German American Bancorp - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

Commission File Number 0-11244

German American Bancorp, Inc

(Exact name of registrant as specified in its charter)

711 Main Street, Jasper, Indiana 47546

(Address of Principal Executive Offices and Zip Code)

Registrant’s telephone number, including area code: (812) 482-1314

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.

YESx      NOo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large Accelerated filer o       Accelerated filer x      Non-accelerated filer o      Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

YES o       NOx

Information included in or incorporated by reference in this Quarterly Report on Form 10-Q, our other filings with the Securities and Exchange Commission (the “SEC”) and our press releases or other public statements, contains or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to a discussion of our forward-looking statements and associated risks in Item 2 of Part I of this Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) at the conclusion of that Item 2 under the heading “Forward-Looking Statements and Associated Risks.”

INDEX

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

See accompanying notes to consolidated financial statements.

 

 

German American Bancorp, Inc. operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries conform to U.S. generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the German American Bancorp, Inc. December 31, 2007 Annual Report on Form 10-K.

 

The computations of Earnings per Share and Diluted Earnings per Share are as follows:

 

Stock options for 249,396 and 257,063 shares of common stock were not considered in computing diluted earnings per share for the quarter ended June 30, 2008 and 2007, respectively, because they were anti-dilutive.

 

Stock options for 236,025 and 257,063 shares of common stock were not considered in computing diluted earnings per share for the six months ended June 30, 2008 and 2007, respectively, because they were anti-dilutive.

 

The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale at June 30, 2008 and December 31, 2007, were as follows:

 

Equity securities that do not have readily determinable fair values are included in the above totals, are carried at historical cost and are evaluated for impairment on a periodic basis.

Below is a summary of securities with unrealized losses as of June 30, 2008 and December 31, 2007, presented by length of time the securities have been in a continuous unrealized loss position:

 

Securities are written down to fair value when a decline in fair value is not considered temporary. In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. The Company has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to changes in market interest rates, therefore, the Company does not consider these securities to be other-than-temporarily impaired. All mortgage-backed securities in the Company’s portfolio are performing as expected with no disruption in cash flows.

Total loans, as presented on the balance sheet, are comprised of the following classifications:

 

A summary of the activity in the Allowance for Loan Losses follows:

 

The Company’s operations include three primary segments: core banking, trust and investment advisory services, and insurance operations. The core banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial and agricultural, commercial and agricultural real estate, and residential mortgage loans, primarily in the Company’s local markets. The core banking segment also involves the sale of residential mortgage loans in the secondary market. The trust and investment advisory services segment involves providing trust, investment advisory, and brokerage services to customers. The insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the affiliate banks’ local markets.

The core banking segment is comprised by the Company’s banking subsidiary, German American Bancorp, which operates through six community banking affiliates with 28 retail banking offices. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment. The trust and investment advisory services segment’s revenues are comprised primarily of fees generated by German American Financial Advisors & Trust Company (“GAFA”). These fees are derived by providing trust, investment advisory, and brokerage services to its customers. The insurance segment consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products as agent under six distinctive insurance agency names from six offices; and German American Reinsurance Company, Ltd. (“GARC”), which reinsures credit insurance products sold by the Company’s affiliate banks. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment.

The following segment financial information has been derived from the internal financial statements of German American Bancorp, Inc., which are used by management to monitor and manage the financial performance of the Company. The accounting policies of the three segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the column labeled “Other” below, along with amounts to eliminate transactions between segments.

 

 

 

On April 26, 2001 the Company announced that its Board of Directors approved a stock repurchase program for up to 607,754 (as adjusted for subsequent stock dividends) of the outstanding Common Shares of the Company. Shares may be purchased from time to time in the open market and in large block privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time before the maximum number of shares specified by the program are purchased. As of June 30, 2008, the Company had purchased 334,965 (as adjusted for subsequent stock dividends) shares under the program. No shares were purchased under the plan during the six months ended June 30, 2008.

The Company maintains two equity incentive plans under which stock options, restricted stock, and other equity incentive awards can be granted. At June 30, 2008, the Company has reserved 620,144 shares of Common Stock (as adjusted for subsequent stock dividends and subject to further customary anti-dilution adjustments) for the purpose of issuance pursuant to outstanding and future grants of options, restricted stock, and other equity awards to officers, directors and other employees of the Company.

For the six months ended June 30, 2008 and 2007 there were no stock options granted. There was no option expense during the three or six month periods ended June 30, 2008 and 2007. In addition, there was no unrecognized option expense as all outstanding options were fully vested prior to June 30, 2008 and 2007.

During the quarter and six months ended June 30, 2008, the Company granted awards of 385 shares of restricted stock. During the quarter and six months ended June 30, 2007, the Company granted awards of 350 shares and 21,400 shares of restricted stock. The expense recorded for the restricted stock grants totaled $1, net of an income tax benefit of $1, during the three and six months ended June 30, 2008, respectively. The expense recorded for the restricted stock grants totaled $50, net of an income tax benefit of $33, and $83, net of an income tax benefit of $55, during the three and six months ended June 30, 2007, respectively. Unrecognized expense associated with the restricted stock grants totaled $3 and $140 as of June 30, 2008 and 2007, respectively.

The Company maintains an Employee Stock Purchase Plan whereby eligible employees have the option to purchase the Company’s common stock at a discount. The plan year for the Employee Stock Purchase Plan runs from August 17 through August 16 of the subsequent year. For years prior to the plan year beginning August 17, 2007, the purchase price of the shares were determined annually and in the range from 85% to 100% of the fair market value of such stock at either the beginning or end of the plan year. For the plan year beginning August 17, 2007, the purchase price of the shares under this Plan is 95% of the fair market value of the Company’s common stock as of the last day of the plan year. The plan provides for the purchase of up to 542,420 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares. Funding for the purchase of common stock is from employee and Company contributions.

 

 

The Company acquired through previous bank mergers a noncontributory defined benefit pension plan with benefits based on years of service and compensation prior to retirement. The benefits under the plan were suspended in 1998. The following tables represent the components of net periodic benefit cost for the periods presented:

 

The Company previously disclosed in its financial statements for the year ended December 31, 2007, that it expected to contribute $97 to the pension plan during the fiscal year ending December 31, 2008. As of June 30, 2008, the Company had contributed $37 to the pension plan.

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

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

 

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

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

Assets and liabilities measured at fair value on a recurring basis are summarized below:

Equity securities that do not have readily determinable fair values are carried at cost and are evaluated for impairment on a periodic basis. Equity securities carried at cost and included in the table above totaled $2,093 at June 30, 2008. There were no changes in fair value for these equity securities during the first six months of 2008.

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $5,464, with a valuation allowance of $2,232, resulting in an additional provision for loan losses of $710 and $1,777 for the three and six months ended June 30, 2008, respectively. Values for collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisals and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure or other factors management deems relevant to arrive at a representative fair value. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Values of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor’s required return. The final fair value is based on the reconciliation of these three approaches.

 

 

 

 

German American Bancorp, Inc. is a financial services holding company based in Jasper, Indiana. The Company’s Common Stock is traded on NASDAQ’s Global Select Market, under the symbol GABC. The principal subsidiary of German American Bancorp, Inc. is its banking subsidiary, German American Bancorp, which operates through six community banking affiliates with 28 retail banking offices in the ten contiguous Southern Indiana counties of Daviess, Dubois, Gibson, Knox, Lawrence, Martin, Monroe, Perry, Pike, and Spencer. German American Bancorp owns a trust, brokerage, and financial planning subsidiary, which operates from its banking offices, and a full line property and casualty insurance agency with six insurance agency offices throughout its market area.

Throughout this Management’s Discussion and Analysis, as elsewhere in this report, when we use the term “Company”, we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc.

This section presents an analysis of the consolidated financial condition of the Company as of June 30, 2008 and December 31, 2007 and the consolidated results of operations for the three and six months ended June 30, 2008 and 2007. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s December 31, 2007 Annual Report on Form 10-K.

This updated discussion should be read in conjunction with the Management Overview that was included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s December 31, 2007 Annual Report on Form 10-K.

During the second quarter of 2008, the Company generated earnings of $3,111,000 or $0.28 per share, an 18% increase from the $2,643,000 or $0.24 per share in the second quarter of 2007. This level of quarterly earnings represents the third successive quarter that the Company has reported the highest level of quarterly earnings in its history. In comparison with prior year results, the Company produced enhanced performance during the second quarter of 2008 in each major category within the income statement reflecting increased revenue from both net interest income and total non-interest income coupled with a reduction in non-interest expense. Partially offsetting these improvements was an increased level of provision for loan loss. Each of these areas will be discussed in more detail below.

The financial condition and results of operations for German American Bancorp, Inc. presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this report, are, to a large degree, dependent upon the Company’s accounting policies. The selection of and application of these policies involve estimates, judgments and uncertainties that are subject to change. The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for loan losses, the valuation of securities available for sale, and income tax expense.

The Company maintains an allowance for loan losses to cover probable incurred credit losses at the balance sheet date. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. A provision for loan losses is charged to operations based on management's periodic evaluation of the necessary allowance balance. Evaluations are conducted at least quarterly and more often if deemed necessary. The ultimate recovery of all loans is susceptible to future market factors beyond the Company's control.

The Company has an established process to determine the adequacy of the allowance for loan losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors, all of which may be susceptible to significant change. The allowance consists of two components of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover losses inherent in the loan portfolio.

Commercial and agricultural loans are subject to a standardized grading process administered by an internal loan review function. The need for specific reserves is considered for credits when graded substandard or special mention, or when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or, (d) other reasons where the ultimate collectibility of the loan is in question, or the loan characteristics require special monitoring. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that we believe indicates the loan is impaired. Specific allocations on impaired loans are determined by comparing the loan balance to the present value of expected cash flows or expected collateral proceeds. Allocations are also applied to categories of loans not considered individually impaired but for which the rate of loss is expected to be greater than historical averages, including those graded substandard or special mention and non-performing consumer or residential real estate loans. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values.

General allocations are made for other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a five-year historical average for loan losses for these portfolios, judgmentally adjusted for economic factors and portfolio trends.

Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses may include a minor unallocated component. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, lending staff quality, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period.

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, all securities are required to be written down to fair value when a decline in fair value is other than temporary; therefore, future changes in the fair value of securities could have a significant impact on the Company’s operating results. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline and the duration of the decline. As of June 30, 2008, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $1,996,000.

 

Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations.

A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carryback and carryforward periods, including consideration of available tax planning strategies. As of December 31, 2007, the Company had a deferred tax asset of $649,000 which includes tax credit carryforwards of $403,000. Based on the long carryforward periods available, management has assessed it more likely than not that these credits will be realized and no valuation allowance has been established on this asset.

Tax-related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management’s intended response to any assessment.

 

Net income increased $468,000 or 18% to $3,111,000 or $0.28 per share for the quarter ended June 30, 2008, compared to $2,643,000 or $0.24 per share for the second quarter of 2007. The increase in net income during the second quarter 2008 compared with same quarter of 2007 was due to improvement across the major categories of the income statement including net interest income, non-interest income, non-interest expense, partially offset by an increased level of provision for loan losses.

Net income for the first six months of 2008 totaled $6,131,000 or $0.55 per share representing an increase of $2,009,000 or 49% over the $4,122,000 or $0.37 per share recorded in the six months ended June 30, 2007. The increase in net income during the first half of 2008 compared with the same period of 2007 was attributable to improvement in net interest income, non-interest income and expense, and a relatively flat level of provision for loan losses.

Net interest income is the Company’s single largest source of earnings, and represents the difference between interest and fees realized on earning assets, less interest paid on deposits and borrowed funds. The following table summarizes the Company’s net interest income (on a tax-equivalent basis, at an effective tax rate of 34%) for each of the periods presented herein (dollars in thousands):

Average earning assets totaled approximately $1.090 billion for the quarter ended June 30, 2008 compared with $1.021 billion for the quarter ended June 30, 2007. During the second quarter of 2008, average loans outstanding totaled $872.3 million, an increase of $37.8 million or 5%, compared to the $834.5 million in average loans outstanding during the second quarter of 2007. Average commercial and agricultural loans totaled $629.4 million, an increase of $45.5 million or 8% during the quarter ended June 30, 2008 compared with the same quarter of the prior year. Average residential mortgage loans and consumer loans totaled $242.9 million during the quarter ended June 30, 2008 representing an decline of $7.7 million or 3% over 2007.

 

Average earning assets totaled approximately $1.073 billion for the six months ended June 30, 2008 compared with $1.010 billion for the six months ended June 30, 2007. During the first half of 2008, average loans outstanding totaled $870.3 million, an increase of $53.4 million or 7%, compared to the $816.9 million in average loans outstanding during the first half of 2007. Average commercial and agricultural loans totaled $623.8 million, an increase of $56.0 million or 10% during the six months ended June 30, 2008 compared with the same period of the prior year. Average residential mortgage loans and consumer loans totaled $246.5 million during the six months ended June 30, 2008 representing a decrease of $2.5 million or 1% over 2007.

The provision for loan loss totaled $2,278,000 during the six months ended June 30, 2008, representing a decline of $25,000 from the first half of 2007 provision of $2,303,000. During the six months ended June 30, 2008, the annualized provision for loan loss represented 0.52% of average loans outstanding compared with 0.56% on an annualized basis of average loans outstanding during the six months ended June 30, 2007.

Net charge-offs totaled $279,000 or 0.13% on an annualized basis of average loans outstanding during the three months ended June 30, 2008 compared with $219,000 or 0.10% on an annualized basis of average loans outstanding during the same period of 2007. Net charge-offs totaled $469,000 or 0.11% on an annualized basis of average loans outstanding during the six months ended June 30, 2008 compared with $1,656,000 or 0.41% on an annualized basis of average loans outstanding during the same period of 2007. The significantly higher level of net charge-offs during the six months ended June 30, 2007, was primarily attributable to the charge-off related to a single large commercial credit facility.

The provisions for loan losses made during the quarter ended June 30, 2008 were made at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provisions for loan losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

During the second quarter of 2008, non-interest income totaled $4,493,000 representing an increase of $268,000 or 6% over the second quarter of 2007. During the six months ended June 30, 2008, non-interest income totaled $9,525,000 representing an increase of $1,348,000 or 16% over 2007.

Trust and investment product fees totaled $636,000 during the quarter ended June 30, 2008 representing a decline of $24,000 or 4% from the same period of 2007. Trust and investment product fees totaled $1,223,000 during the six months ended June 30, 2008 representing a decline of $118,000 or 9% from the same period of 2007.

Deposit service charges and fees totaled $1,245,000 during the quarter ended June 30, 2008 representing an increase of $131,000 or 12% over the same period of 2007. Deposit service charges and fees totaled $2,428,000 during the six months ended June 30, 2008 representing an increase of $396,000 or 19% over the same period of 2007. The increase was attributable to a combination of increased gross fees and a reduced level of refunded and waived fees.

During the second quarter of 2008, insurance commission and fees totaled $1,307,000 which is a decline of $234,000 or 15% compared to the second quarter of 2007. The decline was largely attributable to the receipt of $109,000 in contingency revenue at the Company’s property and casualty insurance subsidiary, German American Insurance during the second quarter of 2007 while all 2008 contingency revenues were received during the first quarter of 2008. During the six month period ended June 30, 2008, insurance commission and fees totaled $3,210,000 which is an increase of $165,000 or 5% compared to 2007. The increase was attributable to an increase of $316,000 in contingency revenue during the first half of 2008 compared with the first half of 2007.

During the quarter ended June 30, 2008, the net gain on sale of residential loans totaled $404,000, an increase of $231,000 or 134% over the gain recognized in the quarter ended June 30, 2007. The increase was primarily attributable to higher levels of residential loan sales which totaled $32.3 million in the second quarter of 2008, compared to $15.5 million in the same period of 2007. During the six months ended June 30, 2008, the net gain on sale of residential loans totaled $728,000, an increase of $395,000 or 119% over the gain of $333,000 recognized in the six months ended June 30, 2007. The increase was attributable to higher levels of residential loan sales which totaled $60.7 million in the first half of 2008, compared to $27.6 million in the same period of 2007.

Net gain on securities totaled $285,000 during the six months ended June 30, 2008, compared with no gains during the same period of 2007. The Company recognized a net gain on securities of $285,000 in the first quarter of 2008. The Company sold approximately $16 million of agency mortgage related securities at a gain of $189,000. In addition, the Company recognized a gain of $96,000 on the mandatory redemption on a portion of VISA stock acquired as part of the initial public offering of VISA, Inc.

During the quarter ended June 30, 2008, non-interest expense totaled $8,985,000, a decline of $483,000 or 5% from the same period of 2007. During the six months ended June 30, 2008, non-interest expense totaled $18,333,000, a decline of $611,000 or 3% from the same period of 2007.

Salaries and benefits totaled $5,118,000 in the quarter ended June 30, 2008 representing a decline of $436,000 or 8% from 2007. Salaries and benefits totaled $10,445,000 in the first half of 2008 representing a decline of $612,000 or 6% from 2007. The declines were largely attributable to a decrease in excess of 30 full-time equivalent employees, or 8% of total full-time equivalent employees, during the three and six months ended June 30, 2008 compared with the same periods of 2007. The decline in salaries and benefits was achieved while the Company recognized $196,000 and $466,000 in the three and six months ended June 30, 2008, respectively, for post-retirement benefits for employees that were accrued as part of the Company’s formal review of effectiveness and efficiency.

In the quarter ended June 30, 2008, occupancy and furniture and equipment expense totaled $1,398,000, an increase of $50,000 or 4% compared to the quarter ended June 30, 2007. During the six months ended June 30, 2008, occupancy and furniture and equipment expense totaled $2,870,000, an increase of $172,000 or 6% compared to the six months ended June 30, 2007. The increases were largely attributable to higher levels of real estate taxes and higher levels of furniture, fixtures and equipment depreciation.

Professional fees increased $91,000 or 26% during the second quarter of 2008 and $264,000 or 36% during the six months ended June 30, 2008, compared with the same periods of 2007. The increases were due primarily to professional fees associated with the Company’s formal review of effectiveness and efficiency.

During the three and six months ended June 30, 2008, collection costs declined by $120,000 and $239,000, respectively, as compared with the same periods of 2007. The declines were largely due to elevated levels in 2007 related to the resolution of a single large non-performing commercial credit facility. During the three and six months ended June 30, 2008, losses related to fraudulent ATM/debit card transactions decreased by $168,000 and $244,000, respectively, compared with the same periods of 2007; however, losses of this type have been incurred at an increased level during the third quarter of 2008 and it is therefore likely that losses of this type for the full year 2008 could be closer to those incurred in 2007 than the partial year comparisons might otherwise suggest.

 

Total assets at June 30, 2008 increased $43.3 million to $1.175 billion compared with $1.132 billion in total assets at December 31, 2007. Cash and cash equivalents increased $18.6 million to $46.5 million at June 30, 2008 compared with $27.9 million at year-end 2007. This increase was largely attributable to an increase in deposits during 2008. Securities available-for-sale and held-to-maturity increased $14.0 million to $166.8 million at June 30, 2008 compared with $152.8 million at year-end 2007. Loans, net of unearned income, increased $9.5 million to $877.2 million at June 30, 2008 compared to $867.7 million at December 31, 2007. Commercial and industrial loans increased $36.5 million or 8%, agricultural based loans decreased $11.2 million or 7%, consumer loans decreased $5.6 million or 4% and residential mortgage loans declined $10.2 million or 9% during the six months ended June 30, 2008.

Total Deposits at June 30, 2008, increased $46.3 million to $923.7 million compared with $877.4 million in total deposits at December 31, 2007. Demand, savings, and money market accounts increased $91.6 million while time deposits decreased $45.3 million.

The following is an analysis of the Company’s non-performing assets at June 30, 2008 and December 31, 2007 (dollars in thousands):

The largest credit facility, other than the above referenced apartment complex credit, included in non-performing assets is an approximately $736,000 loan (after a partial charge-off during 2006) to a manufacturing entity which has ceased operations. During the third quarter of 2005, the real estate and equipment of the manufacturing entity were sold at auction to an unrelated third party. The closing of this auction sale was completed during the third quarter of 2008, with no additional write-down required.

 

Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures such as loan commitments and standby letters of credit.

Tier 1, or core capital, consists of shareholders’ equity less goodwill, core deposit intangibles, other identifiable intangibles and certain deferred tax assets defined by bank regulations. Tier 2 capital currently consists of the amount of the allowance for loan losses which does not exceed a defined maximum allowance limit of 1.25 percent of gross risk adjusted assets and subordinated debenture obligations. Total capital is the sum of Tier 1 and Tier 2 capital.

The minimum requirements under these standards are generally at least a 4.0 percent leverage ratio, which is Tier 1 capital divided by defined “total assets”; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent total capital to risk-adjusted assets ratios. Under these guidelines, the Company, on a consolidated basis, and its subsidiary bank, have capital ratios that exceed the regulatory minimums.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. Under these regulations, a “well-capitalized” entity must achieve a Tier 1 risk-based capital ratio of at least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a leverage ratio of at least 5.0 percent, and not be under a capital directive. The Company’s subsidiary bank was categorized as well-capitalized as of June 30, 2008.

At June 30, 2008, management was not under such a capital directive, nor was it aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have or are reasonably likely to have, a material effect on the Company’s liquidity, capital resources or operations.

 

The table below presents the Company’s consolidated capital ratios under regulatory guidelines: