GERMAN AMERICAN BANCORP, INC.
Jasper, Indiana
February 21, 2013
VIA EDGAR
Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549-0408
Attention: Mr. David Irving, Reviewing Accountant
| Re: | German American Bancorp, Inc. |
| Form 10-K for the fiscal year ended December 31, 2011 | |
| Response Dated January 23, 2013 | |
| File No. 001-15877 |
Dear Mr. Irving:
German American Bancorp, Inc. (the “Company”) hereby transmits this response via EDGAR to the comments of the Staff contained in a supplemental comment letter, dated February 8, 2013, relating to the Company’s response made by the above-referenced response letter to certain Staff comments included in a comment letter from the Staff dated December 21, 2012 on the above-referenced filing. Set forth below are the comments contained in the Staff’s February 8 letter and immediately below each comment is the Company’s response with respect thereto.
Form 10-K for Fiscal Year Ended December 31, 2011
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Non-Performing Assets, page 35
| 1. | We note your response to comment 1 from our letter dated December 21, 2012. If the December 31, 2012 non-performing loan balance is materially represented by a particular loan segment (i.e., commercial loans), please provide disclosures in future filings in MD&A discussing material non-performing loans and disclose the recent performance of these loan relationships. |
The Company advises you supplementally that the Company’s non-performing loan balance as of December 31, 2012, was materially represented by commercial loans. See proposed draft disclosure to be included in the MD&A section of its annual report for its fiscal year ended December 31, 2012 (“2012 10-K”) in Exhibit 1 to this letter concerning certain material non-performing commercial loan relationships. For so long as these loan relationships remain non-performing or are otherwise material, the Company will include in the MD&A section of subsequent future filings (e.g., its quarterly reports on Form 10-Q for the first three quarters of 2013 and its annual report on Form 10-K for the year ending December 31, 2013) a discussion of the recent performance of those loan relationships.
Notes to Consolidated Financial Statements
Note 3. Loans, page 50
| 2. | We note your response to comment 2 from our letter dated December 21, 2012. Please provide a draft of the MD&A discussion you intend to include in the December 31, 2012 Form 10-K, when available. |
The current draft of the Company’s proposed response to be included in the Management’s Discussion and Analysis section of its 2012 10-K is attached on Exhibit 1. This draft addresses how the Company’s accounting for loans acquired with deteriorated credit quality impacts its credit metrics and trends, specifically identifying the credit metrics and trends most impacted and discussing the comparability between periods. It does not address comparability of such credit metrics and trends with other institutions as the Company does not have access to information prepared by other institutions regarding comparable subject matter.
The Company intends to discuss how it classifies loans acquired with deteriorated credit quality as non-accrual, impaired, loans > 90 days and accruing, or as a trouble debt restructuring in its notes to financial statements addressing Loans for the year ended December 31, 2012. A draft of this Loans footnote is attached in response to Comment 2 below as Exhibit 2.
Although management believes that the drafts set forth on Exhibits 1 and 2 will ultimately be included in 2012 10-K substantially as presented, these drafts remain under review by management and the Company’s advisers and are subject to change and revision in the course of that review if deemed necessary or advisable in the interests of improved disclosure, and are also subject to review by the Company’s Disclosure Committee and its Board of Directors.
| 3. | We note your response to comment 3 from our letter dated December 21, 2012. Please provide a draft of the statement and quantification, if applicable, that you intend to include in future filings, when available. |
A draft of the statement and quantification that the Company intends to include in the Loans footnote to the notes to financial statements to be included in its 2012 10-K is set forth on Exhibit 2. Although management believes that the draft set forth on Exhibit 2 will ultimately be included in the 2012 10-K substantially as presented, that draft remains under review by management and the Company’s advisers and is subject to change and revision in the course of that review if deemed necessary or advisable in the interests of improved disclosure, and is also subject to review by the Company’s Disclosure Committee and its Board of Directors.
Please do not hesitate to call me if you have any questions regarding this response.
Very truly yours,
/s/ Bradley M. Rust
Bradley M. Rust
Executive Vice President and Chief Financial Officer
Exhibit 1 – Draft of MD&A Excerpt
December 31, 2012 Form 10-K
NON-PERFORMING ASSETS
Non-performing assets consist of: (a) non-accrual loans; (b) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower; (c) loans past due 90 days or more as to principal or interest; and, (d) other real estate owned. Loans are placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. Uncollected accrued interest is reversed against income at the time a loan is placed on non-accrual. Loans are typically charged-off at 180 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection. The following table presents an analysis of the Company’s non-performing assets.
| Non-performing Assets | December 31, | |||||||||||||||||||
| (dollars in thousands) | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
| Non-accrual Loans . | $ | 10,357 | $ | 17,857 | $ | 10,150 | $ | 8,374 | $ | 8,316 | ||||||||||
| Past Due Loans (90 days or more) | --- | --- | 671 | 113 | 34 | |||||||||||||||
| Restructured Loans | 362 | 409 | 396 | 306 | --- | |||||||||||||||
| Total Non-performing Loans | 10,719 | 18,266 | 11,217 | 8,793 | 8,350 | |||||||||||||||
| Other Real Estate | 1,645 | 2,343 | 2,095 | 2,363 | 1,818 | |||||||||||||||
| Total Non-performing Assets | $ | 12,364 | $ | 20,609 | $ | 13,312 | $ | 11,156 | $ | 10,168 | ||||||||||
| Non-performing Loans to Total Loans | 0.89 | % | 1.63 | % | 1.22 | % | 1.00 | % | 0.94 | % | ||||||||||
Allowance for Loan Losses to Non- performing Loans | 144.79 | % | 83.83 | % | 118.72 | % | 125.28 | % | 114.04 | % | ||||||||||
Non-performing assets totaled $12.4 million or 0.62% of total assets at December 31, 2012 compared to $20.6 million or 1.10% of total assets at December 31, 2011. Non-performing loans totaled $10.7 million or 0.89% of total loans at December 31, 2012 representing a $7.5 million, or 41%, decline in non-performing loans compared to the $18.3 million of non-performing loans at December 31, 2011.
The decline in non-performing loans during 2012 was largely the result of a decline in non-accrual commercial real estate loans and to a lesser extent a decline in non-accrual commercial and industrial loans. Non-accrual commercial real estate loans totaled $7.3 million at December 31, 2012 representing a decline of $6.0 million, or 45%, from the $13.3 million of non-accrual commercial real estate loans at year-end 2011. Non-accrual commercial real estate loans represented 70% of the total non-performing loans at year-end 2012 compared to 74% of total non-performing loans at year-end 2011. Non-accrual commercial and industrial loans totaled $7.3 million at December 31, 2012 representing a decline of $1.0 million, or 29%, decline from the $13.3 million of non-accrual commercial and industrial loans at year-end 2011. Non-accrual commercial and industrial loans represented 24% of the total non-performing loans at year-end 2012 compared with 19% of total non-performing loans at year-end 2011. The decline in both non-accrual commercial real estate and commercial and industrial loans was the result of pay-offs, pay-downs on remaining non-performing loans, partial charge-offs on remaining non-performing loans, and foreclosure and liquidation of non-performing loans during 2012. There were no significant additions to non-performing loans during 2012.
At December 31, 2012, three commercial loan relationships represented approximately 64% of the total non-performing loans of the Company. The first relationship was a $2.7 million commercial real estate loan secured by various commercial real estate properties. This loan was in non-performing status as of December 31, 2011. The borrower has made all contractual payments due during 2012 and the principal balance of the loan was reduced by approximately $0.8 million during 2012. The second relationship was an approximately $2.0 million loan secured by the business assets of a mechanical contractor. This loan was in non-performing status as of year-end 2011. The borrower has made all contractual payments due during 2012 and the principal balance of the loan was reduced by $0.3 million during 2012. The third relationship was a $2.0 million commercial real estate loan secured by a commercial warehouse facility. This loan was in non-performing status as of year-end 2011. The borrower has made all contractual payments due during 2012 and the principal balance of this relationship was reduced by $0.1 million during 2012. These three relationships represent the only loan relationships greater than $1.0 million included in non-performing loans.
The Company purchases individual loans and groups of loans. Purchased loans that show evidence of credit deterioration since origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller’s allowance for loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.
Exhibit 1 – Draft of MD&A Excerpt
December 31, 2012 Form 10-K
Purchased loans that indicated evidence of credit deterioration since origination at the time of acquisition by the Company did not have a material adverse impact on the Company’s key credit metrics during 2011 or 2012. The key credit metrics the Company measures generally include non-performing loans, past due loans, and adversely classified loans.
Non-performing purchased loans with evidence of credit deterioration since origination totaled $148,000 at December 31, 2012 compared with $859,000 at December 31, 2011 a decline of approximately 83%. The non-performing purchased loans with evidence of credit deterioration since origination represented approximately 1% of total non-performing loans at December 31, 2012 compared with approximately 5% of total non-performing loans at December 31, 2011.
Past due purchased loans with evidence of credit deterioration since origination totaled $118,000 at year-end 2012 compared with $859,000 at year-end 2011 representing a decline of approximately 86%. Past due purchased loans with evidence of credit deterioration since origination represented approximately 1% of total past due loans at year-end 2012 compared with approximately 7% of total past due loans at December 31, 2011.
Adversely classified purchased loans with evidence of credit deterioration since origination totaled $7.3 million at December 31, 2012 compared with $12.9 million at December 31, 2011 a decline of approximately 44%. Adversely classified purchased loans with evidence of credit deterioration since origination represented approximately 19% of total adversely classified loans at year-end 2012 compared with approximately 28% of total adversely classified loans at December 31, 2011.
Loan impairment is reported when full repayment under the terms of the loan is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial and industrial loans, commercial real estate loans, and agricultural loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The amount of loans individually evaluated for impairment including purchase credit impaired loans totaled $12.6 million at December 31, 2012. For additional detail on impaired loans, see Note 4 to the Company’s consolidated financial statements included in Item 8 of this Report.
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans
Loans were comprised of the following classifications at December 31:
| 2012 | 2011 | |||||||
| Commercial: | ||||||||
| Commercial and Industrial Loans and Leases | $ | 335,373 | $ | 293,172 | ||||
| Commercial Real Estate Loans | 488,496 | 452,071 | ||||||
| Agricultural Loans | 179,906 | 167,693 | ||||||
| Retail: | ||||||||
| Home Equity Loans | 74,437 | 77,070 | ||||||
| Consumer Loans | 41,103 | 47,409 | ||||||
| Residential Mortgage Loans | 88,586 | 86,134 | ||||||
| Subtotal | 1,207,901 | 1,123,549 | ||||||
| Less: Unearned Income | (3,035 | ) | (2,556 | ) | ||||
| Allowance for Loan Losses | (15,520 | ) | (15,312 | ) | ||||
| Loans,net | $ | 1,189,346 | $ | 1,105,681 | ||||
The following tables present the activity in the allowance for loan losses by portfolio class for the years ended December 31, 2012 and 2011:
| Commercial | ||||||||||||||||||||||||||||||||
| and | ||||||||||||||||||||||||||||||||
| Industrial | Commercial | Home | Residential | |||||||||||||||||||||||||||||
| Loans and | Real Estate | Agricultural | Equity | Consumer | Mortgage | |||||||||||||||||||||||||||
| Leases | Loans | Loans | Loans | Loans | Loans | Unallocated | Total | |||||||||||||||||||||||||
| December 31, 2012 | ||||||||||||||||||||||||||||||||
| Beginning Balance | $ | 3,493 | $ | 9,297 | $ | 926 | $ | 258 | $ | 190 | $ | 402 | $ | 746 | $ | 15,312 | ||||||||||||||||
| Provision for Loan Losses | 1,150 | 1,326 | 63 | (32 | ) | 194 | (47 | ) | (242 | ) | 2,412 | |||||||||||||||||||||
| Recoveries | 74 | 97 | --- | 2 | 123 | 30 | --- | 326 | ||||||||||||||||||||||||
| Loans Charged-off | (162 | ) | (1,789 | ) | --- | (87 | ) | (293 | ) | (199 | ) | --- | (2,530 | ) | ||||||||||||||||||
| Ending Balance | $ | 4,555 | $ | 8,931 | $ | 989 | $ | 141 | $ | 214 | $ | 186 | $ | 504 | $ | 15,520 | ||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||
| and | ||||||||||||||||||||||||||||||||
| Industrial | Commercial | Home | Residential | |||||||||||||||||||||||||||||
| Loans and | Real Estate | Agricultural | Equity | Consumer | Mortgage | |||||||||||||||||||||||||||
| Leases | Loans | Loans | Loans | Loans | Loans | Unallocated | Total | |||||||||||||||||||||||||
| December 31, 2011 | ||||||||||||||||||||||||||||||||
| Beginning Balance | $ | 3,713 | $ | 7,497 | $ | 750 | $ | 220 | $ | 362 | $ | 543 | $ | 232 | $ | 13,317 | ||||||||||||||||
| Provision for Loan Losses | 1,195 | 4,265 | 176 | 287 | 23 | 340 | 514 | 6,800 | ||||||||||||||||||||||||
| Recoveries | 98 | 139 | --- | 6 | 125 | 16 | --- | 384 | ||||||||||||||||||||||||
| Loans Charged-off | (1,513 | ) | (2,604 | ) | --- | (255 | ) | (320 | ) | (497 | ) | --- | (5,189 | ) | ||||||||||||||||||
| Ending Balance | $ | 3,493 | $ | 9,297 | $ | 926 | $ | 258 | $ | 190 | $ | 402 | $ | 746 | $ | 15,312 | ||||||||||||||||
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2010:
| 2010 | ||||
| Beginning Balance | $ | 11,016 | ||
| Provision for Loan Losses | 5,225 | |||
| Loans Charged-off | (4,214 | ) | ||
| Recoveries | 1,290 | |||
| Ending Balance | $ | 13,317 | ||
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
Loan impairment is reported when full repayment under the terms of the loan is not expected. This methodology is used for all loans, including loans acquired with deteriorated credit quality. For purchased loans, the assessment is made at the time of acquisition as well as over the life of loan. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial and industrial loans, commercial real estate loans, and agricultural loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of December 31, 2012 and 2011:
| Commercial | ||||||||||||||||||||||||||||||||
| and | ||||||||||||||||||||||||||||||||
| Industrial | Commercial | Home | Residential | |||||||||||||||||||||||||||||
| Loans and | Real Estate | Agricultural | Equity | Consumer | Mortgage | |||||||||||||||||||||||||||
| December 31, 2012 | Total | Leases | Loans | Loans | Loans | Loans | Loans | Unallocated | ||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
| Ending Allowance Balance | ||||||||||||||||||||||||||||||||
| Attributable to Loans: | ||||||||||||||||||||||||||||||||
| Individually Evaluated | ||||||||||||||||||||||||||||||||
| for Impairment | $ | 5,323 | $ | 1,279 | $ | 3,894 | $ | 150 | $ | --- | $ | --- | $ | --- | $ | --- | ||||||||||||||||
| Collectively Evaluated | ||||||||||||||||||||||||||||||||
| for Impairment | 10,109 | 3,208 | 5,017 | 839 | 141 | 214 | 186 | 504 | ||||||||||||||||||||||||
| Acquired with Deteriorated Credit Quality | 88 | 68 | 20 | --- | --- | --- | --- | --- | ||||||||||||||||||||||||
| Total Ending Allowance Balance | $ | 15,520 | $ | 4,555 | $ | 8,931 | $ | 989 | $ | 141 | $ | 214 | $ | 186 | $ | 504 | ||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Loans Individually Evaluated for Impairment | $ | 12,520 | $ | 2,547 | $ | 7,550 | $ | 2,423 | $ | --- | $ | --- | $ | --- | $ | --- | ||||||||||||||||
| Loans Collectively Evaluated for Impairment | 1,189,729 | 331,920 | 473,209 | 180,152 | 74,699 | 41,083 | 88,666 | --- | ||||||||||||||||||||||||
| Loans Acquired with Deteriorated Credit Quality | 11,174 | 1,840 | 9,037 | --- | --- | 148 | 149 | --- | ||||||||||||||||||||||||
| Total Ending Loans Balance(1) | $ | 1,213,423 | $ | 336,307 | $ | 489,796 | $ | 182,575 | $ | 74,699 | $ | 41,231 | $ | 88,815 | $ | --- | ||||||||||||||||
(1) Total recorded investment in loans includes $5,522 in accrued interest.
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
| Commercial | ||||||||||||||||||||||||||||||||
| and | ||||||||||||||||||||||||||||||||
| Industrial | Commercial | Home | Residential | |||||||||||||||||||||||||||||
| Loans and | Real Estate | Agricultural | Equity | Consumer | Mortgage | |||||||||||||||||||||||||||
| December 31, 2011 | Total | Leases | Loans | Loans | Loans | Loans | Loans | Unallocated | ||||||||||||||||||||||||
| Allowance for Loan Losses: | ||||||||||||||||||||||||||||||||
| Ending Allowance Balance | ||||||||||||||||||||||||||||||||
| Attributable to Loans: | ||||||||||||||||||||||||||||||||
| Individually Evaluated for Impairment | $ | 4,834 | $ | 466 | $ | 4,368 | $ | --- | $ | --- | $ | --- | $ | --- | $ | --- | ||||||||||||||||
| Collectively Evaluated for Impairment | 10,401 | 3,027 | 4,852 | 926 | 258 | 190 | 402 | 746 | ||||||||||||||||||||||||
| Acquired with Deteriorated Credit Quality | 77 | --- | 77 | --- | --- | --- | --- | --- | ||||||||||||||||||||||||
| Total Ending Allowance Balance | $ | 15,312 | $ | 3,493 | $ | 9,297 | $ | 926 | $ | 258 | $ | 190 | $ | 402 | $ | 746 | ||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Loans Individually Evaluated for Impairment | $ | 16,613 | $ | 3,567 | $ | 13,046 | $ | --- | $ | --- | $ | --- | $ | --- | $ | --- | ||||||||||||||||
| Loans Collectively Evaluated for Impairment | 1,096,571 | 287,924 | 427,063 | 170,513 | 77,323 | 47,431 | 86,317 | --- | ||||||||||||||||||||||||
| Loans Acquired with Deteriorated Credit Quality | 16,121 | 2,596 | 13,209 | --- | --- | 164 | 152 | --- | ||||||||||||||||||||||||
| Total Ending Loans Balance(1) | $ | 1,129,305 | $ | 294,087 | $ | 453,318 | $ | 170,513 | $ | 77,323 | $ | 47,595 | $ | 86,469 | $ | --- | ||||||||||||||||
(1) Total recorded investment in loans includes $5,756 in accrued interest.
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012 and 2011:
| Unpaid | Allowance for | |||||||||||||
| Principal | Recorded | Loan Losses | ||||||||||||
| Balance(1) | Investment | Allocated | ||||||||||||
| December 31, 2012 | ||||||||||||||
| With No Related Allowance Recorded: | ||||||||||||||
| Commercial and Industrial Loans and Leases | $ | 108 | $ | 87 | $ | --- | ||||||||
| Commercial Real Estate Loans | 4,312 | 2,154 | --- | |||||||||||
| Agricultural Loans | 2,126 | 2,137 | --- | |||||||||||
| With An Allowance Recorded: | ||||||||||||||
| Commercial and Industrial Loans and Leases | 2,642 | 2,581 | 1,347 | |||||||||||
| Commercial Real Estate Loans | 5,579 | 5,418 | 3,914 | |||||||||||
| Agricultural Loans | 285 | 286 | 150 | |||||||||||
| Total | $ | 15,052 | $ | 12,663 | $ | 5,411 | ||||||||
| Loans Acquired with Deteriorated Credit Quality with no Related Allowance Recorded | ||||||||||||||
| (Included in the Total Above) | $ | 45 | $ | 25 | $ | --- | ||||||||
| Loans Acquired with Deteriorated Credit Quality with an Additional Allowance Recorded | ||||||||||||||
| (Included in the Total Above) | $ | 155 | $ | 118 | $ | 88 | ||||||||
(1) Unpaid Principal Balance is the remaining contractual payments inclusive of partial charge-offs.
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
| Unpaid | Allowance for | |||||||||||
| Principal | Recorded | Loan Losses | ||||||||||
| Balance(1) | Investment | Allocated | ||||||||||
| December 31, 2011 | ||||||||||||
| With No Related Allowance Recorded: | ||||||||||||
| Commercial and Industrial Loans and Leases | $ | 1,731 | $ | 1,066 | $ | --- | ||||||
| Commercial Real Estate Loans | 6,991 | 5,894 | --- | |||||||||
| Agricultural Loans | --- | --- | --- | |||||||||
| With An Allowance Recorded: | ||||||||||||
| Commercial and Industrial Loans and Leases | 2,502 | 2,501 | 466 | |||||||||
| Commercial Real Estate Loans | 7,587 | 7,230 | 4,445 | |||||||||
| Agricultural Loans | --- | --- | --- | |||||||||
| Total | $ | 18,811 | $ | 16,691 | $ | 4,911 | ||||||
| Loans Acquired with Deteriorated Credit Quality with no Related Allowance Recorded | ||||||||||||
| (Included in the Total Above) | $ | 48 | $ | 28 | $ | --- | ||||||
| Loans Acquired with Deteriorated Credit Quality with an Additional Allowance Recorded | ||||||||||||
| (Included in the Total Above) | $ | 205 | $ | 77 | $ | 77 | ||||||
(1)Unpaid Principal Balance is the remaining contractual payments inclusive of partial charge-offs.
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012 and 2011:
| Average | Interest | Cash | ||||||||||
| Recorded | Income | Basis | ||||||||||
| Investment | Recognized | Recognized | ||||||||||
| December 31, 2012 | ||||||||||||
| With No Related Allowance Recorded: | ||||||||||||
| Commercial and Industrial Loans and Leases | $ | 252 | $ | 3 | $ | 3 | ||||||
| Commercial Real Estate Loans | 4,506 | 18 | 18 | |||||||||
| Agricultural Loans | 535 | 2 | 2 | |||||||||
| With An Allowance Recorded: | ||||||||||||
| Commercial and Industrial Loans and Leases | 2,726 | 9 | 8 | |||||||||
| Commercial Real Estate Loans | 6,660 | 23 | 19 | |||||||||
| Agricultural Loans | 74 | --- | --- | |||||||||
| Total | $ | 14,753 | $ | 55 | $ | 50 | ||||||
| Loans Acquired with Deteriorated Credit Quality with no Related Allowance Recorded | ||||||||||||
| (Included in the Total Above) | $ | 26 | $ | 2 | $ | 2 | ||||||
| Loans Acquired with Deteriorated Credit Quality with an Additional Allowance Recorded | ||||||||||||
| (Included in the Total Above) | $ | 154 | $ | 6 | $ | 4 | ||||||
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
| Average | Interest | Cash | ||||||||||
| Recorded | Income | Basis | ||||||||||
| Investment | Recognized | Recognized | ||||||||||
| December 31, 2011 | ||||||||||||
| With No Related Allowance Recorded: | ||||||||||||
| Commercial and Industrial Loans and Leases | $ | 1,107 | $ | 9 | $ | 9 | ||||||
| Commercial Real Estate Loans | 4,438 | 75 | 75 | |||||||||
| Agricultural Loans | 19 | 6 | 6 | |||||||||
| With An Allowance Recorded: | ||||||||||||
| Commercial and Industrial Loans and Leases | 3,642 | 11 | 11 | |||||||||
| Commercial Real Estate Loans | 9,390 | 37 | 34 | |||||||||
| Agricultural Loans | --- | --- | --- | |||||||||
| Total | $ | 18,596 | $ | 138 | $ | 135 | ||||||
| Loans Acquired with Deteriorated Credit Quality with no Related Allowance Recorded | ||||||||||||
| (Included in the Total Above) | $ | 28 | $ | 4 | $ | 4 | ||||||
| Loans Acquired with Deteriorated Credit Quality with an Additional Allowance Recorded | ||||||||||||
| (Included in the Total Above) | $ | 77 | $ | 1 | $ | 1 | ||||||
The following table presents information for loans individually evaluated for impairment for the year ended December 31, 2010:
| 2010 | ||||
| Average Balance of Impaired Loans During the Year | $ | 10,166 | ||
| Interest Income Recognized During Impairment | 78 | |||
| Interest Income Recognized on Cash Basis | 78 | |||
All classes of loans, including loans acquired with deteriorated credit quality, are generally placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. For purchased loans, the determination is made at the time of acquisition as well as over the life of the loan. Uncollected accrued interest for each class of loans is reversed against income at the time a loan is placed on non-accrual. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. All classes of loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are typically charged-off at 180 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection.
The following table presents the recorded investment in non-accrual loans and loans past due 90 days or more still on accrual by class of loans as of December 31, 2012 and 2011:
| Loans Past Due | ||||||||||||||||
| 90 Days or More | ||||||||||||||||
| Non-Accrual | & Still Accruing | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Commercial and Industrial Loans and Leases | $ | 2,480 | $ | 3,471 | $ | --- | $ | --- | ||||||||
| Commercial Real Estate Loans | 7,275 | 13,289 | --- | --- | ||||||||||||
| Agricultural Loans | --- | --- | --- | --- | ||||||||||||
| Home Equity Loans | 178 | 90 | --- | --- | ||||||||||||
| Consumer Loans | 167 | 259 | --- | --- | ||||||||||||
| Residential Mortgage Loans | 257 | 748 | --- | --- | ||||||||||||
| Total | $ | 10,357 | $ | 17,857 | $ | --- | $ | --- | ||||||||
| Loans Acquired with Deteriorated Credit Quality | ||||||||||||||||
| (Included in the Total Above) | $ | 148 | $ | 859 | $ | --- | $ | --- | ||||||||
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2012 and 2011:
| 90 Days | ||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | or More | Total | Loans Not | ||||||||||||||||||||
| Total | Past Due | Past Due | Past Due | Past Due | Past Due | |||||||||||||||||||
| December 31, 2012 | ||||||||||||||||||||||||
| Commercial and Industrial Loans and Leases | $ | 336,307 | $ | 436 | $ | 133 | $ | 448 | $ | 1,017 | $ | 335,290 | ||||||||||||
| Commercial Real Estate Loans | 489,796 | 1,352 | --- | 2,063 | 3,415 | 486,381 | ||||||||||||||||||
| Agricultural Loans | 182,575 | 42 | 14 | --- | 56 | 182,519 | ||||||||||||||||||
| Home Equity Loans | 74,699 | 177 | 48 | 178 | 403 | 74,296 | ||||||||||||||||||
| Consumer Loans | 41,231 | 431 | 23 | 18 | 472 | 40,759 | ||||||||||||||||||
| Residential Mortgage Loans | 88,815 | 2,070 | 495 | 257 | 2,822 | 85,993 | ||||||||||||||||||
| Total(1) | $ | 1,213,423 | $ | 4,508 | $ | 713 | $ | 2,964 | $ | 8,185 | $ | 1,205,238 | ||||||||||||
| Loans Acquired with Deteriorated Credit Quality | ||||||||||||||||||||||||
| (Included in the Total Above) | $ | 11,177 | $ | --- | $ | 121 | $ | --- | $ | 121 | $ | 11,056 | ||||||||||||
(1) Total recorded investment in loans includes $5,522 in accrued interest.
| 90 Days | ||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | or More | Total | Loans Not | ||||||||||||||||||||
| Total | Past Due | Past Due | Past Due | Past Due | Past Due | |||||||||||||||||||
| December 31, 2011 | ||||||||||||||||||||||||
| Commercial and Industrial Loans and Leases | $ | 294,087 | $ | 220 | $ | --- | $ | 1,141 | $ | 1,361 | $ | 292,726 | ||||||||||||
| Commercial Real Estate Loans | 453,318 | 381 | 148 | 5,920 | 6,449 | 446,869 | ||||||||||||||||||
| Agricultural Loans | 170,513 | 10 | --- | --- | 10 | 170,503 | ||||||||||||||||||
| Home Equity Loans | 77,323 | 176 | 6 | 90 | 272 | 77,051 | ||||||||||||||||||
| Consumer Loans | 47,595 | 287 | 117 | 221 | 625 | 46,970 | ||||||||||||||||||
| Residential Mortgage Loans | 86,469 | 2,752 | 893 | 748 | 4,393 | 82,076 | ||||||||||||||||||
| Total(1) | $ | 1,129,305 | $ | 3,826 | $ | 1,164 | $ | 8,120 | $ | 13,110 | $ | 1,116,195 | ||||||||||||
| Loans Acquired with Deteriorated Credit Quality | ||||||||||||||||||||||||
| (Included in the Total Above) | $ | 16,121 | $ | 248 | $ | 56 | $ | 554 | $ | 858 | $ | 15,263 | ||||||||||||
(1) Total recorded investment in loans includes $5,756 in accrued interest.
Troubled Debt Restructurings:
In certain instances, the Company may choose to restructure the contractual terms of loans. A troubled debt restructuring occurs when the Bank grants a concession to the borrower that it would not otherwise consider due to a borrower’s financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the Company's internal underwriting policy. The Company uses the same methodology for loans acquired with deteriorated credit quality as for all other loans when determining whether the loan is a troubled debt restructuring.
During the years ending December 31, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. There were no troubled debt restructurings for the years ended December 31, 2012 and 2011 for loans acquired with deteriorated credit quality at the time of acquisition.
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
The following table presents the recorded investment of troubled debt restructurings by class of loans as of December 31, 2012 and 2011:
| Total | Performing | Non-Accrual(1) | ||||||||||
| December 31, 2012 | ||||||||||||
| Commercial and Industrial Loans and Leases | $ | 2,461 | $ | 66 | $ | 2,395 | ||||||
| Commercial Real Estate Loans | 6,031 | 304 | 5,727 | |||||||||
| Total | $ | 8,492 | $ | 370 | $ | 8,122 | ||||||
| Total | Performing | Non-Accrual(1) | ||||||||||
| December 31, 2011 | ||||||||||||
| Commercial and Industrial Loans and Leases | $ | 3,391 | $ | 98 | $ | 3,293 | ||||||
| Commercial Real Estate Loans | 9,088 | 315 | 8,773 | |||||||||
| Total | $ | 12,479 | $ | 413 | $ | 12,066 | ||||||
(1)The non-accrual troubled debt restructurings are included in the Non-Accrual Loan table presented on previous page.
The Company has not committed to lending any additional amounts as of December 31, 2012 and 2011 to customers with outstanding loans that are classified as troubled debt restructurings.
The following table presents loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2012 and 2011:
| Pre-Modification | Post-Modification | |||||||||||
| Number of | Outstanding Recorded | Outstanding Recorded | ||||||||||
| Loans | Investment | Investment | ||||||||||
| December 31, 2012 | ||||||||||||
| Commercial and Industrial Loans and Leases | 2 | $ | 9 | $ | 9 | |||||||
| Commercial Real Estate Loans | --- | --- | --- | |||||||||
| Total | 2 | $ | 9 | $ | 9 | |||||||
The troubled debt restructurings described above increased the allowance for loan losses by $0 and resulted in charge-offs of $0 during the year ending December 31, 2012.
| Pre-Modification | Post-Modification | |||||||||||
| Number of | Outstanding Recorded | Outstanding Recorded | ||||||||||
| Loans | Investment | Investment | ||||||||||
| December 31, 2011 | ||||||||||||
| Commercial and Industrial Loans and Leases | 4 | $ | 4,541 | $ | 4,499 | |||||||
| Commercial Real Estate Loans | 6 | 7,099 | 6,850 | |||||||||
| Total | 10 | $ | 11,640 | $ | 11,349 | |||||||
The troubled debt restructurings described above increased the allowance for loan losses by $1,945 and resulted in charge-offs of $834 during the year ending December 31, 2011.
The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ending December 31, 2012 and 2011:
| Troubled Debt Restructurings | ||||||||
| That Subsequently Defaulted: | ||||||||
| Number of Loans | Recorded Investment | |||||||
| December 31, 2012 | ||||||||
| Commercial and Industrial Loans and Leases | 1 | $ | 565 | |||||
| Commercial Real Estate Loans | 1 | 292 | ||||||
| Total | 2 | $ | 857 | |||||
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $0 and resulted in charge-offs of $108 during the year ending December 31, 2012.
| Troubled Debt Restructurings | ||||||||
| That Subsequently Defaulted: | ||||||||
| Number of Loans | Recorded Investment | |||||||
| December 31, 2011 | ||||||||
| Commercial and Industrial Loans and Leases | 1 | $ | 527 | |||||
| Commercial Real Estate Loans | --- | --- | ||||||
| Total | 1 | $ | 527 | |||||
The troubled debt restructurings that subsequently defaulted described above decreased the allowance for loan losses by $500 and resulted in charge-offs of $500 during the year ending December 31, 2011.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $100. This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class of loans is a follows:
| Special | ||||||||||||||||||||
| Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
| December 31, 2012 | ||||||||||||||||||||
| Commercial and Industrial Loans and Leases | $ | 307,997 | $ | 14,441 | $ | 13,869 | $ | --- | $ | 336,307 | ||||||||||
| Commercial Real Estate Loans | 446,639 | 21,338 | 21,819 | --- | 489,796 | |||||||||||||||
| Agricultural Loans | 176,730 | 2,855 | 2,990 | --- | 182,575 | |||||||||||||||
| Total | $ | 931,366 | $ | 38,634 | $ | 38,678 | $ | --- | $ | 1,008,678 | ||||||||||
| Loans Acquired with Deteriorated Credit Quality | ||||||||||||||||||||
| (Included in the Total Above) | $ | 319 | $ | 3,220 | $ | 7,338 | $ | --- | $ | 10,877 | ||||||||||
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
| Special | ||||||||||||||||||||
| Pass | Mention | Substandard | Doubtful | Total | ||||||||||||||||
| December 31, 2011 | ||||||||||||||||||||
| Commercial and Industrial Loans and Leases | $ | 264,037 | $ | 16,188 | $ | 13,862 | $ | --- | $ | 294,087 | ||||||||||
| Commercial Real Estate Loans | 396,057 | 28,272 | 28,989 | --- | 453,318 | |||||||||||||||
| Agricultural Loans | 165,153 | 2,744 | 2,616 | --- | 170,513 | |||||||||||||||
| Total | $ | 825,247 | $ | 47,204 | $ | 45,467 | $ | --- | $ | 917,918 | ||||||||||
| Loans Acquired with Deteriorated Credit Quality | ||||||||||||||||||||
| (Included in the Total Above) | $ | --- | $ | 2,804 | $ | 13,001 | $ | --- | $ | 15,805 | ||||||||||
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For home equity, consumer and residential mortgage loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in home equity, consumer and residential mortgage loans based on payment activity as of December 31, 2012 and 2011:
| Home Equity | Consumer | Residential | ||||||||||
| Loans | Loans | Mortgage Loans | ||||||||||
| December 31, 2012 | ||||||||||||
| Performing | $ | 74,521 | $ | 41,064 | $ | 88,558 | ||||||
| Nonperforming | 178 | 167 | 257 | |||||||||
| Total | $ | 74,699 | $ | 41,231 | $ | 88,815 | ||||||
| Loans Acquired with Deteriorated Credit Quality | ||||||||||||
| (Included in the Total Above) | $ | --- | $ | 148 | $ | 149 | ||||||
| Home Equity | Consumer | Residential | ||||||||||
| Loans | Loans | Mortgage Loans | ||||||||||
| December 31, 2011 | ||||||||||||
| Performing | $ | 77,233 | $ | 47,336 | $ | 85,721 | ||||||
| Nonperforming | 90 | 259 | 748 | |||||||||
| Total | $ | 77,323 | $ | 47,595 | $ | 86,469 | ||||||
| Loans Acquired with Deteriorated Credit Quality | ||||||||||||
| (Included in the Total Above) | $ | --- | $ | 164 | $ | 152 | ||||||
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment of those loans is as follows:
| December 31, 2012 | ||||
| Commercial and Industrial Loans | $ | 1,840 | ||
| Commercial Real Estate Loans | 9,037 | |||
| Home Equity Loans | --- | |||
| Consumer Loans | 148 | |||
| Residential Mortgage Loans | 149 | |||
| Total | $ | 11,174 | ||
| Carrying Amount, Net of Allowance | $ | 11,086 | ||
| December 31, 2011 | ||||
| Commercial and Industrial Loans | $ | 2,596 | ||
| Commercial Real Estate Loans | 13,209 | |||
| Home Equity Loans | --- | |||
| Consumer Loans | 164 | |||
| Residential Mortgage Loans | 152 | |||
| Total | $ | 16,121 | ||
| Carrying Amount, Net of Allowance | $ | 16,044 | ||
Exhibit 2 – Draft Loan Footnote
December 31, 2012 Form 10-K
NOTE 4 – Loans (continued)
Accretable yield, or income expected to be collected, is as follows:
| December 31, 2012 | December 31, 2011 | |||||||
| Balance at January 1 | $ | 967 | $ | --- | ||||
| New Loans Purchased | --- | 2,042 | ||||||
| Accretion of Income | (1,265 | ) | (1,130 | ) | ||||
| Reclassifications from Non-accretable Difference | 468 | 129 | ||||||
| Charge-off of Accretable Yield | --- | (74 | ) | |||||
| Balance at December 31 | $ | 170 | $ | 967 | ||||
For those purchased loans disclosed above, the Company increased the allowance for loan losses by $88 and $77 for the years ended December 31, 2012 and 2011. No allowances for loan losses were reversed during the same period.
Certain directors, executive officers, and principal shareholders of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Company during 2012. A summary of the activity of these loans follows:
| Balance | Changes | Balance | ||||||||||||||||||||
| January 1, | in Persons | Deductions | December 31, | |||||||||||||||||||
| 2012 | Additions | Included | Collected | Charged-off | 2012 | |||||||||||||||||
| $ | 6,994 | $ | 7,419 | $ | 119 | $ | (5,530 | ) | $ | --- | $ | 9,002 | ||||||||||
