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EX-31.1 - CERTIFICATION - SB FINANCIAL GROUP, INC.f10q0914ex31i_sbfinancial.htm
EX-32.2 - CERTIFICATION - SB FINANCIAL GROUP, INC.f10q0914ex32ii_sbfinancial.htm
EX-32.1 - CERTIFICATION - SB FINANCIAL GROUP, INC.f10q0914ex32i_sbfinancial.htm
EX-31.2 - CERTIFICATION - SB FINANCIAL GROUP, INC.f10q0914ex31ii_sbfinancial.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________________to___________________________

 

Commission file number 0-13507

 

SB FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Ohio   34-1395608
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

401 Clinton Street, Defiance, Ohio 43512

(Address of principal executive offices)

(Zip Code)

 

(419) 783-8950

(Registrant’s telephone number, including area code)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ☒   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   ☒   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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerate Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting Company ☒

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Shares, without par value   4,875,131 shares
(class)   (Outstanding at November 13, 2014)

 

 

 

 
 

 

SB FINANCIAL GROUP, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
Item 4. Controls and Procedures 42
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 43
Item 1A. Risk Factors 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
Item 3. Defaults Upon Senior Securities 43
Item 4. Mine Safety Disclosures 43
Item 5. Other Information 43
Item 6. Exhibits 43
     
Signatures 44

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SB Financial Group, Inc.

Condensed Consolidated Balance Sheets
September 30, 2014 and December 31, 2013

 

   September   December 
($ in Thousands)  2014   2013 
   (unaudited)     
ASSETS        
Cash and due from banks  $21,870   $13,137 
           
Securities available for sale, at fair value   81,148    89,793 
Other securities - FRB and FHLB Stock   3,748    3,748 
Total investment securities   84,896    93,541 
           
Loans held for sale   6,736    3,366 
           
Loans, net of unearned income   505,924    477,303 
Allowance for loan losses   (6,713)   (6,964)
Net loans   499,211    470,339 
           
Premises and equipment, net   13,256    12,607 
Cash surrender value of life insurance   13,074    12,906 
Goodwill   16,353    16,353 
Core deposits and other intangibles   338    655 
Foreclosed assets held for sale, net   540    651 
Mortgage servicing rights   5,720    5,180 
Accrued interest receivable   1,853    1,281 
Other assets   709    1,738 
Total assets  $664,556   $631,754 
   Commitments and Contingent liabilities   -    - 
           
LIABILITIES AND EQUITY          
Deposits          
Non interest bearing demand  $90,261   $81,570 
Interest bearing demand   119,805    119,551 
Savings   61,770    61,652 
Money market   96,506    79,902 
Time deposits   166,919    175,559 
Total deposits   535,261    518,234 
           
Notes payable   7,000    589 
Advances from Federal Home Loan Bank   30,000    16,000 
Repurchase agreements   17,902    14,696 
Trust preferred securities   10,310    20,620 
Accrued interest payable   355    639 
Other liabilities   3,462    4,707 
Total liabilities   604,290    575,485 
           
Equity          
Preferred stock   -    - 
Common stock   12,569    12,569 
Additional paid-in capital   15,418    15,412 
Retained earnings   33,075    29,899 
Accumulated other comprehensive income   831    74 
Treasury stock   (1,627)   (1,685)
Total equity   60,266    56,269 
           
Total liabilities and equity  $664,556   $631,754 

 

See notes to condensed consolidated financial statements (unaudited)

 

Note: The balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements at that date

 

3
 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Income (Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September   September   September   September 
($ in thousands, except share data)  2014   2013   2014   2013 
Interest income                
Loans                
Taxable  $5,855   $5,649   $16,750   $17,406 
Nontaxable   9    14    38    54 
Securities                    
Taxable   279    305    898    931 
Nontaxable   178    178    532    522 
Total interest income   6,321    6,146    18,218    18,913 
                     
Interest expense                    
Deposits   500    539    1,501    1,718 
Repurchase Agreements & Other   6    13    21    44 
Federal Home Loan Bank advances   94    83    239    257 
Trust preferred securities   371    336    1,034    1,077 
Total interest expense   971    971    2,795    3,096 
                     
Net interest income   5,350    5,175    15,423    15,817 
                     
Provision for loan losses   150    401    300    900 
                     
Net interest income after provision for loan losses   5,200    4,774    15,123    14,917 
                     
Noninterest income                    
Wealth Management Fees   670    669    1,951    1,964 
Customer service fees   730    659    2,005    1,914 
Gain on sale of mtg. loans & OMSR's   1,442    1,356    3,225    4,290 
Mortgage loan servicing fees, net   287    408    688    1,005 
Gain on sale of non-mortgage loans   71    44    178    282 
Data service fees   337    333    965    1,205 
Net gain on sales of securities   -    28    56    48 
Gain/(loss) on sale/disposal of assets   (15)   15    (64)   (219)
Other income   287    198    659    608 
Total non-interest income   3,809    3,710    9,663    11,097 
                     
Noninterest expense                    
Salaries and employee benefits   3,435    3,343    10,006    10,470 
Net occupancy expense   508    507    1,566    1,561 
Equipment expense   616    701    1,900    2,159 
Data processing fees   238    189    698    460 
Professional fees   435    456    1,238    1,384 
Marketing expense   105    135    398    335 
Telephone and communication   94    156    313    472 
Postage and delivery expense   195    199    586    623 
State, local and other taxes   89    140    276    412 
Employee expense   122    125    377    403 
Intangible amortization expense   55    129    317    435 
OREO Impairment   -    -    -    33 
Other expenses   996    482    1,918    1,565 
Total non-interest expense   6,888    6,562    19,593    20,312 
                     
Income before income tax expense   2,121    1,922    5,193    5,702 
Income tax expense   608    578    1,455    1,721 
                     
Net income  $1,513   $1,344   $3,738   $3,981 
                     
Common share data:                    
Basic earnings per common share  $0.31   $0.28   $0.77   $0.82 
Diluted earnings per common share  $0.31   $0.28   $0.76   $0.82 
                     
Average shares outstanding ($ in thousands):                    
Basic:   4,875    4,867    4,873    4,865 
Diluted:   4,900    4,881    4,896    4,877 

 

See notes to condensed consolidated financial statements (unaudited)

 

4
 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (unaudited)

 

   Three Months Ended Sep. 30,   Nine Months Ended Sep. 30, 
($'s in thousands)  2014   2013   2014   2013 
                 
Net income  $1,513   $1,344   $3,738   $3,981 
Other comprehensive (loss)/income:                    
Available-for-sale investment securities:                    
Gross unrealized holding (loss) gain arising in the period   (117)   (95)   1,203    (2,096)
Related tax (expense) benefit   40    33    (409)   713 
Less: reclassification adjustment for loss realized in income   -    (28)   (56)   (48)
Related tax benefit   -    9    19    16 
Net effect on other comprehensive (loss) income   (77)   (81)   757    (1,415)
Total comprehensive income  $1,436   $1,263   $4,495   $2,566 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited)

 

($'s in thousands
except per share data)
 
 
Preferred
Stock
 
 
 
 
Common
Stock
 
 
 
 
Additional
Paid-in
Capital
 
 
 
 
Retained
Earnings
 
 
 
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
 
Treasury
Stock
 
 
 
 
Total  
 
                            
Balance, January 1, 2014  $-   $12,569   $15,412   $29,899   $74  $(1,685)  $56,269 
Net Income                  3,738             3,738 
Other Comprehensive Income                       757        757 
Dividends on Common Stk., $0.115 per share                  (562)            (562)
Restricted Stock Issuance                           33    33 
Stock options exercised             (41)            25    (16)
Expense of stock option plan             47                  47 
Balance, September 30, 2014  $-   $12,569   $15,418   $33,075   $831  $(1,627)  $60,266 
                                   
Balance, January 1, 2013  $-   $12,569   $15,374   $25,280   $1,830  $(1,769)  $53,284 
Net Income                  3,981             3,981 
Other Comprehensive Loss                       (1,415)       (1,415)
Dividends on Common Stk., $0.085 per share                  (415)            (415)
Stock options exercised             (27)            77    50 
Expense of stock option plan             52                  52 
Balance, September 30, 2013  $-   $12,569   $15,399   $28,846   $415  $(1,692)  $55,537 

 

See notes to condensed consolidated financial statements (unaudited)

 

5
 

 

SB Financial Group, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   Nine Months Ended Sep. 30, 
($'s in thousands)  2014   2013 
Operating Activities        
Net Income  $3,738   $3,981 
Items (using)/providing cash          
Depreciation and amortization   859    813 
Provision for loan losses   300    900 
Expense of share-based compensation plan   47    52 
Amortization of premiums and discounts on securities   721    755 
Amortization of intangible assets   317    435 
Amortization of originated mortgage servicing rights   439    699 
Recapture of originated mortgage servicing rights impairment   (62)   (649)
Proceeds from sale of loans held for sale   171,993    221,444 
Originations of loans held for sale   (167,667)   (209,104)
Impairment of mortgage servicing rights   101    - 
Gain from sale of loans   (3,403)   (4,572)
Gain on sales of available for sale securities   (56)   (48)
Loss on sale of assets   64    121 
OREO impairment   -    33 
Changes in          
Interest receivable   (572)   (459)
Other assets   (5,414)   (3,694)
Income from bank owned life insurance   (168)   (249)
Interest payable and other liabilities   (624)   (98)
           
Net cash provided by operating activities   613    10,360 
           
Investing Activities          
Purchases of available-for-sale securities   (9,685)   (21,494)
Proceeds from maturities of available-for-sale securities   14,457    23,278 
Proceeds from sales of available-for-sale-securities   4,298    7,390 
Net change in loans   (29,457)   (13,350)
Purchase of premises and equipment and software   (1,505)   (918)
Proceeds from sales or disposal of premises and equipment   (13)   315 
Proceeds from sale of foreclosed assets   236    1,657 
           
Net cash (used in) investing activities   (21,669)   (3,122)
           
Financing Activities          
Net increase in demand deposits, money market, interest checking and savings accounts   25,667    10,452 
Net (decrease) in certificates of deposit   (8,640)   (15,910)
Net increase in securities sold under agreements to repurchase   3,206    4,503 
Repayment of Federal Home Loan Bank advances   (2,000)   (14,000)
Proceeds from Federal Home Loan Bank advances   16,000    9,000 
Proceeds from stock options exercised   17    26 
Dividends on Common Stock   (562)   (415)
Repayment of trust preferred securities   (10,310)   - 
Proceeds from long-term note   7,000    - 
Repayment of notes payable   (589)   (1,022)
           
Net cash provided by (used in) financing activities   29,789    (7,366)
           
Increase (decrease) in Cash and Cash Equivalents   8,733    (128)
           
Cash and Cash Equivalents, Beginning of Year   13,137    19,144 
           
Cash and Cash Equivalents, End of Period  $21,870   $19,016 
           
Supplemental Cash Flows Information          
           
Interest paid  $3,079   $2,786 
Income taxes paid  $1,040   $550 
Transfer of loans to foreclosed assets  $285   $915 

 

See notes to condensed consolidated financial statements (unaudited)

 

6
 

 

SB FINANCIAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1—BASIS OF PRESENTATION

 

SB Financial Group, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, The State Bank and Trust Company (“State Bank”), RFCBC, Inc. (“RFCBC”), Rurbanc Data Services, Inc. dba RDSI Banking Systems (“RDSI”), and Rurban Statutory Trust II (“RST II”). In addition, State Bank owns all of the outstanding stock of Rurban Mortgage Company (“RMC”), and State Bank Insurance, LLC (“SBI”).

 

The consolidated financial statements include the accounts of the Company, State Bank, RFCBC, RDSI, RMC, and SBI. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company. Those adjustments consist only of normal recurring adjustments. Results of operations for the three and nine months ended September 30, 2014, are not necessarily indicative of results for the complete year.

 

The condensed consolidated balance sheet of the Company as of December 31, 2013 has been derived from the audited consolidated balance sheet of the Company as of that date.

 

For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

The following paragraphs summarize the impact of new accounting pronouncements:

 

Accounting Standards Update (ASU) No. 2014-12 (Topic 718): Compensation – Stock Compensation

The ASU provides guidance for the accounting treatment of share-based payments when the terms provide that a performance target could be achieved after the service period. The treatment requires that the target achievement after the service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.  Management does not believe this update will have a material impact on the Company’s consolidated financial statements.

ASU No. 2014-09 (Topic 606): Revenue from Contracts with Customers

The ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards. The core principle is that an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Management does not believe that the implementation of this update will have a material impact on the Company’s consolidated financial statements.

ASU No. 2014-06: Technical Corrections and Improvements Related Glossary Terms.

 

A standing project exists on the FASB’s agenda to address feedback and to make other incremental improvements to U.S. GAAP. This perpetual project should eliminate the need for periodic agenda requests for narrow and incremental items. The Board decided that the types of issues that it will consider through this project are changes to clarify the Codification or correct unintended application of guidance that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. This Update is limited to those amendments related to the Master Glossary, including technical corrections related to glossary links, glossary term deletions, and glossary term name changes. In addition, this Update includes more substantive, limited-scope improvements to reduce instances of the same term appearing multiple times in the Master Glossary with similar, but not entirely identical, definitions. Management does not believe these technical corrections will have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2014-04, Receivables (Topic 310): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.

 

This ASU clarifies that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The amendments may be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. Management does not believe the amendments will have a material impact on the Company’s consolidated financial statements.

 

7
 

 

NOTE 2—EARNINGS PER SHARE

 

Earnings per share (EPS) have been computed based on the weighted average number of shares outstanding during the periods presented. For the three- and nine-month periods ended September 30, 2014, share-based awards totaling 66,570 common shares were not considered in computing diluted EPS as they were anti-dilutive. For the three- and nine-month periods ended September 30, 2013, share-based awards totaling 95,070 common shares were not considered in computing diluted EPS as they were anti-dilutive. The average number of shares used in the computation of basic and diluted earnings per share were:

 

   Three Months Ended   Nine Months Ended 
  September 30,   September 30, 
(shares in thousands)  2014   2013   2014   2013 
Basic earnings per share   4,875    4,867    4,873    4,865 
Diluted earnings per share   4,900    4,881    4,896    4,877 

 

Note 3 - Securities

 

The amortized cost and appropriate fair values, together with gross unrealized gains and losses, of securities at September 30, 2014 and December 31, 2013 were as follows:

 

       Gross   Gross     
  Amortized   Unrealized   Unrealized   Approximate 
($ in thousands)  Cost   Gains   Losses   Fair Value 
Available-for-Sale Securities:                
September 30, 2014:                
U.S. Treasury and Government agencies  $18,034   $142   $(40)  $18,136 
Mortgage-backed securities   43,722    477    (359)   43,840 
State and political subdivisions   18,111    1,045    (7)   19,149 
Equity securities   23    -    -    23 
                     
   $79,890   $1,664   $(406)  $81,148 

 

       Gross   Gross     
  Amortized   Unrealized   Unrealized     
($ in thousands)  Cost   Gains   Losses   Fair Value 
Available-for-Sale Securities:                
December 31, 2013:                
U.S. Treasury and Government agencies  $11,305   $120   $(125)  $11,300 
Mortgage-backed securities   57,322    417    (516)   57,223 
State and political subdivisions   17,937    546    (328)   18,155 
Money Market Mutual Fund   3,092    -    -    3,092 
Equity securities   23    -    -    23 
                     
   $89,679   $1,083   $(969)  $89,793 

 

8
 

 

The amortized cost and fair value of securities available for sale at September 30, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Available for Sale 
   Amortized   Fair 
($'s in thousands)  Cost   Value 
September 30, 2014:        
Within one year  $470   $479 
Due after one year through five years   1,866    1,935 
Due after five years through ten years   7,319    7,498 
Due after ten years   26,490    27,373 
    36,145    37,285 
           
Mortgage-backed securities & equity securities   43,745    43,863 
           
   $79,890   $81,148 

 

The fair value of securities pledged as collateral, to secure public deposits and for other purposes, was $72.2 million at September 30, 2014 and $42.3 million at December 31, 2013. The fair value of securities delivered for repurchase agreements was $20.4 million at September 30, 2014 and $17.5 million at December 31, 2013.

 

Gross gains of $0.06 million resulting from sales of available-for-sale securities, were realized during the nine-month period ending September 30, 2014. There were no realized gains or losses from sales of available-for-sale securities for the three-month period ending September 30, 2014. There were realized gains of $0.05 million from sales of available-for-sale securities for the three- and nine-month periods ending September 30, 2013. The $0.06 million and the $0.05 million gain on sale was a reclassification from accumulated other comprehensive income (OCI) and is included in the net gain on sales of securities. The related $0.02 million and the $0.02 million in tax expense is a reclassification from OCI and is included in the income tax expense line item in the income statement.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments was $27.2 million at September 30, 2014, and $35.8 million at December 31, 2013, which was approximately 33.5 and 39.9 percent, respectively, of the Company’s available-for-sale investment portfolio at such dates. Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

9
 

 

Securities with unrealized losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014 and December 31, 2013 are as follows:

 

($ in thousands)  Less than 12 Months   12 Months or Longer   Total 
September 30, 2014  Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
Available-for-Sale Securities:                              
U.S. Treasury and Government agencies  $5,043   $(16)  $2,976   $(24)  $8,019   $(40)
Mortgage-backed securities   10,999    (69)   7,315    (290)   18,314    (359)
State and political subdivisions   -    -    844    (7)   844    (7)
                               
   $16,042   $(85)  $11,135   $(321)  $27,177   $(406)

 

($ in thousands)  Less than 12 Months   12 Months or Longer   Total 
December 31, 2013  Fair Value   Unrealized Losses   Fair Value   Unrealized Losses   Fair Value   Unrealized Losses 
Available-for-Sale Securities:                        
U.S. Treasury and Government agencies  $3,834   $(125)  $-   $-   $3,834   $(125)
Mortgage-backed securities  24,773   (410)  2,333   (106)  27,106   (516)
State and political subdivisions   4,868    (328)   -    -    4,868    (328)
                               
   $33,475   $(863)  $2,333   $(106)  $35,808   $(969)

 

The total unrealized loss as of September 30, 2014 in the securities portfolio is contained in 33 percent of the portfolio with a potential loss of $0.4 million, which is down from the $1.0 million unrealized loss at December 31, 2013. The unrealized losses are contained within 22 individual securities and are not segregated by type or duration of security. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to not sell the investment and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost. Management has determined there is no other-than-temporary-impairment on these securities.

 

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoffs, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Generally, all loan classes are placed on non-accrual status not later than 90 days past due, unless the loan is well-secured and in the process of collection. All interest accrued, but not collected, for loans that are placed on non-accrual or charge-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

10
 

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the non-collectability of a loan balance is probable. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as new information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected on the historical loss or risk rating data.

 

A loan is considered impaired when, based on current information and events, it is probable that State Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration each of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial, agricultural, and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

When State Bank moves a loan to non-accrual status, total unpaid interest accrued to date is reversed from income. Subsequent payments are applied to the outstanding principal balance with the interest portion of the payment recorded on the balance sheet as a contra-loan. Interest received on impaired loans may be realized once all contractual principal amounts are received or when a borrower establishes a history of six consecutive timely principal and interest payments. It is at the discretion of management to determine when a loan is placed back on accrual status upon receipt of six consecutive timely payments.

 

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, State Bank does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

 

11
 

 

Categories of loans at September 30, 2014 and December 31, 2013 include:

 

  Total Loans   Non-Accrual Loans 
($ in thousands)  Sep. 2014   Dec. 2013   Sep. 2014   Dec. 2013 
Commercial & Industrial  $90,407   $85,368    1,397    2,316 
Commercial RE & Construction   212,964    205,301    616    532 
Agricultural & Farmland   44,162    39,210    -    - 
Residential Real Estate   107,712    99,620    1,015    1,651 
Consumer & Other   50,679    47,804    174    345 
Total loans, net of unearned income  $505,924   $477,303   $3,202   $4,844 
                     
Allowance for loan losses  $(6,713)  $(6,964)          

 

The following tables present the activity in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2014, December 31, 2013 and September 30, 2013.

 

For the Three Months Ended Sep. 30, 2014

 

  Commercial   Commercial RE   Agricultural   Residential   Consumer     
($'s in thousands)  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
                         
ALLOWANCE FOR LOAN AND LEASE LOSSES         
                         
Beginning balance  $1,660   $2,657   $194   $1,266   $791   $6,568 
Charge Offs   -    (12)   -    (18)   (63)  (93)
Recoveries   6    64    1    14    3    88 
Provision   120    (114)   21    46    77    150 
Ending Balance  $1,786   $2,595   $216   $1,308   $808   $6,713 

 

For the Nine Months Ended Sep. 30, 2014

 

  Commercial   Commercial RE   Agricultural   Residential   Consumer     
($'s in thousands)  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
                         
ALLOWANCE FOR LOAN AND LEASE LOSSES           
                         
Beginning balance  $2,175   $2,708   $159   $1,067   $855   $6,964 
Charge Offs   (607)   (13)   -    (33)   (93)  (746)
Recoveries   18    124    2    28    23    195 
Provision   200    (224)   55    246    23    300 
Ending Balance  $1,786   $2,595   $216   $1,308   $808   $6,713 

 

12
 

 

For the Nine Months Ended Sep. 30, 2014

 

  Commercial   Commercial RE   Agricultural   Residential   Consumer     
($'s in thousands)  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
            
Loans Receivable at September 30, 2014           
            
Allowance:                        
Ending balance:                        
individually evaluated for  impairment  $510   $16   $-   $167   $47   $740 
Ending balance:                              
collectively evaluated for  impairment  $1,276   $2,579   $216   $1,141   $761   $5,973 
Loans:                              
Ending balance:                              
individually evaluated for  impairment  $1,278   $741   $-   $1,619   $524   $4,162 
Ending balance:                              
collectively evaluated for  impairment  $89,129   $212,223   $44,162   $106,093   $50,155   $501,762 

 

 

   Commercial   Commercial RE   Agricultural   Residential   Consumer     
($'s in thousands)  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
                         
Loans Receivable at December 31, 2013            
             
Allowance:                        
Ending balance:                        
individually evaluated for  impairment  $1,079   $56   $-   $192   $168   $1,495 
Ending balance:                              
collectively evaluated for  impairment  $1,096   $2,652   $159   $875   $687   $5,469 
Loans:                              
Ending balance:                              
individually evaluated for  impairment  $2,116   $649   $-   $1,985   $590   $5,340 
Ending balance:                              
collectively evaluated for  impairment  $83,252   $204,652   $39,210   $97,635   $47,214   $471,963 

 

13
 

 

                        
   Commercial   Commercial RE   Agricultural   Residential   Consumer     
($'s in thousands)  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
             
ALLOWANCE FOR LOAN AND LEASE LOSSES            
                         
For the Three Months Ended Sep. 30, 2013
 
Beginning balance  $1,547   $3,059   $180   $1,183   $1,044   $7,013 
Charge Offs   -    (53)   -    (69)   (185)   (307)
Recoveries   2    1    1    -    9    13 
Provision   183    86    (4)   22    114    401 
Ending Balance  $1,732   $3,093   $177   $1,136   $982   $7,120 
                               
For the Nine Months Ended Sep. 30, 2013      
                               
Beginning balance  $1,561   $3,034   $186   $1,088   $942   $6,811 
Charge Offs   (1)   (58)   -    (167)   (430)   (656)
Recoveries   16    16    3    19    11    65 
Provision   156    101    (12)   196    459    900 
Ending Balance  $1,732   $3,093   $177   $1,136   $982   $7,120 

 

The risk characteristics of each loan portfolio segment are as follows:

 

Commercial and Agricultural

 

Commercial and agricultural loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

14
 

 

Commercial Real Estate including Construction

 

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus non-owner-occupied loans.

 

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

Residential and Consumer

 

Residential and consumer loans consist of two segments – residential mortgage loans and personal loans. Residential mortgage loans are secured by 1-4 family residences and are generally owner-occupied, and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that these loans are of smaller individual amounts and spread over a large number of borrowers.

 

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2014 and December 31, 2013.

 

Sep. 30, 2014  Commercial   Commercial RE   Agricultural   Residential   Consumer     
Loan Grade  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
($ in thousands)                        
1-2  $887   $70   $69   $-   $-   $1,026 
   3   21,591    53,807    8,528    99,528    46,882    230,336 
   4   65,996    147,325    35,565    5,603    3,473    257,962 
Total Pass   88,474    201,202    44,162    105,131    50,355    489,324 
                               
Special Mention   34    6,643    -    1,123    86    7,886 
Substandard   752    4,503    -    255    64    5,574 
Doubtful   1,147    616    -    1,203    174    3,140 
Loss   -    -    -    -    -    - 
Total Loans  $90,407   $212,964   $44,162   $107,712   $50,679   $505,924 

 

15
 

 

December 31, 2013  Commercial   Commercial RE   Agricultural   Residential   Consumer     
Loan Grade  & Industrial   & Construction   & Farmland   Real Estate   & Other   Total 
($ in thousands)                        
1-2  $1,345   $81   $76   $-   $87   $1,589 
   3   22,328    44,095    6,543    90,606    43,250    206,822 
   4   56,188    146,861    32,591    5,700    3,782    245,122 
Total Pass   79,861    191,037    39,210    96,306    47,119    453,533 
                               
Special Mention   3,159    8,917    -    1,373    86    13,535 
Substandard   32    4,815    -    290    84    5,221 
Doubtful   2,316    532    -    1,651    515    5,014 
Loss   -    -    -    -    -    - 
Total Loans  $85,368   $205,301   $39,210   $99,620   $47,804   $477,303 

 

The Company evaluates the loan risk grading system definitions and allowance for loan loss methodology on an ongoing basis.

 

Credit Risk Profile

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 analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100 thousand and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

Special Mention (5): Assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. Ordinarily, special mention credits have characteristics which corrective management action would remedy.

 

Substandard (6): Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful (7): Loans classified as doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current known facts, conditions and values, highly questionable and improbable.

 

Loss (8): Loans are considered uncollectable and of such little value that continuing to carry them as assets on the Company’s financial statement is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass (1-4) rated loans. Pass ratings are assigned to those borrowers that do not have identified potential or well-defined weaknesses and for which there is a high likelihood of orderly repayment. All other categories are updated on a quarterly basis.

 

16
 

 

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2014 and December 31, 2013.

 

   30-59 Days   60-89 Days   Greater Than   Total Past       Total Loans 
September 30, 2014  Past Due   Past Due   90 Days   Due   Current   Receivable 
($ in thousands)                        
                         
Commercial & Industrial  $-   $-   $997   $997   $89,410   $90,407 
Commercial RE & Construction   3,713    -    616    4,329    208,635    212,964 
Agricultural & Farmland   -    -    -    -    44,162    44,162 
Residential Real Estate   118    -    380    498    107,214    107,712 
Consumer & Other   108    57    10    175    50,504    50,679 
Total Loans  $3,939   $57   $2,003   $5,999   $499,925   $505,924 

 

   30-59 Days   60-89 Days   Greater Than   Total Past       Total Loans 
December 31, 2013  Past Due   Past Due   90 Days   Due   Current   Receivable 
($ in thousands)                          
                         
Commercial & Industrial  $-   $-   $1,890   $1,890   $83,478   $85,368 
Commercial RE & Construction   424    364    168    956    204,345    205,301 
Agricultural & Farmland   -    -    -    -    39,210    39,210 
Residential Real Estate   -    14    453    467    99,153    99,620 
Consumer & Other   22    34    98    154    47,650    47,804 
Total Loans  $446   $412   $2,609   $3,467   $473,836   $477,303 

 

All loans past due 90 days are systematically placed on nonaccrual status.

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable State Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forebearance or other actions intended to maximize collection.

 

The following tables present impaired loan information as of and for the nine months ended September 30, 2014 and 2013, and for the twelve months ended December 31, 2013:

 

Nine Months Ended Sep. 30, 2014

 

  Recorded   Unpaid
Principal
   Related   Average
Recorded
   Interest
Income
 
($'s in thousands)  Investment   Balance   Allowance   Investment   Recognized 
With no related allowance recorded:                    
Commercial & Industrial  $316   $316   $-   $316   $- 
Commercial RE & Construction   560    560    -    578    - 
Agricultural & Farmland   -    -    -    -    - 
Residential Real Estate   654    697    -    813    41 
Consumer & Other   99    105    -    120    8 
All Impaired Loans < $100,000   660    660    -    660    - 
With a specific allowance recorded:                         
Commercial & Industrial   962    1,562    510    1,622    - 
Commercial RE & Construction   181    181    16    185    8 
Agricultural & Farmland   -    -    -    -    - 
Residential Real Estate   965    965    167    1,026    29 
Consumer & Other   426    426    47    452    18 
Totals:                         
Commercial & Industrial  $1,278   $1,878   $510   $1,938   $- 
Commercial RE & Construction  $741   $741   $16   $763   $8 
Agricultural & Farmland  $-   $-   $-   $-   $- 
Residential Real Estate  $1,619   $1,662   $167   $1,839   $70 
Consumer & Other  $525   $531   $47   $512   $26 
All Impaired Loans < $100,000  $660   $660   $-   $660   $- 

 

17
 

 

Three Months Ended Sep. 30, 2014

 

  Average Recorded   Interest Income 
($'s in thousands)  Investment   Recognized 
With no related allowance recorded:        
Commercial & Industrial  $316   $- 
Commercial RE & Construction   566    - 
Agricultural & Farmland   -    - 
Residential Real Estate   808    14 
Consumer & Other   115    3 
All Impaired Loans < $100,000   660    - 
With a specific allowance recorded:          
Commercial & Industrial   1,578    - 
Commercial RE & Construction   182    2 
Agricultural & Farmland   -    - 
Residential Real Estate   1,020    8 
Consumer & Other   446    6 
Totals:          
Commercial & Industrial  $1,894   $- 
Commercial RE & Construction  $748   $2 
Agricultural & Farmland  $-   $- 
Residential Real Estate  $1,828   $22 
Consumer & Other  $561   $9 
All Impaired Loans < $100,000  $660   $- 

 

Twelve Months Ended December 31, 2013            
             
  Recorded   Unpaid Principal   Related 
($'s in thousands)  Investment   Balance   Allowance 
With no related allowance recorded:            
Commercial & Industrial  $316   $316   $- 
Commercial RE & Construction   389    442    - 
Agricultural & Farmland   -    -    - 
Residential Real Estate   1,131    1,131    - 
Consumer & Other   252    252    - 
All Impaired Loans < $100,000   1,242    1,242    - 
With a specific allowance recorded:               
Commercial & Industrial   1,800    1,800    1,079 
Commercial RE & Construction   260    260    56 
Agricultural & Farmland   -    -    - 
Residential Real Estate   854    854    192 
Consumer & Other   338    338    168 
Totals:               
Commercial & Industrial  $2,116   $2,116   $1,079 
Commercial RE & Construction  $649   $702   $56 
Agricultural & Farmland  $-   $-   $- 
Residential Real Estate  $1,985   $1,985   $192 
Consumer & Other  $590   $590   $168 
All Impaired Loans < $100,000  $1,242   $1,242   $- 

 

18
 

 

   Nine Months Ended Sep. 30, 2013   Three Months Ended Sep. 30, 2013 
   Average
Recorded
   Interest
Income
   Average
Recorded
   Interest
Income
 
($'s in thousands)  Investment   Recognized   Investment   Recognized 
With no related allowance recorded:                
Commercial & Industrial  $2,341   $13   $870   $4 
Commercial RE & Construction   820    19    805    5 
Agricultural & Farmland   -    -    -    - 
Residential Real Estate   1,160    35    1,156    12 
Home Equity Consumer & Other   203    8    199    3 
All Impaired Loans < $100,000   1,065    -    1,065    - 
With a specific allowance recorded:                    
Commercial & Industrial   1,773    44    1,800    12 
Commercial RE & Construction   261    8    259    3 
Agricultural & Farmland   -    -    -    - 
Residential Real Estate   983    36    978    12 
Home Equity Consumer & Other   445    22    438    7 
Totals:                    
Commercial & Industrial  $4,114   $57   $2,670   $16 
Commercial RE & Construction  $1,081   $27   $1,064   $8 
Agricultural & Farmland  $-   $-   $-   $- 
Residential Real Estate  $2,143   $71   $2,134   $24 
Consumer & Other  $648   $30   $637   $10 
All Impaired Loans < $100,000  $1,065   $-   $1,065   $- 

 

Impaired loans less than $100,000 are included in groups of homogenous loans. These loans are evaluated based on delinquency status.

 

Interest income recognized on a cash basis does not materially differ from interest income recognized on an accrual basis.

 

Troubled Debt Restructured (TDR) Loans

 

TDRs are modified loans where a concession was provided to a borrower experiencing financial difficulties. Loan modifications are considered TDRs when the concessions provided are not available to the borrower through either normal channels or other sources. However, not all loan modifications are TDRs.

 

TDR Concession Types

 

The Company’s standards relating to loan modifications consider, among other factors, minimum verified income requirements, cash flow analysis, and collateral valuations. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet a borrower’s specific circumstances at a point in time. All loan modifications, including those classified as TDRs, are reviewed and approved. The types of concessions provided to borrowers include:

 

Interest rate reduction: A reduction of the stated interest rate to a nonmarket rate for the remaining original life of the debt. The Company also may grant interest rate concessions for a limited timeframe on a case by case basis.
   
Amortization or maturity date change: A change in the amortization or maturity date beyond what the collateral supports, including a concession that does any of the following:

 

(1)Lengthens the amortization period of the amortized principal beyond market terms. This concession reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.
   
(2)Reduces the amount of loan principal to be amortized. This concession also reduces the minimum monthly payment and increases the amount of the balloon payment at the end of the term of the loan. Principal is generally not forgiven.

 

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(3)Extends the maturity date or dates of the debt beyond what the collateral supports. This concession generally applies to loans without a balloon payment at the end of the term of the loan. In addition, there may be instances where renewing loans potentially require non-market terms and would then be reclassified as TDRs.

 

Other: A concession that is not categorized as one of the concessions described above. These concessions include, but are not limited to: principal forgiveness, collateral concessions, covenant concessions, and reduction of accrued interest. Principal forgiveness may result from any TDR modification of any concession type.

 

The following presents the activity of TDRs during the three and nine months ended September 30, 2014, and September 30, 2013.

 

    Three Months Ended September 30, 2014 
($ in thousands)   Number of Loans      Pre-
Modification
Recorded Balance  
    Post Modification
Recorded Balance
 
                
Residential Real Estate   -   $-   $- 
Consumer & Other   -    -    - 
                
Total Modifications   -   $-   $- 

 

   Interest              Total 
($ in thousands)   Only    Term    Combination    Modification 
                     
Residential Real Estate  $-   $-   $-   $- 
Consumer & Other   -    -    -    - 
                     
Total Modifications  $-   $-   $-   $- 

 

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There was no increase in the allowance for loan and lease losses ("ALLL") due to TDRs in the three month period ended September 30, 2014.

 

    Nine Months Ended September 30, 2014 
($ in thousands)   Number of Loans    Pre-
Modification
Recorded Balance
    Post Modification
Recorded Balance
 
                
Residential Real Estate   -   $-   $- 
Consumer & Other   -    -    - 
                
Total Modifications   -   $-   $- 

 

   Interest              Total 
($ in thousands)   Only    Term    Combination    Modification 
                     
Residential Real Estate  $-   $-   $-   $- 
Consumer & Other   -    -    -    - 
                     
Total Modifications  $-   $-   $-   $- 

 

There was no increase in the allowance for loan and lease losses ("ALLL") due to TDRs in the nine month period ended September 30, 2014.

 

    Three Months Ended September 30, 2013 
($ in thousands)   Number of Loans    Pre-
Modification
Recorded Balance
    Post Modification
Recorded Balance
 
                
Residential Real Estate   -   <