|
|
45 |
|
|
|
1.77 |
% |
|
|
5,155 |
|
|
|
51 |
|
|
|
1.94 |
% |
Total interest-bearing liabilities |
$ |
410,573 |
|
|
$ |
1,769 |
|
|
|
0.87 |
% |
|
$ |
387,922 |
|
|
$ |
2,091 |
|
|
|
1.08 |
% |
Net interest income |
|
|
|
|
$ |
8,556 |
|
|
|
|
|
|
|
|
|
|
$ |
8,821 |
|
|
|
|
|
Net interest rate spread(4) |
|
|
|
|
|
|
|
|
|
3.12 |
% |
|
|
|
|
|
|
|
|
|
|
3.47 |
% |
Net interest margin(5) |
|
|
|
|
|
|
|
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
3.68 |
% |
(1) |
Includes both taxable and tax exempt investment securities available-for-sale and loans and tax exempt trading securities. |
(2) |
The amounts are presented on a fully taxable equivalent basis using the statutory tax rate of 34%, and have been adjusted to reflect the effect of disallowed interest expense related to carrying tax-exempt assets. The tax equivalent income adjustment for loans, investment securities available-for-sale and trading securities was $18,000, $303,000 and $21,000, respectively, for 2013 and $23,000, $357,000 and $0, respectively, for 2012. |
(3) |
Average balance outstanding includes the average amount outstanding of all non- accrual investment securities and loans. Investment securities consist of average total principal adjusted for amortization of premium and accretion of discount and include both taxable and tax-exempt securities. Loans consist of average total loans, including loans held for sale, less average deferred fees and costs. |
(4) |
Net interest rate spread represents the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. |
(5) |
Net interest margin is calculated by dividing the net interest income by total interest-earning assets. |
Net interest income, the principal source of the Companys earnings, is the amount by which interest and fees generated by interest-earning assets, primarily loans and investment securities, exceeds the interest cost of deposits and borrowed funds. On a fully taxable equivalent basis, net interest income measured $8.6 million at June 30, 2013 and $8.8 million at June 30, 2012. During the recent reporting period the net interest margin registered 3.31% at June 30, 2013 and 3.68% at June 30, 2012.
40
The decrease in interest income, on a fully taxable equivalent basis, of $587,000 is the product of a 56 basis point decrease in interest rates earned offset somewhat by a 8.2% year-over-year increase in average earning assets. The decrease in interest expense of $322,000 was a product of a 21 basis point decrease in rates paid and a 5.8% increase in interest-bearing liabilities. The net result was a 3.0% decrease in net interest income on a fully taxable equivalent basis, and a 37 basis point decrease in the Companys net interest margin on a slightly larger asset base with a different mix.
On a fully taxable equivalent basis, income on investment securities available-for-sale decreased by $739,000, or 24.8%. The average invested balances in these securities decreased by $4.1 million, or 2.2%, from the levels of a year ago. The decrease in the average balance of investment securities was accompanied by a 74 basis point decrease in the tax equivalent yield of the portfolio. The Company will continue attempting to redeploy liquidity into loans. Any reinvestment into the securities portfolio will serve to decrease the yield due to the current low rate environment. The Company has a $7.0 million investment in trading securities at June 30, 2013 with none at June 30, 2012.
On a fully taxable equivalent basis, income on loans increased by $86,000, or 1.1%, for the first six months of 2013 compared to the same period in 2012. A $34.1 million increase in the average balance of the loan portfolio, or 11.9%, was accompanied by a 52 basis point decrease in the portfolios tax equivalent yield. Likewise, new loan volume is at historic low interest rates, while strong competition for good credits also drives rates downward. The commercial loan portfolio housed the majority of the increase in balances.
Other interest income increased by $4,000, or 33.3%, from the same period a year ago. The average balance of interest-earning deposits increased by $5.7 million, or 93.5%. The yield decreased by 11 basis points during the first six months of 2013 compared to 2012. Management intends to remain fully invested, minimizing on-balance sheet liquidity.
As the Company is located in the heart of the Utica Shale geography, material deposit growth was experienced in the latter part of 2012 as a result of customers receiving signing bonuses for the lease of mineral rights. Nearly $40 million in new deposits has been attributed to these bonuses. In the first half of 2013, nearly half of these funds were withdrawn for ultimate market plays and presumably to pay taxes. Average interest-bearing demand deposits and money market accounts increased by $12.9 million, or 16.1%, for the six months ended June 30, 2013 compared to the same period of 2012, while average savings balances increased by $18.7 million, or 18.4%. Total interest paid on interest-bearing demand deposits and money market accounts was $93,000, a $28,000 increase from last year. The average rate paid on these products increased by 4 basis points primarily the result of larger deposits in the higher yielding tiers of the money market accounts. Total interest paid on savings accounts was $44,000, a $7,000 decrease from last year. The average rate paid on savings accounts decreased by 2 basis points. The average balance of time deposit products decreased by $11.8 million, or 7.5%, as the average rate paid decreased by 29 basis points, from 1.64% to 1.35%. Interest expense decreased on time deposits by $314,000 from the prior year. Customers are opting for more liquid accounts versus time deposits in this low rate environment. As time deposits mature, the balances are reinvested at the lower current rates. After an extended period of declining average rates paid on deposits, the Company is experiencing a flattening on a linked quarter basis.
Average borrowings and subordinated debt increased by $2.8 million while the average rate paid on borrowings decreased by 26 basis points. Management plans to pay down long-term borrowings at their respective maturity dates in the future using current liquidity and continues to utilize short-term borrowings to bridge liquidity gaps.
Impairment Analysis of Investment Securities
The Company owns 12 trust preferred securities totaling $14.5 million (par value) issued by banks, thrifts, insurance companies and real estate investment trusts. The market for these securities at June 30, 2013 is not fully active and markets for similar securities are also not completely active. Given conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, the Company determined the few observable transactions and market quotations that are available are not reliable for purposes of determining fair value at June 30, 2013. It was decided that an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs would be more representative of fair value than the market approach valuation technique used at measurement dates prior to 2008.
The Company enlisted the aid of an independent third party to perform the trust preferred securities valuations. The approach to determining fair value involved the following process:
1. |
Estimate the credit quality of the collateral using average probability of default values for each issuer (adjusted for rating levels). |
2. |
Consider the potential for correlation among issuers within the same industry for default probabilities (e.g. banks with other banks). |
41
3. |
Forecast the cash flows for the underlying collateral and apply to each trust preferred security tranche to determine the resulting distribution among the securities. |
4. |
Discount the expected cash flows to calculate the present value of the security. |
The effective fair value discount rates on an overall basis generally range from 5.5% to 18.3% and are highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the trust preferred securities and the prepayment assumptions.
Based upon the results of the analysis, the Company currently believes that a weighted average price of approximately $0.67 per $1.00 of par value is representative of the fair value of the 12 trust preferred securities, with individual securities therein ranging from $0.31 to $0.95.
The Company considered all information available as of June 30, 2013 to estimate the impairment and resulting fair value of the trust preferred securities. These securities are supported by a number of banks and insurance companies located throughout the country. The FDIC has recently indicated that there are many financial institutions still considered troubled banks even after the numerous failures in the past three years. The Company recognized no credit related impairment in the first half of 2013 and $171,000 in the first half of 2012. If the conditions of the underlying banks in the trust preferred securities worsen, there may be additional impairment to recognize in 2013 or later.
Analysis of Provision, Non-Interest Income, Non-Interest Expense and Federal Income Tax for the First Six Months
During the first six months of both 2012 and 2013, the amount charged to operations as a provision for loan loss was adjusted to account for charge-offs against the allowance, as well as an increase in loan balances recorded in the portfolio, expected losses on specific problem loans and several qualitative factors, including factors specific to the local economy and to industries operating in the local market. The Company has allocated a portion of the allowance for a number of specific problem loans through the first six months of 2013, but has not experienced significant deterioration in any loan type, including the residential real estate portfolios or the commercial loan portfolio, and accordingly has not added any special provision for these loan types. At June 30, 2013, the provision for loan losses was $350,000, substantially exceeding the net charge-offs of $30,000. For the same period last year, the provision was $600,000, also exceeding net charge-offs of $320,000. Provision expense levels are in recognition of loan growth and a changing composition of the loan portfolio as the Company takes aim at managing its balance sheet with a commercially-oriented focus.
With the addition of substantial mortgage banking gains, the Company was able to continue to improve non-interest income overall. Total non-interest income, excluding investment gains and impairment losses, increased by $711,000. After impairment losses and gains on investment securities, non-interest income increased by $999,000 from the same period a year ago.
The wholesale mortgage unit, CSB Mortgage Company, which was formed in 2011 specifically as a result of strategic initiatives aimed at improving overall profitability, saw mortgage banking gains at $1.3 million in 2013 versus $420,000 in the same period of 2012. As indicated in Note 8 to the Consolidated Financial Statements, the Companys mortgage banking unit enters into various interest rate derivative contracts with the purpose of neutralizing the effect of interest rates on mortgage loan commitments. The gains and losses of all these activities are included in mortgage banking gains. As a revenue diversification initiative, the Company continues to expand its retail arm of the mortgage banking operation, not only in its current footprint, but in adjacent markets throughout Ohio.
Fees for customer services decreased by $126,000, or 12.1%, driven by customer activities. Other sources of non-recurring non-interest income decreased by $69,000 from the same period a year ago. This latter income category is subject to fluctuation due to the non-recurring nature of the items.
Gains on securities called and net gains on the sale of available-for-sale investment securities increased by $117,000 from year ago levels. Gains in the first half of 2012 were offset by impairment losses attributable to trust preferred securities primarily issued by bank holding companies. Losses of $171,000 were recognized in 2012 while none were recognized in 2013.
Total non-interest expenses in the first six months were $8.5 million in 2013 compared to $7.6 million in 2012, an increase of $960,000, or 12.7%.
During the first half of 2013, expenditures for salaries and employee benefits increased by $943,000 or 23.1% from the similar period a year ago. Much of this increase is due to the additional personnel hired to operate the mortgage banking operation and to manage the increasing lending volume generated though core bank lending operations. Also, approximately $200,000 in reorganization costs were incurred in 2013. Full time equivalent employment averaged 166 during the first six months of 2013 and 158 during the first six
42
months of 2012. The addition of employees thoughout 2012 were related to the mortgage banking operation. Management does not expect that the rate of increase in compensation and employee benefits experienced during 2012 and 2013 will continue in 2014.
Included in non-interest expenses for the six months ended June 30, 2012 quarter is the one-time investment of $444,000 in a Historic Tax Credit partnership which generated $634,000 in tax credits for 2012. The Company recorded no tax credit activity through the six month period ended June 30, 2013. All other expense categories increased by 15.2%, or $461,000 in the aggregate. These expense categories are subject to fluctuation due to non-recurring items. The majority of these increases relate to the expenses incurred by the mortgage banking operation in the form of professional fees, third-party consulting fees and compliance-related costs.
The effective tax rate for the first six months was 21.2% in 2013 and (5.2)% in 2012, resulting in income tax expense of $439,000 in 2013 and income tax benefit of $105,000 in 2012. A $483,000 historic tax credit and the $151,000 tax benefit on the partnership loss contributed to the lower effective tax rate in 2012.
The provision for income taxes differs from the amount of income tax determined applying the applicable U.S. statutory federal income tax rate (34%) to pre-tax income as a result of the following differences:
|
(Amounts in thousands) |
|
|||||||||||||
|
June 30, 2013 |
|
|
June 30, 2012 |
|
||||||||||
|
Balance |
|
|
% |
|
|
Balance |
|
|
% |
|
||||
Provision at statutory rate |
$ |
703 |
|
|
|
34.0 |
|
|
$ |
682 |
|
|
|
34.0 |
|
Add (Deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of earnings on bank-owned life insurance-net |
|
(63 |
) |
|
|
(3.0 |
) |
|
|
(67 |
) |
|
|
(3.3 |
) |
Tax effect of historic tax credit |
|
|
|
|
|
|
|
|
|
(483 |
) |
|
|
(24.1 |
) |
Tax effect of other non-taxable income |
|
(234 |
) |
|
|
(11.3 |
) |
|
|
(262 |
) |
|
|
(13.1 |
) |
Tax effect of non-deductible expense |
|
33 |
|
|
|
1.5 |
|
|
|
25 |
|
|
|
1.3 |
|
Federal income taxes |
$ |
439 |
|
|
|
21.2 |
|
|
$ |
(105 |
) |
|
|
(5.2 |
) |
The majority of non-taxable income consists of interest on obligations of states and political subdivisions.
Analysis of Net Interest Income Second quarter ended June 30, 2013 and 2012
|
(Amounts in thousands) |
|
|||||||||||||||||||||
|
June 30, 2013 |
|
|
June 30, 2012 |
|
||||||||||||||||||
|
Average
|
|
|
Interest |
|
|
Average
|
|
|
Average
|
|
|
Interest |
|
|
Average
|
|
||||||
INTEREST-EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits and other earning assets |
$ |
12,612 |
|
|
$ |
10 |
|
|
|
0.34 |
% |
|
$ |
7,364 |
|
|
$ |
7 |
|
|
|
0.34 |
% |
Investment securities(1)(2)(3) |
|
179,021 |
|
|
|
1,115 |
|
|
|
2.48 |
% |
|
|
185,034 |
|
|
|
1,479 |
|
|
|
3.19 |
% |
Trading securities(1)(2)(3) |
|
6,996 |
|
|
|
62 |
|
|
|
3.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
% |
Loans(1)(2)(3) |
|
311,408 |
|
|
|
3,933 |
|
|
|
5.06 |
% |
|
|
287,960 |
|
|
|
3,937 |
|
|
|
5.48 |
% |
Total interest-earning assets |
$ |
510,037 |
|
|
$ |
5,120 |
|
|
|
4.02 |
% |
|
$ |
480,358 |
|
|
$ |
5,423 |
|
|
|
4.52 |
% |
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and money market deposits |
$ |
89,862 |
|
|
$ |
41 |
|
|
|
0.18 |
% |
|
$ |
78,554 |
|
|
$ |
32 |
|
|
|
0.16 |
% |
Savings |
|
119,136 |
|
|
|
22 |
|
|
|
0.07 |
% |
|
|
103,130 |
|
|
|
25 |
|
|
|
0.09 |
% |
Time |
|
143,062 |
|
|
|
464 |
|
|
|
1.30 |
% |
|
|
157,483 |
|
|
|
626 |
|
|
|
1.59 |
% |
Total interest-bearing deposits |
|
352,060 |
|
|
|
527 |
|
|
|
0.60 |
% |
|
|
339,167 |
|
|
|
683 |
|
|
|
0.81 |
% |
Other borrowings |
|
44,307 |
|
|
|
309 |
|
|
|
2.80 |
% |
|
|
42,760 |
|
|
|
319 |
|
|
|
2.99 |
% |
Subordinated debt |
|
5,155 |
|
|
|
22 |
|
|
|
1.73 |
% |
|
|
5,155 |
|
|
|
25 |
|
|
|
1.92 |
% |
Total interest-bearing liabilities |
$ |
401,522 |
|
|
$ |
858 |
|
|
|
0.86 |
% |
|
$ |
387,082 |
|
|
$ |
1,027 |
|
|
|
1.07 |
% |
Net interest income |
|
|
|
|
$ |
4,262 |
|
|
|
|
|
|
|
|
|
|
$ |
4,396 |
|
|
|
|
|
Net interest rate spread(4) |
|
|
|
|
|
|
|
|
|
3.16 |
% |
|
|
|
|
|
|
|
|
|
|
3.45 |
% |
Net interest margin(5) |
|
|
|
|
|
|
|
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
|
|
3.66 |
% |
(1) Includes both taxable and tax exempt investment securities available-for-sale and loans and tax exempt trading securities. |
|
(2) The amounts are presented on a fully taxable equivalent basis using the statutory tax rate of 34%, and have been adjusted to reflect the effect of disallowed interest expense related to carrying tax-exempt assets. The tax equivalent income adjustment for loans, investment securities available-for-sale and trading securities was $8,000, $153,000 and $21,000, respectively, for 2013 and $11,000, $185,000 and $0, respectively, for 2012. |
|
(3) Includes applicable loan origination and commitment fees, net of deferred origination cost amortization. |
43
(4) Net interest rate spread represents the difference between the yield on earning assets and the rate paid on interest-bearing liabilities. |
|
(5)Net interest margin is calculated by dividing the net interest income by total interest-earning assets. |
Net interest income, the principal source of the Companys earnings, is the amount by which interest and fees generated by interest-earning assets, primarily loans and investment securities, exceed the interest cost of deposits and borrowed funds. On a fully taxable equivalent basis, net interest income measured $4.3 million at June 30, 2013 and $4.4 million at June 30, 2012. During the recent reporting period the net interest margin registered 3.34% at June 30, 2013 and 3.66% at June 30, 2012.
The decrease in interest income, on a fully taxable equivalent basis, of $303,000 is the product of a 50 basis point decrease in interest rates earned offset somewhat by a 6.2% year-over-year increase in average earning assets. The decrease in interest expense of $169,000 was a product of a 21 basis point decrease in rates paid and a 3.7% increase in interest-bearing liabilities. The net result was a 3.0% decrease in net interest income on a fully taxable equivalent basis, and a 32 basis point decrease in the Companys net interest margin on a slightly larger asset base with a different mix.
On a fully taxable equivalent basis, income on investment securities available-for-sale decreased by $364,000, or 24.6%. The average invested balances in these securities decreased by $6.0 million, or 3.2%, from the levels of a year ago. The decrease in the average balance of investment securities available-for-sale was accompanied by a 71 basis point decrease in the tax equivalent yield of the portfolio. The Company expects to continue redeployment of liquidity into loans. Any reinvestment into the securities portfolio will serve to decrease the yield due to the current low rate environment. The Company has an investment in trading securities at June 30, 2013 with none at June 30, 2012.
On a fully taxable equivalent basis, income on loans decreased by $4,000, or 0.1%, for the second quarter of 2013 compared to the same period in 2012. A $23.4 million increase in the average balance of the loan portfolio, or 8.1%, was accompanied by a 42 basis point decrease in the portfolios tax equivalent yield. Likewise, new loan volume is at historic low interest rates, while strong competition for good credits also drives rates downward.
Other interest income increased by $3,000, or 42.9%, from the same period a year ago. The average balance of interest earning deposits increased by $5.2 million, or 71.3%. The yield showed no change from the second quarter of 2013 compared to 2012. Management intends to minimize amounts held in deposits in order to increase yield on assets.
Average interest-bearing demand deposits and money market accounts increased by $11.3 million, or 14.4%, while average savings balances increased by $16.0 million, or 15.5%. Total interest paid on interest-bearing demand deposits and money market accounts was $41,000, a $9,000 increase from last year. The average rate paid on these products increased by 2 basis points. Total interest paid on savings accounts was $22,000, a $3,000 decrease from last year. The average rate paid on savings accounts decreased by 2 basis points. The average balance of time deposit products decreased by $14.4 million, or 9.2%, as the average rate paid decreased by 29 basis points, from 1.59% to 1.30%. Interest expense decreased on time deposits by $162,000 from the prior year. As time deposits mature, the balances are reinvested at the lower current rates. After an extended period of declining average rates paid on deposits, the Company is experiencing a flattening on a linked quarter basis.
Average borrowings and subordinated debt increased by $1.5 million while the average rate paid on borrowings decreased by 19 basis points. Management plans to pay down long-term borrowings at their respective maturity dates in the future using current liquidity.
Analysis of Other Income, Other Expense and Federal Income Tax for the Second Quarter
Loan charge-offs during the quarter were $31,000 in 2013, compared to $168,000 in 2012, while the recovery of previously charged-off loans amounted to $135,000 during the quarter of 2013, compared to $37,000 in the same period of 2012. The Companys provision for loan losses was $150,000 during the quarter of 2013 and $330,000 in the same quarter of 2012. Charge-offs of specific problem loans, as well as for smaller balance homogeneous loans, are recorded periodically during the year. The number of loan accounts and the amount of charge-offs associated with account balances vary from period to period as loans are deemed uncollectible by management. The balance of the allowance for loan losses and provisions to the loan loss allowance are based on an assessment of both the risk of loss and the amount of loss on loans within the loan portfolio.
Total non-interest income, excluding investment gains and impairment losses, increased by $264,000 from the quarter ended June 30, 2012 compared to the same quarter of 2013. After impairment losses and gains on investment securities, non-interest income increased by $388,000 from the same period a year ago. The increase is due to mortgage banking gains of $638,000 compared to $266,000 in 2012, the strategic initiative for which was noted prior in this discussion. Fees for other customer services decreased by $74,000. Other sources of non-recurring non-interest income decreased by $34,000 from the same period a year ago. This latter income
44
category is subject to fluctuation due to the non-recurring nature of the items. Gains on securities called and net gains on the sale of available-for-sale investment securities increased by $124,000 from year ago levels.
Total non-interest expenses in the second quarter were $4.3 million in 2013, compared to $3.7 million in 2012, an increase of $649,000, or 17.6%. Salaries and benefits increased in the second quarter of 2013 by $474,000, or 22.9%, from the similar period a year ago. This increase is due mainly to costs associated with the wholesale mortgage unit formed late in 2011 and reorganization costs of $128,000 in 2013. Charges for insurance premiums paid to the FDIC increased by $39,000 from the second quarter of 2012. All other expense categories increased by 8.8%, or $136,000 in the aggregate. These expense categories are subject to fluctuation due to non-recurring items. The majority of the increase is due to increased costs associated with the wholesale mortgage unit.
Income before tax during the second quarter amounted to $1.0 million in 2013 compared to $1.2 million in 2012. The effective tax rate for the second quarter was 20.3% in 2013 and 20.9% in 2012, resulting in income tax expense of $204,000 and $252,000, respectively. Second quarter net income was $799,000 in 2013 compared $952,000 in 2012. Income per share for the second quarter was $0.18 in 2013 and $0.21 in 2012.
Liquidity
The central role of the Companys liquidity management is to (1) ensure sufficient liquid funds to meet the normal transaction requirements of its customers, (2) take advantage of market opportunities requiring flexibility and speed, and (3) provide a cushion against unforeseen liquidity needs.
Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. The objective of liquidity management is to ensure the Company has the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. The Company maintains strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, proper management of capital markets funding sources and addressing unexpected liquidity requirements.
Principal sources of liquidity for the Company include assets considered relatively liquid, such as interest-bearing deposits in other banks, federal funds sold and, cash and due from banks, as well as cash flows from maturities and repayments of loans, investment securities and mortgage-backed securities.
In order to address the concern of FDIC insurance of larger depositors, the Bank became a member of the Certificate of Deposit Account Registry Service (CDARS ® ) program in 2009 and the Insured Cash Sweep (ICS) program in 2011. Through CDARS ® , the Banks customers can increase their FDIC insurance by up to $50.0 million through reciprocal certificate of deposit accounts and likewise through ICS, they can accomplish the same through money market savings accounts. This is accomplished by the Bank entering into reciprocal depository relationships with other member banks. The individual customers large deposit is broken into amounts below $250,000 and placed with other banks that are members of the network. The reciprocal member bank issues certificates of deposit or money market savings accounts in amounts that ensure that the entire deposit is eligible for FDIC insurance. At June 30, 2013, the Bank did not have any deposits in the CDARS ® program, but had $2.1 million of deposits in the ICS money market program. For regulatory purposes, CDARS ® and ICS are considered a brokered deposit even though reciprocal deposits are matched with funds from customers in the local market.
Along with its liquid assets, the Bank has other sources of liquidity available to it which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, the ability to obtain deposits through the adjustment of interest rates, the purchasing of federal funds, correspondent bank lines of credit and access to the Federal Reserve Discount Window. The Bank is also a member of the Federal Home Loan Bank of Cincinnati, which provides its largest source of liquidity. At June 30, 2013, the Bank had approximately $15.0 million available of collateral-based borrowing capacity at FHLB of Cincinnati, supplementing the $852,000 of availability with the Federal Reserve Discount window. Additionally, the FHLB has committed a $25.8 million cash management line, of which nothing has been disbursed, subject to posting additional collateral. The Bank, by policy, has access to approximately 5% of total deposits in brokered certificates of deposit that could be used as an additional source of liquidity. At June 30, 2013, there was a $6.2 million outstanding balance in brokered certificates of deposit. The Company was also granted a total of $8.5 million in unsecured, discretionary Federal Funds lines of credit with no funds drawn upon as of June 30, 2013. Unpledged securities of $53.7 million are also available for borrowing under repurchase agreements or as additional collateral for FHLB lines of credit or to sell to generate liquidity.
45
CSB obtains its funding through the Bank. The Bank occasionally utilizes short term borrowings under its FHLB cash management line to fund the needs of CSB. Upon establishing a consistent inventory of loans held for sale, such loans may be used as additional collateral for FHLB borrowings.
The Company has other more limited sources of liquidity. In addition to its existing liquid assets, it can raise funds in the securities market through debt or equity offerings or it can receive dividends from its bank subsidiary. Generally, the Bank may pay dividends without prior approval as long as the dividend is not more than the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, as long as the Bank remains well-capitalized after the dividend payment. The amount available for dividend at June 30, 2013 is $7.8 million. Future dividend payments by the Bank to the Company are based upon future earnings. The Company had cash of $226,000 at June 30, 2013 available to meet cash needs. It also held a $6.0 million note receivable, the cash flow from which approximates the debt service on the Junior Subordinated Debentures. Cash is generally used by the Company to pay quarterly interest payments on the debentures, pay dividends to common shareholders and to fund operating expenses.
Cash and cash equivalents increased from $17.1 million at June 30, 2012 to $18.2 million at June 30, 2013.
The following table details the cash flows from operating activities for the six months ended:
|
(Amounts in thousands) |
|
|||||
|
June 30, |
|
|||||
|
2013 |
|
|
2012 |
|
||
Net income |
$ |
1,629 |
|
|
$ |
2,111 |
|
Adjustments to reconcile net income to net cash flows (deficit) from operating activities: |
|
|
|
|
|
|
|
Depreciation, amortization and accretion |
|
1,762 |
|
|
|
1,443 |
|
Provision for loan loss |
|
350 |
|
|
|
600 |
|
Investment securities gains |
|
(152 |
) |
|
|
(35 |
) |
Impairment losses |
|
|
|
|
|
171 |
|
Other real estate (gains) losses |
|
(13 |
) |
|
|
(2 |
) |
Originations of mortgage banking loans held for sale |
|
(181,477 |
) |
|
|
(73,967 |
) |
Proceeds from the sale of mortgage banking loans |
|
193,101 |
|
|
|
60,452 |
|
Net mortgage banking income |
|
(1,326 |
) |
|
|
(420 |
) |
Purchase of trading securities |
|
(7,000 |
) |
|
|
|
|
Loss on trading securities |
|
51 |
|
|
|
|
|
Tax refund |
|
933 |
|
|
|
|
|
Changes in: |
|
|
|
|
|
|
|
Deferred tax |
|
416 |
|
|
|
(553 |
) |
Prepaid FDIC assessment |
|
1,187 |
|
|
|
131 |
|
Bank-owned life insurance |
|
(255 |
) |
|
|
(197 |
) |
Other assets and liabilities |
|
(733 |
) |
|
|
(64 |
) |
Net cash flows (deficit) from operating activities |
$ |
8,473 |
|
|
$ |
(10,330 |
) |
Key variations stem from: 1) Amortization on investments measured $1.8 million at June 30, 2013 compared to $1.4 million at June 30, 2012, reflecting more securities purchased at a premium in this low rate environment. 2) Impairment losses of $171,000 were recognized in 2012 with none being recognized in 2013. 3). In 2013, a refund of $933,000 was received from the IRS with a resulting decrease in federal income tax receivable. 4) Loans held for sale decreased by $10.3 million in 2013 compared to an increase of $13.9 in 2012 due to the impact of interest rates on activity of CSB. 5) Included in the $1.2 million change in FDIC assessment is a refund of $1.1 million. 6) A purchase of trading securities was made in 2013 for $7.0 million. Refer to the Consolidated Statements of Cash Flows for a summary of the sources and uses of cash for 2013 and 2012.
Critical Accounting Policies and Estimates
The discussion and analysis of the Companys financial condition and results of operation are based upon the Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Companys consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
46
Certain accounting policies involve significant judgments and assumptions by management which has a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.
Management believes the following are critical accounting policies that require the most significant judgments and estimates used in the preparation of the Companys consolidated financial statements.
Accounting for the Allowance for Loan Losses
The determination of the allowance for loan losses and the resulting amount of the provision for loan losses charged to operations reflects managements current judgment about the credit quality of the loan portfolio and takes into consideration changes in lending policies and procedures, changes in economic and business conditions, changes in the nature and volume of the portfolio and, in the terms of loans, changes in the experience, ability and depth of lending management, changes in the volume and severity of past due, non-accrual and adversely classified or graded loans, changes in the quality of the loan review system, changes in the value of underlying collateral for collateral-dependent loans, the existence and effect of any concentrations of credit and the effect of competition, legal and regulatory requirements and other external factors. The nature of the process by which we determine the appropriate allowance for loan losses requires the exercise of considerable judgment. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of the loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The allowance is increased by the provision for loan losses and decreased by charge-offs when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies or defaults and a higher level of non-performing assets, net charge offs, and provision for loan losses in future periods.
The Companys allowance for loan losses methodology consists of three elements: specific valuation allowances based on probable losses on specific loans; valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends; and general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Company. These elements support the basis for determining allocations between the various loan categories and the overall adequacy of our allowance to provide for probable losses inherent in the loan portfolio.
With these methodologies, a general allowance is established for each loan type based on historical losses for each loan type in the portfolio. Additionally, management allocates a specific allowance for Impaired Credits, which is based on current information and events; it is probable the Company will not collect all amounts due according to the original contractual terms of the loan agreement. The level of the general allowance is established to provide coverage for managements estimate of the credit risk in the loan portfolio by various loan segments not covered by the specific allowance. Additional information regarding allowance for credit losses can be found in the Notes to the Consolidated Financial Statements (Note 4) and elsewhere in this Managements Discussion and Analysis.
Investment Securities and Impairment
The classification and accounting for investment securities is discussed in detail in Note 3 of the Consolidated Financial Statements. Investment securities must be classified as held-to-maturity, available-for-sale, or trading. The appropriate classification is based partially on our ability to hold the securities to maturity and largely on managements intentions, if any, with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities, if any, flow directly through earnings during the periods in which they arise, whereas available-for-sale securities are recorded as a separate component of shareholders equity (accumulated other comprehensive income or loss) and do not affect earnings until realized. The fair values of our investment securities are generally determined by reference to quoted market prices and reliable independent sources. At each reporting date, the Company assesses whether there is an other-than-temporary impairment to the Companys investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income (loss).
The Company reviews investment debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on individual investment securities were recognized during 2012 in accordance with FASB ASC topic 320, Investments Debt and Equity Securities . The purpose of this ASC is to provide greater clarity to investors about the credit and noncredit component of an OTTI event and to communicate more effectively when an OTTI event has occurred. This ASC amends the OTTI guidance in GAAP for debt securities, improves the presentation and disclosure of OTTI on investment securities and changes the calculation of the OTTI recognized in earnings in the financial statements. This ASC does not amend existing recognition and measurement guidance related to OTTI of equity securities.
47
For debt securities, ASC topic 320 requires an entity to assess whether it has the intent to sell the debt security or it is more-likely-than-not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an OTTI on the security must be recognized.
In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more-likely-than-not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), ASC topic 320 changes the presentation and amount of the OTTI recognized in the income statement.
In these instances, the impairment is separated into the amount of the total impairment related to the credit loss and the amount of the total impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income (loss). The total OTTI is presented in the income statement with an offset for the amount of the total OTTI that is recognized in other comprehensive income (loss). In determining the amount of impairment related to credit loss, the Company uses a third party discounted cash flow model, several inputs for which require estimation and judgment. Among these inputs are projected deferral and default rates and estimated recovery rates. Realization of events different than that projected could result in a large variance in the values of the securities.
Income Taxes
The provision for income taxes is based on income reported for financial statement purposes and differs from the amount of taxes currently payable, since certain income and expense items are reported for financial statement purposes in different periods than those for tax reporting purposes. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of the Companys tax position.
The Company accounts for income taxes using the asset and liability approach, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The Company conducts periodic assessments of deferred tax assets, including net operating loss carryforwards, to determine if it is more-likely-than-not that they will be realized. In making these assessments, the Company considers taxable income in prior periods, projected future taxable income, potential tax planning strategies and projected future reversals of deferred tax items. These assessments involve a certain degree of subjectivity which may change significantly depending on the related circumstances.
Authoritative Accounting Guidance
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities . The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entitys financial statements to evaluate the effect or potential effect of netting arrangements on an entitys financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU did not have a material effect on the Companys financial position or results of operations.
In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities . The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging , including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of Update 2011-11. This ASU did not have a material effect on the Companys financial position or results of operations.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income . The amendments in this Update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being
48
reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. This ASU did not have a material effect on the Companys financial position or results of operations.
In July 2013, the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not expect this ASU to have a material effect on the Companys financial position or results of operations.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company does not expect this ASU to have a material effect on the Companys financial position or results of operations.
Available Information
The Company files an annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports with the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934 Amended (the Exchange Act). The Companys website is www.cortland-banks.com. The Company makes available through its website, free of charge, the reports filed with the SEC, as soon as reasonably practicable after such material is electronically filed, or furnished to, the SEC. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The public may read and copy any materials filed with the Commission at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.
49
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and qualitative information about market risk from the information provided in the Companys Form 10-K for the year ended December 31, 2012.
50
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures . With the supervision and participation by management, including the Companys principal executive officer and principal financial officer, the effectiveness of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) has been evaluated as of the end of the period covered by this report. Based upon that evaluation, the Companys principal executive officer and principal financial officer have concluded that these controls and procedures were effective.
Changes in Internal Control Over Financial Reporting . Our Chief Executive Officer and Chief Financial Officer have concluded that there have been no significant changes during the period covered by this report in the Companys internal control over financial reporting (as defined in Rules 13a-13 and 15d-15 of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
51
PART IIOTHER INFORMATION
See Note (5) of the financial statements.
There have been no material changes in the risk factors disclosed by the Company in its Report on Form 10-K for the fiscal year ended December 31, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable
Companys Common Stock There were no repurchases of shares of the Companys common stock during the six months ended June 30, 2013.
On July 23, 2013, The Cortland Savings and Banking Company entered into an Endorsement Split Dollar Agreement with Senior Vice President and Chief Lending Officer Stanley P. Feret. Provided death occurs before age 65 and before employment with The Cortland Savings and Banking Company terminates, Mr. Ferets Endorsement Split Dollar Agreement allows him to designate the beneficiary of a portion of the death benefit payable on a policy on Mr. Ferets life, which policy is owned by The Cortland Savings and Banking Company. The portion of the death benefit for which Mr. Feret would be able to designate a beneficiary is the amount equal to or the lesser of (x) 100% of the insurance policy net death benefit, meaning the total death proceeds minus the cash surrender value, and (y) the age 65 normal retirement age accrual balance under Mr. Ferets Salary Continuation Agreement.
52
CORTLAND BANCORP AND SUBSIDIARIES
INDEX TO EXHIBITS
Item 6. Exhibits The following exhibits are filed or incorporated by reference as part of this report:
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Incorporated by Reference |
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Exhibit
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Exhibit Description |
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Form*** |
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Exhibit |
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Filing
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Filed
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3.1 |
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Restated Amended Articles of Cortland Bancorp reflecting amendment dated June 25, 1999. Note: filed for purposes of SEC reporting compliance only. This restated document has not been filed with the State of Ohio. |
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10-K(1) |
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3.1 |
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03/16/06 |
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3.2 |
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Code of Regulations, as amended: |
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For the Bancorp |
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10-K(1) |
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3.2 |
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03/16/06 |
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For Cortland Savings and Banking |
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10-K |
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3.2 |
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03/15/07 |
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4.1 |
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The rights of holders of equity securities are defined in portions of the Articles of Incorporation and Code of Regulations as referenced in Exhibits 3.1 and 3.2 |
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10-K(1) |
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4.1 |
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03/16/06 |
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4.2 |
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Agreement to furnish instruments and agreements defining rights of holders of long-term debt |
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10-Q |
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4.2 |
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8/13/2013 |
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ü |
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*10.1 |
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Group Term Carve Out Plan dated February 23, 2001, by The Cortland Savings and Banking Company with each executive officer other than Rodger W. Platt and with selected other officers, as amended by the August 2002 letter amendment |
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10-K(1) |
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10.1 |
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03/16/06 |
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*10.2 |
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Group Term Carve Out Plan Amended Split Dollar Policy Endorsement entered into by The Cortland Savings and Banking Company on December 15, 2003 with Stephen A. Telego, Sr. |
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10-K(1) |
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10.2 |
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03/16/06 |
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*10.3 |
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Amended Director Retirement Agreement between Cortland Bancorp and Jerry A. Carleton, dated as of December 18, 2007 |
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10-K |
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10.3 |
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03/17/08 |
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*10.4 |
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Amended Director Retirement Agreement between Cortland Bancorp and David C. Cole, dated as of December 18, 2007 |
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10-K |
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10.4 |
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03/17/08 |
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*10.5 |
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Amended Director Retirement Agreement between Cortland Bancorp and George E. Gessner, dated as of December 18, 2007 |
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10-K |
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10.5 |
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03/17/08 |
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*10.6 |
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Amended Director Retirement Agreement between Cortland Bancorp and William A. Hagood, dated as of October 12, 2003 |
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10-K(1) |
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10.6 |
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03/16/06 |
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*10.7 |
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Amended Director Retirement Agreement between Cortland Bancorp and James E. Hoffman III, dated as of December 18, 2007 |
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10-K |
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10.7 |
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03/17/08 |
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*10.8 |
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Amended Director Retirement Agreement between Cortland Bancorp and Neil J. Kaback, dated as of December 18, 2007 |
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10-K |
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10.8 |
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03/17/08 |
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*10.9 |
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Director Retirement Agreement between Cortland Bancorp and K. Ray Mahan, dated as of March 1, 2001 |
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10-K(1) |
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10.9 |
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03/16/06 |
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*10.10 |
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Amended Director Retirement Agreement between Cortland Bancorp and Richard B. Thompson, dated as of December 18, 2007 |
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10-K |
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10.10 |
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03/17/08 |
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53
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Incorporated by Reference |
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Exhibit
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Exhibit Description |
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Form*** |
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Exhibit |
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Filing
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Filed
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*10.11 |
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Amended Director Retirement Agreement between Cortland Bancorp and Timothy K. Woofter, dated as of December 18, 2007 |
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10-K |
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10.11 |
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03/17/08 |
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*10.12 |
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Form of Split Dollar Agreement entered into by Cortland Bancorp and each of Directors David C. Cole, George E. Gessner, William A. Hagood, James E. Hoffman III, K. Ray Mahan, and Timothy K. Woofter as of February 23, 2001, as of March 1, 2004, with Director Neil J. Kaback, and as of October 1, 2001, with Director Richard B. Thompson; |
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10-K(1) |
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10.12 |
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03/16/06 |
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as amended on December 26, 2006, for Directors Cole, Gessner, Hoffman, Mahan, Thompson, and Woofter; |
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10-K |
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10.12 |
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03/15/07 |
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Amended Split Dollar Agreement and Endorsement entered into by Cortland Bancorp as of December 18, 2007, with Director Jerry A. Carleton |
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10-K |
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10.12 |
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03/17/08 |
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*10.13 |
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Directors Retirement Agreement between Cortland Bancorp and Director Joseph E. Koch, dated as of April 19, 2011 |
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8-K |
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10.13 |
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04/22/11 |
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*10.14 |
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Split Dollar Agreement and Endorsement between Cortland Bancorp and Director Joseph E. Koch, dated as of April 19, 2011 |
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8-K |
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10.14 |
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04/22/11 |
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*10.15 |
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Form of Indemnification Agreement entered into by Cortland Bancorp with each of its directors |
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10-K(1) |
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10.15 |
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03/16/06 |
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*10.16 |
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Endorsement Split Dollar Agreement between The Cortland Savings and Banking Company and David J. Lucido, dated as of March 27, 2012 |
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10-K |
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10.16 |
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03/29/12 |
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*10.17 |
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Fifth Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Timothy Carney, dated as of March 27, 2012 |
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10-K |
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10.17 |
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03/29/12 |
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*10.18 |
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Third Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Lawrence A. Fantauzzi, dated as of December 3, 2008 |
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8-K |
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10.18 |
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12/12/08 |
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*10.19 |
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Fifth Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and James M. Gasior, dated as of March 27, 2012 |
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10-K |
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10.19 |
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03/29/12 |
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*10.20 |
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Second Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Marlene Lenio, dated as of December 3, 2008 |
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8-K |
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10.20 |
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12/12/08 |
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*10.20.1 |
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Amendment of the December 3, 2008 Second Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Marlene J. Lenio |
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10-Q |
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10.20.1 |
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05/17/10 |
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*10.21 |
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Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Craig Phythyon, dated as of December 3, 2008 |
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8-K |
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10.21 |
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12/12/08 |
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*10.21.1 |
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Amendment of the December 3, 2008 Second Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Craig M. Phythyon |
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10-Q |
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10.21.1 |
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05/17/10 |
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54
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Third Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Stephen A. Telego, Sr., dated as of December 3, 2008 |
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8-K |
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10.22 |
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12/12/08 |
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*10.22.1 |
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Amendment of the December 3, 2008 Third Amended Salary Continuation Agreement between The Cortland Savings and Banking Company and Stephen A. Telego, Sr. |
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10-Q |
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10.22.1 |
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05/17/10 |
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*10.23 |
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Salary Continuation Agreement between The Cortland Savings and Banking Company and David J. Lucido dated as of June 1, 2010 |
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8-K |
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10.23 |
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06/02/10 |
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*10.24 |
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Fourth Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Timothy Carney, dated as of April 19, 2011 |
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8-K |
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10.24 |
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04/22/11 |
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*10.25 |
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Salary Continuation Agreement between The Cortland Savings and Banking Company and Stanley P. Feret dated as of June 1, 2010 |
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8-K |
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10.25 |
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06/02/10 |
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*10.26 |
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Fourth Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and James M. Gasior, dated as of April 19, 2011 |
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8-K |
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10.26 |
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04/22/11 |
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*10.27 |
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Second Amended Split Dollar Agreement between The Cortland Savings and Banking Company and Marlene Lenio, dated as of December 3, 2008 |
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8-K |
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10.27 |
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12/12/08 |
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*10.27.1 |
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Termination of Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Marlene Lenio |
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10-Q |
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10.27.1 |
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05/17/10 |
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*10.28.1 |
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Termination of the Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Craig Phythyon |
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10-Q |
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10.28.1 |
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05/17/10 |
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*10.29 |
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Third Amended Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Stephen A. Telego, Sr., dated as of December 3, 2008 |
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8-K |
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10.29 |
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12/12/08 |
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*10.29.1 |
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Termination of the Split Dollar Agreement and Endorsement between The Cortland Savings and Banking Company and Stephen A. Telego, Sr. |
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10-Q |
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10.29.1 |
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05/17/10 |
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*10.30 |
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Endorsement Split Dollar Agreement between The Cortland Savings and Banking Company and Stanley P. Feret, dated as of July 23, 2013 |
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10-Q |
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10.30 |
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08/13/13 |
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*10.31.1 |
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Severance Agreement between Cortland Bancorp and Tim Carney, dated as of September 28, 2012 |
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8-K |
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10.31.1 |
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10/03/12 |
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*10.31.2 |
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Severance Agreement between Cortland Bancorp and James Gasior, dated as of September 28, 2012 |
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8-K |
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10.31.2 |
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10/03/12 |
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*10.31.3 |
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Severance Agreement between Cortland Bancorp and David J. Lucido, dated as of September 28, 2012 |
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8-K |
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10.31.3 |
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10/03/12 |
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55
(1) |
Film number 06691632 |
* |
Management contract or compensatory plan or arrangement |
** |
Pursuant to Rule 406T of Regulation S- T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
*** |
SEC File No. 000- 13814 |
56
CORTLAND BANCORP AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CORTLAND BANCORP
(Registrant)
/s/ James M. Gasior |
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Date: August 13, 2013 |
James M. Gasior President and Chief Executive Officer (Principal Executive Officer) |
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/s/ David J. Lucido |
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Date: August 13, 2013 |
David J. Lucido Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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EXHIBIT 4.2
CORTLAND BANCORP
194 West Main Street
Cortland, OH 44410
August 13, 2013
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re: Cortland Bancorp Quarterly Report on Form 10-Q for the quarter ended June 30, 2013
Ladies and Gentlemen:
Cortland Bancorp, an Ohio corporation, is today filing a Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (the Form 10-Q), as executed on August 13, 2013.
Pursuant to the instructions relating to the Exhibits in Item 601(b)(4)(iii) of Regulation S-K, Cortland Bancorp hereby agrees to furnish the Commission, upon request, copies of instruments and agreements defining the rights of holders of its long-term debt and of the long-term debt of its consolidated subsidiaries, which are not being filed as exhibits to the Form 10-Q. No such instrument or agreement represents long-term debt exceeding 10% of the total assets of Cortland Bancorp and its subsidiaries on a consolidated basis.
Very truly yours,
/s/ James M. Gasior
James M. Gasior
President and CEO
Exhibit 10.30
C ORTLAND S AVINGS AND B ANKING C OMPANY
E NDORSEMENT S PLIT D OLLAR A GREEMENT
This E NDORSEMENT S PLIT D OLLAR A GREEMENT (this Agreement) is entered into as of this 23rd day of July, 2013, by and between Cortland Savings and Banking Company, an Ohio-chartered, FDIC-insured member bank (the Bank), and Stanley P. Feret, an executive of the Bank (the Executive). This Agreement shall append the Split Dollar Policy Endorsement entered into on even date herewith or as subsequently amended, by and between the Bank and the Executive.
W HEREAS , to encourage the Executive to remain a Bank employee, the Bank is willing to divide the death proceeds of a life insurance policy on the Executives life,
W HEREAS , the Bank will pay life insurance premiums from its general assets,
W HEREAS , the split dollar life insurance arrangement represented by this Agreement replaces the existing arrangement whereby the Bank maintains term insurance on the Executives life, with the Executive designating the beneficiary of a portion of the death proceeds payable under the term life insurance policy, and
W HEREAS , the Bank has allowed or will allow the term insurance policy on the Executives life to lapse, resulting in cancellation of the term life insurance policy by the insurer, and the Executive shall therefore have no right to designate the beneficiary of death proceeds payable under the term insurance policy previously maintained by the Bank on the Executives life.
N OW T HEREFORE , in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows.
A RTICLE 1
G ENERAL D EFINITIONS
Capitalized terms not otherwise defined in this Agreement are used herein as defined in the Salary Continuation Agreement between the Bank and the Executive. The following terms shall have the meanings specified.
1.1 Administrator means the administrator described in Article 7.
1.2 Executives Interest means the benefit set forth in section 2.2.
1.3 Insured means the Executive.
1.4 Insurer means each life insurance carrier for which there is a Split Dollar Policy Endorsement attached to this Agreement.
1.5 Net Death Proceeds means the total death proceeds of the Policy minus the cash surrender value.
1.6 Policy means the specific life insurance policy or policies issued by the Insurer.
1.7 Salary Continuation Agreement means the June 1, 2010 Salary Continuation Agreement, as the same may have been or may hereafter be amended, between the Bank and the Executive.
1.8 Split Dollar Policy Endorsement means the form required by the Administrator or the Insurer to indicate the Executives interest, if any, in a Policy on the Executives life.
A RTICLE 2
P OLICY O WNERSHIP /I NTERESTS
2.1 Bank Ownership . The Bank is the sole owner of the Policy and shall have the right to exercise all incidents of ownership. The Bank shall be the beneficiary of the remaining death proceeds of the Policy after the Executives interest is paid according to section 2.2 below.
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2.2 Death Benefit . Provided the Executives death occurs both before the Executives Separation from Service and before the Executive attains age 65, at the Executives death the Executives beneficiary designated in accordance with the Split Dollar Policy Endorsement shall be entitled to Policy proceeds in an amount equal to the lesser of ( x ) 100% of the Net Death Proceeds or ( y ) a portion of the Net Death Proceeds equal to 100% of the Accrual Balance required at Normal Retirement Age under the Salary Continuation Agreement (the lesser of the amounts specified in clauses ( x ) and ( y ) being referred to in this Agreement as the Executives Interest). The Executives Interest shall be extinguished at the earlier of the date of the Executives Separation from Service or the date the Executive attains age 65, and the Executives beneficiary shall be entitled to no benefits under this Agreement for the Executives death occurring thereafter. The Executive shall have the right to designate the beneficiary of the Executives Interest.
2.3 Option to Purchase . The Bank shall not sell, surrender, or transfer ownership of the Policy before the Executives Separation from Service without first giving the Executive or the Executives transferee the option to purchase the Policy for a period of 60 days. The purchase price shall be an amount equal to the Policy cash surrender value. The option to purchase the Policy shall lapse if not exercised within 60 days after the date the Bank gives written notice of the Banks intention to sell, surrender, or transfer ownership of the Policy. This provision shall not impair the Banks rights to terminate this Agreement.
2.4 Comparable Coverage . The Bank shall maintain the Policy in full force and effect. The Bank may not amend, terminate, or otherwise abrogate the Executives interest in the Policy before the Executives Separation from Service unless the Bank replaces the Policy with a comparable insurance policy to cover the benefit provided under this Agreement and executes a new split dollar agreement and endorsement for the comparable insurance policy. The Policy or any comparable policy shall be subject to claims of the Banks creditors.
2.5 Internal Revenue Code Section 1035 Exchanges . The Executive recognizes and agrees that the Bank may after this Agreement is adopted wish to exchange the Policy of life insurance on the Executives life for another contract of life insurance insuring the Executives life. Provided that the Policy is replaced (or intended to be replaced) with a comparable policy of life insurance, the Executive agrees to provide medical information and cooperate with medical insurance-related testing required by a prospective insurer for implementing the Policy or, if necessary, for modifying or updating to a comparable insurer.
A RTICLE 3
P REMIUMS
3.1 Premium Payment . The Bank shall pay any premiums due on the Policy.
3.2 Economic Benefit . The Administrator shall annually determine the economic benefit attributable to the Executive based on the life insurance premium factor for the Executives age multiplied by the aggregate death benefit payable to the Executives beneficiary. The life insurance premium factor is the minimum factor applicable under guidance published pursuant to Treasury Reg. section 1.61-22(d)(3)(ii) or any subsequent authority.
3.3 Imputed Income . The Bank shall impute the economic benefit to the Executive on an annual basis by adding the economic benefit to the Executives W-2, or if applicable, Form 1099.
A RTICLE 4
A SSIGNMENT
The Executive may irrevocably assign without consideration all of the Executives interest in the Policy and in this Agreement to any person, entity, or trust established by the Executive or the Executives spouse. If the Executive transfers all of the Executives interest in the Policy, all of the Executives interest in the Policy and in the Agreement shall be vested in the Executives transferee, who shall be substituted as a party hereunder and the Executive shall have no further interest in this Agreement.
A RTICLE 5
I NSURER
The Insurer shall be bound by the terms of the Policy only. Any payments the Insurer makes or actions it takes in accordance with the Policy shall fully discharge it from all claims, suits, and demands of all entities or persons. The Insurer shall not be bound by or be deemed to have notice of the provisions of this Agreement.
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A RTICLE 6
C LAIMS AND R EVIEW P ROCEDURES
6.1 Claims Procedure . Any person or entity who has not received benefits under this Agreement that he or she believes should be paid (the claimant) shall make a claim for benefits as follows
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6.1.1 Initiation written claim . The claimant initiates a claim by submitting to the Administrator a written claim for benefits. If the claim relates to the contents of a notice received by the claimant, the claim must be made within 60 days after the notice was received by the claimant. All other claims must be made within 180 days after the date of the event that caused the claim to arise. The claim must state with particularity the determination desired by the claimant. |
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6.1.2 Timing of Administrator response . The Administrator shall respond to the claimant within 90 days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 90 days by notifying the claimant in writing, before the end of the initial 90-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision. |
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6.1.3 Notice of decision . If the Administrator denies part or all of the claim, the Administrator shall notify the claimant in writing of the denial. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth |
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The specific reasons for the denial, |
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A reference to the specific provisions of this Agreement on which the denial is based, |
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A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed, |
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(d) |
An explanation of the Agreements review procedures and the time limits applicable to such procedures, and |
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(e) |
A statement of the claimants right to bring a civil action under ERISA section 502(a) after an adverse benefit determination on review. |
6.2 Review Procedure . If the Administrator denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Administrator of the denial, as follows
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6.2.1 Initiation written request . To initiate the review, the claimant must file with the Administrator a written request for review within 60 days after receiving the Administrators notice of denial. |
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6.2.2 Additional submissions information access . The claimant shall then have the opportunity to submit written comments, documents, records, and other information relating to the claim. Upon request and free of charge, the Administrator shall also provide the claimant reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimants claim for benefits. |
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6.2.3 Considerations on review . In considering the review, the Administrator shall take into account all materials and information the claimant submits relating to the claim, without regard to whether the information was submitted or considered in the initial benefit determination. |
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6.2.4 Timing of Administrator response . The Administrator shall respond in writing to the claimant within 60 days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional 60 days by notifying the claimant in writing before the end of the initial 60-day period that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision. |
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6.2.5 Notice of decision . The Administrator shall notify the claimant in writing of its decision on review. The Administrator shall write the notification in a manner calculated to be understood by the claimant. The notification shall set forth |
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(a) |
The specific reasons for the denial, |
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A reference to the specific provisions of the Agreement on which the denial is based, |
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A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant (as defined in applicable ERISA regulations) to the claimants claim for benefits, and |
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(d) |
A statement of the claimants right to bring a civil action under ERISA section 502(a). |
A RTICLE 7
A DMINISTRATION OF A GREEMENT
7.1 Administrator Duties . This Agreement shall be administered by an Administrator, which shall consist of the Banks board of directors or such committee as the board shall appoint. The Executive may not be a member of the Administrator. The Administrator shall have the discretion and authority to ( x ) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Agreement and ( y ) decide or resolve any and all questions that may arise, including interpretations of this Agreement.
7.2 Agents . In the administration of this Agreement, the Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel, who may be counsel to the Bank.
7.3 Binding Effect of Decisions . The decision or action of the Administrator about any question arising out of the administration, interpretation, and application of this Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.
7.4 Indemnity of Administrator . The Bank shall indemnify and hold harmless the members of the Administrator against any and all claims, losses, damages, expenses, or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Administrator or any of its members.
7.5 Information . To enable the Administrator to perform its functions, the Bank shall supply full and timely information to the Administrator on all matters relating to the date and circumstances of the retirement, death, or Separation from Service of the Executive, and such other pertinent information as the Administrator may reasonably require.
A RTICLE 8
M ISCELLANEOUS
8.1 Amendment and Termination of Agreement . This Agreement may be amended or terminated solely by a written agreement signed by the Bank and the Executive. However, this Agreement shall terminate upon the first to occur of ( w ) distribution of the death benefit proceeds in accordance with section 2.2 above, or ( x ) termination of the Salary Continuation Agreement under Article 5 of the Salary Continuation Agreement, or ( y ) the Executives Separation from Service, or ( z ) the date the Executive attains age 65.
8.2 Binding Effect . This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators, and transferees, and any Policy beneficiary.
8.3 No Guarantee of Employment . This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank nor does it interfere with the Banks right to discharge the Executive. It also does not require the Executive to remain an employee or interfere with the Executives right to terminate employment at any time.
8.4 Successors; Binding Agreement . By an assumption agreement in form and substance satisfactory to the Executive, the Bank shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business or assets of the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform this Agreement had no succession occurred.
8.5 Applicable Law . This Agreement and all rights hereunder shall be governed by and construed according to the laws of the State of Ohio, except to the extent preempted by the laws of the United States of America.
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8.6 Entire Agreement . This Agreement and the Salary Continuation Agreement constitute the entire agreement between the Bank and the Executive concerning the subject matter. No rights are granted to the Executive under this Agreement other than those specifically set forth.
The split dollar life insurance arrangement represented by this Agreement replaces the existing arrangement whereby the Bank maintains term insurance on the Executives life, with the Executive designating the beneficiary of a portion of the death proceeds payable under the term life insurance policy. The Bank has allowed or will allow the term insurance policy on the Executives life to lapse, resulting in cancellation of the term life insurance policy by the insurer, and the Executive shall therefore have no right to designate the beneficiary of death proceeds payable under the term insurance policy previously maintained by the Bank on the Executives life.
8.7 Severability . If any provision of this Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall continue in full force and effect to the full extent consistent with law. If any provision of this Agreement is held invalid in part, such invalidity shall not affect the remainder of the provision not held invalid, and the remainder of the provision together with all other provisions of this Agreement shall continue in full force and effect to the full extent consistent with law.
8.8 Headings . Headings and subheadings herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any provision of this Agreement.
8.9 Notices . All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid, to the following addresses or to such other address as either party may designate by like notice. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to the address of the Executive on the books and records of the Bank at the time of the delivery of such notice, and properly addressed to the Bank if addressed to the board of directors, Cortland Savings and Banking Company, 194 W. Main Street, P.O. Box 98, Cortland, Ohio 44410.
I N W ITNESS W HEREOF , the Executive and a duly authorized representative of the Bank have executed this Agreement as of the date first written above.
E XECUTIVE : |
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B ANK : |
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Cortland Savings and Banking Company |
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By: |
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Stanley P. Feret |
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James M. Gasior |
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Its: |
President |
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A GREEMENT TO C OOPERATE WITH I NSURANCE U NDERWRITING I NCIDENT TO I NTERNAL R EVENUE C ODE SECTION 1035 E XCHANGE |
I acknowledge that I have read the Endorsement Split Dollar Agreement and agree to be bound by its terms, particularly the covenant on my part set forth in section 2.5 of the Endorsement Split Dollar Agreement to provide medical information and cooperate with medical insurance-related testing required by an insurer to issue a comparable insurance policy to cover the benefit provided under this Endorsement Split Dollar Agreement.
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Witness |
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Stanley P. Feret |
5
S PLIT D OLLAR P OLICY E NDORSEMENT
Insured: |
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Stanley P. Feret |
Insurer |
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Massachusetts Mutual Life Insurance Company |
Policy No.: |
39110579 |
According to the terms of the Cortland Savings and Banking Company Endorsement Split Dollar Agreement dated as of July 23, 2013, the undersigned Owner requests that the above-referenced policy issued by the Insurer provide for the following beneficiary designation and limited contract ownership rights to the Insured:
1. Upon the death of the Insured, proceeds shall be paid in one sum to the Owner, its successors or assigns, to the extent of the Owners interest in the policy. It is hereby provided that the Insurer may rely solely upon a statement from the Owner concerning the amount of proceeds it is entitled to receive under this paragraph.
2. The proceeds at the death of the Insured in excess of the amount paid under the provisions of paragraph 1 shall be paid as follows:
A. 67% shall be paid in one sum to:
Toni Lynn Feret, Beneficiary, wife of the Insured, if living, otherwise to the Insureds estate
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P RIMARY B ENEFICIARY , R ELATIONSHIP /S OCIAL S ECURITY N UMBER
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Insureds estate
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C ONTINGENT B ENEFICIARY , R ELATIONSHIP /S OCIAL S ECURITY N UMBER |
B. 33% shall be paid in one sum to:
The Stanley P. Feret Revocable Living Trust under agreement dated April 13, 2005, as amended, Beneficiary, if the trust evidenced by said agreement is in effect at the Insureds death, otherwise to the Insureds estate
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P RIMARY B ENEFICIARY , R ELATIONSHIP /S OCIAL S ECURITY N UMBER
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Insureds estate
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C ONTINGENT B ENEFICIARY , R ELATIONSHIP /S OCIAL S ECURITY N UMBER |
C. The exclusive rights to change the beneficiary for the proceeds payable under this paragraph and to assign all rights and interests granted under this paragraph are hereby granted to the Insured. The sole signature of the Insured shall be sufficient to exercise the rights. The Owner retains all contract rights not granted to the Insured under this paragraph.
3. It is agreed by the undersigned that this designation and limited assignment of rights shall be subject in all respects to the contractual terms of the policy.
4. Any payment directed by the Owner under this endorsement shall be a full discharge of the Insurer, and such discharge shall be binding on all parties claiming any interest under the policy.
5. This Split Dollar Policy Endorsement supersedes and replaces all prior endorsements of the Insured relating to the above-referenced policy issued by the Insurer.
6. The exercise by the Owner of the right to surrender the policy shall terminate the rights of the Insured.
7. The Owner of the policy is Cortland Savings and Banking Company. The Owner alone may exercise all policy rights, except that the Owner will not have the rights specified in paragraph 2 of this Split Dollar Policy Endorsement.
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The undersigned for the Owner is signing in a representative capacity and warrants that he or she has the authority to bind the entity on whose behalf this document is executed.
Signed at Cortland, Ohio this day of , 2013.
I NSURED : |
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O WNER : |
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Cortland Savings and Banking Company |
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By: |
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Stanley P. Feret |
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James M. Gasior |
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Its: |
President |
7
Exhibit 31.1
CERTIFICATION
I, James M. Gasior, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cortland Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
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All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 13, 2013 |
/s/ James M. Gasior |
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James M. Gasior President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, David J. Lucido, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cortland Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
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All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 13, 2013 |
/s/ David J. Lucido |
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David J. Lucido Senior Vice President and Chief Financial Officer |
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO TITLE 18, UNITED
STATES CODE, SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cortland Bancorp (the Company) on Form 10-Q for the quarterly period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, James M. Gasior, the President and Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ James M. Gasior |
Print name: James M. Gasior Title: President and Chief Executive Officer Date: August 13, 2013 |
In connection with the Quarterly Report of Cortland Bancorp (the Company) on Form 10-Q for the quarterly period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David J. Lucido, the Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ David J. Lucido |
Print name: David J. Lucido Title: Senior Vice President and Chief Financial Officer Date: August 13, 2013 |
*This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the Exchange Act) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to and is being retained by Cortland Bancorp and will be forwarded to the Securities and Exchange Commission or its staff upon request.