fmao-10q_20180930.htm

 

 

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, 2018

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

Registrant’s 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 every Interactive Data File required to be submitted 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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

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

9,285,261

Class

Outstanding as of October 19, 2018

 

 

1


 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10Q

 

FARMERS & MERCHANTS BANCORP, INC.

INDEX

 

 

Form 10-Q Items

 

Page

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item   1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets-
September 30, 2018 and December 31, 2017

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income & Comprehensive Income -
Three and Nine Months Ended September 30, 2018 and September 30, 2017

4-5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 2018 and September 30, 2017

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7-36

 

 

 

 

 

Item   2.

Management's Discussion and Analysis of Financial Condition
and Results of Operations

37-52

 

 

 

 

 

Item   3.

Qualitative and Quantitative Disclosures About Market Risk

53

 

 

 

 

 

Item   4.

Controls and Procedures

54

 

 

 

 

 

PART II.

OTHER INFORMATION

54

 

 

 

 

 

Item   1.

Legal Proceedings

54

 

 

 

 

 

Item 1A.

Risk Factors

54

 

 

 

 

 

Item   2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

 

 

Item   3.

Defaults Upon Senior Securities

54

 

 

 

 

 

Item   4.

Mine Safety Disclosures

54

 

 

 

 

 

Item   5.

Other Information

54

 

 

 

 

 

Item   6.

Exhibits

55

 

 

 

 

 

Signatures

 

56

 

 

 

 

 

101.INS

XBRL Instance Document (1)

 

 

101.SCH

XBRL Taxonomy Extension Scheme Document (1)

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (1)

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (1)

 

 

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

 

 

 

(in thousands of dollars)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

28,782

 

 

$

33,480

 

Federal funds sold

 

 

939

 

 

 

987

 

Total cash and cash equivalents

 

 

29,721

 

 

 

34,467

 

Interest-bearing time deposits

 

 

4,019

 

 

 

4,018

 

Securities - available-for-sale

 

 

183,075

 

 

 

196,398

 

Other securities, at cost

 

 

3,717

 

 

 

3,717

 

Loans held for sale

 

 

1,679

 

 

 

1,221

 

Loans, net

 

 

831,943

 

 

 

816,156

 

Premises and equipment

 

 

22,117

 

 

 

21,726

 

Goodwill

 

 

4,074

 

 

 

4,074

 

Mortgage servicing rights

 

 

2,373

 

 

 

2,299

 

Other real estate owned

 

 

717

 

 

 

674

 

Bank owned life insurance

 

 

14,799

 

 

 

14,523

 

Other assets

 

 

9,778

 

 

 

7,736

 

Total Assets

 

$

1,108,012

 

 

$

1,107,009

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

197,088

 

 

$

199,114

 

Interest-bearing

 

 

 

 

 

 

 

 

NOW accounts

 

 

314,873

 

 

 

298,711

 

Savings

 

 

230,306

 

 

 

233,949

 

Time

 

 

186,592

 

 

 

187,566

 

Total deposits

 

 

928,859

 

 

 

919,340

 

Federal funds purchased and securities sold under agreements to

   repurchase

 

 

27,026

 

 

 

39,495

 

Federal Home Loan Bank (FHLB) advances

 

 

5,000

 

 

 

5,000

 

Dividend payable

 

 

1,287

 

 

 

1,193

 

Accrued expenses and other liabilities

 

 

6,493

 

 

 

7,844

 

Total liabilities

 

 

968,665

 

 

 

972,872

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock - No par value 20,000,000 shares authorized; issued and

   outstanding 10,400,000 shares 9/30/18 and 12/31/17

 

 

10,589

 

 

 

11,546

 

Treasury stock - 1,114,739 shares 9/30/18, 1,134,120 shares 12/31/17

 

 

(12,409

)

 

 

(12,160

)

Retained earnings

 

 

146,072

 

 

 

136,577

 

Accumulated other comprehensive loss

 

 

(4,905

)

 

 

(1,826

)

Total stockholders' equity

 

 

139,347

 

 

 

134,137

 

Total Liabilities and Stockholders' Equity

 

$

1,108,012

 

 

$

1,107,009

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements.

 

Note: The December 31, 2017, 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

(Unaudited)

 

 

(in thousands of dollars, except per share data)

 

 

(in thousands of dollars, except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

10,725

 

 

$

9,547

 

 

$

31,348

 

 

$

27,367

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government agencies

 

 

613

 

 

 

605

 

 

 

1,848

 

 

 

1,870

 

Municipalities

 

 

275

 

 

 

290

 

 

 

845

 

 

 

905

 

Dividends

 

 

56

 

 

 

49

 

 

 

164

 

 

 

135

 

Federal funds sold and other

 

 

84

 

 

 

44

 

 

 

221

 

 

 

103

 

Total interest income

 

 

11,753

 

 

 

10,535

 

 

 

34,426

 

 

 

30,380

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,611

 

 

 

1,161

 

 

 

4,319

 

 

 

3,289

 

Federal funds purchased and securities sold under agreements to repurchase

 

 

134

 

 

 

135

 

 

 

376

 

 

 

366

 

Borrowed funds

 

 

20

 

 

 

37

 

 

 

60

 

 

 

110

 

Total interest expense

 

 

1,765

 

 

 

1,333

 

 

 

4,755

 

 

 

3,765

 

Net Interest Income - Before Provision for Loan Losses

 

 

9,988

 

 

 

9,202

 

 

 

29,671

 

 

 

26,615

 

Provision for Loan Losses

 

 

47

 

 

 

99

 

 

 

219

 

 

 

197

 

Net Interest Income After Provision

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For Loan Losses

 

 

9,941

 

 

 

9,103

 

 

 

29,452

 

 

 

26,418

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer service fees

 

 

1,392

 

 

 

1,320

 

 

 

4,323

 

 

 

4,131

 

Other service charges and fees

 

 

1,097

 

 

 

1,134

 

 

 

3,149

 

 

 

3,214

 

Net gain on sale of loans

 

 

184

 

 

 

181

 

 

 

617

 

 

 

600

 

Net gain on sale of available-for-sale securities

 

 

10

 

 

 

-

 

 

 

10

 

 

 

47

 

Total noninterest income

 

 

2,683

 

 

 

2,635

 

 

 

8,099

 

 

 

7,992

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages

 

 

3,391

 

 

 

3,236

 

 

 

9,926

 

 

 

9,374

 

Employee benefits

 

 

1,029

 

 

 

943

 

 

 

3,013

 

 

 

2,648

 

Net occupancy expense

 

 

478

 

 

 

434

 

 

 

1,306

 

 

 

1,221

 

Furniture and equipment

 

 

588

 

 

 

493

 

 

 

1,660

 

 

 

1,456

 

Data processing

 

 

364

 

 

 

300

 

 

 

1,000

 

 

 

919

 

Franchise taxes

 

 

243

 

 

 

226

 

 

 

710

 

 

 

676

 

ATM expense

 

 

327

 

 

 

256

 

 

 

972

 

 

 

853

 

Advertising

 

 

236

 

 

 

181

 

 

 

669

 

 

 

548

 

Net loss on sale of other assets owned

 

 

1

 

 

 

13

 

 

 

17

 

 

 

27

 

FDIC assessment

 

 

81

 

 

 

82

 

 

 

249

 

 

 

247

 

Mortgage servicing rights amortization

 

 

84

 

 

 

85

 

 

 

264

 

 

 

266

 

Other general and administrative

 

 

1,304

 

 

 

1,108

 

 

 

3,618

 

 

 

3,291

 

Total noninterest expense

 

 

8,126

 

 

 

7,357

 

 

 

23,404

 

 

 

21,526

 

Income Before Income Taxes

 

 

4,498

 

 

 

4,381

 

 

 

14,147

 

 

 

12,884

 

Income Taxes

 

 

623

 

 

 

1,159

 

 

 

2,391

 

 

 

3,600

 

Net Income

 

$

3,875

 

 

$

3,222

 

 

$

11,756

 

 

$

9,284

 

Basic and Diluted Earnings Per Share

 

$

0.42

 

 

$

0.35

 

 

$

1.27

 

 

$

1.01

 

Dividends Declared

 

$

0.14

 

 

$

0.13

 

 

$

0.41

 

 

$

0.37

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements

4


 

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

(in thousands of dollars)

 

 

(in thousands of dollars)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Net Income

 

$

3,875

 

 

$

3,222

 

 

$

11,756

 

 

$

9,284

 

Other Comprehensive Income (Loss) (Net of Tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on available-for-sale

   securities

 

 

(617

)

 

 

(472

)

 

 

(3,432

)

 

 

1,984

 

Reclassification adjustment for gain on sale of

   available-for-sale securities

 

 

(10

)

 

 

-

 

 

 

(10

)

 

 

(47

)

Net unrealized gain (loss) on available-for-sale

   securities

 

 

(627

)

 

 

(472

)

 

 

(3,442

)

 

 

1,937

 

Tax expense (benefit)

 

 

(132

)

 

 

(160

)

 

 

(723

)

 

 

659

 

Other comprehensive income (loss)

 

 

(495

)

 

 

(312

)

 

 

(2,719

)

 

 

1,278

 

Comprehensive Income

 

$

3,380

 

 

$

2,910

 

 

$

9,037

 

 

$

10,562

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements

 

5


 

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

(in thousands of dollars)

 

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

11,756

 

 

$

9,284

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,411

 

 

 

1,426

 

Amortization on available-for-sale securities, net

 

 

743

 

 

 

843

 

Amortization of servicing rights

 

 

264

 

 

 

266

 

Amortization of core deposit intangible

 

 

126

 

 

 

203

 

Compensation expense related to stock awards

 

 

497

 

 

 

346

 

Deferred income taxes

 

 

(723

)

 

 

1,116

 

Provision for loan loss

 

 

219

 

 

 

197

 

Gain on sale of loans held for sale

 

 

(617

)

 

 

(600

)

Originations of loans held for sale

 

 

(40,814

)

 

 

(42,601

)

Proceeds from sale of loans held for sale

 

 

39,435

 

 

 

44,574

 

Loss on sale of other assets owned

 

 

17

 

 

 

27

 

Gain on sales of securities available-for-sale

 

 

(10

)

 

 

(47

)

Change in other assets and other liabilities, net

 

 

(2,531

)

 

 

(2,918

)

Net cash provided by operating activities

 

 

9,773

 

 

 

12,116

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

 

 

 

 

Maturities, prepayments and calls

 

 

11,754

 

 

 

16,682

 

Sales

 

 

6,781

 

 

 

13,562

 

Purchases

 

 

(9,416

)

 

 

(3,387

)

Change in interest-bearing time deposits

 

 

1

 

 

 

(626

)

Proceeds from sale of other assets owned

 

 

8

 

 

 

133

 

Additions to premises and equipment

 

 

(1,911

)

 

 

(1,459

)

Loan originations and principal collections, net

 

 

(14,627

)

 

 

(39,195

)

Net cash used in investing activities

 

 

(7,410

)

 

 

(14,290

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net change in deposits

 

 

9,519

 

 

 

61,163

 

Net change in federal funds purchased and securities sold under agreements

   to repurchase

 

 

(12,469

)

 

 

(34,774

)

Purchase of treasury stock

 

 

(490

)

 

 

(183

)

Cash dividends paid on common stock

 

 

(3,669

)

 

 

(3,250

)

Net cash provided by (used in) financing activities

 

 

(7,109

)

 

 

22,956

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

(4,746

)

 

 

20,782

 

Cash and cash equivalents - Beginning of year

 

 

34,467

 

 

 

28,322

 

Cash and cash equivalents - End of period

 

$

29,721

 

 

$

49,104

 

Supplemental Information

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

Interest

 

$

4,706

 

 

$

3,735

 

Income taxes

 

$

2,407

 

 

$

3,802

 

Noncash investing activities:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

$

68

 

 

$

-

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements.

 

6


 

ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

NOTE 1 BASIS OF PRESENTATION AND OTHER

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, 2018 are not necessarily indicative of the results that are expected for the year ended December 31, 2018.  The condensed consolidated balance sheet of the Company as of  December 31, 2017, 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 Company's Annual Report on Form 10-K for the year ended December 31, 2017.

The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured.  The Company’s principal source of revenue is interest income from loans and investment securities.  The Company also earns noninterest income from various banking and financial services offered primarily through Farmers & Merchants State Bank.  Interest income is primarily recognized on an accrual basis according to nondiscretionary formulas written in contracts, such as loan agreements or investment security contracts.  The Company also earns noninterest income from various banking and financial services provided to business and consumer clients such as deposit account, debit card, and mortgage banking services.  Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed.

 

NOTE 2 ASSET PURCHASES

 

The Company purchased an office 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, 2017 was $245 thousand, which included the remaining $78 thousand from the purchase of the Hicksville office on July 9, 2010.  Of the $167 thousand to be expensed in 2018, $126 thousand has been expensed for the nine months ended September 30, 2018.

 

 

 

(In Thousands)

 

 

 

Custar

 

2018

 

$

167

 

2019

 

 

167

 

2020

 

 

161

 

 

 

$

495

 

 

NOTE 3 SECURITIES

 

Mortgage-backed securities, as shown in the following tables, are all government sponsored enterprises.  The amortized cost and fair value of securities, with gross unrealized gains and losses at September 30, 2018 and December 31, 2017,  follows:

 

 

 

(In Thousands)

 

 

 

September 30, 2018

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

21,141

 

 

$

-

 

 

$

(370

)

 

$

20,771

 

U.S. Government agencies

 

 

78,753

 

 

 

-

 

 

 

(2,986

)

 

 

75,767

 

Mortgage-backed securities

 

 

36,350

 

 

 

11

 

 

 

(1,761

)

 

 

34,600

 

State and local governments

 

 

53,040

 

 

 

199

 

 

 

(1,302

)

 

 

51,937

 

Total available-for-sale securities

 

$

189,284

 

 

$

210

 

 

$

(6,419

)

 

$

183,075

 

 

 

7


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 3 SECURITIES (Continued)

 

 

 

(In Thousands)

 

 

 

December 31, 2017

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

21,219

 

 

$

-

 

 

$

(241

)

 

$

20,978

 

U.S. Government agencies

 

 

82,198

 

 

 

-

 

 

 

(1,732

)

 

 

80,466

 

Mortgage-backed securities

 

 

40,236

 

 

 

64

 

 

 

(790

)

 

 

39,510

 

State and local governments

 

 

55,512

 

 

 

437

 

 

 

(505

)

 

 

55,444

 

Total available-for-sale securities

 

$

199,165

 

 

$

501

 

 

$

(3,268

)

 

$

196,398

 

 

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.

Information pertaining to securities with gross unrealized losses at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:    

 

 

 

(In Thousands)

 

 

 

September 30, 2018

 

 

 

Less Than  Twelve Months

 

 

Twelve Months  & Over

 

 

 

Gross Unrealized

 

 

Fair

 

 

Gross Unrealized

 

 

Fair

 

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

U.S. Treasury

 

$

(111

)

 

$

6,860

 

 

$

(259

)

 

$

13,910

 

U.S. Government agencies

 

 

(166

)

 

 

7,424

 

 

 

(2,820

)

 

 

68,344

 

Mortgage-backed securities

 

 

(132

)

 

 

7,220

 

 

 

(1,629

)

 

 

26,657

 

State and local governments

 

 

(350

)

 

 

23,413

 

 

 

(952

)

 

 

20,371

 

Total available-for-sale securities

 

$

(759

)

 

$

44,917

 

 

$

(5,660

)

 

$

129,282

 

 

8


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 3 SECURITIES (Continued)

 

 

 

(In Thousands)

 

 

 

December 31, 2017

 

 

 

Less Than  Twelve Months

 

 

Twelve Months  & Over

 

 

 

Gross Unrealized

 

 

Fair

 

 

Gross Unrealized

 

 

Fair

 

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

U.S. Treasury

 

$

(36

)

 

$

6,924

 

 

$

(205

)

 

$

14,054

 

U.S. Government agencies

 

 

(314

)

 

 

27,328

 

 

 

(1,418

)

 

 

53,139

 

Mortgage-backed securities

 

 

(70

)

 

 

7,149

 

 

 

(720

)

 

 

28,080

 

State and local governments

 

 

(205

)

 

 

24,999

 

 

 

(300

)

 

 

11,567

 

Total available-for-sale securities

 

$

(625

)

 

$

66,400

 

 

$

(2,643

)

 

$

106,840

 

 

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, 2018 and September 30, 2017.

 

 

 

Three Months

 

 

Nine Months

 

 

 

(In Thousands)

 

 

(In Thousands)

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Gross realized gains

 

$

51

 

 

$

-

 

 

$

51

 

 

$

58

 

Gross realized losses

 

 

(41

)

 

 

-

 

 

 

(41

)

 

 

(11

)

Net realized gains

 

$

10

 

 

$

-

 

 

$

10

 

 

$

47

 

Tax expense related to net realized gains

 

$

2

 

 

$

-

 

 

$

2

 

 

$

16

 

 

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 income taxes in the condensed consolidated statements of income and comprehensive income.

The amortized cost and fair value of debt securities at September 30, 2018, 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

 

$

34,797

 

 

$

34,563

 

After one year through five years

 

 

70,423

 

 

 

68,544

 

After five years through ten years

 

 

44,678

 

 

 

42,533

 

After ten years

 

 

3,036

 

 

 

2,835

 

Total

 

$

152,934

 

 

$

148,475

 

Mortgage-backed securities

 

 

36,350

 

 

 

34,600

 

Total

 

$

189,284

 

 

$

183,075

 

 

Investments with a carrying value of $81.2 million and $82.9 million at September 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017.

 

 

 

9


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

 

 

NOTE 4 LOANS

Loan balances as of  September 30, 2018 and December 31, 2017:

 

 

 

(In Thousands)

 

Loans:

 

September 30, 2018

 

 

December 31, 2017

 

Consumer Real Estate

 

$

83,134

 

 

$

83,620

 

Agricultural Real Estate

 

 

68,548

 

 

 

64,073

 

Agricultural

 

 

103,624

 

 

 

95,111

 

Commercial Real Estate

 

 

417,217

 

 

 

410,520

 

Commercial and Industrial

 

 

119,536

 

 

 

126,275

 

Consumer

 

 

41,444

 

 

 

37,757

 

Industrial Development Bonds

 

 

6,005

 

 

 

6,415

 

 

 

 

839,508

 

 

 

823,771

 

Less: Net deferred loan fees and costs

 

 

(810

)

 

 

(747

)

 

 

 

838,698

 

 

 

823,024

 

Less: Allowance for loan losses

 

 

(6,755

)

 

 

(6,868

)

 

 

 

 

 

 

 

 

 

Loans - Net

 

$

831,943

 

 

$

816,156

 

 

The following is a contractual maturity schedule by major category of loans as of September 30, 2018:

 

 

 

(In Thousands)

 

 

 

 

 

 

 

After One

 

 

 

 

 

 

 

Within

 

 

Year Within

 

 

After

 

 

 

One Year

 

 

Five Years

 

 

Five Years

 

Consumer Real Estate

 

$

4,537

 

 

$

16,239

 

 

$

62,358

 

Agricultural Real Estate

 

 

1,168

 

 

 

5,448

 

 

 

61,932

 

Agricultural

 

 

65,987

 

 

 

25,287

 

 

 

12,350

 

Commercial Real Estate

 

 

16,295

 

 

 

146,828

 

 

 

254,094

 

Commercial and Industrial

 

 

64,513

 

 

 

46,655

 

 

 

8,368

 

Consumer

 

 

4,960

 

 

 

26,926

 

 

 

9,558

 

Industrial Development Bonds

 

 

600

 

 

 

65

 

 

 

5,340

 

 

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of September 30, 2018:

 

 

 

(In Thousands)

 

 

 

Fixed

 

 

Variable

 

 

 

Rate

 

 

Rate

 

Consumer Real Estate

 

$

38,575

 

 

$

44,559

 

Agricultural Real Estate

 

 

49,110

 

 

 

19,438

 

Agricultural

 

 

37,032

 

 

 

66,592

 

Commercial Real Estate

 

 

257,596

 

 

 

159,621

 

Commercial and Industrial

 

 

45,603

 

 

 

73,933

 

Consumer

 

 

37,207

 

 

 

4,237

 

Industrial Development Bonds

 

 

6,005

 

 

 

-

 

 

As of September 30, 2018 and December 31, 2017 one to four family residential mortgage loans amounting to $15.4 and $17.3 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.

 

 

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, 2018 and December 31, 2017, net of deferred loan fees and costs:

 

September 30, 2018

 

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

 

$

555

 

 

$

9

 

 

$

178

 

 

$

742

 

 

$

81,887

 

 

$

82,629

 

 

$

-

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

68,524

 

 

 

68,524

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

103,760

 

 

 

103,760

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

416,632

 

 

 

416,632

 

 

 

-

 

Commercial and Industrial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

125,612

 

 

 

125,612

 

 

 

-

 

Consumer

 

 

35

 

 

 

-

 

 

 

-

 

 

 

35

 

 

 

41,506

 

 

 

41,541

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

590

 

 

$

9

 

 

$

178

 

 

$

777

 

 

$

837,921

 

 

$

838,698

 

 

$

-

 

 

December 31, 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

 

$

565

 

 

$

212

 

 

$

113

 

 

$

890

 

 

$

82,310

 

 

$

83,200

 

 

$

-

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

101

 

 

 

101

 

 

 

63,943

 

 

 

64,044

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

95,238

 

 

 

95,238

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

-

 

 

 

38

 

 

 

38

 

 

 

409,915

 

 

 

409,953

 

 

 

-

 

Commercial and Industrial

 

 

-

 

 

 

42

 

 

 

-

 

 

 

42

 

 

 

132,745

 

 

 

132,787

 

 

 

-

 

Consumer

 

 

34

 

 

 

2

 

 

 

7

 

 

 

43

 

 

 

37,759

 

 

 

37,802

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

599

 

 

$

256

 

 

$

259

 

 

$

1,114

 

 

$

821,910

 

 

$

823,024

 

 

$

-

 

 

 

 

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, 2018 and December 31, 2017:

 

 

 

(In Thousands)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

$

384

 

 

$

708

 

Agricultural Real Estate

 

 

-

 

 

 

101

 

Agricultural

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

38

 

Commercial & Industrial

 

 

99

 

 

 

149

 

Consumer

 

 

-

 

 

 

7

 

Total

 

$

483

 

 

$

1,003

 

 

Following are the characteristics and underwriting criteria for each major type of loan the Bank offers:

Consumer Real Estate: Purchase, refinance, or equity financing of one to four family owner occupied dwelling.   Success in repayment is subject to borrower’s income, debt level, character in fulfilling payment obligations, employment, and others.

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.

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 farmer’s ability to hedge their position by the use of the future contracts. The risk related to weather is often mitigated by requiring crop insurance.

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, borrower’s ability to repay in orderly fashion, and others.  The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customer’s ability to repay in a changing rate environment before granting loan approval.

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 customer's ability to repay in a changing rate environment before granting loan approval.

Industrial Development Bonds (IDB): Funds for public improvements in the Bank’s service area.  Repayment ability is based on the continuance of the taxation revenue as the source of repayment.

Consumer: Funding for individual and family purposes.  Success in repayment is subject to borrower’s income, debt level, character in fulfilling payment obligations, employment, and others.

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 Bank's 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.

12


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

 

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-to-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 these credit weaknesses are 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 deserve close attention but 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 and 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.

 

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 but 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.

13


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

 

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, 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 institution’s 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.

 

 

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, 2018and December 31, 2017:

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 

Agricultural

 

 

 

 

 

 

Commercial

 

 

Commercial

 

 

Development

 

 

 

Real Estate

 

 

Agricultural

 

 

Real Estate

 

 

and Industrial

 

 

Bonds

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-2

 

$

4,265

 

 

$

5,148

 

 

$

3,179

 

 

$

2,026

 

 

$

-

 

3

 

 

14,710

 

 

 

32,613

 

 

 

29,383

 

 

 

18,411

 

 

 

3,189

 

4

 

 

49,107

 

 

 

64,849

 

 

 

374,663

 

 

 

96,753

 

 

 

2,816

 

5

 

 

431

 

 

 

1,150

 

 

 

7,528

 

 

 

277

 

 

 

-

 

6

 

 

11

 

 

 

-

 

 

 

1,879

 

 

 

528

 

 

 

-

 

7

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,612

 

 

 

-

 

8

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

68,524

 

 

$

103,760

 

 

$

416,632

 

 

$

119,607

 

 

$

6,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 

Agricultural

 

 

 

 

 

 

Commercial

 

 

Commercial

 

 

Development

 

 

 

Real Estate

 

 

Agricultural

 

 

Real Estate

 

 

and Industrial

 

 

Bonds

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-2

 

$

4,143

 

 

$

6,558

 

 

$

1,244

 

 

$

9,205

 

 

$

-

 

3

 

 

15,244

 

 

 

37,267

 

 

 

32,498

 

 

 

15,277

 

 

 

3,489

 

4

 

 

43,416

 

 

 

51,312

 

 

 

359,600

 

 

 

99,581

 

 

 

2,926

 

5

 

 

1,125

 

 

 

101

 

 

 

7,758

 

 

 

1,381

 

 

 

-

 

6

 

 

116

 

 

 

-

 

 

 

8,853

 

 

 

817

 

 

 

-

 

7

 

 

-

 

 

 

-

 

 

 

-

 

 

 

111

 

 

 

-

 

8

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

64,044

 

 

$

95,238

 

 

$

409,953

 

 

$

126,372

 

 

$

6,415

 

 

 

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, 2018 and December 31, 2017.  

 

 

 

(In Thousands)

 

 

 

Consumer

 

 

Consumer

 

 

 

Real Estate

 

 

Real Estate

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Grade

 

 

 

 

 

 

 

 

Pass

 

$

82,175

 

 

$

82,632

 

Special Mention (5)

 

 

-

 

 

 

-

 

Substandard (6)

 

 

454

 

 

 

488

 

Doubtful (7)

 

 

-

 

 

 

80

 

Total

 

$

82,629

 

 

$

83,200

 

 

 

 

(In Thousands)

 

 

 

Consumer - Credit

 

 

Consumer - Other

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

September 30,

2018

 

 

December 31,

2017

 

Performing

 

$

3,800

 

 

$

4,108

 

 

$

37,720

 

 

$

33,666

 

Nonperforming

 

 

-

 

 

 

-

 

 

 

21

 

 

 

28

 

Total

 

$

3,800

 

 

$

4,108

 

 

$

37,741

 

 

$

33,694

 

 

Information about impaired loans as of September 30, 2018, December 31, 2017 and September 30, 2017are as follows:

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a valuation allowance

 

$

1,841

 

 

$

1,131

 

 

$

1,294

 

Impaired loans with a valuation allowance

 

 

970

 

 

 

614

 

 

 

685

 

Total impaired loans

 

$

2,811

 

 

$

1,745

 

 

$

1,979

 

Valuation allowance related to impaired loans

 

$

148

 

 

$

106

 

 

$

123

 

Total non-accrual loans

 

$

483

 

 

$

1,003

 

 

$

1,729

 

Total loans past-due ninety days or more and

   still accruing

 

$

-

 

 

$

-

 

 

$

-

 

Quarter ended average investment in impaired

   loans

 

$

2,158

 

 

$

2,160

 

 

$

1,804

 

Year to date average investment in impaired

   loans

 

$

1,765

 

 

$

1,885

 

 

$

1,793

 

 

Additional funds of $20 thousand are available to be advanced in connection with impaired loans.

The Bank had approximately $98 thousand of its impaired loans classified as troubled debt restructured (TDR) as of September 30, 2018, $534 thousand as of December 31, 2017 and $540 thousand as of September 30, 2017.  During the year to date  2018 and 2017, there were no new loans considered TDR.    

For the three and nine month period ended September 30, 2018 and 2017, there were no TDRs that subsequently defaulted after modification.  

For the nine month period ended September 30, 2018, $418 thousand of impaired loans classified as TDR involving one relationship was paid off.

16


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 4 LOANS (Continued)

 

For the majority of the Bank’s 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 loan’s 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.

The following tables present loans individually evaluated for impairment by class of loans for three months ended September 30, 2018 and September 30, 2017.

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QTD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QTD

 

 

QTD

 

 

Interest

 

Three Months Ended September 30, 2018

 

 

 

 

 

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

 

$

589

 

 

$

589

 

 

$

-

 

 

$

645

 

 

$

9

 

 

$

5

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

196

 

 

 

196

 

 

 

-

 

 

 

197

 

 

 

3

 

 

 

-

 

Commercial and Industrial

 

 

1,056

 

 

 

1,056

 

 

 

-

 

 

 

504

 

 

 

12

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

With a specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

 

174

 

 

 

174

 

 

 

26

 

 

 

227

 

 

 

-

 

 

 

-

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial and Industrial

 

 

796

 

 

 

796

 

 

 

122

 

 

 

585

 

 

 

3

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Totals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

$

763

 

 

$

763

 

 

$

26

 

 

$

872

 

 

$

9

 

 

$

5

 

Agricultural Real Estate

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Agricultural

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Commercial Real Estate

 

$

196

 

 

$

196

 

 

$

-

 

 

$

197

 

 

$

3

 

 

$

-

 

Commercial and Industrial

 

$

1,852

 

 

$

1,852

 

 

$

122

 

 

$

1,089

 

 

$

15

 

 

$

-

 

Consumer

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

17


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, 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)

 

The following tables present loans individually evaluated for impairment by class of loans for nine month period ended September 30, 2018 and  September 30, 2017.

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YTD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

YTD

 

 

YTD

 

 

Interest

 

Nine Months Ended September 30, 2018

 

 

 

 

 

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

 

$

589

 

 

$

589

 

 

$

-

 

 

$

554

 

 

$

23

 

 

$

15

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22

 

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

196

 

 

 

196

 

 

 

-

 

 

 

199

 

 

 

8

 

 

 

-

 

Commercial and Industrial

 

 

1,056

 

 

 

1,056

 

 

 

-

 

 

 

238

 

 

 

12

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

With a specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

 

174

 

 

 

174

 

 

 

26

 

 

 

153

 

 

 

-

 

 

 

-

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

186

 

 

 

-

 

 

 

-

 

Commercial and Industrial

 

 

796

 

 

 

796

 

 

 

122

 

 

 

413

 

 

 

11

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Totals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

$

763

 

 

$

763

 

 

$

26

 

 

$

707

 

 

$

23

 

 

$

15

 

Agricultural Real Estate

 

$

-

 

 

$

-

 

 

$

-

 

 

$

22

 

 

$

-

 

 

$

-

 

Agricultural

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Commercial Real Estate

 

$

196

 

 

$

196

 

 

$

-

 

 

$

385

 

 

$

8

 

 

$

-

 

Commercial and Industrial

 

$

1,852

 

 

$

1,852

 

 

$

122

 

 

$

651

 

 

$

23

 

 

$

-

 

Consumer

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

19


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, 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

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

As of September 30, 2018, the Company had $68 thousand of foreclosed residential real estate property obtained by physical possession and $174 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, 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 were in process according to local jurisdictions.

20


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, 2018

 

 

December 31, 2017

 

Allowance for Loan & Lease Losses

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

6,868

 

 

$

6,784

 

Provision for loan loss

 

 

219

 

 

 

222

 

Loans charged off

 

 

(450

)

 

 

(288

)

Recoveries

 

 

118

 

 

 

150

 

Allowance for Loan & Lease Losses

 

$

6,755

 

 

$

6,868

 

Allowance for Unfunded Loan Commitments &

      Letters of Credit

 

$

333

 

 

$

227

 

Total Allowance for Credit Losses

 

$

7,088

 

 

$

7,095

 

 

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.

 

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21


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, 2018 and September 30, 2017 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, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLOWANCE FOR CREDIT LOSSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

251

 

 

$

255

 

 

$

751

 

 

$

3,260

 

 

$

1,420

 

 

$

459

 

 

$

315

 

 

$

393

 

 

 

 

$

7,104

 

Charge Offs

 

 

(29

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(94

)

 

 

-

 

 

 

-

 

 

 

 

 

(123

)

Recoveries

 

 

18

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

3

 

 

 

18

 

 

 

-

 

 

 

-

 

 

 

 

 

42

 

Provision (Credit)

 

 

(5

)

 

 

(3

)

 

 

(8

)

 

 

9

 

 

 

(25

)

 

 

88

 

 

 

-

 

 

 

(9

)

 

 

 

 

47

 

Other Non-interest expense related to

   unfunded

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

18

 

 

 

-

 

 

 

 

 

18

 

Ending Balance

 

$

235

 

 

$

252

 

 

$

743

 

 

$

3,272

 

 

$

1,398

 

 

$

471

 

 

$

333

 

 

$

384

 

 

 

 

$

7,088

 

Ending balance: individually evaluated

   for impairment

 

$

26

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

122

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

148

 

Ending balance: collectively evaluated

   for impairment

 

$

209

 

 

$

252

 

 

$

743

 

 

$

3,272

 

 

$

1,276

 

 

$

471

 

 

$

333

 

 

$

384

 

 

 

 

$

6,940

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

-

 

FINANCING RECEIVABLES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

82,629

 

 

$

68,524

 

 

$

103,760

 

 

$

416,632

 

 

$

125,612

 

 

$

41,541

 

 

$

-

 

 

$

-

 

 

 

 

$

838,698

 

Ending balance: individually evaluated

   for impairment

 

$

763

 

 

$

-

 

 

$

-

 

 

$

196

 

 

$

1,852

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

2,811

 

Ending balance: collectively evaluated

   for impairment

 

$

81,866

 

 

$

68,524

 

 

$

103,760

 

 

$

416,436

 

 

$

123,760

 

 

$

41,541

 

 

$

-

 

 

$

-

 

 

 

 

$

835,887

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

118

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

118

 

 

22


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, 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)

 

Additional analysis, presented in thousands, related to the allowance for credit losses for nine months ended September 30, 2018 and September 30, 2017 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, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLOWANCE FOR CREDIT LOSSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

343

 

 

$

244

 

 

$

667

 

 

$

3,149

 

 

$

1,546

 

 

$

441

 

 

$

227

 

 

$

478

 

 

 

 

$

7,095

 

Charge Offs

 

 

(63

)

 

 

-

 

 

 

-

 

 

 

(15

)

 

 

(100

)

 

 

(272

)

 

 

-

 

 

 

-

 

 

 

 

 

(450

)

Recoveries

 

 

18

 

 

 

-

 

 

 

6

 

 

 

7

 

 

 

8

 

 

 

79

 

 

 

-

 

 

 

-

 

 

 

 

 

118

 

Provision (Credit)

 

 

(63

)

 

 

8

 

 

 

70

 

 

 

131

 

 

 

(56

)

 

 

223

 

 

 

-

 

 

 

(94

)

 

 

 

 

219

 

Other Non-interest expense related to

   unfunded

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

106

 

 

 

-

 

 

 

 

 

106

 

Ending Balance

 

$

235

 

 

$

252

 

 

$

743

 

 

$

3,272

 

 

$

1,398

 

 

$

471

 

 

$

333

 

 

$

384

 

 

 

 

$

7,088

 

Ending balance: individually evaluated

   for impairment

 

$

26

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

122

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

148

 

Ending balance: collectively evaluated

   for impairment

 

$

209

 

 

$

252

 

 

$

743

 

 

$

3,272

 

 

$

1,276

 

 

$

471

 

 

$

333

 

 

$

384

 

 

 

 

$

6,940

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

-

 

FINANCING RECEIVABLES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

82,629

 

 

$

68,524

 

 

$

103,760

 

 

$

416,632

 

 

$

125,612

 

 

$

41,541

 

 

$

-

 

 

$

-

 

 

 

 

$

838,698

 

Ending balance: individually evaluated

   for impairment

 

$

763

 

 

$

-

 

 

$

-

 

 

$

196

 

 

$

1,852

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

2,811

 

Ending balance: collectively evaluated

   for impairment

 

$

81,866

 

 

$

68,524

 

 

$

103,760

 

 

$

416,436

 

 

$

123,760

 

 

$

41,541

 

 

$

-

 

 

$

-

 

 

 

 

$

835,887

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

118

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

118

 

 

24


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, 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

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

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

 

 

 

 

 

25


ITEM 1 NOTES TO CONDENSED 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 of dollars)

 

 

(in thousands of dollars)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,875

 

 

$

3,222

 

 

$

11,756

 

 

$

9,284

 

Less: distributed earnings allocated to participating

   securities

 

 

(13

)

 

 

(12

)

 

 

(38

)

 

 

(33

)

Less: undistributed earnings allocated to participating

   securities

 

 

(26

)

 

 

(19

)

 

 

(80

)

 

 

(55

)

Net earnings available to common shareholders

 

$

3,836

 

 

$

3,191

 

 

$

11,638

 

 

$

9,196

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding including

   participating securities (1)

 

 

9,274,507

 

 

 

9,252,919

 

 

 

9,268,819

 

 

 

9,245,514

 

Less: average unvested restricted shares (1)

 

 

(93,242

)

 

 

(88,596

)

 

 

(92,683

)

 

 

(87,074

)

Weighted average common shares outstanding (1)

 

 

9,181,265

 

 

 

9,164,323

 

 

 

9,176,136

 

 

 

9,158,440

 

Basic earnings and diluted per share (1)

 

$

0.42

 

 

$

0.35

 

 

$

1.27

 

 

$

1.01

 

 

 

 

 

26


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

 

 

 

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of financial instruments are management's 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.

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 respective redemption provisions.

Loans Held for Sale

The carrying amount approximates fair value due to insignificant amount of time between origination and date of sale.

Loans, net

The fair values of the loans are estimated using a credit mark adjustment along with discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.  The credit mark adjustment was estimated using merger and acquisition analysis of nationwide bank and thrift deals.

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.

FHLB Advances

Fair values or FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types or borrowing arrangements.

 

27


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate their fair values.

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.

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of September 30, 2018 and December 31, 2017 are reflected below.

 

 

 

(In Thousands)

 

 

 

September 30, 2018

 

 

 

Carrying

 

 

Fair

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

29,721

 

 

$

29,721

 

 

$

29,721

 

 

$

-

 

 

$

-

 

Interest-bearing time deposits

 

 

4,019

 

 

 

4,019

 

 

 

-

 

 

 

4,019

 

 

 

-

 

Securities - available-for-sale

 

 

183,075

 

 

 

183,075

 

 

 

20,771

 

 

 

160,911

 

 

 

1,393

 

Other Securities

 

 

3,717

 

 

 

3,717

 

 

 

-

 

 

 

-

 

 

 

3,717

 

Loans held for sale

 

 

1,679

 

 

 

1,679

 

 

 

-

 

 

 

-

 

 

 

1,679

 

Loans, net

 

 

831,943

 

 

 

815,856

 

 

 

-

 

 

 

-

 

 

 

815,856

 

Interest receivable

 

 

5,826

 

 

 

5,826

 

 

 

-

 

 

 

-

 

 

 

5,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing Deposits

 

$

545,179

 

 

$

545,208

 

 

$

-

 

 

$

-

 

 

$

545,208

 

Non-interest bearing Deposits

 

 

197,088

 

 

 

197,088

 

 

 

-

 

 

 

197,088

 

 

 

-

 

Time Deposits

 

 

186,592

 

 

 

186,690

 

 

 

-

 

 

 

-

 

 

 

186,690

 

Total Deposits

 

 

928,859

 

 

 

928,986

 

 

 

-

 

 

 

197,088

 

 

 

731,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Purchased and Securities Sold Under

   Agreement to Repurchase

 

 

27,026

 

 

 

27,026

 

 

 

-

 

 

 

-

 

 

 

27,026

 

Federal Home Loan Bank advances

 

 

5,000

 

 

 

5,001

 

 

 

-

 

 

 

-

 

 

 

5,001

 

Interest payable

 

 

367

 

 

 

367

 

 

 

-

 

 

 

-

 

 

 

367

 

28


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

 

 

 

(In Thousands)

 

 

 

December 31, 2017

 

 

 

Carrying

 

 

Fair

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

34,467

 

 

$

34,467

 

 

$

34,467

 

 

$

-

 

 

$

-

 

Interest-bearing time deposits

 

 

4,018

 

 

 

4,009

 

 

 

-

 

 

 

4,009

 

 

 

-

 

Securities - available-for-sale

 

 

196,398

 

 

 

196,398

 

 

 

20,978

 

 

 

173,992

 

 

 

1,428

 

Other Securities

 

 

3,717

 

 

 

3,717

 

 

 

-

 

 

 

-

 

 

 

3,717

 

Loans held for sale

 

 

1,221

 

 

 

1,221

 

 

 

-

 

 

 

-

 

 

 

1,221

 

Loans, net

 

 

816,156

 

 

 

819,193

 

 

 

-

 

 

 

-

 

 

 

819,193

 

Interest receivable

 

 

4,276

 

 

 

4,276

 

 

 

-

 

 

 

-

 

 

 

4,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing Deposits

 

$

532,660

 

 

$

532,660

 

 

$

-

 

 

$

-

 

 

$

532,660

 

Non-interest bearing Deposits

 

 

199,114

 

 

 

199,114

 

 

 

-

 

 

 

199,114

 

 

 

-

 

Time Deposits

 

 

187,566

 

 

 

188,335

 

 

 

-

 

 

 

-

 

 

 

188,335

 

Total Deposits

 

 

919,340

 

 

 

920,109

 

 

 

-

 

 

 

199,114

 

 

 

720,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Purchased and Securities Sold Under

   Agreement to Repurchase

 

 

39,495

 

 

 

39,495

 

 

 

-

 

 

 

-

 

 

 

39,495

 

Federal Home Loan Bank advances

 

 

5,000

 

 

 

5,021

 

 

 

-

 

 

 

-

 

 

 

5,021

 

Interest payable

 

 

318

 

 

 

318

 

 

 

-

 

 

 

-

 

 

 

318

 

 

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.

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 Company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

29


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

The following summarizes financial assets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, 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)

 

September 30, 2018

 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant

Observable

Inputs

(Level 2)

 

 

Significant

Observable

Inputs

(Level 3)

 

Assets - (Securities Available-for-Sale)

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

20,771

 

 

$

-

 

 

$

-

 

U.S. Government agencies

 

 

-

 

 

 

75,767

 

 

 

-

 

Mortgage-backed securities

 

 

-

 

 

 

34,600

 

 

 

-

 

State and local governments

 

 

-

 

 

 

50,544

 

 

 

1,393

 

Total Securities Available-for-Sale

 

$

20,771

 

 

$

160,911

 

 

$

1,393

 

 

December 31, 2017

 

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant

Observable

Inputs

(Level 2)

 

 

Significant

Observable

Inputs

(Level 3)

 

Assets - (Securities Available-for-Sale)

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

20,978

 

 

$

-

 

 

$

-

 

U.S. Government agencies

 

 

-

 

 

 

80,466

 

 

 

-

 

Mortgage-backed securities

 

 

-

 

 

 

39,510

 

 

 

-

 

State and local governments

 

 

-

 

 

 

54,016

 

 

 

1,428

 

Total Securities Available-for-Sale

 

$

20,978

 

 

$

173,992

 

 

$

1,428

 

 

The following table represents the changes in the Level 3 fair-value category of which unobservable inputs are relied upon as of September 30, 2018 and September 30, 2017.

 

 

 

(In Thousands)

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

 

 

State and Local

Governments

Tax-Exempt

 

 

State and Local

Governments

Taxable

 

 

State and Local

Governments

Total

 

Balance at January 1, 2018

 

$

-

 

 

$

1,428

 

 

$

1,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Market Value

 

 

-

 

 

 

(35

)

 

 

(35

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments & Maturities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

$

-

 

 

$

1,393

 

 

$

1,393

 

30


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

 

 

 

(In Thousands)

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

 

 

State and Local

Governments

Tax-Exempt

 

 

State and Local

Governments

Taxable

 

 

State and Local

Governments

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

 

 

Most of the Company's 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, 2018 and December 31, 2017, 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 management's 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.)  

At September 30, 2018 and December 31, 2017, fair value of collateral dependent impaired loans categorized as Level 3 was $822 and $508 thousand, respectively. The specific allocation for impaired loans was $148 and $106 thousand as of September 30, 2018 and December 31, 2017, 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 asset's 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 asset's 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:

 

 

 

(In Thousands)

 

 

 

 

 

 

Range

 

 

Fair Value at

 

 

 

 

 

 

(Weighted

 

 

September 30, 2018

 

 

Valuation Technique

 

Unobservable Inputs

 

Average)

State and local government

 

$

1,393

 

 

Discounted Cash Flow

 

Credit strength of underlying project or

entity / Discount rate

 

0-5%

(3.92% )

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   impaired loans

 

 

822

 

 

Collateral based

measurements

 

Discount to reflect current market

conditions and ultimate collectability

 

0-50%

(15.28%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned -

   residential

 

 

-

 

 

Appraisals

 

Discount to reflect current

market

 

— %

( — )

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned -

   commercial

 

 

-

 

 

Appraisals

 

Discount to reflect current

market

 

— %

( — )

31


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

 

 

 

(In Thousands)

 

 

 

 

 

 

Range

 

 

Fair Value at

 

 

 

 

 

 

(Weighted

 

 

December 31, 2017

 

 

Valuation Technique

 

Unobservable Inputs

 

Average)

State and local government

 

$

1,428

 

 

Discounted Cash Flow

 

Credit strength of underlying project or

entity / Discount rate

 

0-5%

(3.68%)

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   impaired loans

 

 

508

 

 

Collateral based

measurements

 

Discount to reflect current market

conditions and ultimate collectability

 

0-50%

(17.28%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned -

   residential

 

 

22

 

 

Appraisals

 

Discount to reflect current

market

 

0-20%

(2.22%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned -

   commercial

 

 

266

 

 

Appraisals

 

Discount to reflect current

market

 

0-20%

(5.15%)

 

The following table presents impaired loans and other real estate owned as recorded at fair value on September 30, 2018 and December 31, 2017:

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2018

 

 

 

(In Thousands)

 

 

 

Balance at

September 30, 2018

 

 

Quoted Prices

in Active

Markets for

Identical

Assets (Level 1)

 

 

Significant

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Collateral dependent

   impaired loans

 

$

822

 

 

$

-

 

 

$

-

 

 

$

822

 

Other real estate

   owned - residential

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other real estate

   owned - commercial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2017

 

 

 

(In Thousands)

 

 

 

Balance at

December 31, 2017

 

 

Quoted Prices

in Active

Markets for

Identical

Assets (Level 1)

 

 

Significant

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Collateral dependent

   impaired loans

 

$

508

 

 

$

-

 

 

$

-

 

 

$

508

 

Other real estate

   owned - residential

 

 

22

 

 

 

-

 

 

 

-

 

 

 

22

 

Other real estate

   owned - commercial

 

 

266

 

 

 

-

 

 

 

-

 

 

 

266

 

 

 

 

 

32


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

 

NOTE 7 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

The Company had $1.5 million and $10.4 million in Federal Funds Purchased as of September 30, 2018 and as of December 31, 2017, respectively.  During the same time periods, the company also had $25.6 million and $29.1 million in securities sold under agreement to repurchase.

 

 

 

September 30, 2018

 

 

 

Remaining Contractual Maturity of the Agreements (In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overnight & Continuous

 

 

Up to 30 days

 

 

30-90 days

 

 

Greater Than

90 days

 

 

Total

 

Federal funds purchased

 

$

1,452

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,452

 

Repurchase Agreements;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury & agency securities

 

 

819

 

 

 

-

 

 

 

-

 

 

 

24,755

 

 

 

25,574

 

 

 

$

2,271

 

 

$

-

 

 

$

-

 

 

$

24,755

 

 

$

27,026

 

 

 

 

December 31, 2017

 

 

 

Remaining Contractual Maturity of the Agreements (In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overnight & Continuous

 

 

Up to 30 days

 

 

30-90 days

 

 

Greater Than

90 days

 

 

Total

 

Federal funds purchased

 

$

10,425

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

10,425

 

Repurchase Agreements;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury & agency securities

 

 

6,145

 

 

 

-

 

 

 

-

 

 

 

22,925

 

 

 

29,070

 

 

 

$

16,570

 

 

$

-

 

 

$

-

 

 

$

22,925

 

 

$

39,495

 

 

 

 

 

NOTE 8 PROPOSED BUSINESS COMBINATION

 

The Company signed a definitive merger agreement whereby F&M will acquire Limberlost Bancshares, Inc. (“Limberlost”), Geneva, Indiana, the holding company for Bank of Geneva, in a combination stock and cash transaction.  Bank of Geneva operates six full-service offices in northeast Indiana and has approximately $287 million in assets, $257 million in loans, $212 million in deposits and $30.6 million in consolidated equity as of June 30, 2018.  Limberlost is taxed as an S-Corporation.

 

Subject to the terms of the merger agreement, which has been approved by the Board of Directors of each company, Limberlost shareholders will receive 1,830 shares of F&M common stock for each outstanding share of Limberlost common stock plus $8,465 in cash.  Limberlost currently has 1,000 shares of common stock outstanding.  Based on the F&M closing share price as of August 17, 2018, the transaction is valued at approximately $88.765 million in aggregate.

 

 

33


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

 

NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS  

 

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606)”ASU 2014-09 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved amendments deferring the effective date by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. Early application was permitted but not before the original public entity effective date, i.e., annual periods beginning after December 15, 2016.  The Company has adopted ASU 2014-09 on January 1, 2018 and ASU No 2014-09 did not have a significant impact on its financial statements.  Several of the Company’s revenue streams were reviewed as a result of the standard.

In January 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-01 “Financial Instruments - Overall (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 adopted ASU 2016-01 on January 1, 2018 and it did not have a material impact on the consolidated financial statement.  The Bank’s equity securities are membership stocks in the Federal Home Loan Bank and Farmer Mac and thereby excluded from fair value pricing.  For exit pricing on loans, the company used recent Merger and Acquisition Transaction Metrics compiled by S&P Global Market Intelligence for the second half of 2017.  This provided the credit mark to be used along with the fair value adjustment based on the yield metrics of the portfolio.  

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 doesn’t 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 ASU No. 2016-13, Financial Instruments - Credit 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 organization’s 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.

 

34


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS (Continued)  

 

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 external advisor has been contracted.  The Company is in the early stages of CECL conversion analysis.

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 adopted ASU 2016-18 on January 1, 2018 and does not currently have restricted cash or restricted cash equivalents.  In the future, restricted cash or restricted cash equivalents will be presented in accordance with the guidance.

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 adopted ASU 2017-01 on January 1, 2018 and going forward will account for business combinations accordingly.

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 adopted this standard as of January 1, 2018.  The impact of just over $30 thousand of accelerated amortization was recorded as an adjustment to beginning retained earnings.  This will not alter the Bank or Company’s well capitalized status.  The Bank’s Municipal Tax-Exempt category of securities was the only category affected by the adoption.  

35


ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS (Continued)  

 

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-Income Statement – Reporting Comprehensive Income (Topic 220):  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  The amendments allow for the reclassification of stranded tax effects in accumulated other comprehensive income (AOCI) an option rather than a requirement; however, disclosure is required if not elected.  The reclassification from accumulated other comprehensive income to retained earnings results from the newly enacted federal corporate income tax rate resulting from the Tax Cuts and Job Acts signed by President Trump in December 2017.  The amount of the reclassification is the difference between the historical corporate income tax rate and the newly enacted corporate income tax rate of 21%.  Entities will have an option to adopt the standard retrospectively or in the period of adoption.  The company has adopted this standard on January 1, 2018 and reclassified approximately $360 thousand into retained earnings.

In March of 2018, the FASB issued ASU 2018-05 “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118.”  These amendments add SEC guidance to the FASB Accounting Standards Codification regarding the Tax Cuts and Jobs Act pursuant to the issuance of SAB 118.  The amendments are effective upon addition to the FASB Codification.  

In June 2018, the financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.”  These amendments expand the scope of Topic 718, Compensation – Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.  Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned.  The ASU supersedes Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees.  The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers.  At this time, the Company does not recognize the existence of any non-employee relationships involving share-based payments.  The Company will continue to assess prior to adoption.  

 

  

 

36


 

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Overall, the local economies continue to grow and the loan pipeline remains strong.  The business climate is strong though tempered by some concern with tariffs.  Profitability remains solid in all loan segments. Harvest has begun and crop yields are running better than average.  It is still early in the process and concern is more focused on price.  Tariffs are impacting crop prices, especially soybeans at this time.  Farmers may decide to store crops, which may put pressure on storage if prior year crops are still being held also.  The automotive industry is still strong and the manufacturers in our market area continue to fill orders.  More companies are turning to automation as finding employees has become more difficult.  The labor shortage is a concern for many industrial sectors.  The Company has also experienced difficulty in finding quality employees with the low unemployment rates throughout our markets.  

Federal rate increases have resulted in a widening of the net interest margin.  The sustainability of a widening of the margin with future rate hikes is questionable.  Pressure on the cost of funds continues to mount with each rate increase.  The challenge is to keep the cost of funds increase equal to or below the improvement in asset yield.  As core deposits price up, the challenge becomes more difficult.  Competition for deposits has increased within the Company’s market area.  A slowing in the rate of loan growth has and will put pressure on the margin also.  

Lastly, a very bright spot in 2018 has been the change in tax rates.  The Company has chosen to invest a portion of those tax savings dollars to increase the base pay of our lowest paid employees.  We continue to evaluate how best to utilize those funds to impact our shareholders, customers, communities and employees.  Additional investment in capital assets is also occurring.  

With long-term sustainable growth as a strategic objective, the Bank opened its 25th office in Findlay, Ohio, in the first quarter.  Unique to the office is the utilization of newer technology in the form of Interactive Teller Machines (ITMs).  The use of ITMs enabled the office to be remodeled and eliminated the traditional teller line and drive-up.  The ITMs have remote assistance available upon request or the customer can complete the transactions themselves with debit card activation.  Previous teller line space has been converted to work stations at which personal relationship bankers may assist customers with transactions, open a deposit account, add a service or grant a consumer loan.  The strategic initiative provides a better customer experience upon entering the office.  A personal relationship banker will greet the customer and personally assist them with their banking needs.  The physical office transformations will continue with existing offices over multiple years and any additional new offices will be designed accordingly.  The Bank converted its first existing office to our new vision in June with an additional office completed in October.

All offices had some type of personnel transformation during the second quarter as the banking experience of our communities is also more personalized.  Bankers will be spending more time out of the office, focused on small business relationships and home loan originations.  Along with the new office, the Company plans for growth in 2018 to be more focused within its newer markets – both in loans and deposits.    

The Company announced a definitive agreement with Limberlost Bancshares, Inc. on August 17th.  Both companies are currently working towards obtaining necessary regulatory and shareholder approval to be able to close at yearend or early first quarter 2019.  The acquisition will increase the Farmers & Merchants’ holdings in Indiana by six offices.  Similar cultures, strong financial performance and a focus on community banking make the two companies a natural fit.  

The dividend declared for the third quarter represented a 7.7% increase over the declaration of the same period last year and a 10.8% increase over 2017 on a year-to-date declaration basis.  Strong earnings for the third quarter exceeded the third quarter last year.  The focus remains on loan and deposit growth for 2018 along with a widening of our footprint from the additional offices both existing and through acquisition.  As mentioned previously, improved profitability through long term sustainable growth is the overall goal of the organization.

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.

37


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

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-four full service banking offices throughout Northwest Ohio and Northeast Indiana.

The Bank opened an additional office during February of 2018 in Findlay, Ohio and the office is located in Hancock County. The Bank purchased the building in 2017 and was subsequently remodeled.  The Bank has continued its expansion strategy and the new office is expected to provide new growth opportunities.

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 Bank's 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 Bank’s “earn to free” strategic initiative. Upgrades to our digital products and services continue to occur in both retail and business lines.  The Bank began utilizing Integrated Teller Machines (ITMs) with the opening of our Findlay office and incorporated the use of them in our Waterville office at the end of second quarter 2018 and our Perrysburg, Ohio, office in October.  ITMs operate as an ATM with the addition of remote teller access to assist the user.  The Bank plans to utilize ITMs in locations going forward.

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 Bank's 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 Bank's 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 Bank's 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 Bank's Loan Policy. In addition, credit scores of those seeking consumer credit are reviewed and if they do not meet the Bank's Loan Policy guidelines an additional officer approval is required.

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 the result of additional charges for extended warranties and/or insurance coverage for wage or death.

38


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

 

Boats, campers, motorcycles, RV's 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 Bank’s primary market includes communities located in the Ohio counties of Defiance, Fulton, Hancock, 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, 2018, we had 286 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 and amended rules have resulted in uncertainties regarding liability which could pose an increased risk of noncompliance.  Various significant mortgage rules require monitoring by means of testing, validation of results, additional training, and further research or consultation to assist with ensuring compliance.  

The Economic Growth Regulatory Reform and Consumer Protection Act (EGRRCPA) was signed into law on May 24, 2018.   EGRRCPA is considered right-sized financial regulation which is intended to pave the way for banks to lend to creditworthy borrowers and better serve their communities.  Regulatory relief will not be immediate.  In many instances, guidance or new rulemaking will be required to implement the changes.  The Bank along with many community banks should eventually experience the rollback of some burdensome requirements resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act.   Sections in the EGRRCPA address access to mortgage credit; consumer access to credit; protections for

39


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

veterans, consumers, and homeowners; rules for certain bank holding companies, capital access; and protections for student borrowers.  Implementation of the rules and guidance for the various provisions of the EGRRCPA will commence as rulemaking occurs.    

 

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.

The Bank completed implementation of the U.S. Department of the Treasury’s final rules on Customer Due Diligence (CDD) and Beneficial Ownership.  The mandatory effective date was May 11, 2018.  Prior to these new rules, the ability for individuals to hide financial activity through anonymous ownership of business entities was a weakness in the fight against financial crime.  The CDD Final Rule is a significant step toward greater financial transparency.  By gaining a more complete profile of entity customers, financial institutions can help further reduce the flow of illicit funds through the US banking system.  The CDD and Beneficial Ownership final rules added a fifth core element to the original core elements necessary for an effective Bank Secrecy Act and Anti-Money Laundering compliance program.

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 Company's 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 real 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.

40


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

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.

The net income from operations of foreclosed real estate held for sale is reported either in noninterest income or noninterest expense depending upon whether the property is in a gain or loss position overall. At September 30, 2018 OREO property holdings were $717 thousand. OREO totaled $674 thousand and $615 thousand as of December 31, 2017 and September 30, 2017 respectively.

The ALLL and ACL represents management’s estimate of probable credit losses inherent in the Bank’s 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 Bank’s 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 Bank’s ALLL provides a margin for imprecision with an unallocated portion.  Bank regulatory agencies and external auditors periodically review the Bank’s 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 Bank’s 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 Bank’s 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 Bank’s mortgage servicing rights relating to loans serviced for others represent an asset. This asset is initially capitalized and included in other assets on the Company's 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 Bank's 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 party's valuation of the mortgage servicing rights is based on relevant characteristics of the Bank's 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 quarter's analysis related to the mortgage servicing asset. In addition, based upon the independent third party's valuation of the Bank's 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 Bank's 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

For more information regarding the estimates and calculations used to establish the ALLL please see Note 4 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 2018 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 markets. The Bank decreased the level of pledged securities by offering the Insured Cash Sweep, “ICS” product accessed through the Promontory network of financial institutions as compared to a year ago.  This has provided more availability for runoff of securities by the Bank if warranted to fund loan growth. Competition for deposits is intense with most competitors offering “special” rates for specific terms.  Relationship ties garner higher rates.  

Liquidity in terms of cash and cash equivalents ended $4.7 million lower as of September 30, 2018 than it was at yearend December 31, 2017. A decrease in securities held along with increased deposits funded the $15.8 million increase in net loans since yearend 2017. The largest loan growth occurred in agricultural real estate and agricultural portfolios.  Commercial real estate and consumer portfolios also experienced increases. The largest decline was in the commercial and industrial portfolios.

In comparing to the same prior year period, the September 30, 2018 (net of deferred fees and cost) loan balances of $838.7 million accounted for a $43.5 million or 5.5% increase when compared to 2017’s $795.2 million. The year over year improvement was made up of a 5.8% increase in commercial real estate loans, a 15.8% increase in consumer loans and lastly a combined increase in agricultural related loans (comprised of a 7.8% increase in agricultural real estate loans and 18.9% increase in non-real estate agricultural loans). Consumer real estate loans slightly decreased by 1.5%, commercial and industrial loans decreased by 3.7% and Industrial Development Bonds (“IDB’s”) decreased 8.4%. 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.    

 

 

 

(In Thousands)

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2016

 

 

 

Amount

 

 

Amount

 

 

Amount

 

Consumer Real Estate

 

$

82,629

 

 

$

83,875

 

 

$

85,977

 

Agricultural Real Estate

 

 

68,524

 

 

 

63,571

 

 

 

59,458

 

Agricultural

 

 

103,760

 

 

 

87,239

 

 

 

79,332

 

Commercial Real Estate

 

 

416,632

 

 

 

393,913

 

 

 

369,721

 

Commercial and Industrial

 

 

119,607

 

 

 

124,165

 

 

 

106,061

 

Consumer

 

 

41,541

 

 

 

35,887

 

 

 

30,616

 

Industrial Development Bonds

 

 

6,005

 

 

 

6,555

 

 

 

5,892

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans, net

 

$

838,698

 

 

$

795,205

 

 

$

737,057

 

 

While the security portfolio has been utilized to fund loan growth for the last three years, additional sources have been cultivated during 2016, 2017, and 2018. The security portfolio decreased $13.3 million in the first nine months 2018 from yearend 2017. The amount of pledged investment securities decreased by $1.7 million as compared to yearend and decreased $3.3 million as compared to September 30, 2017. This was accomplished by utilizing Promontory’s 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, 2018, pledged investment securities totaled $81.2 million.  The current portfolio is in a net unrealized loss position of $6.2 million.

 

For the Bank, an additional $4.2 million is also available from the Federal Home Loan Bank based on current collateral pledging with up to $114.0 million available provided adequate collateral is pledged.

42


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

With the exception of FHLB stock and Farmer Mac stock, carried at cost, which is shown as other securities, all of the Company’s 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 $123.1 million of unsecured borrowing capacity through its correspondent banks.

Overall total assets increased 0.1% since yearend 2017 and grew 1.6% since September 30, 2017. The largest growth in both periods was in the loan portfolios followed by other assets since yearend and interest-bearing time deposits since September 30, 2017.

Deposits accounted for the largest growth within liabilities, up 1.0% or $9.5 million since yearend and 2.8% or $25.5 million over September 30, 2017 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, 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 $5.2 million as of the third quarter of 2018 compared to yearend 2017, as earnings exceeded dividend declarations. Accumulated other comprehensive loss increased in loss position by $3.1 million from December 2017.   Dividends paid for the quarter increased from the previous quarter by $100 thousand and dividends declared were the same as the second quarter at $0.14 per share.  Compared to September 30, 2017, shareholders’ equity increased 4.9% or $6.5 million. Record profits during 2017 were offset by a change in accumulated other comprehensive loss related to the available-for-sale securities portfolio from a loss position of $693 thousand to a loss position of $4.9 million as of September 30, 2017 and 2018, respectively. Profits are higher year-to-date September 2018 than year-to-date September 2017 by $2.5 million.

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 year 2017, the applicable required capital conservation buffer percentage was 1.25%. For 2018, the capital conservation buffer percentage increased to 1.875%.  The total buffer requirement will increase to 2.5% for calendar year 2019. As of September 30, 2018, 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

 

 

12.68

%

Risk Based Capital Tier I

 

 

15.45

%

Total Risk Based Capital

 

 

16.24

%

Stockholders' Equity/Total Assets

 

 

12.58

%

Capital Conservation Buffer

 

 

8.24

%

 

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Comparison of Results of Interest Earnings and Expenses for three month periods ended September 30, 2018 and 2017

When comparing third quarter 2018 to third quarter 2017, average loan balances grew $40.8 million. This represented a strong 5.2% increase in a one year time period. Interest income on loan balances also experienced an increase of $1.2 million as compared to the quarter ended September 30, 2017.  Increases in the prime lending rate between the periods also contributed to the improvement in interest income and rate yield.

The higher levels of loan interest income helped to offset the available-for-sale securities portfolio, which decreased in average balances when comparing to 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 was the same as third quarter 2017.  

43


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Overall, interest income for the quarter comparisons was higher for third quarter 2018 by 11.6% or $1.2 million as to third quarter 2017.

In terms of annualized yield, for the quarter ended September 30, 2018, it was 4.52% which compares to a year ago third quarter ended September 30, 2017 of 4.24%. The following chart demonstrates the value of increased loan balances in the balance sheet mix, even if offset by lower balances in the available-for-sale security portfolio. During the current quarter, securities were sold without realizing a loss to allow for new securities to be purchased as a means to increase yield and extend maturity.  The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 34% tax rate for 2017 and a 21% tax rate for 2018 in the charts to follow.

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Quarter to Date Ended September 30, 2018

 

 

Yield/Rate

 

Interest Earning Assets:

 

Average Balance

 

 

Interest/Dividends

 

 

September 30, 2018

 

 

September 30, 2017

 

Loans

 

$

831,246

 

 

$

10,725

 

 

 

5.16

%

 

 

4.83

%

Taxable Investment Securities

 

 

145,464

 

 

 

710

 

 

 

1.95

%

 

 

1.88

%

Tax-exempt Investment Securities

 

 

48,438

 

 

 

234

 

 

 

2.45

%

 

 

2.98

%

Fed Funds Sold & Other

 

 

19,674

 

 

 

84

 

 

 

1.71

%

 

 

1.01

%

Total Interest Earning Assets

 

$

1,044,822

 

 

$

11,753

 

 

 

4.52

%

 

 

4.24

%

 

Change in Interest Income Quarter to Date September 30, 2018 Compared to September 30, 2017

 

 

 

(In Thousands)

 

Interest Earning Assets:

 

Change

 

 

Due to

Volume

 

 

Due to Rate

 

Loans

 

$

1,178

 

 

$

527

 

 

$

651

 

Taxable Investment Securities

 

 

20

 

 

 

(6

)

 

 

26

 

Tax-exempt Investment Securities

 

 

(20

)

 

 

(20

)

 

 

-

 

Fed Funds Sold & Other

 

 

40

 

 

 

9

 

 

 

31

 

Total Interest Earning Assets

 

$

1,218

 

 

$

510

 

 

$

708

 

 

Offsetting some of the increase in interest income for the quarter was the increase in cost of funds in 2018.  Third quarter 2018 was higher by $432 thousand than third quarter 2017.  Since 2017, average interest-bearing deposit balances have increased $34.1 million and resulted in $450 thousand more in interest expense for the most recent quarter.  During the quarter, 10-month CD specials have been rolled out which carry a higher interest rate.  Additionally, interest expense on FHLB borrowings was down $17 thousand in the third quarter 2018 over the same time frame in 2017 due to a payoff of $5 million in December 2017.

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Quarter to Date Ended September 30, 2018

 

 

Yield/Rate

 

Interest Bearing Liabilities:

 

Average Balance

 

 

Interest

 

 

September 30, 2018

 

 

September 30, 2017

 

Savings Deposits

 

$

551,902

 

 

$

921

 

 

 

0.67

%

 

 

0.47

%

Other Time Deposits

 

 

180,858

 

 

 

690

 

 

 

1.53

%

 

 

1.19

%

Other Borrowed Money

 

 

5,000

 

 

 

20

 

 

 

1.60

%

 

 

1.48

%

Fed Funds Purchased & Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold under Agreement to Repurchase

 

 

25,827

 

 

 

134

 

 

 

2.08

%

 

 

1.51

%

Total Interest Bearing Liabilities

 

$

763,587

 

 

$

1,765

 

 

 

0.92

%

 

 

0.72

%

 

44


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Change in Interest Expense Quarter to Date September 30, 2018 Compared to September 30, 2017

 

 

 

(In Thousands)

 

Interest Bearing Liabilities:

 

Change

 

 

Due to

Volume

 

 

Due to Rate

 

Savings Deposits

 

$

312

 

 

$

64

 

 

$

248

 

Other Time Deposits

 

 

138

 

 

 

(16

)

 

 

154

 

Other Borrowed Money

 

 

(17

)

 

 

(20

)

 

 

3

 

Fed Funds Purchased & Securities

 

 

 

 

 

 

 

 

 

 

 

 

Sold under Agreement to Repurchase

 

 

(1

)

 

 

(52

)

 

 

51

 

Total Interest Bearing Liabilities

 

$

432

 

 

$

(24

)

 

$

456

 

 

Overall, net interest spread for the third quarter 2018 is higher than last year.  As the following chart illustrates, higher yields on interest and dividend income did offset the higher interest expense in the most recent quarter when comparing to the same period a year ago.

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2016

 

Interest/Dividend income/yield

 

 

4.52

%

 

 

4.24

%

 

 

4.03

%

Interest Expense / yield

 

 

0.92

%

 

 

0.72

%

 

 

0.60

%

Net Interest Spread

 

 

3.60

%

 

 

3.52

%

 

 

3.43

%

Net Interest Margin

 

 

3.85

%

 

 

3.71

%

 

 

3.57

%

 

Net interest income was up $786 thousand for the third quarter 2018  over the same time frame in 2017 due to the increase in loan interest income and partially offset by higher interest expense, as previously mentioned.  As the new loans added in 2017 and 2018 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to continue to widen this margin as measured in dollars.  In terms of net interest margin rate, the Bank recognizes competition for deposits have and will continue to put pressure on the margin which may lead to a tightening.

Comparison of Noninterest Results of Operations - Third Quarter 2018 to Third Quarter 2017

Provision Expense

The ALLL has a direct impact on the provision expense.  The increase in the ALLL is funded through recoveries and provision expense. The following tables both deal with the allowance for credit losses. The first table breaks down the activity within ALLL for each loan portfolio class and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs. The second table discloses how much of the ALLL is attributed to each class of the loan portfolio, as well as the percent that each particular class of the loan portfolio represents to the entire loan portfolio in the aggregate. The commercial and industrial along with the consumer loan portfolios accounted for the largest component of charge-offs and recoveries for third quarter of 2018 and 2017.  As was mentioned in previous discussion, the commercial real estate portfolio is currently creating a large impact on the ALLL due to the loan growth.  

Total provision for loan losses was $52 thousand lower for the third quarter 2018 as compared to the same quarter 2017.  Management continues to monitor asset quality, making adjustments to the provision as necessary.  Loan charge-offs were $12 thousand higher in third quarter 2018 than the same quarter 2017.  Recoveries were $18 thousand higher in third quarter 2018 as compared to third quarter 2017. Combined net charge-offs were $6 thousand lower in third quarter 2018 than the same time period 2017. Past due loans decreased $734 thousand from September 30, 2017 as compared to September 30, 2018.  The majority of the change is attributed to the decrease of past due balances in the consumer real estate, agricultural real estate, agricultural and commercial real estate portfolios.

45


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

The following table breaks down the activity within the ALLL for each loan portfolio class and shows the contribution provided by both recoveries and the provision, along with the reduction of the allowance caused by charge-offs. The time period covered is for three months ended September 30, 2018, 2017, and 2016.

 

 

(In Thousands)

 

 

Three Months Ended

September 30, 2018

 

 

 

 

Three Months Ended

September 30, 2017

 

 

 

 

Three Months Ended

September 30, 2016

 

Loans, net

$

838,698

 

 

 

 

$

795,205

 

 

 

 

$

737,057

 

Daily average of outstanding loans

$

831,246

 

 

 

 

$

790,397

 

 

 

 

$

736,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses - July 1,

$

6,789

 

 

 

 

$

6,858

 

 

 

 

$

6,493

 

Loans Charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

29

 

 

 

 

 

-

 

 

 

 

 

42

 

Agriculture Real Estate

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Agricultural

 

-

 

 

 

 

 

-

 

 

 

 

 

3

 

Commercial Real Estate

 

-

 

 

 

 

 

19

 

 

 

 

 

90

 

Commercial and Industrial

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Consumer

 

94

 

 

 

 

 

92

 

 

 

 

 

83

 

 

 

123

 

 

 

 

 

111

 

 

 

 

 

218

 

Loan Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

18

 

 

 

 

 

-

 

 

 

 

 

1

 

Agriculture Real Estate

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Agricultural

 

-

 

 

 

 

 

-

 

 

 

 

 

4

 

Commercial Real Estate

 

3

 

 

 

 

 

4

 

 

 

 

 

2

 

Commercial and Industrial

 

3

 

 

 

 

 

2

 

 

 

 

 

3

 

Consumer

 

18

 

 

 

 

 

18

 

 

 

 

 

19

 

 

 

42

 

 

 

 

 

24

 

 

 

 

 

29

 

Net Charge Offs

 

81

 

 

 

 

 

87

 

 

 

 

 

189

 

Provision for loan loss

 

47

 

 

 

 

 

99

 

 

 

 

 

308

 

Acquisition provision for loan loss

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Allowance for Loan & Lease Losses

   - September 30,

 

6,755

 

 

 

 

 

6,870

 

 

 

 

 

6,612

 

Allowance for Unfunded Loan Commitments

   & Letters of Credit - September 30,

 

333

 

 

 

 

 

228

 

 

 

 

 

227

 

Total Allowance for Credit Losses - September 30,

$

7,088

 

 

 

 

$

7,098

 

 

 

 

$

6,839

 

Ratio of net charge-offs to average

   Loans outstanding

 

0.01

%

 

 

 

 

0.01

%

 

 

 

 

0.03

%

Ratio of the Allowance for Loan Loss to

   Nonperforming Loans*

 

1399.58

%

 

 

 

 

397.35

%

 

 

 

 

584.18

%

 

 

*

Nonperforming loans are defined as all loans on nonaccrual, plus any loans past 90 days not on nonaccrual.

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off of a loan, whether partial loan balance or full loan balance.  A charge down 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

46


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

notification of bankruptcy, unsecured debt is charged off. Additional charge-offs may be realized as further unsecured positions are recognized.

Loans classified as nonaccrual were lower as of September 30, 2018 at $483 thousand as compared to $1.7 million as of September 30, 2017.

In determining the allocation for impaired loans the Bank applies the appraised market value of the collateral securing the asset, reduced by applying a discount for estimated costs of collateral liquidation.  In some instances where the discounted market value is less than the loan amount, a specific impairment allocation is assigned, which may be reduced or eliminated by the write down of the credit’s active principal outstanding balance.

For the majority of the Bank’s impaired loans, including all collateral dependent loans, the Bank will apply the appraised market value methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan's effective rate of interest.  To determine appraised market value, 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 and heavily relied upon. Until such time that updated appraisals are received, the Bank may discount the collateral value used.

The following table presents the balances for allowance of loan losses by loan type for nine months ended September 30, 2018 and September 30, 2017.

 

 

 

(In Thousands)

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

Balance at End of Period Applicable To:

 

Amount

 

 

% of Loan Category

 

 

Amount

 

 

% of Loan Category

 

Consumer Real Estate

 

$

235

 

 

 

9.85

%

 

$

276

 

 

 

10.56

%

Agricultural Real Estate

 

 

252

 

 

 

8.17

%

 

 

248

 

 

 

8.00

%

Agricultural

 

 

743

 

 

 

12.37

%

 

 

613

 

 

 

10.97

%

Commercial Real Estate

 

 

3,272

 

 

 

49.68

%

 

 

3,117

 

 

 

49.51

%

Commercial and Industrial

 

 

1,398

 

 

 

14.98

%

 

 

1,392

 

 

 

16.44

%

Consumer

 

 

471

 

 

 

4.95

%

 

 

423

 

 

 

4.52

%

Unallocated

 

 

384

 

 

 

0.00

%

 

 

801

 

 

 

0.00

%

Allowance for Loan & Lease Losses

 

 

6,755

 

 

 

 

 

 

 

6,870

 

 

 

 

 

Off Balance Sheet Commitments

 

 

333

 

 

 

 

 

 

 

228

 

 

 

 

 

Total Allowance for Credit Losses

 

$

7,088

 

 

 

 

 

 

$

7,098

 

 

 

 

 

 

Noninterest Income

Noninterest income was up $48 thousand for the third quarter 2018 over the same time frame in 2017.  The Company has seen an increase in its mortgage production volume; however the gain on the sale of these loans was only $3 thousand higher for the third quarter 2018 over the same period in 2017. Loan originations on loans held for sale for the third quarter 2018 were $13.6 million with proceeds from sale at $11.2 million for 2018 compared to 2017’s third quarter activity of $12.4 million in originations and $12.9 million in sales. The net result of the activity was 2018 had only $3 thousand more revenue on gain of sale for the quarter.  The mortgages sold were both 1-4 family and agricultural real estate loans originated for sale.

The largest fluctuation in noninterest income was in the combined service fee lines, which was $35 thousand higher than the same quarter last year.  The Company was also able to better take advantage of market fluctuations in its available-for-sale portfolio and sales on securities in third quarter 2018 than third quarter 2017. The gain was $10 thousand higher in the most recent quarter than the same quarter prior year.

47


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

The impact of mortgage servicing rights, both to income and expense, is shown in the following table which reconciles the value of mortgage servicing rights. The capitalization runs through noninterest income while the amortization thereof is included in non-interest expense. For the third quarter of 2018, mortgage servicing rights caused a net $17 thousand in income, in comparison to a net $34 thousand income for the third quarter of  2017. The identical capitalized additions for 2018 are attributed to a lower loan origination level of 1-4 families combined with a higher mortgage servicing rights value being applied to originations of 1-4 families in 2018 as compared to 2017. For loans of 15 years and less, the value was 1.008% in the third quarter 2018 versus .927% in third quarter 2017. For loans over 15 years, the value was 1.218% versus 1.137% for the same periods respectively. The carrying value is well below the market value of $3.1 million which indicates any large expense to fund the valuation allowance to be unlikely in 2018.

 

 

 

(In Thousands)

 

 

 

2018

 

 

2017

 

Beginning Balance, January 1,

 

$

2,299

 

 

$

2,192

 

Capitalized Additions

 

$

338

 

 

 

338

 

Amortization

 

$

(264

)

 

 

(266

)

Ending Balance, September 30,

 

$

2,373

 

 

 

2,264

 

Valuation Allowance

 

$

-

 

 

 

-

 

Mortgage Servicing Rights net, September 30,

 

$

2,373

 

 

$

2,264

 

 

Noninterest Expense

For the third quarter 2018, noninterest expenses were $769 thousand higher than for the same quarter in 2017.  Salaries, wages, and employee benefits increased $241 thousand, with the addition of the Findlay office, normal merit increases, and increased employer taxes related to the vesting of restricted shares.  Furniture and equipment expenses increased $95 thousand from the prior year due to an increase in depreciation of $46 thousand and maintenance contracts of $42 thousand.  Data processing charges increased $64 thousand for third quarter 2018 attributed to $54 thousand of conversion expenses related to possible acquisition.  General and administrative expenses were up $196 thousand compared to third quarter 2017 with the largest increases arising from consulting fees, fraud and other losses, and telephone expenses.  These increased expenses were offset by a reduction in legal fees related to loan collection and correspondent bank charges.

Net Income

Results overall, net income in the third quarter of 2018 was up $653 thousand as compared to the same quarter last year, with approximately $400 thousand improvement related to the tax rate change from 34% to 21%.  The Company has done an exceptional job of growing loans while keeping past dues low. The Company remains strong, stable, and well capitalized and has the capacity to continue to cover the increased costs of expansion.

 

Comparison of Results of Interest Earnings and Expenses for nine month periods ended September 30, 2018 and 2017

 

Interest Income

 

Higher loan balances created the improvement in the interest income for the first nine months of  2018 as compared to first nine months of 2017. Interest income rose 13.3% or $4 million while interest income from loans accounted for the majority of the increase. Offsetting the improvement from loans was a decrease in securities income of $53 thousand. The change in the balance sheet mix along with the loan growth caused the asset yield to improve by 29 basis points to 4.41% for the first nine months of 2018 compared to first nine months of 2017’s 4.12%.

 

With each quarter of 2018, the loan growth and prime rate increases contribute to the continued improvement in asset yield. The growth factor contribution is shown in the charts which follow. Improvement in loan interest income far outweighs the loss for investment portfolios decreasing.

 

The average interest earning asset base was $49.1 million higher in first nine months 2018 than the first nine months of 2017, an increase of approximately 4.9%.

 

48


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 34% tax rate for 2017 and a 21% tax rate for 2018 in the charts to follow.

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Year to Date Ended September 30, 2018

 

 

Yield/Rate

 

Interest Earning Assets:

 

Average Balance

 

 

Interest/Dividends

 

 

September 30, 2018

 

 

September 30, 2017

 

Loans

 

$

830,118

 

 

$

31,348

 

 

 

5.04

%

 

 

4.71

%

Taxable Investment Securities

 

 

148,797

 

 

 

2,136

 

 

 

1.91

%

 

 

1.81

%

Tax-exempt Investment Securities

 

 

49,643

 

 

 

721

 

 

 

2.45

%

 

 

3.04

%

Fed Funds Sold & Other

 

 

19,530

 

 

 

221

 

 

 

1.51

%

 

 

0.98

%

Total Interest Earning Assets

 

$

1,048,088

 

 

$

34,426

 

 

 

4.41

%

 

 

4.12

%

 

Change in Interest Income Year to Date September 30, 2018 Compared to September 30, 2017

 

 

 

(In Thousands)

 

Interest Earning Assets:

 

Change

 

 

Due to

Volume

 

 

Due to Rate

 

Loans

 

$

3,981

 

 

$

2,014

 

 

$

1,967

 

Taxable Investment Securities

 

 

19

 

 

 

(97

)

 

 

116

 

Tax-exempt Investment Securities

 

 

(72

)

 

 

(55

)

 

 

(17

)

Fed Funds Sold & Other

 

 

118

 

 

 

63

 

 

 

55

 

Total Interest Earning Assets

 

$

4,046

 

 

$

1,925

 

 

$

2,121

 

 

Interest Expense

 

Interest expense was also higher for first nine months of 2018 compared to first nine months of 2017. At $4.8 million, first nine months of 2018 was up $990 thousand as compared to same time period 2017 or 26.3%.

 

The average balance of interest-bearing liabilities was higher by $30.1 million in 2018 than the first nine months of 2017. Interest bearing deposits increased $41.5 million while Fed Funds sold and securities sold under agreement to repurchase decreased by $11.4 million. The higher balance coupled with the slight variation of the balance sheet mix, resulted in a 15 basis points increase in the cost of funds at 0.83% for first nine months of 2018 as compared to 2017’s 0.68%.

 

The Federal Funds rate and prime rate increases of 25 basis points in December 2015, December 2016, March, June, and December of 2017 along with March, June and September of 2018, has only had a marginal effect on the Bank’s pricing methodologies. Loans with variable rates and floors have had the rates begin to increase over the floors with the 200 basis points increase in prime rate over the last 33 months. This should be evident in the third quarter chart relating to the change report due to volume and rate. On the liability side, the slow pace of the rate increases has placed more pressure on the short term funds. Competition for public funds had caused those short term deposits to price higher. This is evidenced in the change chart as the increase cost is driven more by rate than volume.

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Year to Date Ended September 30, 2018

 

 

Yield/Rate

 

Interest Bearing Liabilities:

 

Average Balance

 

 

Interest

 

 

September 30, 2018

 

 

September 30, 2017

 

Savings Deposits

 

$

554,164

 

 

$

2,497

 

 

 

0.60

%

 

 

0.44

%

Other Time Deposits

 

 

182,772

 

 

 

1,822

 

 

 

1.33

%

 

 

1.15

%

Other Borrowed Money

 

 

5,000

 

 

 

60

 

 

 

1.60

%

 

 

1.47

%

Fed Funds Purchased & Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold under Agreement to Repurchase

 

 

26,402

 

 

 

376

 

 

 

1.90

%

 

 

1.49

%

Total Interest Bearing Liabilities

 

$

768,338

 

 

$

4,755

 

 

 

0.83

%

 

 

0.68

%

49


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

 

Change in Interest Expense Year to Date September 30, 2018 Compared to September 30, 2017

 

 

 

(In Thousands)

 

Interest Bearing Liabilities:

 

Change

 

 

Due to

Volume

 

 

Due to Rate

 

Savings Deposits

 

$

823

 

 

$

211

 

 

$

612

 

Other Time Deposits

 

 

207

 

 

 

(53

)

 

 

260

 

Other Borrowed Money

 

 

(50

)

 

 

(60

)

 

 

10

 

Fed Funds Purchased & Securities

 

 

 

 

 

 

 

 

 

 

 

 

Sold under Agreement to Repurchase

 

 

10

 

 

 

(92

)

 

 

102

 

Total Interest Bearing Liabilities

 

$

990

 

 

$

6

 

 

$

984

 

 

Net Interest Income

Overall, net interest spread figures for the first nine months of 2018 are up from 2017 by 14 basis points and up 17 basis points from 2016. Net interest margin for the first nine months of 2018 is higher than the same period 2017 and 2016. As the chart below illustrates, both higher yields on interest and dividend income, were offset by higher interest expense resulting in total net interest margin up 19 basis points since the first nine months of 2017 and over first nine months of 2016 by 24 basis points.

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2016

 

Interest/Dividend income/yield

 

 

4.41

%

 

 

4.12

%

 

 

4.00

%

Interest Expense / yield

 

 

0.83

%

 

 

0.68

%

 

 

0.59

%

Net Interest Spread

 

 

3.58

%

 

 

3.44

%

 

 

3.41

%

Net Interest Margin

 

 

3.80

%

 

 

3.61

%

 

 

3.56

%

 

Net interest income was up $3.1 million in the first nine months of 2018 over the same time frame in 2017 due to the increase in loan income even with higher interest expense, as previously mentioned. New loans added in 2017 and 2018 will continue to generate more income, while deposit pressure is expected to increase on the expense side.

 

50


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Comparison of Results of Noninterest Earnings and Expenses for nine month periods ended September 30, 2018 and 2017

 

Provision Expense

 

Total provision for loan losses was $22 thousand higher for nine months 2018 than for the first nine months 2017. While loan growth continued in the first nine months, strong asset quality continued also. The strong asset quality and lower net charge-offs offset any need for additional provision above the $219 thousand that was expensed.

 

 

(In Thousands)

 

 

Nine Months Ended

September 30, 2018

 

 

 

 

Nine Months Ended

September 30, 2017

 

 

 

 

Nine Months Ended

September 30, 2016

 

Loans, net

$

838,698

 

 

 

 

$

795,205

 

 

 

 

$

737,057

 

Daily average of outstanding loans

$

830,118

 

 

 

 

$

776,828

 

 

 

 

$

716,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses - January 1,

$

6,868

 

 

 

 

$

6,784

 

 

 

 

$

6,057

 

Loans Charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

63

 

 

 

 

 

-

 

 

 

 

 

106

 

Agriculture Real Estate

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Agricultural

 

-

 

 

 

 

 

-

 

 

 

 

 

21

 

Commercial Real Estate

 

15

 

 

 

 

 

19

 

 

 

 

 

93

 

Commercial and Industrial

 

100

 

 

 

 

 

-

 

 

 

 

 

20

 

Consumer

 

272

 

 

 

 

 

189

 

 

 

 

 

236

 

 

 

450

 

 

 

 

 

208

 

 

 

 

 

476

 

Loan Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

18

 

 

 

 

 

13

 

 

 

 

 

23

 

Agriculture Real Estate

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Agricultural

 

6

 

 

 

 

 

2

 

 

 

 

 

9

 

Commercial Real Estate

 

7

 

 

 

 

 

11

 

 

 

 

 

7

 

Commercial and Industrial

 

8

 

 

 

 

 

8

 

 

 

 

 

8

 

Consumer

 

79

 

 

 

 

 

63

 

 

 

 

 

60

 

 

 

118

 

 

 

 

 

97

 

 

 

 

 

107

 

Net Charge Offs

 

332

 

 

 

 

 

111

 

 

 

 

 

369

 

Provision for loan loss

 

219

 

 

 

 

 

197

 

 

 

 

 

924

 

Acquisition provision for loan loss

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Allowance for Loan & Lease Losses - September 30,

 

6,755

 

 

 

 

 

6,870

 

 

 

 

 

6,612

 

Allowance for Unfunded Loan Commitments

    & Letters of Credit - September 30,

 

333

 

 

 

 

 

228

 

 

 

 

 

227

 

Total Allowance for Credit Losses - September 30,

$

7,088

 

 

 

 

$

7,098

 

 

 

 

$

6,839

 

Ratio of net charge-offs to average

   Loans outstanding

 

0.04

%

 

 

 

 

0.01

%

 

 

 

 

0.05

%

Ratio of the Allowance for Loan Loss to

   Nonperforming Loans*

 

1399.58

%

 

 

 

 

397.35

%

 

 

 

 

584.18

%

 

Noninterest Income

 

In comparing past due balances of loans 30+ days, September 30, 2018 balances were $734 thousand lower than September 30, 2017 balances. Net charge-offs were also higher at $221 thousand for the first nine months of 2018 compared to the first nine months of 2017’s $111 thousand.

 

Noninterest income for the first nine months 2018 increased over the first nine months of 2017 by $107 thousand.  Combined service fees increased by $127 thousand and gain on sale of loans showed a $17 thousand improvement over first nine months of 2017.  Gain on sale of available-for-sale securities decreased by $37 thousand as compared to year-to-date 2017.

 

51


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Noninterest Expense

 

Through the first nine months of 2018, noninterest expenses were $1.9 million higher than in first nine months of 2017.  The effect of an increase of $552 thousand in salaries and wages was combined with an increase of $365 thousand in employee benefits. One new office has been added in 2018, merit increases along with increased costs in medical benefits have impacted the 2018 salaries, wages, and benefits. Higher profit levels are also driving higher incentive accruals for 2018.

 

Data processing fees were only $81 thousand higher than last year due to a seven year contract extension signed in the third quarter of 2016 along with the $54 thousand conversion expenses previously mentioned. It has helped reduce the expense while adding new products and services to better align with our customers’ expectations in the coming years. We have already added additional products in 2018, mainly focused on mobile services and business deposit accounts.

 

General and administrative expenses are up $327 thousand over the first nine months of 2017 with the largest increase attributed to an additional $188 thousand for consulting fees related to the CEO search and possible acquisition.  The next largest increase for 2018 was in the furniture and equipment.  This line item on the income statement was up by $204 thousand over first nine months of 2017.  Increased depreciation for new offices and office transformations, along with maintenance costs have led to this expense to increase over 2017.

 

Net Income

 

Overall, net income through the first nine months of 2018 was up $2.5 million as compared to the first nine months of 2017, with approximately $1.5 million improvement related to the tax rate change from 34% to 21%.  The Company continues to grow loans while keeping past dues low. The growth in loans has spurred the increase in net interest income that has flowed through to the bottom line. The asset quality has kept loan provision down as the allowance for loan loss remains adequate for the level of credit risk. The opening of the new offices has hampered earnings in the short term; however, the Company remains focused on the long term.

 

The Company continues to look for new opportunities to generate and protect revenue and provide additional channels through which to serve our customers and maintain our high level of customer satisfaction.

FORWARD LOOKING STATEMENTS

Statements contained in this portion of the Company's report may be forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements may be identified by the use of words such as "intend," "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." Such forward-looking statements are based on current expectations, but actual results may differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time.  Other factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank's market area, changes in relevant accounting principles and guidelines and other factors over which management has no control.  The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results differ from those projected in the forward-looking statements.

 

 

 

52


 

ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the exposure to loss resulting from changes in interest rates and equity prices.  The primary market risk to which the Company is subject is interest rate risk.  The majority of our interest rate risk arises from the instruments, positions and transactions entered into for purposes other than trading such as loans, available for sale securities, interest bearing deposits, short term borrowings and long term borrowings. Interest rate risk occurs when interest bearing assets and liabilities re-price at different times as market interest rates change. For example, if fixed rate assets are funded with variable rate debt, the spread between asset and liability rates will decline or turn negative if rates increase.

Interest rate risk is managed within an overall asset/liability framework. The principal objectives of asset/liability management are to manage sensitivity of net interest spreads and net income to potential changes in interest rates.

Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. In the event that our asset/liabilities management strategies are unsuccessful, our profitably may be adversely affected. The Company employs a sensitivity analysis utilizing interest rate shocks to help in this analysis.

The shocks presented below assume an immediate change of rate in the percentages and directions shown covering a twelve month period:

 

Interest Rate Shock on Net Interest Margin

 

 

 

 

 

 

 

 

Interest Rate Shock on Net Interest Income

 

Net Interest

 

 

% Change to

 

 

Rate

 

Rate

 

 

Cumulative

 

 

% Change to

 

Margin (Ratio)

 

 

Flat Rate

 

 

Direction

 

Changes by

 

 

Total ($000)

 

 

Flat Rate

 

 

4.29

%

 

 

11.79

%

 

Rising

 

3.00%

 

 

 

48,406

 

 

11.59%

 

 

4.08

%

 

 

6.24

%

 

Rising

 

2.00%

 

 

 

46,075

 

 

6.21%

 

 

3.86

%

 

 

0.60

%

 

Rising

 

1.00%

 

 

 

43,724

 

 

0.79%

 

 

3.84

%

 

 

0.00

%

 

Flat

 

0.00%

 

 

 

43,380

 

 

0.00%

 

 

3.54

%

 

 

-7.78

%

 

Falling

 

-1.00%

 

 

 

40,084

 

 

-7.60%

 

 

3.35

%

 

 

-12.84

%

 

Falling

 

-2.00%

 

 

 

38,133

 

 

-12.10%

 

 

3.12

%

 

 

-18.64

%

 

Falling

 

-3.00%

 

 

 

35,971

 

 

-17.08%

 

 

The net interest margin represents the forecasted twelve month margin. The Company also reviews shocks with a 4.0% fluctuation with a delayed time frame of 10 months and over a 24 month time frame. It also shows the effect rate changes will have on both the margin and net interest income. The goal of the Company is to lengthen the term of some of the Bank’s fixed rate liabilities or sources of funds to decrease the exposure to a rising rate environment.  Of course, customer desires also impact the Bank’s ability to attract longer term deposits.  Some movement into the longer term time deposits has occurred. Over the past five year period, the Bank has experienced a decrease in the time balances of our deposit portfolio, and therefore, a loss of term funding.  Over the past two years, the Bank has also paid off term borrowings with the last $5 million maturing this year.

The shock chart currently shows a slight widening net interest margin over the next twelve months in an increasing rate environment with a tightening in a falling rate environment.  Cost of funds are below 0.85% so at even the lowest shock of 100 basis points, the Bank cannot take full advantage and reprice funds to match the level of shock. Since the average duration of the majority of the assets is outside the 12 month shock period, the rising rate environment only shows minor improvement. The majority of the newer loans added to the commercial real estate portfolio begin with an initial fixed rate period of three to five years whose variable adjustment is outside of the current shock time frame. The Bank continues to adjust its assumptions by including decay rates and key rate ties on certain deposit accounts and continues to review and modify those rates as the index rates change.  All shocks are within risk exposure guidelines at all levels. The effect of the rate shocks may be mitigated to the extent that not all lines of business are directly tied to an external index and actual balance sheet composition may differ from prediction.

Overall, the Company must concentrate on increasing loan spreads on variable loans and extend the duration on cost of funds where possible.

 

53


 

ITEM 4 CONTROLS AND PROCEDURES

As of September 30, 2018, an evaluation was performed under the supervision and with the participation of the Company's management including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures.  Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2018 . There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

None

ITEM 1A RISK FACTORS

There have been no material changes in the risk factors disclosed by Registrant in its Report on Form 10-K for the fiscal year ended December 31, 2017.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Treasury stock repurchased the quarter ended September 30, 2018.

 

Period

 

(a) Total Number of

Shares Purchased

 

 

(b) Average Price

Paid per Share

 

 

(c) Total Number

of Shares Purchased as Part

of Publicly Announced Plan

or Programs

 

 

(d) Maximum

Number

of Shares that may yet be

purchased under the Plans or

Programs

 

7/1/2018 to 7/31/2018

 

 

 

 

 

 

 

 

 

 

 

400,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8/1/2018 to 8/31/2018

 

 

 

 

 

 

 

 

 

 

 

400,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9/1/2018 to 9/30/2018

 

 

 

 

 

 

 

 

 

 

 

400,000

 

Total

 

 

 

 

 

 

 

 

 

 

 

400,000

 

 

 

(1)

From time to time, the Company purchases shares in the market pursuant to a stock repurchase program publicly announced on January 19, 2018.  On that date, the Board of Directors authorized the repurchase of 400,000 common shares between January 19, 2018 and December 31, 2018.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4 MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5 OTHER INFORMATION

 

54


 

ITEM 6 EXHIBITS

 

2.1

 

Agreement and Plan of Reorganization and Merger (incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 8-K filed with the Commission on August 20, 2018).

3.1

 

Amended Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s Report on Form 8-K filed with the Commission on August 25, 2017).

3.2

 

Amended and Restated Code of Regulations of the Registrant (incorporated by reference to Exhibit 3.2 to Registrant's Quarterly Report on Form 10-Q filed with the Commission on July 26, 2017).

10.1

 

Employment Agreement executed by and between The Farmers & Merchants State Bank and Lars B. Eller on September 13, 2018 (incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 8-K filed with the Commission on September 13, 2018).

31.1

 

Rule 13-a-14(a) Certification - CEO

31.2

 

Rule 13-a-14(a) Certification - CFO

32.1

 

Section 1350 Certification - CEO

32.2

 

Section 1350 Certification - CFO

 

 

 

101.INS

 

XBRL Instance Document (1)

101.SCH

 

XBRL Taxonomy Extension Schem Document (1)

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document (1)

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document (1)

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document (1)

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document (1)

 

 

55


 

SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

Farmers & Merchants Bancorp, Inc.,

 

 

 

 

 

Date:

October 24, 2018

By:

/s/ Paul S. Siebenmorgen

 

 

 

 

Paul S. Siebenmorgen

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

October 24, 2018

By:

/s/ Barbara J. Britenriker

 

 

 

 

Barbara J. Britenriker

 

 

 

 

Executive Vice-President and

 

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

56