fmao-10q_20190331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10‑Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period March 31, 2019

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 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.  

 

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

11,106,183

Class

Outstanding as of April 26, 2019

 

 

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 -
March 31, 2019 and December 31, 2018

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2019 and March 31, 2018

4

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 2019 and March 31, 2018

5

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes to Stockholders’ Equity -
Three Months Ended March 31, 2019 and March 31, 2018

6

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2019 and March 31, 2018

7-8

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

 

 

Item   2.

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

38-50

 

 

 

 

 

Item   3.

Qualitative and Quantitative Disclosures About Market Risk

51

 

 

 

 

 

Item   4.

Controls and Procedures

52

 

 

 

 

 

PART II.

OTHER INFORMATION

52

 

 

 

 

 

Item   1.

Legal Proceedings

52

 

 

 

 

 

Item 1A.

Risk Factors

52

 

 

 

 

 

Item   2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

 

 

Item   3.

Defaults Upon Senior Securities

52

 

 

 

 

 

Item   4.

Mine Safety Disclosures

52

 

 

 

 

 

Item   5.

Other Information

52

 

 

 

 

 

Item   6.

Exhibits

53

 

 

 

 

 

Signatures

 

54

 

 

 

 

 

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)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

48,740

 

 

$

37,492

 

Federal funds sold

 

 

33,109

 

 

 

873

 

Total cash and cash equivalents

 

 

81,849

 

 

 

38,365

 

Interest-bearing time deposits

 

 

4,509

 

 

 

4,019

 

Securities - available-for-sale

 

 

174,682

 

 

 

168,447

 

Other securities, at cost

 

 

5,789

 

 

 

3,679

 

Loans held for sale

 

 

859

 

 

 

495

 

Loans, net

 

 

1,091,829

 

 

 

839,599

 

Premises and equipment

 

 

25,205

 

 

 

22,615

 

Goodwill

 

 

47,340

 

 

 

4,074

 

Mortgage servicing rights

 

 

2,397

 

 

 

2,385

 

Other real estate owned

 

 

510

 

 

 

600

 

Bank owned life insurance

 

 

14,963

 

 

 

14,884

 

Other assets

 

 

15,729

 

 

 

17,001

 

Total Assets

 

$

1,465,661

 

 

$

1,116,163

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

236,847

 

 

$

215,422

 

Interest-bearing

 

 

 

 

 

 

 

 

NOW accounts

 

 

418,773

 

 

 

298,254

 

Savings

 

 

272,875

 

 

 

227,701

 

Time

 

 

258,929

 

 

 

187,413

 

Total deposits

 

 

1,187,424

 

 

 

928,790

 

Federal funds purchased and securities sold under agreements to

   repurchase

 

 

25,521

 

 

 

32,181

 

Federal Home Loan Bank (FHLB) advances

 

 

24,682

 

 

 

-

 

Dividend payable

 

 

1,654

 

 

 

1,379

 

Accrued expenses and other liabilities

 

 

9,446

 

 

 

10,526

 

Total liabilities

 

 

1,248,727

 

 

 

972,876

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

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

   outstanding 12,230,000 shares 3/31/19, 10,400,000 shares 12/31/18

 

 

81,760

 

 

 

10,823

 

Treasury stock - 1,122,937 shares 3/31/19, 1,114,739 shares 12/31/18

 

 

(12,680

)

 

 

(12,409

)

Retained earnings

 

 

149,466

 

 

 

147,887

 

Accumulated other comprehensive loss

 

 

(1,612

)

 

 

(3,014

)

Total stockholders' equity

 

 

216,934

 

 

 

143,287

 

Total Liabilities and Stockholders' Equity

 

$

1,465,661

 

 

$

1,116,163

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements.

 

Note: The December 31, 2018, 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)

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Interest Income

 

 

 

 

 

 

 

 

Loans, including fees

 

$

14,680

 

 

$

10,102

 

Debt securities:

 

 

 

 

 

 

 

 

U.S. Treasury and government agencies

 

 

713

 

 

 

623

 

Municipalities

 

 

211

 

 

 

281

 

Dividends

 

 

88

 

 

 

55

 

Federal funds sold and other

 

 

170

 

 

 

75

 

Total interest income

 

 

15,862

 

 

 

11,136

 

Interest Expense

 

 

 

 

 

 

 

 

Deposits

 

 

2,613

 

 

 

1,319

 

Federal funds purchased and securities sold under agreements

   to repurchase

 

 

185

 

 

 

124

 

Borrowed funds

 

 

287

 

 

 

20

 

Total interest expense

 

 

3,085

 

 

 

1,463

 

Net Interest Income - Before Provision for Loan Losses

 

 

12,777

 

 

 

9,673

 

Provision for Loan Losses

 

 

30

 

 

 

40

 

Net Interest Income After Provision For Loan Losses

 

 

12,747

 

 

 

9,633

 

Noninterest Income

 

 

 

 

 

 

 

 

Customer service fees

 

 

1,578

 

 

 

1,466

 

Other service charges and fees

 

 

1,041

 

 

 

1,012

 

Net gain on sale of loans

 

 

102

 

 

 

132

 

Net loss on sale of available-for-sale securities

 

 

(26

)

 

 

-

 

Total noninterest income

 

 

2,695

 

 

 

2,610

 

Noninterest Expense

 

 

 

 

 

 

 

 

Salaries and wages

 

 

4,312

 

 

 

3,310

 

Employee benefits

 

 

1,594

 

 

 

1,136

 

Net occupancy expense

 

 

667

 

 

 

387

 

Furniture and equipment

 

 

696

 

 

 

507

 

Data processing

 

 

1,299

 

 

 

331

 

Franchise taxes

 

 

258

 

 

 

239

 

ATM expense

 

 

447

 

 

 

312

 

Advertising

 

 

260

 

 

 

186

 

Net loss on sale of other assets owned

 

 

15

 

 

 

17

 

FDIC assessment

 

 

96

 

 

 

87

 

Mortgage servicing rights amortization

 

 

75

 

 

 

85

 

Consulting fees

 

 

113

 

 

 

110

 

Other general and administrative

 

 

1,679

 

 

 

933

 

Total noninterest expense

 

 

11,511

 

 

 

7,640

 

Income Before Income Taxes

 

 

3,931

 

 

 

4,603

 

Income Taxes

 

 

707

 

 

 

836

 

Net Income

 

$

3,224

 

 

$

3,767

 

Basic and Diluted Earnings Per Share

 

$

0.29

 

 

$

0.41

 

Dividends Declared

 

$

0.15

 

 

$

0.13

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Net Income

 

$

3,224

 

 

$

3,767

 

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

 

 

 

 

 

 

 

 

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

   securities

 

 

1,749

 

 

 

(2,471

)

Reclassification adjustment for loss on sale of

   available-for-sale securities

 

 

26

 

 

 

-

 

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

   securities

 

 

1,775

 

 

 

(2,471

)

Tax expense (benefit)

 

 

373

 

 

 

(519

)

Other comprehensive income (loss)

 

 

1,402

 

 

 

(1,952

)

Comprehensive Income

 

$

4,626

 

 

$

1,815

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

[ Remainder of this page intentionally left blank ]

 

5


Farmers & Merchants Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated StatementS of Changes TO Stockholders’ Equity

For the Three Months Ended March 31, 2018 and 2019

(000’s Omitted, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Treasury

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Stock

 

 

Stock

 

 

Stock

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance - January 1, 2018

 

 

9,265,880

 

 

$

11,546

 

 

$

(12,160

)

 

$

136,547

 

 

$

(1,826

)

 

$

134,107

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,767

 

 

 

 

 

 

 

3,767

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,952

)

 

 

(1,952

)

Adoption of ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

360

 

 

 

(360

)

 

 

-

 

Issuance of 100 shares of restricted stock

 

 

100

 

 

 

(16

)

 

 

2

 

 

 

2

 

 

 

 

 

 

 

(12

)

Stock-based compensation expense

 

 

 

 

 

 

160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

160

 

Cash dividends declared - $0.13 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,193

)

 

 

 

 

 

 

(1,193

)

Balance - March 31, 2018

 

 

9,265,980

 

 

$

11,690

 

 

$

(12,158

)

 

$

139,483

 

 

$

(4,138

)

 

$

134,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - January 1, 2019

 

 

9,285,261

 

 

$

10,823

 

 

$

(12,409

)

 

$

147,887

 

 

$

(3,014

)

 

$

143,287

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,224

 

 

 

 

 

 

 

3,224

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,402

 

 

 

1,402

 

Issuance of 1,830,000 shares of common stock in acquisition

 

 

1,830,000

 

 

 

70,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70,437

 

Purchase of Treasury stock

 

 

(6,558

)

 

 

 

 

 

 

(213

)

 

 

 

 

 

 

 

 

 

 

(213

)

Issuance of 400 shares of restricted stock

   (Net of Forfeitures - 2,040)

 

 

(1,640

)

 

 

66

 

 

 

(58

)

 

 

9

 

 

 

 

 

 

 

17

 

Stock-based compensation expense

 

 

 

 

 

 

434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

434

 

Cash dividends declared - $0.15 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,654

)

 

 

 

 

 

 

(1,654

)

Balance - March 31, 2019

 

 

11,107,063

 

 

$

81,760

 

 

$

(12,680

)

 

$

149,466

 

 

$

(1,612

)

 

$

216,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements

 

6


 

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

 

 

 

(in thousands of dollars)

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

3,224

 

 

$

3,767

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

654

 

 

 

448

 

Amortization of available-for-sale securities, net

 

 

170

 

 

 

252

 

Amortization of servicing rights

 

 

75

 

 

 

85

 

Amortization of core deposit intangible

 

 

182

 

 

 

42

 

Amortization of fair value adjustments

 

 

155

 

 

 

2

 

Stock-based compensation expense

 

 

434

 

 

 

160

 

Provision for loan loss

 

 

30

 

 

 

40

 

Gain on sale of loans held for sale

 

 

(102

)

 

 

(132

)

Originations of loans held for sale

 

 

(8,340

)

 

 

(11,626

)

Proceeds from sale of loans held for sale

 

 

7,764

 

 

 

9,971

 

Loss on sale of other assets owned

 

 

15

 

 

 

17

 

Loss on sales of securities available-for-sale

 

 

26

 

 

 

-

 

Change in other assets and other liabilities, net

 

 

3,516

 

 

 

(4,015

)

Net cash provided by (used in) operating activities

 

 

7,803

 

 

 

(989

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

 

 

 

 

Maturities, prepayments and calls

 

 

1,703

 

 

 

2,094

 

Sales

 

 

11,100

 

 

 

-

 

Purchases

 

 

35

 

 

 

(1,308

)

Sales

 

 

237

 

 

 

-

 

Change in interest-bearing time deposits

 

 

(490

)

 

 

1

 

Proceeds from sale of other assets owned

 

 

75

 

 

 

5

 

Additions to premises and equipment

 

 

(704

)

 

 

(813

)

Loan originations and principal collections, net

 

 

5,301

 

 

 

(10,166

)

Acquisition of Limberlost, net of cash received

 

 

(2,089

)

 

 

-

 

Net cash provided by (used in) investing activities

 

 

15,168

 

 

 

(10,187

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Net change in deposits

 

 

52,416

 

 

 

33,998

 

Net change in federal funds purchased and securities sold under agreements

   to repurchase

 

 

(6,660

)

 

 

(16,188

)

Repayment of FHLB advances

 

 

(23,651

)

 

 

-

 

Purchase of treasury stock

 

 

(213

)

 

 

-

 

Cash dividends paid on common stock

 

 

(1,379

)

 

 

(1,193

)

Net cash provided by financing activities

 

 

20,513

 

 

 

16,617

 

Net Increase in Cash and Cash Equivalents

 

 

43,484

 

 

 

5,441

 

Cash and Cash Equivalents - Beginning of year

 

 

38,365

 

 

 

34,467

 

Cash and Cash Equivalents - End of period

 

$

81,849

 

 

$

39,908

 

 

 

 

 

 

 

 

 

 

 

(continued)


7


 

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)  (Continued)

 

 

 

(in thousands of dollars)

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Supplemental Information

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

Interest

 

$

2,655

 

 

$

1,479

 

Income taxes

 

 

-

 

 

 

-

 

Noncash investing activities:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate owned

 

 

-

 

 

 

-

 

The Company purchased all of the capital stock of Limberlost for $78,902 on January 1, 2019.  In conjunction with the acquisition, liabilities were assumed as follows:

 

 

 

 

 

 

 

 

Fair value of assets acquired

 

 

336,380

 

 

 

-

 

Less:  common stock issued

 

 

70,437

 

 

 

-

 

Cash paid for the capital stock

 

 

8,465

 

 

 

-

 

Liabilities assumed

 

 

257,478

 

 

 

-

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements.

 

 

 

 

 

 

 

 

 

[ Remainder of this page intentionally left blank ]

 

8


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

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.  Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that are expected for the year ended December 31, 2019.  The condensed consolidated balance sheet of the Company as of  December 31, 2018, 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, 2018.

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.

Reclassification

Certain amounts in the 2018 condensed consolidated financial statements have been reclassified to conform with the 2019 presentation.  These reclassifications had no effect on income.

 

NOTE 2  BUSINESS COMBINATION AND ASSET PURCHASE

 

On January 1, 2019, the Company acquired Limberlost Bancshares, Inc. (“Limberlost”), the bank holding company for Bank of Geneva, a community bank based in Geneva, Indiana.  Bank of Geneva operated six full-service offices in the northeast Indiana communities of Geneva, Berne, Decatur, Monroe, Portland and Monroeville.  Shareholders of Limberlost received 1,830 shares of FMAO common stock and $8,465.00 in cash for each share. Limberlost had 1,000 shares outstanding on January 1, 2019. The share price of Farmers & Merchants Bancorp, Inc. (FMAO) stock on January 1, 2019 was $38.49. Total consideration for the acquisition was approximately $78.9 million consisting of $8.5 million in cash and $70.4 million in stock.  As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs.  The Company also expects to reduce costs through economies of scale.

 

In 2018, the Company incurred $742.1 thousand of third-party acquisition-related costs.  The largest portion of the expenses recognized in 2018 related to consulting fees of $340 thousand, other general and administration expenses of $331.5 thousand and data processing expenses of $58.6 thousand. These three categories of expense accounted for 98.4% of the total acquisition expenses impacting the 2018 financial statements of the Company.

 

In 2019, the Company has incurred additional third-party acquisition-related costs of $1.3 million.  These expenses are comprised of data processing of $891.7 thousand, employee benefits of $107.6 thousand, ATM expense of $31.4 thousand, consulting fees of $18.3 thousand and other general and administrative expense of $238.3 thousand in the Company’s consolidated statement of income for the quarter ended March 31, 2019.

Under the acquisition method of accounting, the total purchase is allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition.  Of the total purchase price of $78.9 million, $3.9 million has been allocated to core deposit intangible included in other assets and will be amortized over seven years on a straight line basis.  Goodwill of $43.3 million resulting from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Bank of Geneva.  Of that total amount, none of the purchase price is deductible for tax purposes.  The following table summarizes the consideration paid for Bank of Geneva and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

9


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

NOTE 2 BUSINESS COMBINATION AND ASSET PURCHASE (Continued)

 

Fair Value of Consideration Transferred

 

 

 

 

 

 

(In Thousands)

 

Cash

 

$

8,465

 

Common Shares (1,830,000 shares)

 

 

70,437

 

Total

 

$

78,902

 

 

 

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

Cash and cash equivalents

 

$

6,376

 

Securities - available-for-sale

 

 

17,494

 

Other securities, at cost

 

 

2,347

 

Loans, net

 

 

257,183

 

Premises and equipment

 

 

2,538

 

Goodwill

 

 

43,266

 

Other assets

 

 

7,176

 

Total Assets Purchased

 

$

336,380

 

 

 

 

 

 

Liabilities

 

 

 

 

Deposits

 

 

 

 

Noninterest bearing

 

$

37,822

 

Interest bearing

 

 

168,312

 

Total deposits

 

 

206,134

 

Federal Home Loan Bank (FHLB) advances

 

 

48,196

 

Accrued expenses and other liabilities

 

 

3,148

 

Total Liabilities Assumed

 

$

257,478

 

 

The fair value of the assets acquired includes loans with a fair value of $257.2 million.  The gross principal and contractual interest due under the contracts is $359.2 million, of which $4.7 million is expected to be uncollectible.  The loans have a weighted average life of 70 months.  

The fair value of building and land included in premises and equipment was written down by $1.2 million and will be amortized based on the remaining life of each building.  The combined average remaining life is 16.75 years.

The fair value for certificates of deposit incorporates a valuation amount of $0.5 million which will be amortized over 1.5 years.  The fair value of Federal Home Loan Bank (FHLB) advances includes a valuation amount of $1.3 million which will be amortized over 2.3 years.

The Company acquired loans in the acquisition that had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired.  Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages.  Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan.  Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date.  Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

10


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

NOTE 2 BUSINESS COMBINATION AND ASSET PURCHASE (Continued)

 

 

The carrying amount of those loans is included in loans, net on the balance sheet at March 31.  The amounts of loans at March 31, 2019 are as follows:

 

 

2019

 

 

 

(In Thousands)

 

Balance - January 1, 2019

 

 

 

 

Commercial

 

$

4,094

 

Consumer RE

 

 

231

 

Consumer

 

 

71

 

Carrying amount, net of allowance of $2,118

 

$

2,278

 

 

 

 

 

 

Balance - March 31, 2019

 

 

 

 

Commercial

 

$

4,091

 

Consumer RE

 

 

231

 

Consumer

 

 

33

 

Carrying amount, net of allowance of $2,081

 

$

2,274

 

Loans acquired during 2019 for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

 

 

(In Thousands)

 

Contractually required payments receivable at acquisition

 

 

 

 

Commercial

 

$

4,215

 

Consumer RE

 

 

261

 

Consumer

 

 

94

 

Total required payments receivable

 

$

4,570

 

 

 

 

 

 

Cash flows expected to be collected at acquisition

 

$

2,788

 

 

 

 

 

 

Basis in acquired loans at acquisition

 

$

4,396

 

No allowances for loan losses were reversed in 2019.  The balance of the allowance for loan losses for loans acquired and accounted for under this guidance (ASC 310-30) was $2.081 million at March 31, 2019 and $2.118 million on January 1, 2019, respectively.

Changes in accretable yield, or income expected to be collected, are as follows:

 

 

2019

 

 

 

(In Thousands)

 

Balance - January 1, 2019

 

$

2,544

 

Additions

 

 

1

 

Accretion

 

 

(109

)

Reclassification from nonaccretable difference

 

 

-

 

Disposals

 

 

-

 

Balance - March 31, 2019

 

$

2,436

 

 

The results of operations of Bank of Geneva have been included in the Company’s consolidated financial statements since the acquisition date of January 1, 2019.  The following schedule includes pro-forma results for the three months ended March 31, 2019 and 2018 as if the Bank of Geneva acquisitions had occurred as of the beginning of the comparable prior reporting period.

 

11


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

NOTE 2 BUSINESS COMBINATION AND ASSET PURCHASE (Continued)

 

 

 

(in thousands of dollars, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Summary of Operations

 

 

 

 

 

 

 

 

Net Interest Income - Before Provision for Loan Losses

 

$

12,777

 

 

$

12,639

 

Provision for Loan Losses

 

 

30

 

 

 

145

 

Net Interest Income After Provision For Loan Losses

 

 

12,747

 

 

 

12,494

 

Noninterest Income

 

 

2,695

 

 

 

2,762

 

Noninterest Expense

 

 

10,224

 

 

 

9,346

 

Income Before Income Taxes

 

 

5,218

 

 

 

5,910

 

Income Taxes

 

 

965

 

 

 

1,108

 

Net Income

 

$

4,253

 

 

$

4,802

 

Basic and Diluted Earnings Per Share

 

$

0.38

 

 

$

0.43

 

 

The pro-forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the branches acquired and the related income tax effects.  The pro-forma information for the quarter ended March 31, 2019 includes approximately $2.1 million, net of tax, of operating revenue from Bank of Geneva since acquisition.

 

The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

 

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.

 

As mentioned previously, the acquisition of Bank of Geneva resulted in the recognition of $3.9 million in core deposit intangible assets which are being amortized over its remaining life of 7 years on a straight line basis.

 

The amortization expense for the three months ended March 31, 2018 was $42 thousand.   Of the $727 thousand to be expensed in 2019, $182 thousand has been expensed for the three months ended March 31, 2019.

 

 

 

(In Thousands)

 

 

(In Thousands)

 

 

(In Thousands)

 

 

 

Custar

 

 

Geneva

 

 

Total

 

2019

 

$

167

 

 

$

560

 

 

$

727

 

2020

 

 

161

 

 

 

560

 

 

 

721

 

2021

 

 

-

 

 

 

560

 

 

 

560

 

2022

 

 

-

 

 

 

560

 

 

 

560

 

2023

 

 

-

 

 

 

560

 

 

 

560

 

2024

 

 

-

 

 

 

560

 

 

 

560

 

2025

 

 

-

 

 

 

560

 

 

 

560

 

 

 

$

328

 

 

$

3,920

 

 

$

4,248

 

 

 

12


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

 

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 March 31, 2019 and December 31, 2018,  follows:

 

 

 

(In Thousands)

 

 

 

March 31, 2019

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

23,059

 

 

$

6

 

 

$

(182

)

 

$

22,883

 

U.S. Government agencies

 

 

75,289

 

 

 

131

 

 

 

(1,205

)

 

 

74,215

 

Mortgage-backed securities

 

 

38,619

 

 

 

97

 

 

 

(822

)

 

 

37,894

 

State and local governments

 

 

39,756

 

 

 

296

 

 

 

(362

)

 

 

39,690

 

Total available-for-sale securities

 

$

176,723

 

 

$

530

 

 

$

(2,571

)

 

$

174,682

 

 

 

 

 

(In Thousands)

 

 

 

December 31, 2018

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

23,078

 

 

$

6

 

 

$

(254

)

 

$

22,830

 

U.S. Government agencies

 

 

71,235

 

 

 

2

 

 

 

(1,910

)

 

 

69,327

 

Mortgage-backed securities

 

 

37,342

 

 

 

62

 

 

 

(1,142

)

 

 

36,262

 

State and local governments

 

 

40,608

 

 

 

225

 

 

 

(805

)

 

 

40,028

 

Total available-for-sale securities

 

$

172,263

 

 

$

295

 

 

$

(4,111

)

 

$

168,447

 

 

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.

13


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

NOTE 3 SECURITIES (Continued)

 

Information pertaining to securities with gross unrealized losses at March 31, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:    

 

 

 

(In Thousands)

 

 

 

March 31, 2019

 

 

 

Less Than  Twelve Months

 

 

Twelve Months  & Over

 

 

 

Gross Unrealized

 

 

Fair

 

 

Gross Unrealized

 

 

Fair

 

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

U.S. Treasury

 

$

-

 

 

$

-

 

 

$

(182

)

 

$

20,908

 

U.S. Government agencies

 

 

-

 

 

 

-

 

 

 

(1,205

)

 

 

65,412

 

Mortgage-backed securities

 

 

(1

)

 

 

720

 

 

 

(821

)

 

 

29,528

 

State and local governments

 

 

-

 

 

 

-

 

 

 

(362

)

 

 

27,792

 

Total available-for-sale securities

 

$

(1

)

 

$

720

 

 

$

(2,570

)

 

$

143,640

 

 

 

 

(In Thousands)

 

 

 

December 31, 2018

 

 

 

Less Than  Twelve Months

 

 

Twelve Months  & Over

 

 

 

Gross Unrealized

 

 

Fair

 

 

Gross Unrealized

 

 

Fair

 

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

U.S. Treasury

 

$

-

 

 

$

-

 

 

$

(254

)

 

$

20,861

 

U.S. Government agencies

 

 

-

 

 

 

-

 

 

 

(1,910

)

 

 

64,727

 

Mortgage-backed securities

 

 

(4

)

 

 

697

 

 

 

(1,138

)

 

 

30,347

 

State and local governments

 

 

(22

)

 

 

3,254

 

 

 

(783

)

 

 

29,413

 

Total available-for-sale securities

 

$

(26

)

 

$

3,951

 

 

$

(4,085

)

 

$

145,348

 

 

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 months ended March 31, 2019 and March 31, 2018.

 

 

 

Three Months

 

 

 

(In Thousands)

 

 

 

2019

 

 

2018

 

Gross realized gains

 

$

16

 

 

$

-

 

Gross realized losses

 

 

(42

)

 

 

-

 

Net realized losses

 

$

(26

)

 

$

-

 

Tax expense related to net realized losses

 

$

(5

)

 

$

-

 

 

The net realized losses on sales and related tax expense is a reclassification out of accumulated other comprehensive income (loss). The net realized loss is included in net loss 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.

14


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

NOTE 3 SECURITIES (Continued)

 

The amortized cost and fair value of debt securities at March 31, 2019, 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

 

$

30,977

 

 

$

30,820

 

After one year through five years

 

 

60,395

 

 

 

59,594

 

After five years through ten years

 

 

45,454

 

 

 

45,152

 

After ten years

 

 

1,278

 

 

 

1,222

 

Total

 

$

138,104

 

 

$

136,788

 

Mortgage-backed securities

 

 

38,619

 

 

 

37,894

 

Total

 

$

176,723

 

 

$

174,682

 

 

Investments with a carrying value of $83.1 million and $81.8 million at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits and securities sold under repurchase agreements.  

Other securities include Federal Home Loan Bank of Cincinnati and Indianapolis stock as of March 31, 2019.  As of  December 31, 2018, other securities only includes Federal Home Loan Bank of Cincinnati stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[ Remainder of this page intentionally left blank ]

 

15


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

 

 

NOTE 4 LOANS

Loan balances as of  March 31, 2019 and December 31, 2018:

 

 

 

(In Thousands)

 

Loans:

 

March 31, 2019

 

 

December 31, 2018

 

Consumer Real Estate

 

$

161,180

 

 

$

80,766

 

Agricultural Real Estate

 

 

192,903

 

 

 

68,609

 

Agricultural

 

 

114,920

 

 

 

108,495

 

Commercial Real Estate

 

 

441,200

 

 

 

419,784

 

Commercial and Industrial

 

 

137,936

 

 

 

121,793

 

Consumer

 

 

47,573

 

 

 

41,953

 

Industrial Development Bonds

 

 

7,384

 

 

 

5,889

 

 

 

 

1,103,096

 

 

 

847,289

 

Less: Net deferred loan fees and costs

 

 

(1,133

)

 

 

(915

)

 

 

 

1,101,963

 

 

 

846,374

 

Less: Allowance for loan losses

 

 

(6,636

)

 

 

(6,775

)

Less: Purchase Accounting Adjustments

 

 

(3,498

)

 

 

-

 

Loans - Net

 

$

1,091,829

 

 

$

839,599

 

 

The following is a contractual maturity schedule by major category of loans as of March 31, 2019:

 

 

 

(In Thousands)

 

 

 

 

 

 

 

After One

 

 

 

 

 

 

 

Within

 

 

Year Within

 

 

After

 

 

 

One Year

 

 

Five Years

 

 

Five Years

 

Consumer Real Estate

 

$

6,370

 

 

$

17,260

 

 

$

137,550

 

Agricultural Real Estate

 

 

680

 

 

 

6,082

 

 

 

186,141

 

Agricultural

 

 

71,544

 

 

 

31,632

 

 

 

11,744

 

Commercial Real Estate

 

 

18,402

 

 

 

169,066

 

 

 

253,732

 

Commercial and Industrial

 

 

74,195

 

 

 

53,787

 

 

 

9,954

 

Consumer

 

 

6,025

 

 

 

30,870

 

 

 

10,678

 

Industrial Development Bonds

 

 

424

 

 

 

291

 

 

 

6,669

 

 

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of March 31, 2019:

 

 

 

(In Thousands)

 

 

 

Fixed

 

 

Variable

 

 

 

Rate

 

 

Rate

 

Consumer Real Estate

 

$

66,857

 

 

$

94,323

 

Agricultural Real Estate

 

 

86,756

 

 

 

106,147

 

Agricultural

 

 

41,061

 

 

 

73,859

 

Commercial Real Estate

 

 

272,827

 

 

 

168,373

 

Commercial and Industrial

 

 

54,861

 

 

 

83,075

 

Consumer

 

 

42,487

 

 

 

5,086

 

Industrial Development Bonds

 

 

7,282

 

 

 

102

 

 

As of March 31, 2019 and December 31, 2018 one to four family residential mortgage loans amounting to $85.5 and $14.9 million, respectively, have been pledged as security for future loans and existing loans the Bank has received from the Federal Home Loan Bank.

Unless listed separately, Industrial Development Bonds are included in the Commercial and Industrial category for the remainder of the tables in this Note 4.

 

 

16


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 March 31, 2019 and December 31, 2018, net of deferred loan fees and costs:

 

March 31, 2019

 

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

 

$

844

 

 

$

142

 

 

$

700

 

 

$

1,686

 

 

$

158,803

 

 

$

160,489

 

 

$

-

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

192,887

 

 

 

192,887

 

 

 

-

 

Agricultural

 

 

74

 

 

 

-

 

 

 

-

 

 

 

74

 

 

 

114,969

 

 

 

115,043

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

440,488

 

 

 

440,488

 

 

 

-

 

Commercial and Industrial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

145,360

 

 

 

145,360

 

 

 

-

 

Consumer

 

 

77

 

 

 

4

 

 

 

35

 

 

 

116

 

 

 

47,580

 

 

 

47,696

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

995

 

 

$

146

 

 

$

735

 

 

$

1,876

 

 

$

1,100,087

 

 

$

1,101,963

 

 

$

-

 

 

December 31, 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

 

$

342

 

 

$

24

 

 

$

254

 

 

$

620

 

 

$

79,612

 

 

$

80,232

 

 

$

-

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

68,588

 

 

 

68,588

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

108,616

 

 

 

108,616

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

419,131

 

 

 

419,131

 

 

 

-

 

Commercial and Industrial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

127,752

 

 

 

127,752

 

 

 

-

 

Consumer

 

 

85

 

 

 

24

 

 

 

8

 

 

 

117

 

 

 

41,938

 

 

 

42,055

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

427

 

 

$

48

 

 

$

262

 

 

$

737

 

 

$

845,637

 

 

$

846,374

 

 

$

-

 

 

 

 

17


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 March 31, 2019 and December 31, 2018:

 

 

 

(In Thousands)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

$

1,071

 

 

$

462

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

-

 

Commercial & Industrial

 

 

70

 

 

 

72

 

Consumer

 

 

47

 

 

 

8

 

Total

 

$

1,188

 

 

$

542

 

 

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 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.

18


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.

19


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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[ Remainder of this page intentionally left blank ]

 

20


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 March 31, 2019 and December 31, 2018:

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 

Agricultural

 

 

 

 

 

 

Commercial

 

 

Commercial

 

 

Development

 

 

 

Real Estate

 

 

Agricultural

 

 

Real Estate

 

 

and Industrial

 

 

Bonds

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-2

 

$

42,560

 

 

$

7,515

 

 

$

9,985

 

 

$

4,641

 

 

$

-

 

3

 

 

60,378

 

 

 

44,179

 

 

 

82,470

 

 

 

27,547

 

 

 

2,505

 

4

 

 

74,077

 

 

 

60,588

 

 

 

340,200

 

 

 

93,937

 

 

 

4,879

 

5

 

 

15,740

 

 

 

2,761

 

 

 

5,262

 

 

 

6,217

 

 

 

-

 

6

 

 

132

 

 

 

-

 

 

 

2,571

 

 

 

4,753

 

 

 

-

 

7

 

 

-

 

 

 

-

 

 

 

-

 

 

 

881

 

 

 

-

 

8

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

192,887

 

 

$

115,043

 

 

$

440,488

 

 

$

137,976

 

 

$

7,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 

Agricultural

 

 

 

 

 

 

Commercial

 

 

Commercial

 

 

Development

 

 

 

Real Estate

 

 

Agricultural

 

 

Real Estate

 

 

and Industrial

 

 

Bonds

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-2

 

$

4,442

 

 

$

5,753

 

 

$

4,698

 

 

$

3,199

 

 

$

-

 

3

 

 

14,118

 

 

 

38,852

 

 

 

64,341

 

 

 

16,284

 

 

 

3,135

 

4

 

 

49,596

 

 

 

63,380

 

 

 

346,072

 

 

 

100,644

 

 

 

2,754

 

5

 

 

422

 

 

 

631

 

 

 

2,171

 

 

 

308

 

 

 

-

 

6

 

 

10

 

 

 

-

 

 

 

1,849

 

 

 

542

 

 

 

-

 

7

 

 

-

 

 

 

-

 

 

 

-

 

 

 

886

 

 

 

-

 

8

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

68,588

 

 

$

108,616

 

 

$

419,131

 

 

$

121,863

 

 

$

5,889

 

 

 

21


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 March 31, 2019 and December 31, 2018.  

 

 

 

(In Thousands)

 

 

 

Consumer

 

 

Consumer

 

 

 

Real Estate

 

 

Real Estate

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Grade

 

 

 

 

 

 

 

 

Pass

 

$

158,309

 

 

$

79,121

 

Special Mention (5)

 

 

135

 

 

 

232

 

Substandard (6)

 

 

2,045

 

 

 

879

 

Doubtful (7)

 

 

-

 

 

 

-

 

Total

 

$

160,489

 

 

$

80,232

 

 

 

 

(In Thousands)

 

 

 

Consumer - Credit

 

 

Consumer - Other

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

March 31,

2019

 

 

December 31,

2018

 

Performing

 

$

3,861

 

 

$

3,909

 

 

$

43,366

 

 

$

38,073

 

Nonperforming

 

 

14

 

 

 

19

 

 

 

455

 

 

 

54

 

Total

 

$

3,875

 

 

$

3,928

 

 

$

43,821

 

 

$

38,127

 

 

Information about impaired loans as of March 31, 2019, December 31, 2018 and March 31, 2018 are as follows:

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a valuation allowance

 

$

1,915

 

 

$

1,808

 

 

$

999

 

Impaired loans with a valuation allowance

 

 

254

 

 

 

246

 

 

 

607

 

Total impaired loans

 

$

2,169

 

 

$

2,054

 

 

$

1,606

 

Valuation allowance related to impaired loans

 

$

59

 

 

$

31

 

 

$

104

 

Total non-accrual loans

 

$

1,188

 

 

$

542

 

 

$

900

 

Total loans past-due ninety days or more and

   still accruing

 

$

-

 

 

$

-

 

 

$

-

 

Quarter ended average investment in impaired

   loans

 

$

2,135

 

 

$

2,533

 

 

$

1,688

 

Year to date average investment in impaired

   loans

 

$

2,135

 

 

$

1,958

 

 

$

1,688

 

 

Additional funds of $1 thousand are available to be advanced in connection with impaired loans.

The Bank had approximately $102 thousand of its impaired loans classified as troubled debt restructured (TDR) as of March 31, 2019, $178 thousand as of December 31, 2018 and $527 thousand as of March 31, 2018.  During the year to date  2019 and 2018, there were no new loans considered TDR.    

For the three month period ended March 31, 2019 and 2018, there were no TDRs that subsequently defaulted after modification.  

For the three month period ended March 31, 2019, there were no impaired loans classified as TDR paid off.

22


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 March 31, 2019 and March 31, 2018.

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QTD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QTD

 

 

QTD

 

 

Interest

 

Three Months Ended March 31, 2019

 

 

 

 

 

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

 

$

648

 

 

$

648

 

 

$

-

 

 

$

603

 

 

$

7

 

 

$

1

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

192

 

 

 

192

 

 

 

-

 

 

 

193

 

 

 

3

 

 

 

-

 

Commercial and Industrial

 

 

1,075

 

 

 

1,075

 

 

 

-

 

 

 

1,085

 

 

 

15

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

With a specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

 

254

 

 

 

254

 

 

 

59

 

 

 

254

 

 

 

-

 

 

 

-

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial and Industrial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Totals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

$

902

 

 

$

902

 

 

$

59

 

 

$

857

 

 

$

7

 

 

$

1

 

Agricultural Real Estate

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Agricultural

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Commercial Real Estate

 

$

192

 

 

$

192

 

 

$

-

 

 

$

193

 

 

$

3

 

 

$

-

 

Commercial and Industrial

 

$

1,075

 

 

$

1,075

 

 

$

-

 

 

$

1,085

 

 

$

15

 

 

$

-

 

Consumer

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

23


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

NOTE 4 LOANS (Continued)

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QTD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QTD

 

 

QTD

 

 

Interest

 

Three Months Ended March 31, 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

 

$

489

 

 

$

489

 

 

$

-

 

 

$

492

 

 

$

8

 

 

$

6

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

67

 

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

200

 

 

 

200

 

 

 

-

 

 

 

201

 

 

 

3

 

 

 

-

 

Commercial and Industrial

 

 

310

 

 

 

310

 

 

 

-

 

 

 

209

 

 

 

4

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

With a specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

 

80

 

 

 

80

 

 

 

20

 

 

 

80

 

 

 

-

 

 

 

-

 

Agricultural Real Estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Agricultural

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial Real Estate

 

 

418

 

 

 

418

 

 

 

42

 

 

 

420

 

 

 

4

 

 

 

-

 

Commercial and Industrial

 

 

109

 

 

 

109

 

 

 

42

 

 

 

219

 

 

 

-

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Totals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

$

569

 

 

$

569

 

 

$

20

 

 

$

572

 

 

$

8

 

 

$

6

 

Agricultural Real Estate

 

$

-

 

 

$

-

 

 

$

-

 

 

$

67

 

 

$

-

 

 

$

-

 

Agricultural

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Commercial Real Estate

 

$

618

 

 

$

618

 

 

$

42

 

 

$

621

 

 

$

7

 

 

$

-

 

Commercial and Industrial

 

$

419

 

 

$

419

 

 

$

42

 

 

$

428

 

 

$

4

 

 

$

-

 

Consumer

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

As of March 31, 2019, the Company had no foreclosed residential real estate property obtained by physical possession and $639 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions. As of March 31, 2018, the Company had $3 thousand of foreclosed residential real estate property obtained by physical possession and $49 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process according to local jurisdictions.

 

 

 

 

 

 

 

 

 

 

 

[ Remainder of this page intentionally left blank ]

 

24


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)

 

 

 

Three Months Ended

 

 

Twelve Months Ended

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Allowance for Loan & Lease Losses

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

6,775

 

 

$

6,868

 

Provision for loan loss

 

 

30

 

 

 

324

 

Loans charged off

 

 

(207

)

 

 

(580

)

Recoveries

 

 

38

 

 

 

163

 

Allowance for Loan & Lease Losses

 

$

6,636

 

 

$

6,775

 

Allowance for Unfunded Loan Commitments &

      Letters of Credit

 

$

346

 

 

$

274

 

Total Allowance for Credit Losses

 

$

6,982

 

 

$

7,049

 

 

The Company segregates its ALLL into two reserves:  The ALLL and the Allowance for Unfunded Loan Commitments and Letters of Credit (AULC).  When combined, these reserves constitute the total Allowance for Credit Losses (ACL).

The AULC is reported within other liabilities on the balance sheet while the ALLL is netted within the loans, net asset line.  The ACL presented above represents the full amount of reserves available to absorb possible credit losses.

 

 

 

 

 

 

[ Remainder of this page intentionally left blank ]

 

 

25


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 March 31, 2019 and March 31, 2018 in addition to the ending balances as of December 31, 2018 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 March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLOWANCE FOR CREDIT LOSSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

247

 

 

$

250

 

 

$

768

 

 

$

3,217

 

 

$

1,305

 

 

$

484

 

 

$

274

 

 

$

504

 

 

 

 

$

7,049

 

Charge Offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(207

)

 

 

-

 

 

 

-

 

 

 

 

 

(207

)

Recoveries

 

 

-

 

 

 

-

 

 

 

1

 

 

 

2

 

 

 

3

 

 

 

32

 

 

 

-

 

 

 

-

 

 

 

 

 

38

 

Provision (Credit)

 

 

21

 

 

 

20

 

 

 

(63

)

 

 

(16

)

 

 

182

 

 

 

187

 

 

 

-

 

 

 

(301

)

 

 

 

 

30

 

Other Non-interest expense related to

   unfunded

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

72

 

 

 

-

 

 

 

 

 

72

 

Ending Balance

 

$

268

 

 

$

270

 

 

$

706

 

 

$

3,203

 

 

$

1,490

 

 

$

496

 

 

$

346

 

 

$

203

 

 

 

 

$

6,982

 

Ending balance: individually evaluated

   for impairment

 

$

59

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

59

 

Ending balance: collectively evaluated

   for impairment

 

$

209

 

 

$

270

 

 

$

706

 

 

$

3,203

 

 

$

1,490

 

 

$

496

 

 

$

346

 

 

$

203

 

 

 

 

$

6,923

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

-

 

FINANCING RECEIVABLES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

160,489

 

 

$

192,887

 

 

$

115,043

 

 

$

440,488

 

 

$

145,360

 

 

$

47,696

 

 

$

-

 

 

$

-

 

 

 

 

$

1,101,963

 

Ending balance: individually evaluated

   for impairment

 

$

902

 

 

$

-

 

 

$

-

 

 

$

192

 

 

$

1,075

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

2,169

 

Ending balance: collectively evaluated

   for impairment

 

$

159,241

 

 

$

192,887

 

 

$

115,043

 

 

$

440,296

 

 

$

142,242

 

 

$

47,696

 

 

$

-

 

 

$

-

 

 

 

 

$

1,097,405

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

346

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,043

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

$

2,389

 

 


26

 


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

NOTE 4 LOANS (Continued)

 

 

 

(In Thousands)

 

December 31, 2018

 

Consumer

Real Estate

 

 

 

 

Agricultural Real Estate

 

 

Agricultural

 

 

Commercial Real Estate

 

 

Commercial

and Industrial

 

 

Consumer

 

 

Unfunded

Loan

Commitment

& Letters of

Credit

 

 

Unallocated

 

 

Total

 

ALLOWANCE FOR CREDIT LOSSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending Balance

 

$

247

 

 

 

 

$

250

 

 

$

768

 

 

$

3,217

 

 

$

1,305

 

 

$

484

 

 

$

274

 

 

$

504

 

 

$

7,049

 

Ending balance: individually evaluated for

   impairment

 

$

26

 

 

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

5

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

31

 

Ending balance: collectively evaluated for

   impairment

 

$

221

 

 

 

 

$

250

 

 

$

768

 

 

$

3,217

 

 

$

1,300

 

 

$

484

 

 

$

274

 

 

$

504

 

 

$

7,018

 

Ending balance: loans acquired with deteriorated

   credit quality

 

$

-

 

 

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

FINANCING RECEIVABLES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

80,232

 

 

 

 

$

68,588

 

 

$

108,616

 

 

$

419,131

 

 

$

127,752

 

 

$

42,055

 

 

$

-

 

 

$

-

 

 

$

846,374

 

Ending balance: individually evaluated for

   impairment

 

$

757

 

 

#

 

$

-

 

 

$

-

 

 

$

194

 

 

$

1,103

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,054

 

Ending balance: collectively evaluated for

   impairment

 

$

79,359

 

 

 

 

$

68,588

 

 

$

108,616

 

 

$

418,937

 

 

$

126,649

 

 

$

42,055

 

 

$

-

 

 

$

-

 

 

$

844,204

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

116

 

 

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

116

 

 

27


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 March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLOWANCE FOR CREDIT LOSSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

343

 

 

$

244

 

 

$

667

 

 

$

3,149

 

 

$

1,546

 

 

$

441

 

 

$

227

 

 

$

478

 

 

$

7,095

 

Charge Offs

 

 

(34

)

 

 

-

 

 

 

-

 

 

 

(14

)

 

 

-

 

 

 

(97

)

 

 

-

 

 

 

-

 

 

 

(145

)

Recoveries

 

 

-

 

 

 

-

 

 

 

3

 

 

 

2

 

 

 

2

 

 

 

30

 

 

 

-

 

 

 

-

 

 

 

37

 

Provision (Credit)

 

 

(55

)

 

 

19

 

 

 

36

 

 

 

537

 

 

 

(105

)

 

 

57

 

 

 

-

 

 

 

(449

)

 

 

40

 

Other Non-interest expense related to

   unfunded

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

38

 

 

 

-

 

 

 

38

 

Ending Balance

 

$

254

 

 

$

263

 

 

$

706

 

 

$

3,674

 

 

$

1,443

 

 

$

431

 

 

$

265

 

 

$

29

 

 

$

7,065

 

Ending balance: individually evaluated

   for impairment

 

$

20

 

 

$

-

 

 

$

-

 

 

$

42

 

 

$

42

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

104

 

Ending balance: collectively evaluated

   for impairment

 

$

234

 

 

$

263

 

 

$

706

 

 

$

3,632

 

 

$

1,401

 

 

$

431

 

 

$

265

 

 

$

29

 

 

$

6,961

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

FINANCING RECEIVABLES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

84,052

 

 

$

67,569

 

 

$

99,954

 

 

$

414,666

 

 

$

129,865

 

 

$

38,631

 

 

$

-

 

 

$

-

 

 

$

834,737

 

Ending balance: individually evaluated

   for impairment

 

$

569

 

 

$

-

 

 

$

-

 

 

$

618

 

 

$

419

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,606

 

Ending balance: collectively evaluated

   for impairment

 

$

83,362

 

 

$

67,569

 

 

$

99,954

 

 

$

414,048

 

 

$

129,446

 

 

$

38,631

 

 

$

-

 

 

$

-

 

 

$

833,010

 

Ending balance: loans acquired with

   deteriorated credit quality

 

$

121

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

121

 

 

28


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)

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

Earnings per share

 

 

 

 

 

 

 

 

Net income

 

$

3,224

 

 

$

3,767

 

Less: distributed earnings allocated to participating

   securities

 

 

(12

)

 

 

(12

)

Less: undistributed earnings allocated to participating

   securities

 

 

(12

)

 

 

(26

)

Net earnings available to common shareholders

 

$

3,200

 

 

$

3,729

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding including

   participating securities

 

 

11,089,839

 

 

 

9,265,959

 

Less: average unvested restricted shares

 

 

(83,417

)

 

 

(92,429

)

Weighted average common shares outstanding

 

 

11,006,422

 

 

 

9,173,530

 

Basic earnings and diluted per share

 

$

0.29

 

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

 

 

[ Remainder of this page intentionally left blank ]

 

29

 


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

 

 

 

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS

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 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 stock of Cincinnati and Indianapolis, approximates fair value based on the redemption provisions of the respective Federal Home Loan Bank.

Loans Held for Sale

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

Loans, net

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 and/or the Bank’s most recent acquisition experience.

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.

 

30

 


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 March 31, 2019 and December 31, 2018 are reflected below.

 

 

 

(In Thousands)

 

 

 

March 31, 2019

 

 

 

Carrying

 

 

Fair

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

81,849

 

 

$

81,849

 

 

$

81,849

 

 

$

-

 

 

$

-

 

Interest-bearing time deposits

 

 

4,509

 

 

 

4,509

 

 

 

-

 

 

 

4,509

 

 

 

-

 

Securities - available-for-sale

 

 

174,682

 

 

 

174,682

 

 

 

22,883

 

 

 

150,356

 

 

 

1,443

 

Other securities

 

 

5,789

 

 

 

5,789

 

 

 

 

 

 

 

 

 

 

 

5,789

 

Loans held for sale

 

 

859

 

 

 

859

 

 

 

 

 

 

 

 

 

 

 

859

 

Loans, net

 

 

1,091,829

 

 

 

1,070,726

 

 

 

 

 

 

 

 

 

 

 

1,070,726

 

Interest receivable

 

 

7,238

 

 

 

7,238

 

 

 

 

 

 

 

 

 

 

 

7,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

$

691,648

 

 

$

691,702

 

 

$

-

 

 

$

-

 

 

$

691,702

 

Non-interest bearing deposits

 

 

236,847

 

 

 

236,847

 

 

 

-

 

 

 

236,847

 

 

 

-

 

Time deposits

 

 

258,929

 

 

 

259,395

 

 

 

-

 

 

 

-

 

 

 

259,395

 

Total Deposits

 

 

1,187,424

 

 

 

1,187,944

 

 

 

-

 

 

 

236,847

 

 

 

951,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased and securities sold under

   agreement to repurchase

 

 

25,521

 

 

 

25,521

 

 

 

-

 

 

 

-

 

 

 

25,521

 

Federal Home Loan Bank advances

 

 

24,682

 

 

 

24,604

 

 

 

-

 

 

 

-

 

 

 

24,604

 

Interest payable

 

 

3,728

 

 

 

3,728

 

 

 

-

 

 

 

-

 

 

 

3,728

 

31


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

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

 

 

 

(In Thousands)

 

 

 

December 31, 2018

 

 

 

Carrying

 

 

Fair

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,365

 

 

$

38,365

 

 

$

38,365

 

 

$

-

 

 

$

-

 

Interest-bearing time deposits

 

 

4,019

 

 

 

3,954

 

 

 

-

 

 

 

3,954

 

 

 

-

 

Securities - available-for-sale

 

 

168,447

 

 

 

168,447

 

 

 

36,935

 

 

 

130,085

 

 

 

1,427

 

Other securities

 

 

3,679

 

 

 

3,679

 

 

 

-

 

 

 

-

 

 

 

3,679

 

Loans held for sale

 

 

495

 

 

 

495

 

 

 

-

 

 

 

-

 

 

 

495

 

Loans, net

 

 

839,599

 

 

 

823,914

 

 

 

-

 

 

 

-

 

 

 

823,914

 

Interest receivable

 

 

4,542

 

 

 

4,542

 

 

 

-

 

 

 

-

 

 

 

4,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

$

525,955

 

 

$

525,955

 

 

$

-

 

 

$

-

 

 

$

525,955

 

Non-interest bearing deposits

 

 

215,422

 

 

 

215,422

 

 

 

-

 

 

 

215,422

 

 

 

-

 

Time deposits

 

 

187,413

 

 

 

187,545

 

 

 

-

 

 

 

-

 

 

 

187,545

 

Total Deposits

 

 

928,790

 

 

 

928,922

 

 

 

-

 

 

 

215,422

 

 

 

713,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds purchased and securities sold under

   agreement to repurchase

 

 

32,181

 

 

 

3,181

 

 

 

-

 

 

 

-

 

 

 

32,181

 

Federal Home Loan Bank advances

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Interest payable

 

 

418

 

 

 

418

 

 

 

-

 

 

 

-

 

 

 

418

 

 

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.

32


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 March 31, 2019 and December 31, 2018, 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)

 

March 31, 2019

 

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

 

$

22,883

 

 

$

-

 

 

$

-

 

U.S. Government agencies

 

 

-

 

 

 

74,215

 

 

 

-

 

Mortgage-backed securities

 

 

-

 

 

 

37,894

 

 

 

-

 

State and local governments

 

 

-

 

 

 

38,247

 

 

 

1,443

 

Total Securities Available-for-Sale

 

$

22,883

 

 

$

150,356

 

 

$

1,443

 

 

December 31, 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

 

$

22,830

 

 

$

-

 

 

$

-

 

U.S. Government agencies

 

 

14,105

 

 

 

55,222

 

 

 

-

 

Mortgage-backed securities

 

 

-

 

 

 

36,262

 

 

 

-

 

State and local governments

 

 

-

 

 

 

38,601

 

 

 

1,427

 

Total Securities Available-for-Sale

 

$

36,935

 

 

$

130,085

 

 

$

1,427

 

 

The following table represents the changes in the Level 3 fair-value category of which unobservable inputs are relied upon as of March 31, 2019 and March 31, 2018.

 

 

 

(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, 2019

 

$

-

 

 

$

1,427

 

 

$

1,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Market Value

 

 

-

 

 

 

16

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments & Maturities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

$

-

 

 

$

1,443

 

 

$

1,443

 

33


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, 2018

 

$

-

 

 

$

1,428

 

 

$

1,428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Market Value

 

 

-

 

 

 

(5

)

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments & Maturities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

$

-

 

 

$

1,423

 

 

$

1,423

 

 

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 March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018, fair value of collateral dependent impaired loans categorized as Level 3 was $195 and $215 thousand, respectively. The specific allocation for impaired loans was $59 and $31 thousand as of March 31, 2019 and December 31, 2018, 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

 

 

March 31, 2019

 

 

Valuation Technique

 

Unobservable Inputs

 

Average)

State and local government

 

$

1,443

 

 

Discounted Cash Flow

 

Credit strength of underlying project or

entity / Discount rate

 

0-5%

(3.27%)

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   impaired loans

 

 

195

 

 

Collateral based

measurements

 

Discount to reflect current market

conditions and ultimate collectability

 

0-50%

(23.33%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned -

   residential

 

 

-

 

 

Appraisals

 

Discount to reflect current

market

 

0-20%

(0% )

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned -

   commercial

 

 

29

 

 

Appraisals

 

Discount to reflect current

market

 

0-20%

(48.67% )

34


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, 2018

 

 

Valuation Technique

 

Unobservable Inputs

 

Average)

State and local government

 

$

1,427

 

 

Discounted Cash Flow

 

Credit strength of underlying project or

entity / Discount rate

 

0-5%

(3.51%)

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent

   impaired loans

 

 

215

 

 

Collateral based

measurements

 

Discount to reflect current market

conditions and ultimate collectability

 

0-50%

(12.38%)

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned -

   residential

 

 

-

 

 

Appraisals

 

Discount to reflect current

market

 

— %

( — )

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned -

   commercial

 

 

-

 

 

Appraisals

 

Discount to reflect current

market

 

— %

( — )

 

The following table presents impaired loans and other real estate owned as recorded at fair value on March 31, 2019 and December 31, 2018:

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis at March 31, 2019

 

 

 

(In Thousands)

 

 

 

Balance at

March 31, 2019

 

 

Quoted Prices

in Active

Markets for

Identical

Assets (Level 1)

 

 

Significant

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Collateral dependent

   impaired loans

 

$

195

 

 

$

-

 

 

$

-

 

 

$

195

 

Other real estate

   owned - residential

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other real estate

   owned - commercial

 

 

29

 

 

 

-

 

 

 

-

 

 

 

29

 

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2018

 

 

 

(In Thousands)

 

 

 

Balance at

December 31, 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

 

$

215

 

 

$

-

 

 

$

-

 

 

$

215

 

Other real estate

   owned - residential

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other real estate

   owned - commercial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

35


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 no Federal Funds purchased as of March 31, 2019 and $6.5 million as of December 31, 2018, respectively.  During the same time periods, the company also had $25.5 million and $25.7 million in securities sold under agreement to repurchase.

 

 

 

March 31, 2019

 

 

 

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

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Repurchase agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury & agency securities

 

 

681

 

 

 

-

 

 

 

-

 

 

 

24,840

 

 

 

25,521

 

 

 

$

681

 

 

$

-

 

 

$

-

 

 

$

24,840

 

 

$

25,521

 

 

 

 

December 31, 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

 

$

6,486

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

6,486

 

Repurchase agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury & agency securities

 

 

806

 

 

 

-

 

 

 

-

 

 

 

24,889

 

 

 

25,695

 

 

 

$

7,292

 

 

$

-

 

 

$

-

 

 

$

24,889

 

 

$

32,181

 

 

36


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

 

 

NOTE 8 RECENT ACCOUNTING PRONOUNCEMENTS  

 

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 has adopted ASU 2016-02 on January 1, 2019 and recorded a right of use asset and a corresponding liability in the amount of $491.7 thousand.  This did not have a significant impact on the company’s financial statements.

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.

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 has contracted with an external advisor and has formed a committee to determine 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. The Company is in the early stages of CECL conversion analysis with use of a third party service provider and is working to run parallel for a minimum of the last two quarters of 2019.

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 financial statements, as goodwill testing has been completed annually without any impairment concerns.

In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 will be effective until years beginning after December 15, 2019, with early adoption permitted.  The Company is in the process of evaluating and does not expect ASU 2018-13 to have a material impact on its accounting disclosures.  

  

 

37

 


 

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

OVERVIEW

 

The Company completed the merger with Limberlost on January 1, 2019 and three weeks later integrated the Bank of Geneva into The Farmers & Merchants State Bank’s core operating system. The first quarter of 2019 has been impacted by a very labor-intensive process as we welcomed new employees, customers and shareholders into the F&M family. Training and reconciliation of items has been priority one and has involved many extra hours from all parties involved. Training will continue to be a focus throughout the next two quarters. Great benefits will follow as the Company continues its strategy for long-term sustainable growth from the six offices that have been added.  Financially, the merger is expected to be accretive to earnings during 2019, as a larger legal lending limit will enable the expansion of existing customer’s borrowings, a wider range of products and services becomes available to all customers, and a larger organization provides additional revenue-generating opportunities for our employees. F&M will continue to operate on the foundation of a strong community bank platform in the communities we serve.

 

The positive effect of the merger is in having the balances added on day one of 2019 so we have a whole year of earnings to offset the expense.  The negative effect is that most of the acquisition costs have been paid in the first quarter with only three months of earnings available to offset these costs. In first quarter 2019, approximately $1.3 million of direct acquisition costs have been expensed which doesn’t include the many indirect or soft costs such as overtime or the purchase accounting expenses surrounding the goodwill and fair value calculations.

 

Overall, the local economies continue to remain strong. The manufacturing sector has shown some expansion though tempered somewhat by possible recession concerns for 2020. Unemployment in our market areas remains low and has impacted expansion strategies. Finding quality employees is a challenge for all including the Company.

 

The agricultural sector faces similar challenges as last year with low grain prices (imports still impacting prices along with farm bill) and a very wet first quarter.  However, there is time for both situations to improve before it will affect the agricultural community. Land values for good soil types are holding while sales on marginal soil types continue to show a slight deterioration in prices.

 

Federal rate increases have resulted in a widening of the net interest margin though Fed appears to be on hold for future increases in 2019. Pressure continues to build on cost of funds as depositors seek out higher rates. The Bank has offered new products in 2019 to attract new depositors and for current depositors to increase their holdings with us. Competitive pressure has forced us to increase rates and thereby put pressure on the margin. The Bank of Geneva had a larger net interest margin than F&M which will help widen the margin in 2019.

The dividend declared for the first quarter represented a 15.4% increase over the declaration of the same period last year. Core earnings were strong for the first quarter and exceeded the prior quarter and first quarter last year after acquisition related expenses are factored out. The focus remains on growth for 2019 along with the widening of our footprint from additional offices. Welcoming and developing our newest offices is also important and a priority. The Company is positioned for positive results in 2019 and remains well capitalized.

 

NATURE OF ACTIVITIES

Farmers & Merchants Bancorp, Inc. (the “Company”) is a financial holding company incorporated under the laws of Ohio in 1985.  Our subsidiaries are, The Farmers & Merchants State Bank (the “Bank”), a community bank operating in Northwest Ohio since 1897 and Farmers & Merchants Risk Management, Inc., a captive insurance company formed in December 2014 and is located in Nevada. We report our financial condition and net income on a consolidated basis and we have only one segment.

Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our telephone number is (419) 446-2501.  The Bank operates thirty 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.  On January 1, 2019, six Bank of Geneva offices located in the Indiana counties of Adams, Allen and Jay, were merged with and into The Farmers & Merchants State Bank.  The Bank has continued its expansion strategy and the new offices are expected to provide new growth opportunities.

38


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

 

The Farmers & Merchants State Bank engages in general commercial banking and savings business including commercial, agricultural and residential mortgage, consumer and credit card lending activities.  The largest segment of the lending business relates to commercial, both real estate and non-real estate. The type of commercial business ranges from small business to multi-million dollar companies. The loans are a reflection of business located within the Banks’ market area. Because the 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) or Interactive Teller Machines (ITMs) are provided at most branch locations along with other independent locations in the market area. ITMs operate as an ATM with the addition of remote teller access to assist the user.  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 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.

 

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.

39


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

 

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 Adams, Allen, DeKalb, Jay 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 March 31, 2019, we had 313 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 regulatory agencies’ risk-based approach to examinations.  Regulatory changes and the complexity of new and amended rules have resulted in lack of clarity and uncertainties 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 ongoing compliance.  

The Economic Growth Regulatory Relief and Consumer Protection Act (EGRRCPA) was signed into law in May 2018.   EGRRCPA was intended to pave the way for banks to lend to creditworthy borrowers and better serve their communities.  Regulatory relief was not immediate, as guidance and new rulemaking remains to be completed to implement many of the changes.  The Bank along with many community banks welcome 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 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.    

 

40


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

 

The Bank is subject to numerous laws, rules, regulations and guidance which include, but are not limited to, the following significant matters: deposit insurance coverage; equal credit opportunity; fair lending; community reinvestment; anti-money laundering; suspicious activity reporting; identity theft identification and prevention; protections for military members and their dependents; flood disaster protection; integrated mortgage disclosures; mortgage servicing rights; legal lending limits; electronic fund transfers; consumer privacy; and unfair and deceptive acts and practices.   Extensive training and training resources are necessary to develop and maintain expertise on the various regulatory matters.

These U.S. Department of the Treasury’s final rules on Customer Due Diligence (CDD) and Beneficial Ownership added a fifth core element to the original core elements necessary for an effective Bank Secrecy Act and Anti-Money Laundering compliance program.  These rules were effective in May 2018.  The CDD Final Rule is a significant step toward greater financial transparency.  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.  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.

41


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 March 31, 2019 OREO property holdings were $510 thousand. OREO totaled $600 thousand and $651 thousand as of December 31, 2018 and March 31, 2018 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.

42


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 2019 led by loan growth from within our newer markets. The Bank is focused on funding the loan growth with the least expensive source of deposits, sale of securities or borrowings. 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.

Liquidity in terms of cash and cash equivalents ended $43.5 million higher as of March 31, 2019 than it was at yearend December 31, 2018. An increase in securities held along with increased deposits funded the $252.2 million increase in net loans since yearend 2018. All loan portfolios increased as a result of the Limberlost acquisition with the largest loan growth having occurred in agricultural real estate and consumer portfolios.  Commercial real estate and commercial and industrial portfolios also experienced large increases.

In comparing to the same prior year period, the March 31, 2019 (net of deferred fees and cost) loan balances of $1.1 billion accounted for $267.2 million or 32.0% increase when compared to 2018’s $834.7 million.  The year over year improvement in all loan categories was made up of a combined increase of 200.6% in agricultural related loans (comprised of 185.5% in agricultural real estate loans and 15.1% in non-real estate agricultural loans).  Consumer real estate loans increased by 90.9%, consumer loans by 23.5%, Industrial Development Bonds (“IDB’s”) by 16.3%, and commercial and industrial loans by 11.7%.  The Company credits the growth not only to the Limberlost acquisition, but also the 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 category as of March 31, for the last three years, net of deferred fees and costs.

 

 

 

(In Thousands)

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

March 31, 2017

 

 

 

Amount

 

 

Amount

 

 

Amount

 

Consumer Real Estate

 

$

160,489

 

 

$

84,052

 

 

$

84,081

 

Agricultural Real Estate

 

 

192,887

 

 

 

67,569

 

 

 

62,803

 

Agricultural

 

 

115,043

 

 

 

99,954

 

 

 

87,078

 

Commercial Real Estate

 

 

440,488

 

 

 

414,666

 

 

 

382,183

 

Commercial and Industrial

 

 

137,976

 

 

 

123,515

 

 

 

115,516

 

Consumer

 

 

47,696

 

 

 

38,631

 

 

 

33,878

 

Industrial Development Bonds

 

 

7,384

 

 

 

6,350

 

 

 

5,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Loans, net

 

$

1,101,963

 

 

$

834,737

 

 

$

771,206

 

 

While the security portfolio has been utilized to fund loan growth for the last three years, additional sources have been cultivated during 2017, 2018, and 2019. The security portfolio increased $6.2 million in the first three months 2019 from yearend 2018. The amount of pledged investment securities increased by $1.3 million as compared to yearend and increased $996 thousand as compared to March 31, 2018. The difference in the growth and consequently pledged securities, improves liquidity with the additional option of selling unpledged investment securities if needed to fund loan growth or other initiatives. As of March 31, 2019, pledged investment securities totaled $83.1 million.  The current portfolio is in a net unrealized loss position of $2.0 million.

 

For the Bank, an additional $31.2 million is also available from the Federal Home Loan Bank based on current collateral pledging with up to $119 million available provided adequate collateral is pledged.

With the exception of FHLB stocks, 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.

43


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

 

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 31.3% since yearend 2018 and grew 30.4% since March 31, 2018. The largest growth in both periods was in the loan portfolios followed by goodwill.

Deposits accounted for the largest growth within liabilities, up 27.8% or $258.6 million since yearend and 24.6% or $234.1 million over March 31, 2018 balances. Core deposits continue to drive the increase which provide the opportunity to generate additional noninterest income.  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 $73.6 million as of the first quarter of 2019 compared to yearend 2018, as the acquisition of Limberlost, which included stock in the transaction, was completed on January 1, 2019 along with earnings exceeding dividend declarations in the first quarter. Accumulated other comprehensive loss decreased in loss position by $1.4 million from December 2018.   Dividends declared were the same as the fourth quarter at $0.15 per share.  Compared to March 31, 2018, shareholders’ equity increased 60.8% or $82.1 million.  Profits are lower year-to-date March 2019 than year-to-date March 2018 by $543 thousand due to acquisition expenses totaling $1.3 million impacting 2019.

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 increased to 2.5% for calendar year 2019.  As of March 31, 2019, the Company and the Bank are both positioned well above the 2019 requirement.

The Bank continues to be well-capitalized in accordance with Federal regulatory capital requirements as the capital ratios below show:

 

Tier I Leverage Ratio

 

 

10.86

%

Risk Based Capital Tier I

 

 

13.13

%

Total Risk Based Capital

 

 

13.74

%

Stockholders' Equity/Total Assets

 

 

14.80

%

Capital Conservation Buffer

 

 

5.74

%

 

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Comparison of Results of Interest Earnings and Expenses for three month periods ended March 31, 2019 and 2018

When comparing first quarter 2019 to first quarter 2018, average loan balances with the acquisition of Limberlost grew $282.9 million. This represented a 34.3% increase in a one year time period. Interest income on loan balances also experienced an increase of $4.6 million as compared to the quarter ended March 31, 2018.  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 increased $53 thousand over first quarter 2018.  

Overall, interest income for the quarter comparisons was higher for first quarter 2019 by 42.4% or $4.7 million as to first quarter 2018.

In terms of annualized yield, for the quarter ended March 31, 2019, it was 4.80% which compares to a year ago first quarter ended March 31, 2018 of 4.28%. 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 realizing a loss of $26 thousand to fund growth and pay off some of the FHLB advances that were derived from the acquisition of Limberlost.  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 21% tax rate in the charts to follow.

44


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

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Quarter to Date Ended March 31, 2019

 

 

Yield/Rate

 

Interest Earning Assets:

 

Average Balance

 

 

Interest/Dividends

 

 

March 31, 2019

 

 

March 31, 2018

 

Loans

 

$

1,108,031

 

 

$

14,680

 

 

 

5.30

%

 

 

4.90

%

Taxable investment securities

 

 

151,885

 

 

 

842

 

 

 

2.22

%

 

 

1.90

%

Tax-exempt investment securities

 

 

34,513

 

 

 

170

 

 

 

2.49

%

 

 

2.44

%

Fed funds sold & other

 

 

31,394

 

 

 

170

 

 

 

2.17

%

 

 

1.53

%

Total Interest Earning Assets

 

$

1,325,823

 

 

$

15,862

 

 

 

4.80

%

 

 

4.28

%

 

Change in Interest Income Quarter to Date March 31, 2019 Compared to March 31, 2018

 

 

 

(In Thousands)

 

Interest Earning Assets:

 

Change

 

 

Due to

Volume

 

 

Due to Rate

 

Loans

 

$

4,578

 

 

$

3,749

 

 

$

829

 

Taxable investment securities

 

 

123

 

 

 

1

 

 

 

122

 

Tax-exempt investment securities

 

 

(70

)

 

 

(95

)

 

 

25

 

Fed funds sold & other

 

 

95

 

 

 

64

 

 

 

31

 

Total Interest Earning Assets

 

$

4,726

 

 

$

3,719

 

 

$

1,007

 

 

Offsetting some of the increase in interest income for the quarter was the increase in cost of funds in 2019.  First quarter 2019 was higher by $1.6 million than first quarter 2018.  Since 2018 with the Limberlost acquisition, average interest-bearing deposit balances have increased $172.1 million and resulted in $1.3 million more in interest expense for the most recent quarter.  During the quarter, 10- and 34-month CD specials and 31-month IRA specials have been rolled out which carry a higher interest rate, in addition to rates increasing on Kasasa II savings, account balances over $20,000 and Ultimate checking accounts.  Additionally, interest expense on FHLB borrowings was up $267 thousand in the first quarter 2019 over the same time frame in 2018 due to borrowings taken on from the acquisition.

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

Quarter to Date Ended March 31, 2019

 

 

Yield/Rate

 

Interest Bearing Liabilities:

 

Average Balance

 

 

Interest

 

 

March 31, 2019

 

 

March 31, 2018

 

Savings deposits

 

$

671,227

 

 

$

1,527

 

 

 

0.91

%

 

 

0.53

%

Other time deposits

 

 

243,342

 

 

 

1,086

 

 

 

1.79

%

 

 

1.24

%

Other borrowed money

 

 

29,392

 

 

 

287

 

 

 

3.91

%

 

 

1.60

%

Fed funds purchased & securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

sold under agreement to repurchase

 

 

33,794

 

 

 

185

 

 

 

2.19

%

 

 

1.83

%

Total Interest Bearing Liabilities

 

$

977,755

 

 

$

3,085

 

 

 

1.26

%

 

 

0.75

%

 

Change in Interest Expense Quarter to Date March 31, 2019 Compared to March 31, 2018

 

 

 

(In Thousands)

 

Interest Bearing Liabilities:

 

Change

 

 

Due to

Volume

 

 

Due to Rate

 

Savings deposits

 

$

786

 

 

$

261

 

 

$

525

 

Other time deposits

 

 

508

 

 

 

257

 

 

 

251

 

Other borrowed money

 

 

267

 

 

 

238

 

 

 

29

 

Fed funds purchased & securities

 

 

 

 

 

 

 

 

 

 

 

 

sold under agreement to repurchase

 

 

61

 

 

 

37

 

 

 

24

 

Total Interest Bearing Liabilities

 

$

1,622

 

 

$

793

 

 

$

829

 

45


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

 

 

Overall, net interest spread for the first quarter 2019 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.

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

March 31, 2017

 

Interest/Dividend income/yield

 

 

4.80

%

 

 

4.28

%

 

 

3.98

%

Interest Expense/cost

 

 

1.26

%

 

 

0.75

%

 

 

0.65

%

Net Interest Spread

 

 

3.54

%

 

 

3.53

%

 

 

3.33

%

Net Interest Margin

 

 

3.87

%

 

 

3.72

%

 

 

3.50

%

 

Net interest income was up $3.1 million for the first quarter 2019  over the same time frame in 2018 due to the increase in loan interest income and partially offset by higher interest expense, as previously mentioned.  As the new loans added in 2018 and 2019 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 - First Quarter 2019 to First Quarter 2018

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 consumer loan portfolios accounted for the largest component of charge-offs and recoveries for first quarter of 2019 and 2018.  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 $10 thousand lower for the first quarter 2019 as compared to the same quarter 2018.  Management continues to monitor asset quality, making adjustments to the provision as necessary.  Loan charge-offs were $62 thousand higher in first quarter 2019 than the same quarter 2018.  Recoveries were $1 thousand higher in first quarter 2019 as compared to first quarter 2018.  Combined net charge-offs were $61 thousand higher in first quarter 2019 than the same time period 2018. Past due loans increased $1.1 million from March 31, 2018 as compared to March 31, 2019.  The majority of the change is attributed to the increase of past due balances in the consumer real estate, agricultural, and consumer portfolios while the commercial and industrial portfolio decreased.

46


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 March 31, 2019, 2018, and 2017.

 

 

(In Thousands)

 

 

Three Months Ended

March 31, 2019

 

 

 

 

Three Months Ended

March 31, 2018

 

 

 

 

Three Months Ended

March 31, 2017

 

Loans, net

$

1,101,963

 

 

 

 

$

834,737

 

 

 

 

$

771,206

 

Daily average of outstanding loans

$

1,108,031

 

 

 

 

$

825,109

 

 

 

 

$

762,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses - Jan 1

$

6,775

 

 

 

 

$

6,868

 

 

 

 

$

6,784

 

Loans Charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

-

 

 

 

 

 

34

 

 

 

 

 

-

 

Agriculture Real Estate

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Agricultural

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Commercial Real Estate

 

-

 

 

 

 

 

14

 

 

 

 

 

0

 

Commercial and Industrial

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Consumer

 

207

 

 

 

 

 

97

 

 

 

 

 

44

 

 

 

207

 

 

 

 

 

145

 

 

 

 

 

44

 

Loan Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Real Estate

 

-

 

 

 

 

 

-

 

 

 

 

 

10

 

Agriculture Real Estate

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Agricultural

 

1

 

 

 

 

 

3

 

 

 

 

 

1

 

Commercial Real Estate

 

2

 

 

 

 

 

2

 

 

 

 

 

2

 

Commercial and Industrial

 

3

 

 

 

 

 

2

 

 

 

 

 

3

 

Consumer

 

32

 

 

 

 

 

30

 

 

 

 

 

21

 

 

 

38

 

 

 

 

 

37

 

 

 

 

 

37

 

Net Charge Offs

 

169

 

 

 

 

 

108

 

 

 

 

 

7

 

Provision for loan loss

 

30

 

 

 

 

 

40

 

 

 

 

 

73

 

Acquisition provision for loan loss

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Allowance for Loan & Lease Losses

   - March 31

 

6,636

 

 

 

 

 

6,800

 

 

 

 

 

6,850

 

Allowance for Unfunded Loan Commitments

   & Letters of Credit - March 31

 

346

 

 

 

 

 

265

 

 

 

 

 

219

 

Total Allowance for Credit Losses - March 31

$

6,982

 

 

 

 

$

7,065

 

 

 

 

$

7,069

 

Ratio of net charge-offs to average

   Loans outstanding

 

0.02

%

 

 

 

 

0.01

%

 

 

 

 

0.00

%

Ratio of the Allowance for Loan Loss to

   Nonperforming Loans*

 

558.92

%

 

 

 

 

755.19

%

 

 

 

 

478.96

%

 

 

*

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

47


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

 

Loans classified as nonaccrual were higher as of March 31, 2019 at $1.2 million as compared to $900 thousand as of March 31, 2018.  The majority of the increase is in the consumer real estate portfolio.

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 three months ended March 31, 2019 and March 31, 2018.

 

 

 

(In Thousands)

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

Balance at End of Period Applicable To:

 

Amount

 

 

% of Loan Category

 

 

Amount

 

 

% of Loan Category

 

Consumer Real Estate

 

$

268

 

 

 

14.56

%

 

$

254

 

 

 

10.07

%

Agricultural Real Estate

 

 

270

 

 

 

17.50

%

 

 

263

 

 

 

8.10

%

Agricultural

 

 

706

 

 

 

10.44

%

 

 

706

 

 

 

11.97

%

Commercial Real Estate

 

 

3,203

 

 

 

39.98

%

 

 

3,674

 

 

 

49.67

%

Commercial and Industrial

 

 

1,490

 

 

 

13.19

%

 

 

1,443

 

 

 

15.56

%

Consumer

 

 

496

 

 

 

4.33

%

 

 

431

 

 

 

4.63

%

Unallocated

 

 

203

 

 

 

0.00

%

 

 

29

 

 

 

0.00

%

Allowance for Loan & Lease Losses

 

 

6,636

 

 

 

 

 

 

 

6,800

 

 

 

 

 

Off Balance Sheet Commitments

 

 

346

 

 

 

 

 

 

 

265

 

 

 

 

 

Total Allowance for Credit Losses

 

$

6,982

 

 

 

 

 

 

$

7,065

 

 

 

 

 

 

Noninterest Income

Noninterest income was up $85 thousand for the first quarter 2019 over the same time frame in 2018.  The Company has seen a decrease in its mortgage production volume and the gain on the sale of these loans was $30 thousand lower for the first quarter 2019 over the same period in 2018. Loan originations on loans held for sale for the first quarter 2019 were $8.3 million with proceeds from sale at $7.8 million for 2019 compared to 2018’s first quarter activity of $11.6 million in originations and $10.0 million in sales.  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 $141 thousand higher than the same quarter last year.  The increase was due to multiple small increments in all areas rather than in one service.  The Company did sell some of its available-for-sale portfolio in first quarter 2019 and recognized a $26 thousand loss.

48


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 first quarter of 2019, mortgage servicing rights caused a net $12 thousand in income, in comparison to a net $14 thousand income for the first quarter of  2018. The slightly lower capitalized additions for 2019 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 2019 as compared to 2018. For loans of 15 years and less, the value was 1.124% in the first quarter 2019 versus .972% in first quarter 2018. For loans over 15 years, the value was 1.309% versus 1.168% for the same periods respectively. The carrying value is well below the market value of $3.6 million which indicates any large expense to fund the valuation allowance to be unlikely in 2019.

 

 

 

(In Thousands)

 

 

 

2019

 

 

2018

 

Beginning Balance, January 1,

 

$

2,385

 

 

$

2,299

 

Capitalized Additions

 

$

87

 

 

 

99

 

Amortization

 

$

(75

)

 

 

(85

)

Ending Balance, March 31,

 

$

2,397

 

 

 

2,313

 

Valuation Allowance

 

$

-

 

 

 

-

 

Mortgage Servicing Rights net, March 31,

 

$

2,397

 

 

$

2,313

 

 

Noninterest Expense

For the first quarter 2019, noninterest expenses were $3.9 million higher than for the same quarter in 2018.  Of this increase, $1.3 million was third party acquisition related costs in connection with the Limberlost transaction.  Salaries, wages, and employee benefits increased $1.5 million, with the addition of the acquired offices, normal merit increases, and increased employer taxes related to the vesting of restricted stock awards and the incentive payout.  Acquisition costs included in these categories were $108 thousand.  Furniture and equipment expenses increased $189 thousand from the prior year primarily due to an increase in depreciation of $116 thousand and maintenance contracts of $65 thousand.  Data processing charges increased $968 thousand for first quarter 2019 attributed to $892 thousand of acquisition expenses. Other general and administrative expenses were up $746 thousand compared to first quarter 2018 with $238 thousand arising from the acquisition. Core deposit intangible increased $140 thousand, loan and collection expense increase $25 thousand, stationary/printing expenses increased $28 thousand and dues, subscription and membership increased $38 thousand.  These increased expenses were offset by a reduction in entertainment, education and OREO real estate taxes.

Net Income

Results overall, net income in the first quarter of 2019 was down $543 thousand as compared to the same quarter last year.  Excluding tax adjusted acquisition costs, net income would have been approximately $4.3 million, an increase of $1.1 million as shown in the below table.  

 

 

 

(in thousands of dollars)

 

 

 

Three Months Ended

 

Non-GAAP Reconciliation of Net Income

 

March 31, 2019

 

 

March 31, 2018

 

 

 

(Unaudited)

 

Net income as reported

 

$

3,224

 

 

$

3,767

 

Acquisition expenses

 

 

1,287

 

 

 

-

 

Tax effect

 

 

(258

)

 

 

-

 

Net income excluding acquisition expenses

 

$

4,253

 

 

$

3,767

 

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.


49


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

 

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.

 

 

 

 

 

[ Remainder of this page intentionally left blank ]

 

 

 

 

 

50


 

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

 

4.72%

 

 

16.25%

 

 

Rising

 

3.00%

 

 

 

64,394

 

 

13.26%

 

4.44%

 

 

9.44%

 

 

Rising

 

2.00%

 

 

 

61,218

 

 

7.68%

 

4.16%

 

 

2.49%

 

 

Rising

 

1.00%

 

 

 

58,021

 

 

2.05%

 

4.06%

 

 

0.00%

 

 

Flat

 

0.00%

 

 

 

56,855

 

 

0.00%

 

3.74%

 

 

-8.00%

 

 

Falling

 

-1.00%

 

 

 

53,190

 

 

-6.45%

 

3.47%

 

 

-14.51%

 

 

Falling

 

-2.00%

 

 

 

50,277

 

 

-11.57%

 

3.18%

 

 

-21.82%

 

 

Falling

 

-3.00%

 

 

 

47,234

 

 

-16.92%

 

 

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 last year; however, additional borrowings were a part of the Limberlost acquisition in 2019.

The shock chart currently shows a 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 at 1.26% so the lowest shock of 100 basis points is where the Bank can take full advantage and reprice funds to match the level of shock.  Once the shocks are falling over 100 basis points, the cost of funds cannot lower to match and the loss on net interest income continues to build.  Since the average duration of the majority of the assets is outside the 12 month shock period, the rising rate environment only shows 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.

 

51


 

ITEM 4 CONTROLS AND PROCEDURES

As of March 31, 2019, 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 March 31, 2019 . There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2019 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, 2018.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Treasury stock repurchased the quarter ended March 31, 2019.

 

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 (1)

 

 

(d) Maximum

Number

of Shares that may yet be

purchased under the Plans or

Programs

 

1/1/2019 to 1/31/2019

 

 

911

 

(2)

 

38.26

 

(2)

 

 

 

 

500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2/1/2019 to 2/28/2019

 

 

5,647

 

(2)

 

31.53

 

(2)

 

 

 

 

500,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3/1/2019 to 3/31/2019

 

 

 

 

 

 

 

 

 

 

 

500,000

 

Total

 

 

6,558

 

 

 

32.46

 

 

 

 

 

 

500,000

 

 

 

(1)

From time to time, the Company purchases shares in the market pursuant to a stock repurchase program publicly announced on January 18, 2019.  On that date, the Board of Directors authorized the repurchase of 500,000 common shares between January 18, 2019 and December 31, 2019.

 

(2)

Shares which were repurchased for taxes on vested stock awards are outside of this program.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4 MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5 OTHER INFORMATION

 

52


 

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 Quarterly Report on Form 10-Q filed with the Commission on October 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).

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)

 

 

53


 

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:

May 1, 2019

By:

/s/ Lars B. Eller

 

 

 

 

Lars B. Eller

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

May 1, 2019

By:

/s/ Barbara J. Britenriker

 

 

 

 

Barbara J. Britenriker

 

 

 

 

Executive Vice-President and

 

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

54