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 September 30, 2017
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 001-38084
FARMERS & MERCHANTS BANCORP, INC.
(Exact name of registrant as specified in its charter)
OHIO | 34-1469491 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
307 North Defiance Street, Archbold, Ohio | 43502 | |
(Address of principal executive offices) | (Zip Code) |
(419) 446-2501
Registrants telephone number, including area code
(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 Section 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 accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicated 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 of each of the issuers classes of common stock, as of the latest practicable date:
Common Stock, No Par Value |
9,266,676 | |
Class | Outstanding as of October 25, 2017 |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
FARMERS & MERCHANTS BANCORP, INC.
Form 10-Q Items |
Page | |||
PART I. | ||||
Item 1. | ||||
Condensed Consolidated Balance Sheets - |
3 | |||
4 | ||||
5 | ||||
6-36 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
37-54 | ||
Item 3. | 55 | |||
Item 4. | 56 | |||
PART II. | ||||
Item 1. | 56 | |||
Item 1A. | 56 | |||
Item 2. | 56 | |||
Item 3. | 57 | |||
Item 4. | 57 | |||
Item 5. | 57 | |||
Item 6. | 58 | |||
Signatures | 59 | |||
Exhibit 3.1 | ||||
Exhibit 31. | ||||
Exhibit 32. | ||||
101.INS | XBRL Instance Document (1) |
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101.SCH | XBRL Taxonomy Extension Scheme Document (1) |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (1) |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (1) |
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101.LAB | XBRL Taxonomy Extension Label Linkbase Document (1) |
|||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (1) |
(1) | Pursuant to Rule 406T of Regulation S-T, the interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
2
ITEM 1 | FINANCIAL STATEMENTS |
FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Condensed Consolidated Balance Sheets (in thousands of dollars) |
||||||||
September 30, 2017 | December 31, 2016 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Cash and due from banks |
$ | 48,313 | $ | 27,348 | ||||
Federal funds sold |
791 | 974 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
49,104 | 28,322 | ||||||
Interest-bearing time deposits |
2,541 | 1,915 | ||||||
Securities - available-for-sale |
192,811 | 218,527 | ||||||
Other securities, at cost |
3,717 | 3,717 | ||||||
Loans held for sale |
2,147 | 2,055 | ||||||
Loans, net |
788,335 | 751,310 | ||||||
Premises and equipment |
21,473 | 21,457 | ||||||
Goodwill |
4,074 | 4,074 | ||||||
Mortgage servicing rights |
2,264 | 2,192 | ||||||
Other real estate owned |
615 | 774 | ||||||
Bank owned life insurance |
14,446 | 14,376 | ||||||
Other assets |
8,628 | 7,176 | ||||||
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|
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Total Assets |
$ | 1,090,155 | $ | 1,055,895 | ||||
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Liabilities and Stockholders Equity |
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Liabilities |
||||||||
Deposits |
||||||||
Noninterest-bearing |
$ | 189,963 | $ | 186,390 | ||||
Interest-bearing |
||||||||
NOW accounts |
294,911 | 230,446 | ||||||
Savings |
224,911 | 226,537 | ||||||
Time |
193,581 | 198,830 | ||||||
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|
|
|
|||||
Total deposits |
903,366 | 842,203 | ||||||
Federal Funds purchased and securities sold under agreements to repurchase |
35,550 | 70,324 | ||||||
Federal Home Loan Bank (FHLB) advances |
10,000 | 10,000 | ||||||
Dividend payable |
1,193 | 1,053 | ||||||
Accrued expenses and other liabilities |
7,157 | 6,738 | ||||||
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|
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Total liabilities |
957,266 | 930,318 | ||||||
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|
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Commitments and Contingencies |
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Stockholders Equity |
||||||||
Common stock - No par value 20,000,000 shares authorized; issued and outstanding 10,400,000 shares 9/30/17 and 12/31/16 (1) |
11,388 | 11,947 | ||||||
Treasury Stock - 1,133,324 shares 9/30/17, 1,158,250 shares 12/31/16 (1) |
(12,126 | ) | (12,267 | ) | ||||
Retained earnings |
134,320 | 127,869 | ||||||
Accumulated other comprehensive loss |
(693 | ) | (1,972 | ) | ||||
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|
|
|
|||||
Total stockholders equity |
132,889 | 125,577 | ||||||
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|
|||||
Total Liabilities and Stockholders Equity |
$ | 1,090,155 | $ | 1,055,895 | ||||
|
|
|
|
(1) | Share data has been adjusted to reflect a 2-for-1 stock split on September 20, 2017 |
See Notes to Condensed Consolidated Unaudited Financial Statements.
Note: The December 31, 2016, Condensed Consolidated Balance Sheet has been derived from the audited Consolidated Balance Sheet as of that date.
3
FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME & COMPREHENSIVE INCOME
(Unaudited)
(in thousands of dollars, except per share data) |
||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Interest Income |
||||||||||||||||
Loans, including fees |
$ | 9,547 | $ | 8,629 | $ | 27,367 | $ | 24,997 | ||||||||
Debt securities: |
||||||||||||||||
U.S. Treasury and government agencies |
605 | 559 | 1,870 | 1,734 | ||||||||||||
Municipalities |
290 | 344 | 905 | 1,093 | ||||||||||||
Dividends |
49 | 36 | 135 | 111 | ||||||||||||
Federal funds sold |
7 | 7 | 10 | 9 | ||||||||||||
Other |
37 | 15 | 93 | 37 | ||||||||||||
|
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|
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|
|||||||||
Total interest income |
10,535 | 9,590 | 30,380 | 27,981 | ||||||||||||
Interest Expense |
||||||||||||||||
Deposits |
1,161 | 947 | 3,289 | 2,686 | ||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
135 | 115 | 366 | 346 | ||||||||||||
Borrowed funds |
37 | 37 | 110 | 110 | ||||||||||||
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Total interest expense |
1,333 | 1,099 | 3,765 | 3,142 | ||||||||||||
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|
|||||||||
Net Interest Income - Before Provision for Loan Losses |
9,202 | 8,491 | 26,615 | 24,839 | ||||||||||||
Provision for Loan Losses |
99 | 308 | 197 | 924 | ||||||||||||
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Net Interest Income After Provision For Loan Losses |
9,103 | 8,183 | 26,418 | 23,915 | ||||||||||||
Noninterest Income |
||||||||||||||||
Customer service fees |
1,320 | 1,711 | 4,131 | 4,497 | ||||||||||||
Other service charges and fees |
1,134 | 941 | 3,214 | 2,850 | ||||||||||||
Net gain on sale of loans |
181 | 216 | 600 | 619 | ||||||||||||
Net gain on sale of available for sale securities |
| 47 | 47 | 503 | ||||||||||||
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|
|||||||||
Total noninterest income |
2,635 | 2,915 | 7,992 | 8,469 | ||||||||||||
Noninterest Expense |
||||||||||||||||
Salaries and Wages |
3,236 | 2,981 | 9,374 | 8,661 | ||||||||||||
Employee benefits |
943 | 849 | 2,648 | 2,426 | ||||||||||||
Net occupancy expense |
434 | 359 | 1,221 | 1,083 | ||||||||||||
Furniture and equipment |
493 | 438 | 1,456 | 1,293 | ||||||||||||
Data processing |
300 | 360 | 919 | 1,132 | ||||||||||||
Franchise taxes |
226 | 219 | 676 | 658 | ||||||||||||
Net (gain) loss on sale of other assets owned |
13 | (6 | ) | 27 | 39 | |||||||||||
FDIC Assessment |
82 | 126 | 247 | 368 | ||||||||||||
Mortgage servicing rights amortization |
85 | 123 | 266 | 311 | ||||||||||||
Other general and administrative |
1,545 | 1,473 | 4,692 | 4,594 | ||||||||||||
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Total other operating expenses |
7,357 | 6,922 | 21,526 | 20,565 | ||||||||||||
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|
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Income Before Income Taxes |
4,381 | 4,176 | 12,884 | 11,819 | ||||||||||||
Income Taxes |
1,159 | 1,161 | 3,600 | 3,349 | ||||||||||||
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Net Income |
3,222 | 3,015 | 9,284 | 8,470 | ||||||||||||
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|
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Other Comprehensive Income (Loss) (Net of Tax): |
||||||||||||||||
Net unrealized gain (loss) on available for sale securities |
(472 | ) | 58 | 1,984 | 2,652 | |||||||||||
Reclassification adjustment for gain on sale of available for sale securities |
| (47 | ) | (47 | ) | (503 | ) | |||||||||
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|
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Net unrealized gain (loss) on available for sale securities |
(472 | ) | 11 | 1,937 | 2,149 | |||||||||||
Tax expense (benefit) |
(160 | ) | 4 | 659 | 731 | |||||||||||
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Other comprehensive income (loss) |
(312 | ) | 7 | 1,278 | 1,418 | |||||||||||
Comprehensive Income |
$ | 2,910 | $ | 3,022 | $ | 10,562 | $ | 9,888 | ||||||||
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Earnings Per Share - Basic and Diluted (1) |
$ | 0.35 | $ | 0.33 | $ | 1.00 | $ | 0.92 | ||||||||
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Dividends Declared (1) |
$ | 0.13 | $ | 0.12 | $ | 0.37 | $ | 0.34 | ||||||||
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(1) | Share data has been adjusted to reflect a 2-for-1 stock split on September 20, 2017 |
See Notes to Condensed Consolidated Unaudited Financial Statements
4
FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands of dollars) | ||||||||
Nine Months Ended | ||||||||
September 30, 2017 | September 30, 2016 | |||||||
Cash Flows from Operating Activities |
||||||||
Net income |
$ | 9,284 | $ | 8,470 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
1,426 | 1,112 | ||||||
Amortization on available for sale securities, net |
843 | 833 | ||||||
Amortization of servicing rights |
266 | 311 | ||||||
Amortization of core deposit intangible |
203 | 242 | ||||||
Compensation expense related to stock awards |
346 | 297 | ||||||
Provision for loan loss |
197 | 924 | ||||||
Gain on sale of loans held for sale |
(600 | ) | (619 | ) | ||||
Originations of loans held for sale |
(42,601 | ) | (44,296 | ) | ||||
Proceeds from sale of loans held for sale |
44,574 | 44,119 | ||||||
Loss on sale of other assets owned |
27 | 39 | ||||||
Gain on sales of securities available for sale |
(47 | ) | (503 | ) | ||||
Change in other assets and other liabilities, net |
(1,667 | ) | (1,300 | ) | ||||
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|
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Net cash provided by operating activities |
12,251 | 9,629 | ||||||
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|
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Cash Flows from Investing Activities |
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Activity in available-for-sale securities: |
||||||||
Maturities, prepayments and calls |
16,682 | 22,910 | ||||||
Sales |
13,562 | 45,418 | ||||||
Purchases |
(3,387 | ) | (55,863 | ) | ||||
Change in interest-bearing time deposits |
(626 | ) | (1,915 | ) | ||||
Proceeds from sales of other assets owned |
17 | 20 | ||||||
Additions to premises and equipment |
(1,459 | ) | (1,901 | ) | ||||
Loan originations and principal collections, net |
(39,195 | ) | (52,996 | ) | ||||
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|
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Net cash used in investing activities |
(14,406 | ) | (44,327 | ) | ||||
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Cash Flows from Financing Activities |
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Net change in deposits |
61,163 | 66,762 | ||||||
Net change in federal funds purchased and securities sold under agreements to repurchase |
(34,774 | ) | (19,328 | ) | ||||
Purchase of Treasury Stock |
(202 | ) | (194 | ) | ||||
Cash dividends paid on common stock |
(3,250 | ) | (3,062 | ) | ||||
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Net cash provided by financing activities |
22,937 | 44,178 | ||||||
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Net Increase in Cash and Cash Equivalents |
20,782 | 9,480 | ||||||
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Cash and cash equivalents - Beginning of year |
28,322 | 22,018 | ||||||
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Cash and cash equivalents - End of period |
$ | 49,104 | $ | 31,498 | ||||
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Supplemental Information |
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Cash paid during the year for: |
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Interest |
$ | 3,735 | $ | 3,098 | ||||
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Income taxes |
$ | 3,802 | $ | 3,810 | ||||
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Noncash investing activities: |
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Transfer of loans to other real estate owned |
$ | | $ | 376 | ||||
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|
See Notes to Condensed Consolidated Unaudited Financial Statements.
5
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS |
NOTE 1 BASIS OF PRESENTATION
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 10Q and Rule 10-01 of Regulation S-X; accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Share data has been adjusted to reflect a 2-for-1 stock split on September 20, 2017. Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that are expected for the year ended December 31, 2017. The condensed consolidated balance sheet of the Company as of December 31, 2016, has been derived from the audited consolidated balance sheet of the Company as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2016.
NOTE 2 ASSET PURCHASES
The Company recognized core deposit intangible assets of $1.09 million with the purchase of the Hicksville office on July 9, 2010. These were amortized over an estimated remaining economic useful life of the deposits of 7 years on a straight line basis.
An office was purchased on December 13, 2013 in Custar, Ohio. Core deposit intangible assets of $1.17 million were recognized and are being amortized over its remaining economic useful life of the deposits of 7 years on a straight line basis.
The amortization expense for the year ended December 31, 2016 was $323 thousand. Of the $245 thousand to be expensed in 2017, $203 thousand has been expensed for the nine months ended September 30, 2017.
(In Thousands) | ||||||||||||
Hicksville | Custar | Total | ||||||||||
2017 |
$ | 78 | $ | 167 | $ | 245 | ||||||
2018 |
| 167 | 167 | |||||||||
2019 |
| 167 | 167 | |||||||||
2020 |
| 161 | 161 | |||||||||
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$ | 78 | $ | 662 | $ | 740 | |||||||
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6
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 3 SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and losses at September 30, 2017 and December 31, 2016, follows:
(In Thousands) | ||||||||||||||||
September 30, 2017 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
Available-for-Sale: |
||||||||||||||||
U.S. Treasury |
$ | 15,790 | $ | | $ | (114 | ) | $ | 15,676 | |||||||
U.S. Government agencies |
79,224 | | (1,064 | ) | 78,160 | |||||||||||
Mortgage-backed securities |
42,409 | 142 | (561 | ) | 41,990 | |||||||||||
State and local governments |
56,438 | 779 | (232 | ) | 56,985 | |||||||||||
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Total available-for-sale securities |
$ | 193,861 | $ | 921 | $ | (1,971 | ) | $ | 192,811 | |||||||
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(In Thousands) | ||||||||||||||||
December 31, 2016 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
Available-for-Sale: |
||||||||||||||||
U.S. Treasury |
$ | 24,920 | $ | 1 | $ | (146 | ) | $ | 24,775 | |||||||
U.S. Government agencies |
84,266 | 3 | (1,795 | ) | 82,474 | |||||||||||
Mortgage-backed securities |
49,155 | 185 | (879 | ) | 48,461 | |||||||||||
State and local governments |
63,173 | 634 | (990 | ) | 62,817 | |||||||||||
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Total available-for-sale securities |
$ | 221,514 | $ | 823 | $ | (3,810 | ) | $ | 218,527 | |||||||
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Investment securities will at times depreciate to an unrealized loss position. The Company utilizes the following criteria to assess whether impairment is other than temporary. No one item by itself will necessarily signal that a security should be recognized as an other than temporary impairment.
1. | The fair value of the security has significantly declined from book value. |
2. | A downgrade has occurred that lowered the credit rating to below investment grade (below Baa3 by Moody and BBB by Standard and Poors.) |
3. | Dividends have been reduced or eliminated or scheduled interest payments have not been made. |
4. | The underwater security has longer than 10 years to maturity and the loss position had existed for more than 3 years. |
5. | Management does not possess both the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. |
If the impairment is judged to be other than temporary, the cost basis of the individual security shall be written down to fair value, thereby establishing a new cost basis. The new cost basis shall not be changed for subsequent recoveries in fair value. The amount of the write down shall be included in current earnings as a realized loss. The recovery in fair value, if any, shall be recognized in earnings when the security is sold. The table below is presented by category of security and length of time in a continuous loss position. The Company currently does not hold any securities with other than temporary impairment.
7
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 3 SECURITIES (Continued)
Information pertaining to securities with gross unrealized losses at September 30, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
(In Thousands) | ||||||||||||||||
September 30, 2017 | ||||||||||||||||
Less Than Twelve Months | Twelve Months & Over | |||||||||||||||
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
U.S. Treasury |
$ | (114 | ) | $ | 15,676 | $ | | $ | | |||||||
U.S. Government agencies |
(554 | ) | 62,910 | (510 | ) | 15,251 | ||||||||||
Mortgage-backed securities |
(288 | ) | 22,344 | (273 | ) | 10,360 | ||||||||||
State and local governments |
(130 | ) | 8,776 | (102 | ) | 6,032 | ||||||||||
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Total available-for-sale securities |
$ | (1,086 | ) | $ | 109,706 | $ | (885 | ) | $ | 31,643 | ||||||
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(In Thousands) | ||||||||||||||||
December 31, 2016 | ||||||||||||||||
Less Than Twelve Months | Twelve Months & Over | |||||||||||||||
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
U.S. Treasury |
$ | (146 | ) | $ | 15,745 | $ | | $ | | |||||||
U.S. Government agencies |
(1,795 | ) | 77,471 | | | |||||||||||
Mortgage-backed securities |
(879 | ) | 36,474 | | | |||||||||||
State and local governments |
(983 | ) | 37,540 | (7 | ) | 526 | ||||||||||
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Total available-for-sale securities |
$ | (3,803 | ) | $ | 167,230 | $ | (7 | ) | $ | 526 | ||||||
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Unrealized losses on securities have not been recognized into income because the issuers bonds are of high credit quality, values have only been impacted by rate changes, and the Company has the intent and ability to hold the securities for the foreseeable future. Additionally, the decline in value is primarily due to changes in interest rates since the securities were purchased. The fair value is expected to recover as the bonds approach the maturity date.
Below are the gross realized gains and losses for the three and nine months ended September 30.
Three Months (In Thousands) |
Nine Months (In Thousands) |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Gross realized gains |
$ | | $ | 47 | $ | 58 | $ | 514 | ||||||||
Gross realized losses |
| | (11 | ) | (11 | ) | ||||||||||
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Net realized gains |
$ | | $ | 47 | $ | 47 | $ | 503 | ||||||||
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|
|||||||||
Tax expense related to net realized gains |
$ | | $ | 16 | $ | 16 | $ | 171 | ||||||||
|
|
|
|
|
|
|
|
The net realized gains on sales and related tax expense is a reclassification out of accumulated other comprehensive income (loss). The net realized gain is included in net gain on sale of available-for-sale securities and the related tax expense is included in tax expense in the condensed consolidated statements of income and comprehensive income.
8
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 3 SECURITIES (Continued)
The amortized cost and fair value of debt securities at September 30, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands) | ||||||||
Amortized Cost |
Fair Value | |||||||
One year or less |
$ | 9,014 | $ | 9,017 | ||||
After one year through five years |
88,228 | 88,088 | ||||||
After five years through ten years |
50,404 | 49,979 | ||||||
After ten years |
3,806 | 3,737 | ||||||
|
|
|
|
|||||
Total |
$ | 151,452 | $ | 150,821 | ||||
Mortgage-backed securities |
42,409 | 41,990 | ||||||
|
|
|
|
|||||
Total |
$ | 193,861 | $ | 192,811 | ||||
|
|
|
|
Investments with a carrying value of $84.5 million and $129.4 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and securities sold under repurchase agreements.
Other securities include Federal Home Loan Bank of Cincinnati and Farmer Mac stock as of September 30, 2017 and December 31, 2016.
NOTE 4 LOANS
Loan balances as of September 30, 2017 and December 31, 2016:
(In Thousands) | ||||||||
Loans: |
September 30, 2017 | December 31, 2016 | ||||||
Consumer Real Estate |
$ | 84,283 | $ | 86,234 | ||||
Agricultural Real Estate |
63,603 | 62,375 | ||||||
Agricultural |
87,095 | 84,563 | ||||||
Commercial Real Estate |
394,481 | 377,481 | ||||||
Commercial and Industrial |
124,078 | 109,256 | ||||||
Consumer |
35,843 | 33,179 | ||||||
Industrial Development Bonds |
6,555 | 5,732 | ||||||
|
|
|
|
|||||
795,938 | 758,820 | |||||||
Less: Net deferred loan fees and costs |
(733 | ) | (726 | ) | ||||
|
|
|
|
|||||
795,205 | 758,094 | |||||||
Less: Allowance for loan losses |
(6,870 | ) | (6,784 | ) | ||||
|
|
|
|
|||||
Loans Net |
$ | 788,335 | $ | 751,310 | ||||
|
|
|
|
9
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The following is a contractual maturity schedule by major category of loans as of September 30, 2017:
(In Thousands) | ||||||||||||
Within One Year |
After One Year Within Five Years |
After Five Years |
||||||||||
Consumer Real Estate |
$ | 2,153 | $ | 14,237 | $ | 67,893 | ||||||
Agricultural Real Estate |
401 | 5,495 | 57,707 | |||||||||
Agricultural |
51,979 | 25,915 | 9,201 | |||||||||
Commercial Real Estate |
10,875 | 120,924 | 262,682 | |||||||||
Commercial and Industrial |
68,139 | 34,860 | 21,079 | |||||||||
Consumer |
5,077 | 23,025 | 7,741 | |||||||||
Industrial Development Bonds |
831 | 85 | 5,639 |
The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of September 30, 2017:
(In Thousands) | ||||||||
Fixed Rate |
Variable Rate |
|||||||
Consumer Real Estate |
$ | 47,662 | $ | 36,621 | ||||
Agricultural Real Estate |
46,557 | 17,046 | ||||||
Agricultural |
35,708 | 51,387 | ||||||
Commercial Real Estate |
266,316 | 128,165 | ||||||
Commercial and Industrial |
58,560 | 65,518 | ||||||
Consumer |
31,554 | 4,289 | ||||||
Industrial Development Bonds |
6,555 | |
As of September 30, 2017 and December 31, 2016 one to four family residential mortgage loans amounting to $17.7 and $17.9 million, respectively, have been pledged as security for future loans and existing loans the Bank has received from the Federal Home Loan Bank.
Unless listed separately, Industrial Development Bonds are included in the Commercial and Industrial category for the remainder of the tables in this Note 4.
[Remainder of this page intentionally left blank]
10
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The following table represents the contractual aging of the recorded investment (in thousands) in past due loans by portfolio classification of loans as of September 30, 2017 and December 31, 2016, net of deferred loan fees and costs:
September 30, 2017 | 30-59 Days Past Due |
60-89 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment > 90 Days and Accruing |
|||||||||||||||||||||
Consumer Real Estate |
$ | 532 | $ | 0 | $ | 505 | $ | 1,037 | $ | 82,838 | $ | 83,875 | $ | | ||||||||||||||
Agricultural Real Estate |
104 | | 101 | 205 | 63,366 | 63,571 | | |||||||||||||||||||||
Agricultural |
| 2 | 124 | 126 | 87,113 | 87,239 | | |||||||||||||||||||||
Commercial Real Estate |
| | 98 | 98 | 393,815 | 393,913 | | |||||||||||||||||||||
Commercial and Industrial |
| | | | 130,720 | 130,720 | | |||||||||||||||||||||
Consumer |
37 | 8 | | 45 | 35,842 | 35,887 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 673 | $ | 10 | $ | 828 | $ | 1,511 | $ | 793,694 | $ | 795,205 | $ | 0 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
December 31, 2016 | 30-59 Days Past Due |
60-89 Days Past Due |
Greater Than 90 Days |
Total Past Due |
Current | Total Financing Receivables |
Recorded Investment > 90 Days and Accruing |
|||||||||||||||||||||
Consumer Real Estate |
$ | 882 | $ | 15 | $ | 507 | $ | 1,404 | $ | 84,469 | $ | 85,873 | $ | | ||||||||||||||
Agricultural Real Estate |
12 | | 132 | 144 | 62,192 | 62,336 | | |||||||||||||||||||||
Agricultural |
101 | | | 101 | 84,591 | 84,692 | | |||||||||||||||||||||
Commercial Real Estate |
60 | | | 60 | 376,827 | 376,887 | | |||||||||||||||||||||
Commercial and Industrial |
| | | | 115,093 | 115,093 | | |||||||||||||||||||||
Consumer |
29 | 6 | | 35 | 33,178 | 33,213 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 1,084 | $ | 21 | $ | 639 | $ | 1,744 | $ | 756,350 | $ | 758,094 | $ | 0 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The following table presents the recorded investment in nonaccrual loans by class of loans as of September 30, 2017 and December 31, 2016:
(In Thousands) | ||||||||
September 30, 2017 |
December 31, 2016 |
|||||||
Consumer Real Estate |
$ | 1,176 | $ | 1,091 | ||||
Agricultural Real Estate |
101 | 132 | ||||||
Agricultural |
193 | | ||||||
Commercial Real Estate |
98 | | ||||||
Commercial & Industrial |
152 | 161 | ||||||
Consumer |
9 | | ||||||
|
|
|
|
|||||
Total |
$ | 1,729 | $ | 1,384 | ||||
|
|
|
|
Following are the characteristics and underwriting criteria for each major type of loan the Bank offers:
Commercial Real Estate: Construction, purchase, and refinance of business purpose real estate. Risks include potential construction delays and overruns, vacancies, collateral value subject to market value fluctuations, interest rate, market demands, borrowers ability to repay in orderly fashion, and others. The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customers ability to repay in a changing rate environment before granting loan approval.
Agricultural Real Estate: Purchase of farm real estate or for permanent improvements to the farm real estate. Cash flow from the farm operation is the repayment source and is therefore subject to the financial success of the farm operation.
Consumer Real Estate: Purchase, refinance, or equity financing of one to four family owner occupied dwelling. Success in repayment is subject to borrowers income, debt level, character in fulfilling payment obligations, employment, and others.
Commercial and Industrial: Loans to proprietorships, partnerships, or corporations to provide temporary working capital and seasonal loans as well as long term loans for capital asset acquisition. Risks include adequacy of cash flow, reasonableness of projections, financial leverage, economic trends, management ability and estimated capital expenditures during the fiscal year. The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customers ability to repay in a changing rate environment before granting loan approval.
Agricultural: Loans for the production and housing of crops, fruits, vegetables, and livestock or to fund the purchase or re-finance of capital assets such as machinery and equipment and livestock. The production of crops and livestock is especially vulnerable to commodity prices and weather. The vulnerability to commodity prices is offset by the farmers ability to hedge their position by the use of the future contracts. The risk related to weather is often mitigated by requiring federal crop insurance.
Consumer: Funding for individual and family purposes. Success in repayment is subject to borrowers income, debt level, character in fulfilling payment obligations, employment, and others.
Industrial Development Bonds (IDB): Funds for public improvements in the Banks service area. Repayment ability is based on the continuance of the taxation revenue as the source of repayment.
12
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The Bank uses a nine tier risk rating system to grade its loans. The grade of a loan may change during the life of the loan.
The risk ratings are described as follows.
1. | Zero (0) Unclassified. Any loan which has not been assigned a classification. |
2. | One (1) Excellent. Credit to premier customers having the highest credit rating based on an extremely strong financial condition, which compares favorably with industry standards (upper quartile of Risk Management Association ratios). Financial statements indicate a sound earnings and financial ratio trend for several years with satisfactory profit margins and excellent liquidity exhibited. Prime credits may also be borrowers with loans fully secured by highly liquid collateral such as traded stocks, bonds, certificates of deposit, savings account, etc. No credit or collateral exceptions exist and the loan adheres to the Banks loan policy in every respect. Financing alternatives would be readily available and would qualify for unsecured credit. This grade is summarized by high liquidity, minimum risk, strong ratios, and low handling costs. |
3. | Two (2) Good. Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Loan supported by financial statements containing strong balance sheets, generally with a leverage position less than 1.50, and a history of profitability. Probability of serious financial deterioration is unlikely. Possessing a sound repayment source (and a secondary source), which would allow repayment in a reasonable period of time. Individual loans backed by liquid personal assets, established history and unquestionable character. |
4. | Three (3) Satisfactory. Satisfactory loans of average or slightly above average risk having some deficiency or vulnerability to changing economic conditions, but still fully collectible. Projects should normally demonstrate acceptable debt service coverage. Generally, customers should have a leverage position less than 2.00. May be some weakness but with offsetting features of other support readily available. Loans that are meeting the terms of repayment. |
Loans may be graded 3 when there is no recent information on which to base a current risk evaluation and the following conditions apply:
At inception, the loan was properly underwritten and did not possess an unwarranted level of credit risk:
a. | At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss; |
b. | The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance; |
c. | During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the business is in an industry which is known to be experiencing problems. If any of the credit weaknesses is observed, a lower risk grade is warranted. |
5. | Four (4) Satisfactory / Monitored. A 4 (Satisfactory/Monitored) risk grade may be established for a loan considered satisfactory but which is of average credit risk due to financial weakness or uncertainty. The loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in Satisfactory/Monitored classification is considered acceptable and within normal underwriting guidelines, so long as the loan is given management supervision. |
6. | Five (5) Special Mention. Loans that possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered potential, versus defined, impairments to the primary source of loan repayment and collateral. |
7. | Six (6) Substandard. One or more of the following characteristics may be exhibited in loans classified substandard: |
a. | Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, are uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss. |
b. | Loans are inadequately protected by the current net worth and paying capacity of the borrower. |
13
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
c. | The primary source of repayment is weakened, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees. |
d. | Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. |
e. | Unusual courses of action are needed to maintain a high probability of repayment. |
f. | The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments. |
g. | The lender is forced into a subordinate position or unsecured collateral position due to flaws in documentation. |
h. | Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms. |
i. | The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. |
j. | There is significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions. |
8. | Seven (7) Doubtful. One or more of the following characteristics may be exhibited in loans classified Doubtful: |
a. | Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable. |
b. | The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. |
c. | The possibility of loss is high, but, because of certain important pending factors which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established deferring the realization of the loss. |
9. | Eight (8) Loss. Loans are considered uncollectable and of such little value that continuing to carry them as assets on the institutions financial statements 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. |
[Remainder of this page intentionally left blank]
14
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The following table represents the risk category of loans by portfolio class, net of deferred fees and costs, based on the most recent analysis performed as of September 30, 2017 and December 31, 2016:
(In Thousands) | ||||||||||||||||||||
Agricultural Real Estate |
Agricultural | Commercial Real Estate |
Commercial and Industrial |
Industrial Development Bonds |
||||||||||||||||
September 30, 2017 |
||||||||||||||||||||
1-2 |
$ | 3,973 | $ | 5,316 | $ | 1,639 | $ | 10,166 | $ | | ||||||||||
3 |
14,762 | 31,796 | 26,253 | 15,037 | 3,568 | |||||||||||||||
4 |
43,491 | 49,712 | 349,120 | 96,923 | 2,987 | |||||||||||||||
5 |
1,124 | 254 | 10,686 | 1,379 | | |||||||||||||||
6 |
221 | 161 | 6,215 | 547 | | |||||||||||||||
7 |
| | | 113 | | |||||||||||||||
8 |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 63,571 | $ | 87,239 | $ | 393,913 | $ | 124,165 | $ | 6,555 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Agricultural Real Estate |
Agricultural | Commercial Real Estate |
Commercial and Industrial |
Industrial Development Bonds |
||||||||||||||||
December 31, 2016 |
||||||||||||||||||||
1-2 |
$ | 4,399 | $ | 7,334 | $ | 677 | $ | 10,060 | $ | | ||||||||||
3 |
16,660 | 31,397 | 27,858 | 14,064 | 2,640 | |||||||||||||||
4 |
39,808 | 44,560 | 333,523 | 83,100 | 3,092 | |||||||||||||||
5 |
1,209 | 1,234 | 8,321 | 1,379 | | |||||||||||||||
6 |
260 | 167 | 6,508 | 641 | | |||||||||||||||
7 |
| | | 117 | | |||||||||||||||
8 |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 62,336 | $ | 84,692 | $ | 376,887 | $ | 109,361 | $ | 5,732 | ||||||||||
|
|
|
|
|
|
|
|
|
|
15
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
For consumer residential real estate, and other, the Company also evaluates credit quality based on the aging status of the loan, as was previously stated, and by payment activity. The following tables present the recorded investment in those classes based on payment activity and assigned risk grading as of September 30, 2017 and December 31, 2016.
(In Thousands) | ||||||||
Consumer Real Estate |
Consumer Real Estate |
|||||||
September 30, 2017 |
December 31, 2016 |
|||||||
Grade |
||||||||
Pass |
$ | 83,471 | $ | 85,322 | ||||
Special Mention (5) |
| 25 | ||||||
Substandard (6) |
320 | 368 | ||||||
Doubtful (7) |
84 | 158 | ||||||
|
|
|
|
|||||
Total |
$ | 83,875 | $ | 85,873 | ||||
|
|
|
|
(In Thousands) | ||||||||||||||||
Consumer - Credit | Consumer - Other | |||||||||||||||
September 30, 2017 |
December 31, 2016 |
September 30, 2017 |
December 31, 2016 |
|||||||||||||
Performing |
$ | 3,845 | $ | 4,061 | $ | 32,013 | $ | 29,120 | ||||||||
Nonperforming |
1 | | 28 | 32 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3,846 | $ | 4,061 | $ | 32,041 | $ | 29,152 | ||||||||
|
|
|
|
|
|
|
|
Information about impaired loans as of September 30, 2017, December 31, 2016 and September 30, 2016 are as follows:
(In Thousands) | ||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||
Impaired loans without a valuation allowance |
$ | 1,294 | $ | 1,141 | $ | 515 | ||||||
Impaired loans with a valuation allowance |
685 | 711 | 891 | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans |
$ | 1,979 | $ | 1,852 | $ | 1,406 | ||||||
|
|
|
|
|
|
|||||||
Valuation allowance related to impaired loans |
$ | 123 | $ | 135 | $ | 125 | ||||||
|
|
|
|
|
|
|||||||
Total non-accrual loans |
$ | 1,729 | $ | 1,384 | $ | 1,132 | ||||||
|
|
|
|
|
|
|||||||
Total loans past-due ninety days or more and still accruing |
$ | | $ | | $ | | ||||||
Quarter ended average investment in impaired loans |
$ | 1,804 | $ | 1,684 | $ | 1,499 | ||||||
Year to date average investment in impaired loans |
$ | 1,793 | $ | 1,802 | $ | 1,843 |
No additional funds are committed to be advanced in connection with impaired loans.
16
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The Bank had approximately $540 thousand of its impaired loans classified as troubled debt restructured (TDR) as of September 30, 2017, $557 thousand as of December 31, 2016 and $562 thousand as of September 30, 2016. During the year to date 2017, there were no new loans considered TDR.
The following table represents three and nine months ended September 30, 2017.
Pre- | Post- | Pre- | Post- | |||||||||||||||||||||||||
Three Months | Number of | Modification | Modification | Nine Months | Number of | Modification | Modification | |||||||||||||||||||||
September 30, 2017 | Contracts | Outstanding | Outstanding | September 30, 2017 | Contracts | Outstanding | Outstanding | |||||||||||||||||||||
(in thousands) | Modified in the | Recorded | Recorded | (in thousands) | Modified in the | Recorded | Recorded | |||||||||||||||||||||
Troubled Debt Restructurings |
Last 3 Months | Investment | Investment | Troubled Debt Restructurings | Last 9 Months | Investment | Investment | |||||||||||||||||||||
None |
| $ | | $ | | None | | $ | | $ | |
The following table represents three and nine months ended September 30, 2016.
Pre- | Post- | Pre- | Post- | |||||||||||||||||||||||
Three Months | Number of | Modification | Modification | Nine Months | Number of | Modification | Modification | |||||||||||||||||||
September 30, 2016 | Contracts | Outstanding | Outstanding | September 30, 2016 | Contracts | Outstanding | Outstanding | |||||||||||||||||||
(in thousands) | Modified in the | Recorded | Recorded | (in thousands) | Modified in the | Recorded | Recorded | |||||||||||||||||||
Troubled Debt Restructurings |
Last 3 Months | Investment | Investment | Troubled Debt Restructurings |
Last 9 Months | Investment | Investment | |||||||||||||||||||
Consumer Real Estate |
| $ | | $ | | Consumer Real Estate | 1 | $ | 138 | $ | 138 |
For the three and nine month period ended September 30, 2017 and 2016, there were no TDRs that subsequently defaulted after modification.
For the majority of the Banks impaired loans, the Bank will apply the fair value of collateral or use a measurement incorporating the present value of expected future cash flows discounted at the loans effective rate of interest. To determine fair value of collateral, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained. Until such time that updated appraisals are received, the Bank may discount the collateral value used.
The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge-off in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial and agricultural credits are charged down at 120 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-off may be realized as further unsecured positions are recognized.
17
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The following tables present loans individually evaluated for impairment by class of loans for three months ended September 30, 2017 and September 30, 2016.
(In Thousands) | ||||||||||||||||||||||||
QTD | ||||||||||||||||||||||||
QTD | QTD | Interest | ||||||||||||||||||||||
Three Months Ended September 30, 2017 | Unpaid | Average | Interest | Income | ||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Recognized | |||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Cash Basis | |||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Consumer Real Estate |
$ | 928 | $ | 928 | $ | | $ | 926 | $ | 8 | $ | 5 | ||||||||||||
Agricultural Real Estate |
205 | 205 | | 136 | | | ||||||||||||||||||
Agricultural |
161 | 161 | | 54 | | | ||||||||||||||||||
Commercial Real Estate |
| | | | | | ||||||||||||||||||
Commercial and Industrial |
| | | | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
With a specific allowance recorded: |
||||||||||||||||||||||||
Consumer Real Estate |
84 | 84 | 25 | 85 | | | ||||||||||||||||||
Agricultural Real Estate |
| | | | | | ||||||||||||||||||
Agricultural |
| | | | | | ||||||||||||||||||
Commercial Real Estate |
488 | 488 | 67 | 489 | 5 | | ||||||||||||||||||
Commercial and Industrial |
113 | 113 | 31 | 114 | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Totals: |
||||||||||||||||||||||||
Consumer Real Estate |
$ | 1,012 | $ | 1,012 | $ | 25 | $ | 1,011 | $ | 8 | $ | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Agricultural Real Estate |
$ | 205 | $ | 205 | $ | | $ | 136 | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Agricultural |
$ | 161 | $ | 161 | $ | | $ | 54 | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial Real Estate |
$ | 488 | $ | 488 | $ | 67 | $ | 489 | $ | 5 | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and Industrial |
$ | 113 | $ | 113 | $ | 31 | $ | 114 | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Consumer |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
18
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
(In Thousands) | ||||||||||||||||||||||||
QTD | ||||||||||||||||||||||||
QTD | QTD | Interest | ||||||||||||||||||||||
Three Months Ended September 30, 2016 | Unpaid | Average | Interest | Income | ||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Recognized | |||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Cash Basis | |||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Consumer Real Estate |
$ | 383 | $ | 383 | $ | | $ | 51 | $ | | $ | | ||||||||||||
Agricultural Real Estate |
132 | 132 | | 132 | | | ||||||||||||||||||
Agricultural |
| | | | | | ||||||||||||||||||
Commercial Real Estate |
| | | 345 | 4 | 4 | ||||||||||||||||||
Commercial and Industrial |
| | | 446 | 6 | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
With a specific allowance recorded: |
||||||||||||||||||||||||
Consumer Real Estate |
329 | 329 | 35 | 377 | 4 | 1 | ||||||||||||||||||
Agricultural Real Estate |
| | | | | | ||||||||||||||||||
Agricultural |
| | | | | | ||||||||||||||||||
Commercial Real Estate |
444 | 444 | 68 | 30 | | | ||||||||||||||||||
Commercial and Industrial |
118 | 118 | 22 | 118 | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Totals: |
||||||||||||||||||||||||
Consumer Real Estate |
$ | 712 | $ | 712 | $ | 35 | $ | 428 | $ | 4 | $ | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Agricultural Real Estate |
$ | 132 | $ | 132 | $ | | $ | 132 | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Agricultural |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial Real Estate |
$ | 444 | $ | 444 | $ | 68 | $ | 375 | $ | 4 | $ | 4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and Industrial |
$ | 118 | $ | 118 | $ | 22 | $ | 564 | $ | 6 | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Consumer |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
19
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The following tables present loans individually evaluated for impairment by class of loans for nine months ended September 30, 2017 and September 30, 2016.
(In Thousands) | ||||||||||||||||||||||||
YTD | ||||||||||||||||||||||||
YTD | YTD | Interest | ||||||||||||||||||||||
Nine Months Ended September 30, 2017 | Unpaid | Average | Interest | Income | ||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Recognized | |||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Cash Basis | |||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Consumer Real Estate |
$ | 928 | $ | 928 | $ | | $ | 959 | $ | 25 | $ | 17 | ||||||||||||
Agricultural Real Estate |
205 | 205 | | 119 | | | ||||||||||||||||||
Agricultural |
161 | 161 | | 18 | | | ||||||||||||||||||
Commercial Real Estate |
| | | | | | ||||||||||||||||||
Commercial and Industrial |
| | | | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
With a specific allowance recorded: |
||||||||||||||||||||||||
Consumer Real Estate |
84 | 84 | 25 | 89 | | | ||||||||||||||||||
Agricultural Real Estate |
| | | | | | ||||||||||||||||||
Agricultural |
| | | | | | ||||||||||||||||||
Commercial Real Estate |
488 | 488 | 67 | 493 | 17 | 2 | ||||||||||||||||||
Commercial and Industrial |
113 | 113 | 31 | 115 | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Totals: |
||||||||||||||||||||||||
Consumer Real Estate |
$ | 1,012 | $ | 1,012 | $ | 25 | $ | 1,048 | $ | 25 | $ | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Agricultural Real Estate |
$ | 205 | $ | 205 | $ | | $ | 119 | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Agricultural |
$ | 161 | $ | 161 | $ | | $ | 18 | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial Real Estate |
$ | 488 | $ | 488 | $ | 67 | $ | 493 | $ | 17 | $ | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and Industrial |
$ | 113 | $ | 113 | $ | 31 | $ | 115 | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Consumer |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
20
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
(In Thousands) | ||||||||||||||||||||||||
YTD | ||||||||||||||||||||||||
YTD | YTD | Interest | ||||||||||||||||||||||
Nine Months Ended September 30, 2016 | Unpaid | Average | Interest | Income | ||||||||||||||||||||
Recorded | Principal | Related | Recorded | Income | Recognized | |||||||||||||||||||
Investment | Balance | Allowance | Investment | Recognized | Cash Basis | |||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Consumer Real Estate |
$ | 383 | $ | 383 | $ | | $ | 78 | $ | 1 | $ | 1 | ||||||||||||
Agricultural Real Estate |
132 | 132 | | 152 | 1 | | ||||||||||||||||||
Agricultural |
| | | | | | ||||||||||||||||||
Commercial Real Estate |
| | | 367 | 17 | 16 | ||||||||||||||||||
Commercial and Industrial |
| | | 450 | 18 | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
With a specific allowance recorded: |
||||||||||||||||||||||||
Consumer Real Estate |
329 | 329 | 35 | 387 | 11 | 7 | ||||||||||||||||||
Agricultural Real Estate |
| | | 13 | | | ||||||||||||||||||
Agricultural |
| | | | | | ||||||||||||||||||
Commercial Real Estate |
444 | 444 | 68 | 254 | | | ||||||||||||||||||
Commercial and Industrial |
118 | 118 | 22 | 142 | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Totals: |
||||||||||||||||||||||||
Consumer Real Estate |
$ | 712 | $ | 712 | $ | 35 | $ | 465 | $ | 12 | $ | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Agricultural Real Estate |
$ | 132 | $ | 132 | $ | | $ | 165 | $ | 1 | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Agricultural |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial Real Estate |
$ | 444 | $ | 444 | $ | 68 | $ | 621 | $ | 17 | $ | 16 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and Industrial |
$ | 118 | $ | 118 | $ | 22 | $ | 592 | $ | 18 | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Consumer |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017, the Company had $25 thousand of foreclosed residential real estate property obtained by physical possession and $59 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions. As of September 30, 2016, the Company had $808 thousand of foreclosed residential real estate property obtained by physical possession and $211 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process according to local jurisdictions.
21
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The Allowance for Loan and Lease Losses (ALLL) has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense. The following tables summarize the activities in the allowance for credit losses.
(In Thousands) | ||||||||
Nine Months Ended | Twelve Months Ended | |||||||
September 30, 2017 | December 31, 2016 | |||||||
Allowance for Loan & Lease Losses |
||||||||
Balance at beginning of year |
$ | 6,784 | $ | 6,057 | ||||
Provision for loan loss |
197 | 1,121 | ||||||
Loans charged off |
(208 | ) | (550 | ) | ||||
Recoveries |
97 | 156 | ||||||
|
|
|
|
|||||
Allowance for Loan & Lease Losses |
$ | 6,870 | $ | 6,784 | ||||
|
|
|
|
|||||
Allowance for Unfunded Loan Commitments & Letters of Credit |
$ | 228 | $ | 217 | ||||
|
|
|
|
|||||
Total Allowance for Credit Losses |
$ | 7,098 | $ | 7,001 | ||||
|
|
|
|
The Company segregates its ALLL into two reserves: The ALLL and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC). When combined, these reserves constitute the total Allowance for Credit Losses (ACL).
The AULC is reported within other liabilities on the balance sheet while the ALLL is netted within the loans, net asset line. The ACL presented above represents the full amount of reserves available to absorb possible credit losses.
[Remainder of this page intentionally left blank]
22
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
The following table breaks down the activity within ACL for each loan portfolio classification and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs.
Additional analysis, presented in thousands, related to the allowance for credit losses for three months ended September 30, 2017 and September 30, 2016 is as follows:
Consumer Real Estate |
Agricultural Real Estate |
Agricultural | Commercial Real Estate |
Commercial and Industrial |
Consumer | Unfunded Loan Commitment & Letters of Credit |
Unallocated | Total | ||||||||||||||||||||||||||||
Three Months Ended September 30, 2017 |
||||||||||||||||||||||||||||||||||||
ALLOWANCE FOR CREDIT LOSSES: |
||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 250 | $ | 253 | $ | 596 | $ | 3,076 | $ | 1,352 | $ | 407 | $ | 219 | $ | 924 | $ | 7,077 | ||||||||||||||||||
Charge Offs |
| | | (19 | ) | | (92 | ) | | | (111 | ) | ||||||||||||||||||||||||
Recoveries |
| | | 4 | 2 | 18 | | | 24 | |||||||||||||||||||||||||||
Provision (Credit) |
26 | (5 | ) | 17 | 56 | 38 | 90 | | (123 | ) | 99 | |||||||||||||||||||||||||
Other Non-interest expense related to unfunded |
| | | | | | 9 | | 9 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending Balance |
$ | 276 | $ | 248 | $ | 613 | $ | 3,117 | $ | 1,392 | $ | 423 | $ | 228 | $ | 801 | $ | 7,098 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 25 | $ | | $ | | $ | 67 | $ | 31 | $ | | $ | | $ | | $ | 123 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 251 | $ | 248 | $ | 613 | $ | 3,050 | $ | 1,361 | $ | 423 | $ | 228 | $ | 801 | $ | 6,975 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
FINANCING RECEIVABLES: |
||||||||||||||||||||||||||||||||||||
Ending balance |
$ | 83,875 | $ | 63,571 | $ | 87,239 | $ | 393,913 | $ | 130,720 | $ | 35,887 | $ | | $ | | $ | 795,205 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 1,012 | $ | 205 | $ | 161 | $ | 488 | $ | 113 | $ | | $ | | $ | | $ | 1,979 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 82,863 | $ | 63,366 | $ | 87,078 | $ | 393,425 | $ | 130,607 | $ | 35,887 | $ | | $ | | $ | 793,226 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality |
$ | 194 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 194 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
Consumer Real Estate |
Agricultural Real Estate |
Agricultural | Commercial Real Estate |
Commercial and Industrial |
Consumer | Unfunded Loan Commitment & Letters of Credit |
Unallocated | Total | ||||||||||||||||||||||||||||
Three Months Ended September 30, 2016 |
||||||||||||||||||||||||||||||||||||
ALLOWANCE FOR CREDIT LOSSES: |
||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 413 | $ | 229 | $ | 591 | $ | 2,717 | $ | 1,215 | $ | 365 | $ | 219 | $ | 963 | $ | 6,712 | ||||||||||||||||||
Charge Offs |
(42 | ) | | (3 | ) | (90 | ) | | (83 | ) | | | (218 | ) | ||||||||||||||||||||||
Recoveries |
1 | | 4 | 2 | 3 | 19 | | | 29 | |||||||||||||||||||||||||||
Provision (Credit) |
(86 | ) | 5 | (12 | ) | 376 | (23 | ) | 59 | | (11 | ) | 308 | |||||||||||||||||||||||
Other Non-interest expense related to unfunded |
| | | | | | 8 | | 8 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending Balance |
$ | 286 | $ | 234 | $ | 580 | $ | 3,005 | $ | 1,195 | $ | 360 | $ | 227 | $ | 952 | $ | 6,839 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 35 | $ | | $ | | $ | 68 | $ | 22 | $ | | $ | | $ | | $ | 125 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 251 | $ | 234 | $ | 580 | $ | 2,937 | $ | 1,173 | $ | 360 | $ | 227 | $ | 952 | $ | 6,714 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality |
$ | 1 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
FINANCING RECEIVABLES: |
||||||||||||||||||||||||||||||||||||
Ending balance |
$ | 85,977 | $ | 59,458 | $ | 79,332 | $ | 369,721 | $ | 111,953 | $ | 30,616 | $ | | $ | | $ | 737,057 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 712 | $ | 132 | $ | | $ | 444 | $ | 118 | $ | | $ | | $ | | $ | 1,406 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 85,265 | $ | 59,326 | $ | 79,332 | $ | 369,277 | $ | 111,835 | $ | 30,616 | $ | | $ | | $ | 735,651 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality |
$ | 265 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 265 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
Additional analysis, presented in thousands, related to the allowance for credit losses for nine months ended September 30, 2017 and September 30, 2016 is as follows:
Consumer Real Estate |
Agricultural Real Estate |
Agricultural | Commercial Real Estate |
Commercial and Industrial |
Consumer | Unfunded Loan Commitment & Letters of Credit |
Unallocated | Total | ||||||||||||||||||||||||||||
Nine Months Ended September 30, 2017 |
||||||||||||||||||||||||||||||||||||
ALLOWANCE FOR CREDIT LOSSES: |
||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 316 | $ | 241 | $ | 616 | $ | 3,250 | $ | 1,318 | $ | 394 | $ | 217 | $ | 649 | $ | 7,001 | ||||||||||||||||||
Charge Offs |
| | | (19 | ) | | (189 | ) | | | (208 | ) | ||||||||||||||||||||||||
Recoveries |
13 | | 2 | 11 | 8 | 63 | | | 97 | |||||||||||||||||||||||||||
Provision (Credit) |
(53 | ) | 7 | (5 | ) | (125 | ) | 66 | 155 | | 152 | 197 | ||||||||||||||||||||||||
Other Non-interest expense related to unfunded |
| | | | | | 11 | | 11 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending Balance |
$ | 276 | $ | 248 | $ | 613 | $ | 3,117 | $ | 1,392 | $ | 423 | $ | 228 | $ | 801 | $ | 7,098 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 25 | $ | | $ | | $ | 67 | $ | 31 | $ | | $ | | $ | | $ | 123 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 251 | $ | 248 | $ | 613 | $ | 3,050 | $ | 1,361 | $ | 423 | $ | 228 | $ | 801 | $ | 6,975 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||
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|||||||||||||||||||
FINANCING RECEIVABLES: |
||||||||||||||||||||||||||||||||||||
Ending balance |
$ | 83,875 | $ | 63,571 | $ | 87,239 | $ | 393,913 | $ | 130,720 | $ | 35,887 | $ | | $ | | $ | 795,205 | ||||||||||||||||||
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|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 1,012 | $ | 205 | $ | 161 | $ | 488 | $ | 113 | $ | | $ | | $ | | $ | 1,979 | ||||||||||||||||||
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|||||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 82,863 | $ | 63,366 | $ | 87,078 | $ | 393,425 | $ | 130,607 | $ | 35,887 | $ | | $ | | $ | 793,226 | ||||||||||||||||||
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|
|||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality |
$ | 194 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 194 | ||||||||||||||||||
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25
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 4 LOANS (Continued)
Consumer Real Estate |
Agricultural Real Estate |
Agricultural | Commercial Real Estate |
Commercial and Industrial |
Consumer | Unfunded Loan Commitment & Letters of Credit |
Unallocated | Total | ||||||||||||||||||||||||||||
Nine Months Ended September 30, 2016 |
||||||||||||||||||||||||||||||||||||
ALLOWANCE FOR CREDIT LOSSES: |
||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 338 | $ | 211 | $ | 582 | $ | 2,516 | $ | 1,229 | $ | 337 | $ | 208 | $ | 844 | $ | 6,265 | ||||||||||||||||||
Charge Offs |
(106 | ) | | (21 | ) | (93 | ) | (20 | ) | (236 | ) | | | (476 | ) | |||||||||||||||||||||
Recoveries |
23 | | 9 | 7 | 8 | 60 | | | 107 | |||||||||||||||||||||||||||
Provision (Credit) |
31 | 23 | 10 | 575 | (22 | ) | 199 | | 108 | 924 | ||||||||||||||||||||||||||
Other Non-interest expense related to unfunded |
| | | | | | 19 | | 19 | |||||||||||||||||||||||||||
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|
|||||||||||||||||||
Ending Balance |
$ | 286 | $ | 234 | $ | 580 | $ | 3,005 | $ | 1,195 | $ | 360 | $ | 227 | $ | 952 | $ | 6,839 | ||||||||||||||||||
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|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 35 | $ | | $ | | $ | 68 | $ | 22 | $ | | $ | | $ | | $ | 125 | ||||||||||||||||||
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|||||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 251 | $ | 234 | $ | 580 | $ | 2,937 | $ | 1,173 | $ | 360 | $ | 227 | $ | 952 | $ | 6,714 | ||||||||||||||||||
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|||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality |
$ | 1 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | 1 | |||||||||||||||||||
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|||||||||||||||||||
FINANCING RECEIVABLES: |
||||||||||||||||||||||||||||||||||||
Ending balance |
$ | 85,977 | $ | 59,458 | $ | 79,332 | $ | 369,721 | $ | 111,953 | $ | 30,616 | $ | | $ | | $ | 737,057 | ||||||||||||||||||
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|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 712 | $ | 132 | $ | | $ | 444 | $ | 118 | $ | | $ | | $ | | $ | 1,406 | ||||||||||||||||||
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|||||||||||||||||||
Ending balance: collectively evaluated for impairment |
$ | 85,265 | $ | 59,326 | $ | 79,332 | $ | 369,277 | $ | 111,835 | $ | 30,616 | $ | | $ | | $ | 735,651 | ||||||||||||||||||
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|||||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality |
$ | 265 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 265 | ||||||||||||||||||
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26
ITEM 1 | NOTES TO CONDESED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 5 EARNINGS PER SHARE
Basic earnings per share are calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to performance based measures. Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Application of the two-class method for participating securities results a more dilutive basic earnings per share as the participating securities are allocated the same amount of income as if they are outstanding for purposes of basic earnings per share. There is no additional potential dilution in calculating diluted earnings per share, therefore basic and diluted earnings per share are the same amounts. Other than the restricted stock plan, the Company has no other stock based compensation plans.
In Thousands | ||||||||||||||||
Three Months Ended | Year to Date Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Earnings per share |
||||||||||||||||
Net income |
$ | 3,222 | $ | 3,015 | $ | 9,284 | $ | 8,470 | ||||||||
Less: distributed earnings allocated to |
(12 | ) | (10 | ) | (33 | ) | (27 | ) | ||||||||
Less: undistributed earnings allocated to |
(19 | ) | (16 | ) | (54 | ) | (45 | ) | ||||||||
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|
|
|
|
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|
|||||||||
Net earnings available to common shareholders |
$ | 3,191 | $ | 2,989 | $ | 9,197 | $ | 8,398 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average common shares outstanding |
9,252,919 | 9,225,532 | 9,245,514 | 9,218,376 | ||||||||||||
Less: average unvested restricted shares (1) |
(88,596 | ) | (80,422 | ) | (87,074 | ) | (77,866 | ) | ||||||||
|
|
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|
|
|
|
|
|||||||||
Weighted average common shares outstanding (1) |
9,164,323 | 9,145,110 | 9,158,440 | 9,140,510 | ||||||||||||
|
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|
|
|||||||||
Basic earnings and diluted per share (1) |
$ | 0.35 | $ | 0.33 | $ | 1.00 | $ | 0.92 | ||||||||
|
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|
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|||||||||
(1) Share data has been adjusted to reflect a 2-for-1 stock split on September 20, 2017 |
|
NOTE 6 FAIR VALUE OF INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are managements estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.
27
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following assumptions and methods were used in estimating the fair value for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash, cash equivalents and federal funds sold approximate their fair values. Also included in this line item are the carrying amounts of interest-bearing deposits maturing within ninety days which approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.
Interest Bearing Time Deposits
Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Securities Available-for-sale
Fair values for securities, excluding Federal Home Loan Bank and Farmer Mac stock, are based on quoted market price, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Other Securities
The carrying value of Federal Home Loan Bank and Farmer Mac stock, listed as other securities, approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Loans Held for Sale
The carrying amount approximates fair value due to insignificant amount of time between origination and date of sale.
Loans, net
For those variable-rate loans that re-price frequently, and with no significant change in credit risk, fair values are based on carrying values. The fair values of the fixed rate and all other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
Deposits
The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair value for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
The carrying value of federal funds purchased and securities sold under agreements to repurchase approximates fair values.
Accrued Interest Receivable and Payable
The carrying amounts of accrued interest approximate their fair values.
28
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Off Balance Sheet Financial Instruments
Fair values for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter-parties credit standing.
FHLB Advances
Fair values or FHLB advances are estimated using discounted cash flow analysis based on the Companys current incremental borrowing rates for similar types or borrowing arrangements.
The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of September 30, 2017 and December 31, 2016 are reflected below.
(In Thousands) | ||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||
Carrying | Fair | |||||||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and Cash Equivalents |
$ | 49,104 | $ | 49,104 | $ | 49,104 | $ | | $ | | ||||||||||
Interest-bearing time deposits |
2,541 | 2,541 | | 2,541 | | |||||||||||||||
Securities - available-for-sale |
192,811 | 192,811 | 15,676 | 175,693 | 1,442 | |||||||||||||||
Other Securities |
3,717 | 3,717 | | | 3,717 | |||||||||||||||
Loans held for sale |
2,147 | 2,147 | | | 2,147 | |||||||||||||||
Loans, net |
788,335 | 790,893 | | | 790,893 | |||||||||||||||
Interest receivable |
5,106 | 5,106 | | | 5,106 | |||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Interest bearing Deposits |
$ | 519,822 | $ | 519,865 | $ | | $ | | $ | 519,865 | ||||||||||
Non-interest bearing Deposits |
189,963 | 189,963 | | 189,963 | | |||||||||||||||
Time Deposits |
193,581 | 194,342 | | | 194,342 | |||||||||||||||
|
|
|
|
|
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|
|
|
|
|||||||||||
Total Deposits |
$ | 903,366 | $ | 904,170 | $ | | $ | 189,963 | $ | 714,207 | ||||||||||
Federal Funds Purchased and Securities Sold Under Agreement to Repurchase |
$ | 35,550 | $ | 35,550 | $ | | $ | | $ | 35,550 | ||||||||||
Federal Home Loan Bank advances |
10,000 | 10,041 | | | 10,041 | |||||||||||||||
Interest payable |
285 | 285 | | | 285 |
[Remainder of this page intentionally left blank]
29
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
(In Thousands) | ||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||
Carrying | Fair | |||||||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and Cash Equivalents |
$ | 28,322 | $ | 28,322 | $ | 28,322 | $ | | $ | | ||||||||||
Interest-bearing time deposits |
1,915 | 1,918 | | 1,918 | | |||||||||||||||
Securities - available-for-sale |
218,527 | 218,527 | 24,775 | 192,334 | 1,418 | |||||||||||||||
Other Securities |
3,717 | 3,717 | | | 3,717 | |||||||||||||||
Loans held for sale |
2,055 | 2,055 | | | 2,055 | |||||||||||||||
Loans, net |
751,310 | 753,357 | | | 753,357 | |||||||||||||||
Interest receivable |
3,880 | 3,880 | | | 3,880 | |||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Interest bearing Deposits |
$ | 456,983 | $ | 456,983 | $ | | $ | | $ | 456,983 | ||||||||||
Non-interest bearing Deposits |
186,390 | 186,390 | | 186,390 | | |||||||||||||||
Time Deposits |
198,830 | 199,658 | | | 199,658 | |||||||||||||||
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|
|
|
|
|||||||||||
Total Deposits |
$ | 842,203 | $ | 843,031 | $ | | $ | 186,390 | $ | 656,641 | ||||||||||
Federal Funds Purchased and Securities Sold Under Agreement to Repurchase |
$ | 70,324 | $ | 70,324 | $ | | $ | | $ | 70,324 | ||||||||||
Federal Home Loan Bank advances |
10,000 | 10,041 | | | 10,041 | |||||||||||||||
Interest payable |
256 | 256 | | | 256 |
Fair Value Measurements
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities in active markets that the Company has the ability to access.
Available-for-sale securities, when quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. The Bank holds some local municipals that the Bank evaluates based on the credit strength of the underlying project. The fair value is determined by valuing similar credit payment streams at similar rates.
30
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Companys assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.
The following summarizes financial assets measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value:
Assets and Liabilities Measured at Fair Value on a Recurring Basis (In Thousands) |
||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||
Active Markets | Observable | Observable | ||||||||||
for Identical | Inputs | Inputs | ||||||||||
September 30, 2017 |
Assets (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets - (Securities Available-for-Sale) |
||||||||||||
U.S. Treasury |
$ | 15,676 | $ | | $ | | ||||||
U.S. Government agencies |
| 78,160 | | |||||||||
Mortgage-backed securities |
| 41,990 | | |||||||||
State and local governments |
| 55,543 | 1,442 | |||||||||
|
|
|
|
|
|
|||||||
Total Securities Available-for-Sale |
$ | 15,676 | $ | 175,693 | $ | 1,442 | ||||||
|
|
|
|
|
|
|||||||
Quoted Prices in | Significant | Significant | ||||||||||
Active Markets | Observable | Observable | ||||||||||
for Identical | Inputs | Inputs | ||||||||||
December 31, 2016 |
Assets (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets - (Securities Available-for-Sale) |
||||||||||||
U.S. Treasury |
$ | 24,775 | $ | | $ | | ||||||
U.S. Government agencies |
| 82,474 | | |||||||||
Mortgage-backed securities |
| 48,461 | | |||||||||
State and local governments |
| 61,399 | 1,418 | |||||||||
|
|
|
|
|
|
|||||||
Total Securities Available-for-Sale |
$ | 24,775 | $ | 192,334 | $ | 1,418 | ||||||
|
|
|
|
|
|
31
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table represents the changes in the Level 3 fair-value category of which unobservable inputs are relied upon as of September 30, 2017 and September 30, 2016.
(In Thousands) | ||||||||||||
Fair Value Measurements Using Significant | ||||||||||||
Unobservable Inputs (Level 3) | ||||||||||||
State and Local | State and Local | State and Local | ||||||||||
Governments | Governments | Governments | ||||||||||
Tax-Exempt | Taxable | Total | ||||||||||
Balance at January 1, 2017 |
$ | | $ | 1,418 | $ | 1,418 | ||||||
Change in Market Value |
| 24 | 24 | |||||||||
Payments & Maturities |
| | | |||||||||
|
|
|
|
|
|
|||||||
Balance at September 30, 2017 |
$ | | $ | 1,442 | $ | 1,442 | ||||||
|
|
|
|
|
|
|||||||
(In Thousands) | ||||||||||||
Fair Value Measurements Using Significant | ||||||||||||
Unobservable Inputs (Level 3) | ||||||||||||
State and Local | State and Local | State and Local | ||||||||||
Governments | Governments | Governments | ||||||||||
Tax-Exempt | Taxable | Total | ||||||||||
Balance at January 1, 2016 |
$ | 5,904 | $ | 1,448 | $ | 7,352 | ||||||
Change in Market Value |
| 93 | 93 | |||||||||
Payments & Maturities |
(5,904 | ) | | (5,904 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at September 30 , 2016 |
$ | | $ | 1,541 | $ | 1,541 | ||||||
|
|
|
|
|
|
Most of the Companys available-for-sale securities, including any bonds issued by local municipalities, have CUSIP numbers or have similar characteristics of those in the municipal markets, making them marketable and comparable as Level 2.
The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At September 30, 2017 and December 31, 2016, such assets consist primarily of collateral dependent impaired loans. Collateral dependent impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using managements best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals.)
32
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
At September 30, 2017 and December 31, 2016, fair value of collateral dependent impaired loans categorized as Level 3 was $562 and $576 thousand, respectively. The specific allocation for impaired loans was $123 and $135 thousand as of September 30, 2017 and December 31, 2016, respectively, which are accounted for in the allowance for loan losses (see Note 4).
Other real estate is reported at either the lower of the fair value of the real estate minus the estimated costs to sell the asset or the cost of the asset. The determination of fair value of the real estate relies primarily on appraisals from third parties. If the fair value of the real estate, minus the estimated costs to sell the asset, is less than the assets cost, the deficiency is recognized as a valuation allowance against the asset through a charge to expense. The valuation allowance is therefore increased or decreased, through charges or credits to expense, for changes in the assets fair value or estimated selling costs.
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:
Fair Value at | Range | |||||||||||
September 30, 2017 | Valuation Technique |
Unobservable Inputs |
(Weighted Average) | |||||||||
(In Thousands) | ||||||||||||
State and local government | $ | 1,442 | Discounted Cash Flow | Credit strength of underlying project or | 0-5%(3.59%) | |||||||
entity / Discount rate | ||||||||||||
Collateral dependent Impaired Loans | 562 | Collateral based measurements | Discount to reflect current market | 0-50%(18.00%) | ||||||||
conditions and ultimate collectability | ||||||||||||
Other real estate owned - residential |
| Appraisals | Discount to reflect current market | 0-20%(0.0%) | ||||||||
Other real estate owned - commercial |
266 | Appraisals | Discount to reflect current market | 0-20%(5.15%) | ||||||||
Range | ||||||||||||
Fair Value at | (Weighted | |||||||||||
December 31, 2016 | Valuation Technique |
Unobservable Inputs |
Average) | |||||||||
(In Thousands) | ||||||||||||
State and local government |
$ | 1,418 | Discounted Cash Flow | Credit strength of underlying project or | 0-5%(3.92%) | |||||||
entity / Discount rate | ||||||||||||
Collateral dependent Impaired Loans | 576 | Collateral based measurements | Discount to reflect current market | 0-50%(18.92%) | ||||||||
conditions and ultimate collectability |
||||||||||||
Other real estate owned - residential |
144 | Appraisals | Discount to reflect current market | 0-20%(0.51%) | ||||||||
Other real estate owned - commercial |
| Appraisals | Discount to reflect current market | 0-20%(0.0%) |
33
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table presents impaired loans and other real estate owned as recorded at fair value on September 30, 2017 and December 31, 2016:
Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2017 | ||||||||||||||||
(In Thousands) | ||||||||||||||||
Quoted Prices in Active | ||||||||||||||||
Markets for | Significant | Significant | ||||||||||||||
Balance at | Identical | Observable Inputs | Unobservable Inputs | |||||||||||||
September 30, 2017 | Assets (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Collateral dependent impaired loans |
$ | 562 | $ | | $ | | $ | 562 | ||||||||
Other real estate owned - residential |
| | | | ||||||||||||
Other real estate owned - commercial |
266 | | | 266 | ||||||||||||
|
|
|||||||||||||||
Total fair value |
$ | 828 | ||||||||||||||
|
|
|||||||||||||||
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2016 | ||||||||||||||||
(In Thousands) | ||||||||||||||||
Quoted Prices in Active | ||||||||||||||||
Markets for | Significant | Significant | ||||||||||||||
Balance at | Identical | Observable Inputs | Unobservable Inputs | |||||||||||||
December 31, 2016 | Assets (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Collateral dependent impaired loans |
$ | 576 | $ | | $ | | $ | 576 | ||||||||
Other real estate owned - residential |
144 | | | 144 | ||||||||||||
Other real estate owned - commercial |
| | | | ||||||||||||
|
|
|||||||||||||||
Total fair value |
$ | 720 | ||||||||||||||
|
|
NOTE 7 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company did not have any Federal Funds Purchased as of September 30, 2017 and had $17 million as of December 31, 2016. During the same time periods the company also had $35.5 million and $53.3 million in securities sold under agreement to repurchase.
September 30, 2017 | ||||||||||||||||||||
Remaining Contratual Maturity of the Agreements (In Thousands) | ||||||||||||||||||||
Overnight & Continuous |
Up to 30 days | 30-90 days | Greater Than 90 days |
Total | ||||||||||||||||
Federal funds purchased |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Repurchase Agreements; |
||||||||||||||||||||
US Treasury & agency securities |
$ | 14,737 | $ | | $ | | $ | 20,813 | $ | 35,550 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 14,737 | $ | | $ | | $ | 20,813 | $ | 35,550 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2016 | ||||||||||||||||||||
Remaining Contratual Maturity of the Agreements (In Thousands) | ||||||||||||||||||||
Overnight & Continuous |
Up to 30 days | 30-90 days | Greater Than 90 days |
Total | ||||||||||||||||
Federal funds purchased |
$ | 17,000 | $ | | $ | | $ | | $ | 17,000 | ||||||||||
Repurchase Agreements; |
||||||||||||||||||||
US Treasury & agency securities |
$ | 32,814 | $ | | $ | | $ | 20,510 | $ | 53,324 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 49,814 | $ | | $ | | $ | 20,510 | $ | 70,324 | |||||||||||
|
|
|
|
|
|
|
|
|
|
34
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 8 RECENT ACCOUNTING PRONOUNCEMENTS
In January 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-01 Financial InstrumentsOverall (Subtopic 825-10)Recognition and Measurement of Financial Assets and Financial Liabilities.ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in a accordance with the fair value option for financial instruments. ASU 2016-01 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company is assessing the impact of ASU 2016-01 on its accounting and disclosures.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842).ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesnt convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures and currently has very limited exposure to the rule.
In June 2016, FASB issued 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organizations portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration
The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently gathering information, reviewing possible vendors and has formed a committee to formulate the methodology to be used. Most importantly, the Company is gathering as much data as possible to enable review scenarios and determine which calculations will produce the most reliable results. . At this time an additional external advisor has not been contracted with though the Bank has been reviewing the use of external software.
35
ITEM 1 | NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued) |
NOTE 8 RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230) Restricted Cash.ASU-2016-18 provides amendments to cash flow statement classification and presentation to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied using a retrospective transition method to each period presented. Early adoption is permitted including adoption in an interim period. The Company has assessed ASU 2016-18 and does not expect a material impact on its accounting and disclosures as it currently does not have what would be considered Restricted cash at this time.
In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805) Clarifying the Definition of a Business.ASU 2017-01 provides amendments to clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and adoption is permitted under certain circumstances. the company has assessed ASU 2017-01 and does not expect it to have a material impact on its accounting and disclosures.
In January 2017, the FASB issued ASU No. 2017-04 Intangibles Goodwill and other (Topic 350) Simplifying the Test for Goodwill Impairment These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company does not expect ASU 2017-04 to have a material impact on its accounting disclosures, as goodwill testing has been completed annually without any impairment concerns.
In March 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-08 Receivables Nonrefundable Fees and Other Cost (Subtopic 310-20), Premium Amortization on Purchased Callable Debit Securities. These amendments shorten the amortization period for certain callable debit securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does have exposure and is assessing the impact of ASU 2017-08 and may choose early adoption. Overall, the Company does not expect it to have a material impact on its accounting.
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09 Compensation Stock Compensation (Topic 718), Scope of Modification Accounting.These amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 7l8. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a prospective basis to an award modified on or after the adoption date. The Company adopted ASU 2016-09 on January 1, 2017. ASU 2016-09 also requires that companies make an accounting policy election regarding forfeitures, to either estimate the number of awards that are expected to vest or account for them when they occur. The impact of this change and that of the remaining provisions of ASU 2016-09 did not have a significant impact on our financial statements.
36
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
The Company continued to obtain greater visibility with the investment community throughout the third quarter of 2017. On July 26, 2017, the Company rang the opening bell at the NASDAQ ceremony in New York City. The Company is listed under the symbol, FMAO. Being listed on the NASDAQ Capital Market and included in the Russell 3000 Index have caused the liquidity of the stock to improve as measured by the increased average daily volume and may have contributed to a higher market value than before these events took place. The stock price rose to an unprecedented $87.00 per share or $43.50 per share adjusted for the stock split. With the increased market value, the associated expense of the 2017 restricted stock awards will be higher than past years. On August 18, 2017, the Companys Board of Directors authorized a two-for-one stock split payable on September 20, 2017 for shareholders of record on September 5, 2017. The Company believes these steps will help with positioning for future strategic opportunities while benefiting shareholders with greater liquidity and enhanced ease of trading.
The Company continued to emphasize the importance of loan growth to overall profitability for the current year. Third quarter loan growth performance for 2017 was not as strong as the previous third quarter 2016. It did represent a continuation of 2016s milestone year. The increases in rate by the Federal Reserve which began in December 2016 provided the stimulus for the prime lending rate to be increased by similar amounts. Many of the Banks variable loans have now had spread adjustments raising the base rates equivalent to their floors or above. This has resulted in improved asset yield and when coupled with loan growth has increased interest income.
After having a wet planting season throughout the Companys market area, the weather changed to an erratic rainfall pattern. As we enter the harvest season, crop production will likely be quite variable area to area. The Bank is not overly concerned as our clients remain well capitalized and we have only seen slight decreases in land values.
Unemployment rates remain low throughout the market area and competition for employees is high. Originations of residential mortgage loans slowed for the third quarter 2017 as compared to third quarter 2016.
Commercial activity remains similar to slightly better than a year ago. Businesses continue to look for additional labor to meet production requirements. The Company continues to see loan growth on the commercial side as clients continue to look for new opportunities as well as referring potential clients to the Company.
Loan growth drove the improvement in net interest income as compared to last year. Net income after taxes ended the third quarter 2017 6.9% above third quarter 2016. The 11.2% increase in net interest income after provision for loan losses was offset by a 9.6% decrease in noninterest income and a 6.3% increase in noninterest expenses which netted a 6.1% increase in earnings per share for the 2017 third quarter as compared to 2016s third quarter.
NATURE OF ACTIVITIES
Farmers & Merchants Bancorp, Inc. (the Company) is a financial holding company incorporated under the laws of Ohio in 1985. Our subsidiaries are, The Farmers & Merchants State Bank (the Bank), a community bank operating in Northwest Ohio since 1897 and Farmers & Merchants Risk Management, Inc., a captive insurance company formed in December 2014 and is located in Nevada. We report our financial condition and net income on a consolidated basis and we have only one segment.
Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our telephone number is (419) 446-2501. The Bank operates twenty-five full service banking offices throughout Northwest Ohio and Northeast Indiana.
The Bank opened an additional office during April of 2016 in Fort Wayne, Indiana and the office is located within the corporation limits of Huntertown, with a Fort Wayne address. The Bank has continued its expansion strategy and the new office is expected to provide new growth opportunities.
The Bank opened its twenty-fourth location in Bowling Green, Ohio in the fourth quarter 2016. It is the second leased office and was renovated to meet the Banks needs before opening.
37
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
NATURE OF ACTIVITIES (Continued)
The Farmers & Merchants State Bank engages in general commercial banking and savings business including commercial, agricultural and residential mortgage, consumer and credit card lending activities. The largest segment of the lending business relates to commercial, both real estate and non-real estate. The type of commercial business ranges from small business to multi-million dollar companies. The loans are a reflection of business located within the Banks market area. Because the Banks offices are located in Northwest Ohio and Northeast Indiana, a substantial amount of the loan portfolio is comprised of loans made to customers in the farming industry for such items as farm land, farm equipment, livestock and operating loans for seed, fertilizer, and feed. Other types of lending activities include loans for home improvements, and loans for the purchase of autos, trucks, recreational vehicles, motorcycles, and other consumer goods.
The Bank also provides checking account services, as well as savings and time deposit services such as certificates of deposits. In addition, Automated Teller Machines (ATMs) are provided at most branch locations along with other independent locations such as major employers and hospitals in the market area. The Bank has custodial services for Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs). The Bank provides on-line banking access for consumer and business customers. For consumers, this includes bill-pay, on-line statement opportunities and mobile banking. For business customers, it provides the option of electronic transaction origination such as wire and Automated Clearing House (ACH) file transmittal. In addition, the Bank offers remote deposit capture or electronic deposit processing and merchant credit card services. Mobile banking was added in 2012 and has been widely accepted and used by consumers. Over the past couple of years, the Bank has updated its consumer offerings with Secure and Pure checking in 2014 and with KASASA Cash Back in 2015. During the second quarter 2017, new business checking products were announced and existing business accounts were converted to one of three new products, Business Essential, Edge or Elite. The new products provided customers with new options to bundle services and for the Bank to utilize the full relationship to determine pricing. This was the next step of implementation for the Banks earn to free strategic initiative. Upgrades to our digital products and services continue to occur in both retail and business lines.
The Bank has established underwriting policies and procedures which facilitate operating in a safe and sound manner in accordance with supervisory and regulatory guidance. Within this sphere of safety and soundness, the Banks practice has been to not promote innovative, unproven credit products which may not be in the best interest of the Bank or its customers. The Bank does offer a hybrid mortgage loan. Hybrid loans are loans that start out as a fixed rate mortgage but after a set number of years automatically adjust to an adjustable rate mortgage. The Bank offers a three year fixed rate mortgage after which the interest rate will adjust annually. The majority of the Banks adjustable rate mortgages are of this type. In order to offer longer term fixed rate mortgages, the Bank does participate in the Freddie Mac, Farmer
Mac and Small Business Lending programs. The Bank also normally retains the servicing rights on these partially or 100% sold loans. In order for the customer to participate in these programs they must meet the requirements established by those agencies. In addition, the Bank does sell some of its longer term fixed rate agricultural mortgages into the secondary market with the aid of a broker.
The Bank does not have a program to fund sub-prime loans. Sub-prime loans are characterized as a lending program or strategy that targets borrowers who pose a significantly higher risk of default than traditional retail banking customers.
All loan requests are reviewed as to credit worthiness and are subject to the Banks underwriting guidelines as to secured versus unsecured credit. Secured loans are in turn subject to loan to value (LTV) requirements based on collateral types as set forth in the Banks Loan Policy. In addition, credit scores of principal borrowers are reviewed and an approved exception from an additional officer is required should a credit score not meet the Banks Loan Policy guidelines.
38
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
NATURE OF ACTIVITIES (Continued)
Consumer Loans:
| Maximum loan to value (LTV) for cars, trucks and light trucks vary from 90% to 110% depending on whether direct or indirect. |
| Loans above 100% are generally due to additional charges for extended warranties and/or insurance coverage periods for wage or death. |
| Boats, campers, motorcycles, RVs and Motor Coaches range from 80%-90% based on age of vehicle. |
| 1st or 2nd mortgages on 1-4 family homes range from 75%-90% with in-house first real estate mortgages requiring private mortgage insurance on those exceeding 80% LTV. |
| Raw land LTV maximum ranges from 65%-75% depending on whether or not the property has been improved. |
Commercial/Agriculture/Real Estate:
| Maximum LTVs range from 70%-80% depending on type. |
| Accounts Receivable: Up to 80% LTV less retainages and greater than 90 days. |
Inventory:
| Agriculture: |
Livestock and grain up to 80% LTV, crops (insured) up to 75% and Warehouse Receipts up to 87%.
| Commercial: |
Maximum LTV of 50% on raw and finished goods.
| Floor plan: |
o New/used vehicles to 100% of wholesale.
o New/Used recreational vehicles and manufactured homes to 80% of wholesale.
Equipment:
| New not to exceed 80% of invoice, used NTE 50% of listed book or 75% of appraised value. |
| Restaurant equipment up to 35% of market value. |
| Heavy trucks, titled trailers up to NTE 75% LTV and aircraft up to 75% of appraised value. |
F&M Investment Services, the brokerage department of the Bank, opened for business in April, 1999. Securities are offered through Raymond James Financial Services, Inc.
In December of 2014, the Company became a financial holding company within the meaning of the Bank Holding Company Act of 1956 as amended (the Act), in order to provide the flexibility to take advantage of the expanded powers available to a financial holding company under the Act. Our subsidiary bank is in turn regulated and examined by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation. The activities of our bank subsidiary are also subject to other federal and state laws and regulations. The Company also formed a captive insurance company (the captive) in December 2014 which is located in Nevada and regulated by the State of Nevada Division of Insurance.
The Banks primary market includes communities located in the Ohio counties of Defiance, Fulton, Henry, Lucas, Williams, Wood and in the Indiana counties of Allen, DeKalb and Steuben. In our banking activities, we compete directly with other commercial banks, credit unions, farm credit services, and savings and loan institutions in each of our operating localities. In a number of our locations, we compete against entities which are much larger than us. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided.
At September 30, 2017, we had 272 full time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive benefit program, some of which are contributory. We consider our employee relations to be good.
REGULATORY DEVELOPMENTS
The Bank remains attentive to the current regulatory environment in light of the risk-based approach regulatory agencies use to conduct examinations. The degree of regulatory changes and the complexity of the recent new rules, which lack clarity or guidance on various provisions, and have resulted in uncertainties regarding liability, pose an increased overall risk of noncompliance. Various significant mortgage rules require ongoing monitoring by means of testing, validation of results, additional training, and further research or consultation to assist with ensuring compliance.
39
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
REGULATORY DEVELOPMENTS (Continued)
The Bank is subject to numerous laws, rules, regulations and guidance which include, but are not limited to, the following significant matters: deposit insurance coverage; equal credit opportunity; fair lending; community reinvestment; anti-money laundering; suspicious activity reporting; identity theft identification and prevention; protections for military members and their dependents; flood disaster protection; integrated mortgage disclosures; mortgage servicing rights; legal lending limits; electronic fund transfers; consumer privacy; and unfair and deceptive acts and practices. Extensive training and training resources are necessary to develop and maintain expertise on the various regulatory matters.
New Military Lending Act (MLA) requirements have been implemented. The MLA is intended to protect active duty military service members and their dependents from potentially abusive lending practices. These new requirements resulted in expanded coverage of more types of loans. Safe harbor methods to identify covered borrowers who are military service members or their dependents are utilized. Coverage of credit card accounts becomes effective on October 3, 2017.
The Company has implemented Basel III capital rules which began to be phased in for the Company on January 1, 2015. These rules may impact the ability of some financial institutions to pay dividends, though the Company believes itself to be able to maintain its strong capital position and not be limited in that regard.
With regard to all regulatory matters, the Bank remains committed in making good faith efforts to comply with technical requirements of the laws, rules, regulations, and guidance from both federal and state agencies which govern its activities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and the Company follows general practices within the financial services industry in which it operates. At times the application of these principles requires management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements and accompanying notes.
These assumptions, estimates and judgments are based on information available as of the date of the financial statements. As this information changes, the financial statements could reflect different assumptions, estimates and judgments. Certain policies inherently have a greater reliance on assumptions, estimates and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Examples of critical assumptions, estimates and judgments are when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not required to be recorded at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event. These policies, along with the disclosures presented in the notes to the condensed consolidated financial statements and in the management discussion and analysis of the financial condition and results of operations, provide information on how significant assets and liabilities are valued and how those values are determined for the financial statements. Based on the valuation techniques used and the sensitivity of financial statement amounts to assumptions, estimates, and judgments underlying those amounts, management has identified the determination of the ALLL, the valuation of its Mortgage Servicing Rights and the valuation of reals estate acquired through or in lieu of; loan foreclosures (OREO Property) as the accounting areas that require the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.
OREO Property held for sale and is initially recorded at fair value at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell.
Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and a write-down is recorded by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell.
40
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (Continued)
The net income from operations of foreclosed real estate held for sale is reported either in non-interest income or non-interest expense depending upon whether the property is in a gain or loss position overall. At September 30, 2017 OREO property holdings were $615 thousand. OREO totaled $774 thousand and $1.4 million as of December 31, 2016 and September 30, 2016 respectively.
The ALLL and ACL represents managements estimate of probable credit losses inherent in the Banks loan portfolio, unfunded loan commitments, and letters of credit at the report date. The ALLL methodology is regularly reviewed for its appropriateness and is approved annually by the Board of Directors. This written methodology is consistent with Generally Accepted Accounting Principles which provides for a consistently applied analysis.
The Banks methodology provides an estimate of the probable credit losses either by calculating a specific loss per credit or by applying a composite of historical factors over a relevant period of time with current internal and external factors which may affect credit collectability. Such factors which may influence estimated losses are the conditions of the local and national economy, local unemployment trends, and abilities of lending staff, valuation trends of fixed assets, and trends in credit delinquency, classified credits, and credit losses.
Inherent in most estimates is imprecision. The Banks ALLL provides a margin for imprecision with an unallocated portion. Bank regulatory agencies and external auditors periodically review the Banks methodology and adequacy of the ALLL. Any required changes in the ALLL or loan charge-offs by these agencies or auditors may have a material effect on the ALLL.
The Bank is also required to estimate the value of its mortgage servicing rights. The Banks mortgage servicing rights relating to fixed rate single-family mortgage loans that is has sold without recourse but services for others for a fee represent an asset on the Banks balance sheet. The valuation is completed by an independent third party.
The expected and actual rates of mortgage loan prepayments are the most significant factors driving the potential for the impairment of the value of mortgage servicing assets. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced.
The Banks mortgage servicing rights relating to loans serviced for others represent an asset. This asset is initially capitalized and included in other assets on the Companys consolidated balance sheet. The mortgage servicing rights are then amortized against noninterest income in proportion to, and over the period of the estimated future net servicing income of the underlying mortgage servicing rights using the level yield method. The amortization thereof is recorded in non-interest expense. There are a number of factors, however, that can affect the ultimate value of the mortgage servicing rights to the Bank. The expected and actual rates of mortgage loan prepayments are the most significant factors driving the potential for the impairment of the value of mortgage servicing assets. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced, meaning that the present value of the mortgage servicing rights is less than the carrying value of those rights on the Banks balance sheet. Therefore, in an attempt to reflect an accurate expected value to the Bank of the mortgage servicing rights, the Bank receives a valuation of its mortgage servicing rights from an independent third party. The independent third partys valuation of the mortgage servicing rights is based on relevant characteristics of the Banks loan servicing portfolio, such as loan terms, interest rates and recent national prepayment experience, as well as current national market interest rate levels, market forecasts and other economic conditions. For purposes of determining impairment, the mortgage servicing assets are stratified into like groups based on loan type, term, new versus seasoned and interest rate. Management, with the advice from its third party valuation firm, reviewed the assumptions related to prepayment speeds, discount rates, and capitalized mortgage servicing income on a quarterly basis. Changes are reflected in the following quarters analysis related to the mortgage servicing asset. In addition, based upon the independent third partys valuation of the Banks mortgage servicing rights, management then establishes a valuation allowance by each strata, if necessary, to quantify the likely impairment of the value of the mortgage servicing rights to the Bank. The estimates of prepayment speeds and discount rates are inherently uncertain, and different estimates could have a material impact on the Banks net income and results of operations. The valuation allowance is evaluated and adjusted quarterly by management to reflect changes in the fair value of the underlying mortgage servicing rights based on market conditions. The accuracy of these estimates and assumptions by management and its third party valuation specialist can be directly tied back to the fact that management has only been required to record minor valuation allowances through its income statement over time based upon the valuation of each stratum of servicing rights.
41
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (Continued)
For more information regarding the estimates and calculations used to establish the ALLL and the value of Mortgage Servicing Rights, please see Note 1 to the consolidated financial statements provided herewith.
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company plans to continue in its growth mode in 2017 led by loan growth from within our newer markets. The Bank is focused on funding the loan growth with the least expensive source. Growing deposits will also be a focus especially in our newer business checking product lines. These products bundle services and enable customers to choose their desired levels services and offer pricing based on a full relationship and not on just the single account. The Bank was able to grow deposits in the last quarter of 2016 and continued to do so through the first nine months of 2017. The Bank also decreased the level of pledged securities by offering the Insured Cash Sweep, ICS product accessed through the Promontory network of financial institutions. This has provided more availability for sales of securities by the Bank if warranted to fund loan growth.
Liquidity in terms of cash and cash equivalents ended almost $20.8 million higher as of September 30, 2017 than it was at yearend December 31, 2016. A decrease in securities held along with increased deposits funded the $37.0 million increase in net loans since yearend 2016. The largest loan growth occurred in commercial real estate and commercial and industrial portfolios. Agricultural, agricultural real estate and consumer portfolios also experienced increases. The largest decline was in consumer real estate which was due to sales into the secondary market outpacing new originations.
In comparing to the same prior year period, the September 30, 2017 (net of deferred fees and cost) loan balances of $795.2 million accounted for a $58.1 million or 7.9% increase when compared to 2016s $737.1 million. The year over year improvement was made up of a 17.1% increase in commercial and industrial loans, a 6.5% increase in commercial real estate loans, a 17.2% increase in consumer loans and lastly a combined increase in agricultural related loans (comprised of a 6.9% increase in agricultural real estate loans and 10.0% increase in non-real estate agricultural loans). Consumer real estate loans decreased by 2.4% while Industrial Development Bonds (IDBs) increased 11.3%. The Company credits the growth to a strong team of lenders focused on providing customers valuable localized services and thereby increasing our market share.
The chart below shows the breakdown of the loan portfolio by category as of September 30 for the last three years, net of deferred fees and costs.
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(In Thousands) |
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September-17 | September-16 | September-15 | ||||||||||
Amount | Amount | Amount | ||||||||||
Consumer Real Estate |
$ | 83,875 | $ | 85,977 | $ | 87,217 | ||||||
Agricultural Real Estate |
63,571 | 59,458 | 54,950 | |||||||||
Agricultural |
87,239 | 79,332 | 73,310 | |||||||||
Commercial Real Estate |
393,913 | 369,721 | 301,342 | |||||||||
Commercial and Industrial |
124,165 | 106,061 | 84,465 | |||||||||
Consumer |
35,887 | 30,616 | 26,458 | |||||||||
Industrial Development Bonds |
6,555 | 5,892 | 6,649 | |||||||||
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Total Loans, net |
$ | 795,205 | $ | 737,057 | $ | 634,391 | ||||||
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While the security portfolio has been utilized to fund loan growth for the last three years, additional sources have been cultivated during 2016 and 2017. The security portfolio decreased $25.7 million in the first nine months 2017 from yearend 2016. The amount of pledged investment securities decreased significantly by $44.9 million as compared to yearend and $108.9 million as compared to September 30, 2016. This was accomplished by utilizing Promontorys Insured Cash Sweep, ICS, product to protect Ohio public fund depositors and commercial sweep customers with FDIC coverage rather than pledge securities. This in turn improves liquidity with the additional option of selling unpledged investment securities if needed to fund loan growth or other initiatives. As of September 30, 2017, pledged investment securities totaled $84.5 million. The current portfolio is in a net unrealized loss position of $1.1 million.
42
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (Continued)
With the exception of stock, which is shown as other securities, all of the Companys security portfolio is categorized as available for sale and as such is recorded at fair value.
Management feels confident that liquidity needs for future growth can be met through additional maturities and/or sales from the security portfolio, increased deposits and additional borrowings. For short term needs, the Bank has $114.8 million of unsecured borrowing capacity through its correspondent banks.
Overall total assets grew 3.2% since yearend 2016 and 4.4% since September 30, 2016. The largest growth was in cash and cash equivalents followed by the loan portfolios.
Deposits accounted for the largest growth within liabilities, up 7.3% or $61.2 million since yearend and 7.8% or $65.3 million over September 30, 2016 balances. Core deposits continue to drive the increase which provided the greatest benefit for both lower cost of funds and the opportunity to generate additional noninterest income. Compared to previous year and last quarter, a movement of funds from securities sold under agreement to repurchase into interest bearing NOW accounts occurred due to utilization of the ICS product previously mentioned. This growth aided the increased liquidity position and funded the loan growth for the periods along with usage of purchased Federal Funds for daily borrowings.
Shareholders equity increased by $7.3 million as of the third quarter of 2017 compared to yearend 2016, as earnings exceeded dividend declarations. Accumulated other comprehensive loss decreased in loss position $1.3 million which encompassed the shift of $47 thousand from unrealized gain to realized gain with the sale of securities since yearend 2016. Dividends paid for the quarter increased from the previous quarter and dividends declared also increased 4.0%. Compared to September 30, 2016, shareholders equity increased 4.7% or $5.9 million. Record profits during 2016 were offset by a change in accumulated other comprehensive income related to the available for sale securities portfolio from a gain of $1.6 million to a loss position of $693 thousand as of September 30, 2016 and 2017, respectively. Profits are also higher in 2017 than 2016 by $814 thousand.
Basel III regulatory capital requirements became effective in 2016. The Bank and Company include a capital conservation buffer as a part of the transition provision. For calendar year 2016, the applicable required capital conservation buffer percentage of 0.625% was the base above which institutions avoid limitations on distributions and certain discretionary bonus payments. For the calendar 2017, the applicable required capital conservation buffer percentage is 1.25%. The total buffer requirement will increase to 2.5% for calendar year 2019. As of September 30, 2017, the Company and the Bank are both positioned well above the 2019 requirement.
The Company continues to be well-capitalized in accordance with Federal regulatory capital requirements as the capital ratios below show:
Tier I Leverage Ratio |
12.02 | % | ||
Risk Based Capital Tier I |
14.71 | % | ||
Total Risk Based Capital |
15.51 | % | ||
Stockholders Equity/Total Assets |
12.19 | % | ||
Capital Conservation Buffer |
7.51 | % |
43
ITEM 2 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Comparison of Results of Interest Earnings and Expenses for three month periods ended September 30, 2017, 2016 and June 30, 2017.
When comparing third quarter 2017 to third quarter 2016, average loan balances grew $53.5 million. This represented a strong 7.3% increase in a one year time period. Interest income on loan balances also experienced an increase of $918 thousand as compared to the same quarter ended September 30, 2016.
In terms of comparison to second quarter 2017, loan interest income was $427 thousand higher in third quarter 2017. The three months of third quarter 2017 had more days at 92 than second quarter had with 91.
The higher levels of loan interest income helped to offset the loss of interest income from the available-for-sale securities portfolio, which decreased in average balances, whether comparing to last quarter or the previous year. The decreased balances were expected as available for sale securities were used as a source of funds for loan growth. The income associated with the security portfolio decreased by $23 thousand in comparison to second quarter 2017 and increased $5 thousand in comparison to the same third quarter 2016. The benefit of the increase in interest income from loans was well above the loss of interest income from the smaller security portfolio.
Overall, interest income for the quarter comparisons was higher for third quarter 2017 by 9.9% or $945 thousand as to third quarter 2016 and higher by 4.1% or $411 thousand as to second quarter 2017.
In terms of annualized yield, for the quarter ended September 30, 2017, it was 4.24% which compares to last quarters 4.11% and a year ago third quarter ended September 30, 2016 of 4.03%. The following chart demonstrates the value of increased loan balances in the balance sheet mix, even if offset by lower balances in the securities portfolio. The yields on tax-exempt securities and the portion of the tax