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FARMERS NATIONAL BANC CORP /OH/ - Quarter Report: 2017 March (Form 10-Q)

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly period ended March 31, 2017

Commission file number 001-35296

 

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

 

 

OHIO

 

34-1371693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No)

 

 

 

20 South Broad Street Canfield, OH

 

44406

(Address of principal executive offices)

 

(Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

Not applicable

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small 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

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

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

 

Class

 

Outstanding at April 30, 2017

Common Stock, No Par Value

 

27,066,592 shares

 

 

 

 

 

 


 

 

Page Number

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (Unaudited)

 

 

 

 

 

Included in Part I of this report:

 

 

 

 

 

Farmers National Banc Corp. and Subsidiaries

 

 

 

 

 

Consolidated Balance Sheets

2

 

Consolidated Statements of Income

3

 

Consolidated Statements of Comprehensive Income

4

 

Consolidated Statement of Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2

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

37

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4

Controls and Procedures

45

 

 

 

PART II - OTHER INFORMATION

45

 

 

 

Item 1

Legal Proceedings

45

 

 

 

Item 1A

Risk Factors

45

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3

Defaults Upon Senior Securities

45

 

 

 

Item 4

Mine Safety Disclosures

46

 

 

 

Item 5

Other Information

46

 

 

 

Item 6

Exhibits

47

 

 

SIGNATURES

48

 

 

10-Q Certifications

 

 

 

Section 906 Certifications

 

 

 

 

1

 


 

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

March 31,

2017

 

 

December 31,

2016

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

19,577

 

 

$

19,678

 

Federal funds sold and other

 

 

41,674

 

 

 

22,100

 

TOTAL CASH AND CASH EQUIVALENTS

 

 

61,251

 

 

 

41,778

 

Securities available for sale

 

 

377,072

 

 

 

369,995

 

Loans held for sale

 

 

1,098

 

 

 

355

 

Loans

 

 

1,461,461

 

 

 

1,427,635

 

Less allowance for loan losses

 

 

11,319

 

 

 

10,852

 

NET LOANS

 

 

1,450,142

 

 

 

1,416,783

 

Premises and equipment, net

 

 

23,212

 

 

 

23,225

 

Goodwill

 

 

37,164

 

 

 

37,164

 

Other intangibles

 

 

7,625

 

 

 

7,990

 

Bank owned life insurance

 

 

30,249

 

 

 

30,048

 

Other assets

 

 

38,674

 

 

 

38,775

 

TOTAL ASSETS

 

$

2,026,487

 

 

$

1,966,113

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

374,399

 

 

$

366,870

 

Interest-bearing

 

 

1,165,821

 

 

 

1,157,886

 

TOTAL DEPOSITS

 

 

1,540,220

 

 

 

1,524,756

 

Short-term borrowings

 

 

235,228

 

 

 

198,460

 

Long-term borrowings

 

 

9,841

 

 

 

15,036

 

Other liabilities

 

 

23,136

 

 

 

14,645

 

TOTAL LIABILITIES

 

 

1,808,425

 

 

 

1,752,897

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common Stock - Authorized 35,000,000 shares; issued 27,713,811 in 2017 and 2016

 

 

178,365

 

 

 

178,317

 

Retained earnings

 

 

46,973

 

 

 

42,547

 

Accumulated other comprehensive loss

 

 

(2,557

)

 

 

(2,791

)

Treasury stock, at cost; 647,219 shares in 2017 and 666,147 in 2016

 

 

(4,719

)

 

 

(4,857

)

TOTAL STOCKHOLDERS' EQUITY

 

 

218,062

 

 

 

213,216

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,026,487

 

 

$

1,966,113

 

 

See accompanying notes

 

 

 

2

 


 

CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands except Per Share Data)

 

 

 

For the Three Months Ended

 

(Unaudited)

 

March 31,

2017

 

 

March 31,

2016

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Loans, including fees

 

$

16,483

 

 

$

15,270

 

Taxable securities

 

 

1,118

 

 

 

1,437

 

Tax exempt securities

 

 

1,071

 

 

 

889

 

Dividends

 

 

115

 

 

 

113

 

Federal funds sold and other interest income

 

 

63

 

 

 

38

 

TOTAL INTEREST AND DIVIDEND INCOME

 

 

18,850

 

 

 

17,747

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

914

 

 

 

707

 

Short-term borrowings

 

 

327

 

 

 

175

 

Long-term borrowings

 

 

78

 

 

 

118

 

TOTAL INTEREST EXPENSE

 

 

1,319

 

 

 

1,000

 

NET INTEREST INCOME

 

 

17,531

 

 

 

16,747

 

Provision for loan losses

 

 

1,050

 

 

 

780

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

16,481

 

 

 

15,967

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

951

 

 

 

935

 

Bank owned life insurance income

 

 

201

 

 

 

212

 

Trust fees

 

 

1,678

 

 

 

1,496

 

Insurance agency commissions

 

 

674

 

 

 

139

 

Security gains

 

 

13

 

 

 

0

 

Retirement plan consulting fees

 

 

513

 

 

 

489

 

Investment commissions

 

 

222

 

 

 

236

 

Net gains on sale of loans

 

 

607

 

 

 

402

 

Debit card and EFT fees

 

 

653

 

 

 

626

 

Other operating income

 

 

375

 

 

 

411

 

TOTAL NONINTEREST INCOME

 

 

5,887

 

 

 

4,946

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

8,287

 

 

 

7,554

 

Occupancy and equipment

 

 

1,587

 

 

 

1,664

 

State and local taxes

 

 

417

 

 

 

393

 

Professional fees

 

 

747

 

 

 

529

 

Merger related costs

 

 

62

 

 

 

289

 

Advertising

 

 

244

 

 

 

345

 

FDIC insurance

 

 

235

 

 

 

283

 

Intangible amortization

 

 

365

 

 

 

337

 

Core processing charges

 

 

655

 

 

 

638

 

Telephone and data

 

 

241

 

 

 

216

 

Other operating expenses

 

 

1,773

 

 

 

2,196

 

TOTAL NONINTEREST EXPENSES

 

 

14,613

 

 

 

14,444

 

INCOME BEFORE INCOME TAXES

 

 

7,755

 

 

 

6,469

 

INCOME TAXES

 

 

1,972

 

 

 

1,671

 

NET INCOME

 

$

5,783

 

 

$

4,798

 

EARNINGS PER SHARE - basic and diluted

 

$

0.21

 

 

$

0.18

 

 

See accompanying notes

 

 

 

3

 


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

For the Three Months Ended

 

(Unaudited)

 

March 31,

2017

 

 

March 31,

2016

 

NET INCOME

 

$

5,783

 

 

$

4,798

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Net unrealized holding gains on available for sale securities

 

 

375

 

 

 

3,357

 

Reclassification adjustment for (gains) realized in income

 

 

(13

)

 

 

0

 

Net unrealized holding gains

 

 

362

 

 

 

3,357

 

Income tax effect

 

 

(128

)

 

 

(1,175

)

Other comprehensive income, net of tax

 

 

234

 

 

 

2,182

 

TOTAL COMPREHENSIVE INCOME

 

$

6,017

 

 

$

6,980

 

 

See accompanying notes

 

4

 


 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

For the

Three Months Ended

March 31, 2017

 

COMMON STOCK

 

 

 

 

Beginning balance

 

$

178,317

 

Issued 18,928 shares under the Long Term Incentive Plan

 

 

(133

)

Stock compensation expense for 480,462 unvested shares

 

 

181

 

Ending balance

 

 

178,365

 

 

 

 

 

 

RETAINED EARNINGS

 

 

 

 

Beginning balance

 

 

42,547

 

Net income

 

 

5,783

 

Decrease as a result of shares issued under the Long Term Incentive Plan

 

 

(5

)

Dividends declared at $.05 per share

 

 

(1,352

)

Ending balance

 

 

46,973

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

Beginning balance

 

 

(2,791

)

Other comprehensive income

 

 

234

 

Ending balance

 

 

(2,557

)

 

 

 

 

 

TREASURY STOCK, AT COST

 

 

 

 

Beginning balance

 

 

(4,857

)

Shares issued under the Long Term Incentive Plan

 

 

138

 

Ending balance

 

 

(4,719

)

TOTAL STOCKHOLDERS' EQUITY

 

$

218,062

 

 

See accompanying notes.

 

5

 


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

Three Months Ended

 

(Unaudited)

 

March 31,

2017

 

 

March 31,

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

5,783

 

 

$

4,798

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,050

 

 

 

780

 

Depreciation and amortization

 

 

879

 

 

 

904

 

Net amortization of securities

 

 

511

 

 

 

530

 

Security gains

 

 

(13

)

 

 

0

 

Stock compensation expense

 

 

181

 

 

 

201

 

Loss on sale of other real estate owned

 

 

33

 

 

 

200

 

Loss on fixed asset disposal

 

 

6

 

 

 

0

 

Earnings on bank owned life insurance

 

 

(201

)

 

 

(212

)

Origination of loans held for sale

 

 

(15,256

)

 

 

(12,885

)

Proceeds from loans held for sale

 

 

15,120

 

 

 

14,568

 

Net gains on sale of loans

 

 

(607

)

 

 

(402

)

Net change in other assets and liabilities

 

 

(1,285

)

 

 

(5,983

)

NET CASH FROM OPERATING ACTIVITIES

 

 

6,201

 

 

 

2,499

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities and repayments of securities available for sale

 

 

14,301

 

 

 

12,013

 

Proceeds from sales of securities available for sale

 

 

43,263

 

 

 

10

 

Purchases of securities available for sale

 

 

(54,891

)

 

 

(1,977

)

Purchase of restricted stock

 

 

(391

)

 

 

0

 

Loan originations and payments, net

 

 

(34,409

)

 

 

(19,192

)

Proceeds from sale of other real estate owned

 

 

131

 

 

 

375

 

Additions to premises and equipment

 

 

(405

)

 

 

(281

)

NET CASH FROM INVESTING ACTIVITIES

 

 

(32,401

)

 

 

(9,052

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in deposits

 

 

15,464

 

 

 

36,835

 

Net change in short-term borrowings

 

 

36,768

 

 

 

(50,215

)

Repayment of long-term borrowings

 

 

(5,207

)

 

 

(216

)

Cash dividends paid

 

 

(1,352

)

 

 

(1,078

)

Repurchase of common shares

 

 

0

 

 

 

(168

)

NET CASH FROM FINANCING ACTIVITIES

 

 

45,673

 

 

 

(14,842

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

19,473

 

 

 

(21,395

)

Beginning cash and cash equivalents

 

 

41,778

 

 

 

56,014

 

Ending cash and cash equivalents

 

$

61,251

 

 

$

34,619

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

1,319

 

 

$

974

 

Income taxes paid

 

$

0

 

 

$

1,000

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate

 

$

0

 

 

$

188

 

Security purchases not settled

 

$

9,886

 

 

$

0

 

Issuance of stock awards

 

$

132

 

 

$

0

 

 

See accompanying notes

 

 

 

6

 


 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (“Company”) is a Financial Holding Company registered under the Bank Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”).  The Bank acquired Bowers Insurance Agency, Inc. (“Bowers”) and consolidated the activity of the Bowers with Farmers National Insurance (“Insurance”) during 2016.  The Company acquired First National Bank of Orrville (“First National Bank”) a subsidiary of National Bancshares Corporation (“NBOH”) and 1st National Community Bank (“FNCB”), a subsidiary of Tri-State 1st Banc, Inc. (“Tri-State”) during 2015 and consolidated all activity of both acquisitions within the Bank.  Farmers National Captive, Inc. (“Captive”) was formed during the third quarter of 2016 and is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and its subsidiaries.  The Captive pools resources with thirteen other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves and to provide insurance where not currently available or economically feasible in today’s insurance market place.  The consolidated financial statements also include the accounts of the Bank’s subsidiaries; Insurance and Farmers of Canfield Investment Co. (“Investments”).  The Company provides trust services through its subsidiary, Farmers Trust Company (“Trust”), retirement consulting services through National Associates, Inc. (“NAI”) and insurance services through the Bank’s subsidiary, Insurance.  The consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, along with the Trust, NAI and Captive. All significant intercompany balances and transactions have been eliminated in the consolidation.

 

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2016 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year. Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.

 

Estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Segments:

The Company provides a broad range of financial services to individuals and companies in northeastern Ohio.  Operations are managed and financial performance is primarily aggregated and reported in three lines of business, the Bank segment, the Trust segment and the Retirement Consulting segment.  

 

Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists of unrealized gains and losses on securities available for sale and changes in the funded status of the post-retirement health plan, which are recognized as separate components of equity, net of tax effects. For all periods presented there was no change in the funded status of the post-retirement health plan.

 

New Accounting Standards:

During April of 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.  Under current U.S. GAAP, a premium is typically amortized to the maturity date when a callable debt security is purchased at a premium, even if the holder is certain the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.  The new standard shortens the amortization period for the premium to the earliest call date to more closely align interest

7

 


 

income recorded on bonds held at a premium or a discount with the economics of the underlying instrument.  The standard takes effect for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  The Company amortizes the premium to the expected call date currently and does not expect the adoption of this ASU to have an impact on its Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have an impact on the Company's Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13: Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The ASU requires an organization to measure 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.  Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  ASU 2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  The Company has begun to accumulate historical credit information and created a task force in preparation for the adoption of ASU 2016-13, but management has not determined the full impact the new standard will have on the Consolidated Financial Statements.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09: Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for public companies for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company adopted the ASU 2016-09 on January 1, 2017 which had no material impact on the Consolidated Financial Statements and disclosures.

In February 2016, FASB issued ASU 2016-02 (Topic 842): Leases.  The main objective of ASU 2016-02 is to provide users with useful, transparent, and complete information about leasing transactions.  ASU 2016-02 requires the rights and obligations associated with leasing arrangements be reflected on the balance sheet in order to increase transparency and comparability among organizations.  Under the updated guidance, lessees will be required to recognize a right-to-use asset and a liability to make a lease payment and disclose key information about leasing arrangements.  ASU 2016-02 is effective for public companies for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.  The Company expects the adoption of this ASU could require capitalization of certain leases in the amount of $2.6 million on the balance sheet as an asset and a related liability of equal amount with no income statement affect.  Therefore the Company does not expect the adoption of this ASU to have a material impact to its Consolidated Financial Statements.

In January 2016, FASB issued ASU 2016-01: Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  The main objective of ASU 2016-01 is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Some of the amendments in ASU 2016-01  include the following: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others.  The amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Management anticipates the impact of the adoption of this guidance on the Company’s consolidated financial statements to be limited.

8

 


 

In May 2014, FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606).  The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016.  Management anticipates the impact of the adoption of this guidance on the Company’s consolidated financial statements to be limited.  There will be no impact to core revenue which is mainly interest income less interest expense.  Management is still assessing the impact from other non-interest income sources, specifically, deposit fees, trust income and retirement consulting income.

 

 

Business Combinations:

 

On March 13, 2017, the Company announced the agreement and plan of merger with Monitor Bancorp, Inc. (“Monitor”), the holding company for Monitor Bank.  Pursuant to the agreement, the actual consideration to be paid will be calculated based on Monitor’s consolidated tangible book value per share as of March 31, 2017, plus the after-tax proceeds of the anticipated sale of Monitor’s interest in the Monitor Wealth Group (in aggregate, “March 31 TBV”).  Each shareholder of Monitor will be entitled to elect to receive consideration in cash or in Farmers’ common shares, subject to an overall limitation of 85% of the shares being exchanged for Farmers’ shares and 15% for cash.  Based on a current estimate of March 31 TBV, the transaction would be valued at approximately $7.8 million with $1.4 million of goodwill recorded.  The merger is expected to qualify as a tax-free reorganization for those shareholders electing to receive Farmers’ shares.  The transaction is subject to receipt of Monitor shareholder approval and customary regulatory approvals.  The Company expects the transaction to close late in the second quarter or early in the third quarter of 2017.

On June 1, 2016, the Bank completed the acquisition of the Bowers Insurance Agency, Inc., and merged all activity of Bowers with Insurance, the Bank’s wholly-owned insurance agency subsidiary.  The Bowers group is engage in selling insurance including commercial, farm, home, and auto property/casualty insurance and will help to meet the needs of all the Company’s customers.  The transaction involved both cash and 123,280 shares of stock totaling $3.2 million, including up to $1.2 million of future payments, contingent upon Bowers meeting performance targets, with an estimated fair value at the acquisition date of $880 thousand.  The acquisition is part of the Company’s plan to increase the levels of noninterest income and to complement the existing insurance services currently being offered.

Goodwill of $1.8 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the companies.  The goodwill was determined not to be deductible for income tax purposes.  The fair value of other intangible assets of $1.6 million is related to client relationships, company name and noncompetition agreements.

 

9

 


 

The following table summarizes the consideration paid for Bowers and the amounts of the assets acquired and liabilities assumed on the closing date of the acquisition.

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

1,137

 

Stock

 

1,138

 

Contingent consideration

 

880

 

Fair value of total consideration transferred

$

3,155

 

Fair value of assets acquired

 

 

 

Cash

$

64

 

Premises and equipment

 

290

 

Other assets

 

34

 

Total assets acquired

 

388

 

Fair value of liabilities assumed

 

124

 

Net assets acquired

$

264

 

 

 

 

 

Assets and liabilities arising from acquisition

 

 

 

Identified intangible assets

 

1,630

 

Deferred tax liability

 

(588

)

Goodwill created

 

1,849

 

Total net assets acquired

$

3,155

 

The following table presents pro forma information as if the above acquisition that occurred during June 2016 actually took place at the beginning of 2016.  The pro forma information includes adjustments for merger related costs, amortization of intangibles arising from the transaction and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effective on the assumed date.

 

 

For Three Months Ended March 31,

 

(In thousands of dollars except per share results)

2016

 

Net interest income

$

16,747

 

Net income

$

4,810

 

Basic and diluted earnings per share

$

0.18

 

 

 

Securities:

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at March 31, 2017 and December 31, 2016 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In Thousands of Dollars)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

5,467

 

 

$

4

 

 

$

(49

)

 

$

5,422

 

State and political subdivisions

 

166,479

 

 

 

1,108

 

 

 

(2,562

)

 

 

165,025

 

Corporate bonds

 

1,042

 

 

 

5

 

 

 

(6

)

 

 

1,041

 

Mortgage-backed securities - residential

 

170,675

 

 

 

567

 

 

 

(2,064

)

 

 

169,178

 

Collateralized mortgage obligations - residential

 

20,504

 

 

 

2

 

 

 

(695

)

 

 

19,811

 

Small Business Administration

 

16,720

 

 

 

0

 

 

 

(479

)

 

 

16,241

 

Equity securities

 

171

 

 

 

184

 

 

 

(1

)

 

 

354

 

Totals

$

381,058

 

 

$

1,870

 

 

$

(5,856

)

 

$

377,072

 

10

 


 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In Thousands of Dollars)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

5,970

 

 

$

5

 

 

$

(54

)

 

$

5,921

 

State and political subdivisions

 

157,014

 

 

 

1,049

 

 

 

(2,760

)

 

 

155,303

 

Corporate bonds

 

1,343

 

 

 

4

 

 

 

(8

)

 

 

1,339

 

Mortgage-backed securities - residential

 

171,215

 

 

 

1,019

 

 

 

(2,552

)

 

 

169,682

 

Collateralized mortgage obligations - residential

 

21,397

 

 

 

1

 

 

 

(705

)

 

 

20,693

 

Small Business Administration

 

17,236

 

 

 

0

 

 

 

(530

)

 

 

16,706

 

Equity securities

 

168

 

 

 

185

 

 

 

(2

)

 

 

351

 

Totals

$

374,343

 

 

$

2,263

 

 

$

(6,611

)

 

$

369,995

 

 

Proceeds from the sale of portfolio securities were $43.3 million during the three month period ended March 31, 2017.  Gross gains of $562 thousand and gross losses of $549 thousand were realized on these sales during the three month period ended March 31, 2017.  Proceeds from the sale of portfolio securities were $10 thousand during the three month period ended March 31, 2016.  Gross gains were $1 thousand and gross losses of $1 thousand during the same three month period ended March 31, 2016.

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

 

 

March 31, 2017

 

(In Thousands of Dollars)

 

Amortized Cost

 

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

Within one year

 

$

11,743

 

 

$

11,754

 

One to five years

 

 

52,051

 

 

 

52,432

 

Five to ten years

 

 

88,905

 

 

 

87,286

 

Beyond ten years

 

 

20,289

 

 

 

20,016

 

Mortgage-backed, collateralized mortgage obligations and Small

   Business Administration securities

 

 

207,899

 

 

 

205,230

 

Total

 

$

380,887

 

 

$

376,718

 

 

 

The following table summarizes the investment securities with unrealized losses at March 31, 2017 and December 31, 2016, aggregated by major security type and length of time in a continuous unrealized loss position.  Unrealized losses for U.S. Treasury and U.S. government sponsored entities for more than twelve months, rounded to less than $1 thousand in 2017.  

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

(In Thousands of Dollars)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

4,719

 

 

$

(49

)

 

$

0

 

 

$

0

 

 

$

4,719

 

 

$

(49

)

State and political subdivisions

 

68,787

 

 

 

(2,549

)

 

 

286

 

 

 

(13

)

 

 

69,073

 

 

 

(2,562

)

Corporate bonds

 

486

 

 

 

(6

)

 

 

0

 

 

 

0

 

 

 

486

 

 

 

(6

)

Mortgage-backed securities - residential

 

80,341

 

 

 

(1,902

)

 

 

8,841

 

 

 

(162

)

 

 

89,182

 

 

 

(2,064

)

Collateralized mortgage obligations - residential

 

7,568

 

 

 

(118

)

 

 

10,573

 

 

 

(577

)

 

 

18,141

 

 

 

(695

)

Small Business Administration

 

8,420

 

 

 

(192

)

 

 

7,778

 

 

 

(287

)

 

 

16,198

 

 

 

(479

)

Equity securities

 

33

 

 

 

(1

)

 

 

0

 

 

 

0

 

 

 

33

 

 

 

(1

)

Total

$

170,354

 

 

$

(4,817

)

 

$

27,478

 

 

$

(1,039

)

 

$

197,832

 

 

$

(5,856

)

11

 


 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

(In Thousands of Dollars)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

4,015

 

 

$

(54

)

 

$

502

 

 

$

0

 

 

$

4,517

 

 

$

(54

)

State and political subdivisions

 

92,560

 

 

 

(2,745

)

 

 

286

 

 

 

(15

)

 

 

92,846

 

 

 

(2,760

)

Corporate bonds

 

786

 

 

 

(8

)

 

 

0

 

 

 

0

 

 

 

786

 

 

 

(8

)

Mortgage-backed securities - residential

 

98,348

 

 

 

(1,823

)

 

 

29,743

 

 

 

(729

)

 

 

128,091

 

 

 

(2,552

)

Collateralized mortgage obligations - residential

 

7,956

 

 

 

(108

)

 

 

10,972

 

 

 

(597

)

 

 

18,928

 

 

 

(705

)

Small Business Administration

 

8,770

 

 

 

(205

)

 

 

7,890

 

 

 

(325

)

 

 

16,660

 

 

 

(530

)

Equity securities

 

44

 

 

 

(2

)

 

 

0

 

 

 

0

 

 

 

44

 

 

 

(2

)

Total

$

212,479

 

 

$

(4,945

)

 

$

49,393

 

 

$

(1,666

)

 

$

261,872

 

 

$

(6,611

)

 

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  Investment securities are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities.  Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.  In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.  The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment, and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis.  If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income or loss.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.  For equity securities, the entire amount of impairment is recognized through earnings.

As of March 31, 2017, the Company’s security portfolio consisted of 511 securities, 178 of which were in an unrealized loss position.  The majority of the unrealized losses on the Company’s securities are related to its holdings of mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities, and Small Business Administration securities as discussed below.

Unrealized losses on debt securities issued by state and political subdivisions have not been recognized into income.  These securities have maintained their investment grade ratings and management does not have the intent and does not expect to be required to sell these securities before their anticipated recovery.  The fair value is expected to recover as the securities approach their maturity date.

All of the Company’s holdings of collateralized mortgage obligations and residential mortgage-backed securities were issued by U.S. government-sponsored entities.  Unrealized losses on these securities have not been recognized into income.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, the issues are guaranteed by the issuing entity which the U.S. government has affirmed its commitment to support, and because the Company does not have the intent to sell these residential mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be OTTI.

Management does not believe any unrealized losses on Small Business Administration securities represent an OTTI.  The securities are issued and backed by the full faith and credit of the U.S. government and the Company does not have the intent and does not

12

 


 

anticipate that it will be required to sell these securities before their anticipated recovery.  The fair value of these securities is expected to recover as they approach their maturity.

 

Loans:

Loan balances were as follows:

 

(In Thousands of Dollars)

 

March 31,

2017

 

 

December 31,

2016

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

116,108

 

 

$

109,750

 

Non-owner occupied

 

 

165,916

 

 

 

165,861

 

Farmland

 

 

41,157

 

 

 

34,155

 

Other

 

 

77,456

 

 

 

70,823

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

178,194

 

 

 

171,145

 

Agricultural

 

 

26,564

 

 

 

24,598

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

237,841

 

 

 

224,222

 

Home equity lines of credit

 

 

62,593

 

 

 

59,642

 

Consumer

 

 

 

 

 

 

 

 

Indirect

 

 

161,596

 

 

 

156,633

 

Direct

 

 

27,835

 

 

 

26,663

 

Other

 

 

7,517

 

 

 

7,611

 

Total originated loans

 

$

1,102,777

 

 

$

1,051,103

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

59,376

 

 

$

60,928

 

Non-owner occupied

 

 

23,931

 

 

 

24,949

 

Farmland

 

 

51,315

 

 

 

54,204

 

Other

 

 

14,130

 

 

 

14,665

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

30,719

 

 

 

33,626

 

Agricultural

 

 

14,832

 

 

 

16,024

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

107,502

 

 

 

112,015

 

Home equity lines of credit

 

 

33,657

 

 

 

34,795

 

Consumer

 

 

 

 

 

 

 

 

Direct

 

 

19,543

 

 

 

21,681

 

Other

 

 

157

 

 

 

247

 

Total acquired loans

 

$

355,162

 

 

$

373,134

 

Net Deferred loan costs

 

 

3,522

 

 

 

3,398

 

Allowance for loan losses

 

 

(11,319

)

 

 

(10,852

)

Net loans

 

$

1,450,142

 

 

$

1,416,783

 

13

 


 

Purchased credit impaired loans

 

As part of the NBOH acquisition the Company acquired various loans that displayed evidence of deterioration of credit quality since origination and which was probable that all contractually required payments would not be collected.  The carrying amounts and contractually required payments of these loans which are included in the loan balances above are summarized in the following tables:

 

(In Thousands of Dollars)

 

March 31,

2017

 

 

December 31,

2016

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

662

 

 

$

689

 

Non-owner occupied

 

 

410

 

 

 

436

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1,171

 

 

 

1,213

 

Total outstanding balance

 

$

2,243

 

 

$

2,338

 

Carrying amount, net of allowance of $0 in 2017 and 2016

 

$

1,790

 

 

$

1,864

 

 

Accretable yield, or income expected to be collected, is shown in the table below:

 

(In Thousands of Dollars)

 

 

 

Three Months Ended

March 31, 2017

 

Beginning balance

 

$

247

 

New loans purchased

 

0

 

Accretion of income

 

 

(19

)

Ending balance

 

$

228

 

 

The key assumptions considered include probability of default and the amount of actual prepayments after the acquisition date.  Prepayments affect the estimated life of the loans and could change the amount of interest income and principal expected to be collected.  In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary.  There were no adjustments to forecasted cash flows that impacted the allowance for loan losses for the three months ended March 31, 2017.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2017 and 2016:

Three Months Ended March 31, 2017

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,577

 

 

$

1,874

 

 

$

2,205

 

 

$

2,766

 

 

$

430

 

 

$

10,852

 

Provision for loan losses

 

 

77

 

 

 

17

 

 

 

109

 

 

 

576

 

 

 

271

 

 

 

1,050

 

Loans charged off

 

 

(140

)

 

 

(102

)

 

 

(6

)

 

 

(695

)

 

 

0

 

 

 

(943

)

Recoveries

 

 

124

 

 

 

57

 

 

 

13

 

 

 

166

 

 

 

0

 

 

 

360

 

Total ending allowance balance

 

$

3,638

 

 

$

1,846

 

 

$

2,321

 

 

$

2,813

 

 

$

701

 

 

$

11,319

 

Three Months Ended March 31, 2016

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,127

 

 

$

1,373

 

 

$

1,845

 

 

$

2,160

 

 

$

473

 

 

$

8,978

 

Provision for loan losses

 

 

43

 

 

 

64

 

 

 

75

 

 

 

446

 

 

 

152

 

 

 

780

 

Loans charged off

 

 

0

 

 

 

0

 

 

 

(34

)

 

 

(544

)

 

 

0

 

 

 

(578

)

Recoveries

 

 

11

 

 

 

15

 

 

 

28

 

 

 

156

 

 

 

0

 

 

 

210

 

Total ending allowance balance

 

$

3,181

 

 

$

1,452

 

 

$

1,914

 

 

$

2,218

 

 

$

625

 

 

$

9,390

 

 

14

 


 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on impairment method as of March 31, 2017 and December 31, 2016. The recorded investment in loans includes the unpaid principal balance and unamortized loan origination fees and costs, but excludes accrued interest receivable, which is not considered to be material:

March 31, 2017

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

35

 

 

$

4

 

 

$

56

 

 

$

0

 

 

$

0

 

 

$

95

 

Collectively evaluated for impairment

 

 

3,603

 

 

 

1,842

 

 

 

2,259

 

 

 

2,813

 

 

 

701

 

 

 

11,218

 

Acquired loans

 

 

0

 

 

 

0

 

 

 

6

 

 

 

0

 

 

 

0

 

 

 

6

 

Acquired with deteriorated credit quality

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total ending allowance balance

 

$

3,638

 

 

$

1,846

 

 

$

2,321

 

 

$

2,813

 

 

$

701

 

 

$

11,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

2,306

 

 

$

336

 

 

$

3,601

 

 

$

52

 

 

$

0

 

 

$

6,295

 

Loans collectively evaluated for impairment

 

 

397,475

 

 

 

204,206

 

 

 

296,612

 

 

 

202,328

 

 

 

0

 

 

 

1,100,621

 

Acquired loans

 

 

147,563

 

 

 

44,608

 

 

 

140,883

 

 

 

19,701

 

 

 

0

 

 

 

352,755

 

Acquired with deteriorated credit quality

 

 

928

 

 

 

862

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,790

 

Total ending loans balance

 

$

548,272

 

 

$

250,012

 

 

$

441,096

 

 

$

222,081

 

 

$

0

 

 

$

1,461,461

 

 

15

 


 

December 31, 2016

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

44

 

 

$

4

 

 

$

48

 

 

$

0

 

 

$

0

 

 

$

96

 

Collectively evaluated for impairment

 

 

3,491

 

 

 

1,763

 

 

 

2,153

 

 

 

2,766

 

 

 

430

 

 

 

10,603

 

Acquired loans

 

 

42

 

 

 

107

 

 

 

4

 

 

 

0

 

 

 

0

 

 

 

153

 

Acquired with deteriorated credit quality

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total ending allowance balance

 

$

3,577

 

 

$

1,874

 

 

$

2,205

 

 

$

2,766

 

 

$

430

 

 

$

10,852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

3,457

 

 

$

477

 

 

$

3,308

 

 

$

96

 

 

$

0

 

 

$

7,338

 

Loans collectively evaluated for impairment

 

 

376,632

 

 

 

195,146

 

 

 

280,215

 

 

 

196,081

 

 

 

0

 

 

 

1,048,074

 

Acquired loans

 

 

153,228

 

 

 

48,536

 

 

 

146,672

 

 

 

21,923

 

 

 

0

 

 

 

370,359

 

Acquired with deteriorated credit quality

 

 

968

 

 

 

896

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,864

 

Total ending loans balance

 

$

534,285

 

 

$

245,055

 

 

$

430,195

 

 

$

218,100

 

 

$

0

 

 

$

1,427,635

 

16

 


 

The following tables present information related to impaired loans by class of loans as of March 31, 2017 and December 31, 2016:

 

(In Thousands of Dollars)

 

Unpaid Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for Loan Losses

Allocated

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,443

 

 

$

926

 

 

$

0

 

Non-owner occupied

 

 

18

 

 

 

18

 

 

 

0

 

Farmland

 

 

94

 

 

 

93

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

204

 

 

 

183

 

 

 

0

 

Agricultural

 

 

126

 

 

 

80

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,649

 

 

 

2,401

 

 

 

0

 

Home equity lines of credit

 

 

345

 

 

 

326

 

 

 

0

 

Consumer

 

 

127

 

 

 

52

 

 

 

0

 

Subtotal

 

 

5,006

 

 

 

4,079

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

167

 

 

 

167

 

 

 

9

 

Non-owner occupied

 

 

1,102

 

 

 

1,102

 

 

 

26

 

Farmland

 

 

0

 

 

 

0

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

73

 

 

 

73

 

 

 

4

 

Agricultural

 

 

0

 

 

 

0

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

813

 

 

 

791

 

 

 

61

 

Home equity lines of credit

 

 

83

 

 

 

83

 

 

 

1

 

Subtotal

 

 

2,238

 

 

 

2,216

 

 

 

101

 

Total

 

$

7,244

 

 

$

6,295

 

 

$

101

 

 

17

 


 

(In Thousands of Dollars)

 

Unpaid Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for

Loan Losses

Allocated

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,974

 

 

$

1,456

 

 

$

0

 

Non-owner occupied

 

 

332

 

 

 

331

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

205

 

 

 

184

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,650

 

 

 

2,403

 

 

 

0

 

Home equity lines of credit

 

 

195

 

 

 

179

 

 

 

0

 

Consumer

 

 

205

 

 

 

96

 

 

 

0

 

Subtotal

 

 

5,561

 

 

 

4,649

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

173

 

 

 

173

 

 

 

14

 

Non-owner occupied

 

 

1,118

 

 

 

1,118

 

 

 

30

 

Farmland

 

 

380

 

 

 

379

 

 

 

42

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

75

 

 

 

75

 

 

 

4

 

Agricultural

 

 

219

 

 

 

218

 

 

 

107

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

661

 

 

 

642

 

 

 

51

 

Home equity lines of credit

 

 

84

 

 

 

84

 

 

 

1

 

Subtotal

 

 

2,710

 

 

 

2,689

 

 

 

249

 

Total

 

$

8,271

 

 

$

7,338

 

 

$

249

 

 

18

 


 

The following tables present the average recorded investment in impaired loans by class and interest income recognized by loan class for the three month periods ended March 31, 2017 and 2016:

 

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

 

For Three Months Ended March 31,

 

 

For Three Months Ended March 31,

 

(In Thousands of Dollars)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,051

 

 

$

2,307

 

 

$

2

 

 

$

10

 

Non-owner occupied

 

 

226

 

 

 

336

 

 

 

0

 

 

 

4

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

210

 

 

 

614

 

 

 

1

 

 

 

5

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,380

 

 

 

2,292

 

 

 

37

 

 

 

38

 

Home equity lines of credit

 

 

227

 

 

 

240

 

 

 

4

 

 

 

3

 

Consumer

 

 

74

 

 

 

116

 

 

 

3

 

 

 

3

 

Subtotal

 

 

4,168

 

 

 

5,905

 

 

 

47

 

 

 

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

422

 

 

 

1,589

 

 

 

2

 

 

 

9

 

Non-owner occupied

 

 

1,107

 

 

 

1,469

 

 

 

14

 

 

 

19

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

273

 

 

 

80

 

 

 

1

 

 

 

1

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

773

 

 

 

749

 

 

 

8

 

 

 

9

 

Home equity lines of credit

 

 

82

 

 

 

86

 

 

 

1

 

 

 

1

 

Consumer

 

 

1

 

 

0

 

 

0

 

 

0

 

Subtotal

 

 

2,658

 

 

 

3,973

 

 

 

26

 

 

 

39

 

Total

 

$

6,826

 

 

$

9,878

 

 

$

73

 

 

$

102

 

 

Cash basis interest recognized during the three month periods ended March 31, 2017 and 2016 was materially equal to interest income recognized.

Nonaccrual loans and loans past due 90 days or more still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

19

 


 

The following table presents the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of March 31, 2017 and December 31, 2016:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

(In Thousands of Dollars)

 

Nonaccrual

 

 

Loans Past Due

90 Days or More

Still Accruing

 

 

Nonaccrual

 

 

Loans Past Due

90 Days or More

Still Accruing

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

806

 

 

$

0

 

 

$

958

 

 

$

0

 

Non-owner occupied

 

 

17

 

 

 

0

 

 

 

343

 

 

 

0

 

Farmland

 

 

55

 

 

 

0

 

 

 

58

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

309

 

 

 

40

 

 

 

400

 

 

 

0

 

Agricultural

 

 

3

 

 

 

0

 

 

 

12

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,857

 

 

 

467

 

 

 

1,929

 

 

 

295

 

Home equity lines of credit

 

 

196

 

 

 

85

 

 

 

202

 

 

 

118

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

368

 

 

 

262

 

 

 

298

 

 

 

438

 

Direct

 

 

7

 

 

 

0

 

 

 

9

 

 

 

65

 

Other

 

 

0

 

 

 

18

 

 

 

0

 

 

 

16

 

Total originated loans

 

$

3,618

 

 

$

872

 

 

$

4,209

 

 

$

932

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

59

 

 

$

0

 

 

$

85

 

 

$

0

 

Other

 

 

8

 

 

 

0

 

 

 

24

 

 

 

0

 

Farmland

 

 

93

 

 

 

0

 

 

 

380

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

894

 

 

 

0

 

 

 

961

 

 

 

0

 

Agricultural

 

 

98

 

 

 

0

 

 

 

236

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

370

 

 

 

156

 

 

 

386

 

 

 

545

 

Home equity lines of credit

 

 

124

 

 

 

86

 

 

 

119

 

 

 

109

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

94

 

 

 

81

 

 

 

89

 

 

 

95

 

Total acquired loans

 

$

1,740

 

 

$

323

 

 

$

2,280

 

 

$

749

 

Total loans

 

$

5,358

 

 

$

1,195

 

 

$

6,489

 

 

$

1,681

 

 

20

 


 

The following tables present the aging of the recorded investment in past due loans as of March 31, 2017 and December 31, 2016 by class of loans:

 

(In Thousands of Dollars)

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or More Past Due

and Nonaccrual

 

 

Total Past

Due

 

 

Loans Not

Past Due

 

 

Total

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

176

 

 

$

0

 

 

$

806

 

 

$

982

 

 

$

114,795

 

 

$

115,777

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

17

 

 

 

17

 

 

 

165,456

 

 

 

165,473

 

Farmland

 

 

0

 

 

 

0

 

 

 

55

 

 

 

55

 

 

 

41,057

 

 

 

41,112

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

77,156

 

 

 

77,156

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

0

 

 

 

143

 

 

 

349

 

 

 

492

 

 

 

177,325

 

 

 

177,817

 

Agricultural

 

 

38

 

 

 

0

 

 

 

3

 

 

 

41

 

 

 

26,603

 

 

 

26,644

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,066

 

 

 

556

 

 

 

2,324

 

 

 

4,946

 

 

 

232,357

 

 

 

237,303

 

Home equity lines of credit

 

 

63

 

 

 

84

 

 

 

281

 

 

 

428

 

 

 

62,203

 

 

 

62,631

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

1,850

 

 

 

359

 

 

 

630

 

 

 

2,839

 

 

 

163,990

 

 

 

166,829

 

Direct

 

 

554

 

 

 

119

 

 

 

7

 

 

 

680

 

 

 

27,356

 

 

 

28,036

 

Other

 

 

29

 

 

 

10

 

 

 

18

 

 

 

57

 

 

 

7,460

 

 

 

7,517

 

Total originated loans:

 

$

4,776

 

 

$

1,271

 

 

$

4,490

 

 

$

10,537

 

 

$

1,095,758

 

 

$

1,106,295

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

0

 

 

$

59

 

 

$

59

 

 

$

59,317

 

 

$

59,376

 

Non-owner occupied

 

 

65

 

 

 

200

 

 

 

0

 

 

 

265

 

 

 

23,666

 

 

 

23,931

 

Farmland

 

 

0

 

 

 

0

 

 

 

93

 

 

 

93

 

 

 

51,222

 

 

 

51,315

 

Other

 

 

0

 

 

 

0

 

 

 

8

 

 

 

8

 

 

 

14,124

 

 

 

14,132

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

65

 

 

 

0

 

 

 

894

 

 

 

959

 

 

 

29,760

 

 

 

30,719

 

Agricultural

 

 

195

 

 

 

0

 

 

 

98

 

 

 

293

 

 

 

14,539

 

 

 

14,832

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

664

 

 

 

299

 

 

 

526

 

 

 

1,489

 

 

 

106,015

 

 

 

107,504

 

Home equity lines of credit

 

 

126

 

 

 

113

 

 

 

210

 

 

 

449

 

 

 

33,209

 

 

 

33,658

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

426

 

 

 

58

 

 

 

175

 

 

 

659

 

 

 

18,884

 

 

 

19,543

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

156

 

 

 

156

 

Total acquired loans

 

$

1,541

 

 

$

670

 

 

$

2,063

 

 

$

4,274

 

 

$

350,892

 

 

$

355,166

 

Total loans

 

$

6,317

 

 

$

1,941

 

 

$

6,553

 

 

$

14,811

 

 

$

1,446,650

 

 

$

1,461,461

 

 

21

 


 

(In Thousands of Dollars)

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or More

Past Due

and Nonaccrual

 

 

Total Past

Due

 

 

Loans Not

Past Due

 

 

Total

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

0

 

 

$

958

 

 

$

958

 

 

$

108,475

 

 

$

109,433

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

343

 

 

 

343

 

 

 

165,105

 

 

 

165,448

 

Farmland

 

 

0

 

 

 

0

 

 

 

58

 

 

 

58

 

 

 

34,057

 

 

 

34,115

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

70,542

 

 

 

70,542

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

90

 

 

 

0

 

 

 

400

 

 

 

490

 

 

 

170,242

 

 

 

170,732

 

Agricultural

 

 

0

 

 

 

29

 

 

 

12

 

 

 

41

 

 

 

24,632

 

 

 

24,673

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

3,368

 

 

 

356

 

 

 

2,224

 

 

 

5,948

 

 

 

217,752

 

 

 

223,700

 

Home equity lines of credit

 

 

77

 

 

 

37

 

 

 

320

 

 

 

434

 

 

 

59,248

 

 

 

59,682

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

2,844

 

 

 

696

 

 

 

736

 

 

 

4,276

 

 

 

157,437

 

 

 

161,713

 

Direct

 

 

744

 

 

 

213

 

 

 

74

 

 

 

1,031

 

 

 

25,815

 

 

 

26,846

 

Other

 

 

92

 

 

 

28

 

 

 

16

 

 

 

136

 

 

 

7,476

 

 

 

7,612

 

Total originated loans

 

$

7,215

 

 

$

1,359

 

 

$

5,141

 

 

$

13,715

 

 

$

1,040,781

 

 

$

1,054,496

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

8

 

 

$

205

 

 

$

85

 

 

$

298

 

 

$

60,630

 

 

$

60,928

 

Non-owner occupied

 

 

134

 

 

 

0

 

 

 

0

 

 

 

134

 

 

 

24,815

 

 

 

24,949

 

Farmland

 

 

83

 

 

 

0

 

 

 

380

 

 

 

463

 

 

 

53,741

 

 

 

54,204

 

Other

 

 

0

 

 

 

0

 

 

 

24

 

 

 

24

 

 

 

14,642

 

 

 

14,666

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

278

 

 

 

0

 

 

 

961

 

 

 

1,239

 

 

 

32,387

 

 

 

33,626

 

Agricultural

 

 

21

 

 

 

0

 

 

 

236

 

 

 

257

 

 

 

15,767

 

 

 

16,024

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,556

 

 

 

504

 

 

 

931

 

 

 

2,991

 

 

 

109,027

 

 

 

112,018

 

Home equity lines of credit

 

 

152

 

 

 

9

 

 

 

228

 

 

 

389

 

 

 

34,406

 

 

 

34,795

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

938

 

 

 

184

 

 

 

184

 

 

 

1,306

 

 

 

20,376

 

 

 

21,682

 

Other

 

 

100

 

 

 

0

 

 

 

0

 

 

 

100

 

 

 

147

 

 

 

247

 

Total acquired loans

 

$

3,270

 

 

$

902

 

 

$

3,029

 

 

$

7,201

 

 

$

365,938

 

 

$

373,139

 

Total loans

 

$

10,485

 

 

$

2,261

 

 

$

8,170

 

 

$

20,916

 

 

$

1,406,719

 

 

$

1,427,635

 

 

 

Troubled Debt Restructurings:

Total troubled debt restructurings were $6.2 million and $7.0 million at March 31, 2017 and December 31, 2016, respectively.  The Company has allocated $101 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at both March 31, 2017 and December 31, 2016.  There were no commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings at March 31, 2017 and at December 31, 2016.

During the three month period ended March 31, 2017 and 2016, the terms of certain loans were modified as troubled debt restructurings.  The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a legal concession.  During the quarter ended March 31, 2017, the terms of such loans included a reduction of the stated interest rate of the loan by 1.89% and extensions of the maturity dates on these and other troubled debt restructurings in the range of 6 to 132 months.  During the quarter ended March 31, 2016, the terms of such loans included a reduction of the stated interest rate of the loan by 1.24% and an extension of the maturity date by 120 months.   

22

 


 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month periods ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

Pre-Modification

 

 

Post-Modification

 

Three Months Ended March 31, 2017

 

Number of

 

 

Outstanding Recorded

 

 

Outstanding Recorded

 

(In thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

6

 

 

$

284

 

 

$

287

 

Home equity lines of credit

 

 

5

 

 

 

94

 

 

 

94

 

Indirect

 

 

4

 

 

 

16

 

 

 

16

 

Total originated loans

 

 

15

 

 

$

394

 

 

$

397

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

1

 

 

 

57

 

 

 

57

 

Total acquired loans

 

 

1

 

 

$

57

 

 

$

57

 

Total loans

 

 

16

 

 

$

451

 

 

$

454

 

 

 

 

 

 

 

 

Pre-Modification

 

 

Post-Modification

 

Three Months Ended March 31, 2016

 

Number of

 

 

Outstanding Recorded

 

 

Outstanding Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

3

 

 

$

47

 

 

$

48

 

Indirect

 

 

8

 

 

 

77

 

 

 

77

 

Consumer

 

 

0

 

 

 

0

 

 

 

0

 

Total originated loans

 

 

11

 

 

$

124

 

 

$

125

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

1

 

 

 

33

 

 

 

33

 

Total acquired loans

 

 

1

 

 

$

33

 

 

$

33

 

Total loans

 

 

12

 

 

$

157

 

 

$

158

 

 

There were $13 thousand  in charge offs and a $13 thousand increase to the provision for loan losses during the three month period ended March 31, 2017, as a result of troubled debt restructurings.  There were $11 thousand in charge offs and a $11 thousand increase to the provision during the three month period ended March 31, 2016, as a result of troubled debt restructurings.   

There were no loans for which there was a payment default within twelve months following the modification of the troubled debt restructuring during the three month period ended March 31, 2017.  A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

There was one residential real estate loan and one home equity line of credit modified as a troubled debt restructuring for which there was a payment default within the first twelve months following the modification during the three month period ended March 31, 2016.  These loans were past due at March 31, 2016.  There was no provision recorded as a result of the default during 2016.

 

 

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships.  For relationships over $750 thousand, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt.  Management also affirms the risk ratings for the loans and leases in their respective portfolios on an annual basis.  The Company uses the following definitions for risk ratings:

23

 


 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of March 31, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(In Thousands of Dollars)

 

Pass

 

 

Special

Mention

 

 

Sub

standard

 

 

Total

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

113,362

 

 

$

481

 

 

$

1,934

 

 

$

115,777

 

Non-owner occupied

 

 

164,806

 

 

 

508

 

 

 

159

 

 

 

165,473

 

Farmland

 

 

41,009

 

 

 

47

 

 

 

56

 

 

 

41,112

 

Other

 

 

76,529

 

 

 

363

 

 

 

264

 

 

 

77,156

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

174,556

 

 

 

2,332

 

 

 

929

 

 

 

177,817

 

Agricultural

 

 

26,348

 

 

 

252

 

 

 

44

 

 

 

26,644

 

Total originated loans

 

$

596,610

 

 

$

3,983

 

 

$

3,386

 

 

$

603,979

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

57,248

 

 

$

493

 

 

$

1,635

 

 

$

59,376

 

Non-owner occupied

 

 

22,397

 

 

 

1,163

 

 

 

371

 

 

 

23,931

 

Farmland

 

 

50,451

 

 

 

0

 

 

 

864

 

 

 

51,315

 

Other

 

 

12,972

 

 

 

1,036

 

 

 

124

 

 

 

14,132

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

27,606

 

 

 

290

 

 

 

2,823

 

 

 

30,719

 

Agricultural

 

 

13,820

 

 

 

722

 

 

 

290

 

 

 

14,832

 

Total acquired loans

 

$

184,494

 

 

$

3,704

 

 

$

6,107

 

 

$

194,305

 

Total loans

 

$

781,104

 

 

$

7,687

 

 

$

9,493

 

 

$

798,284

 

 

24

 


 

(In Thousands of Dollars)

 

Pass

 

 

Special

Mention

 

 

Sub

standard

 

 

Total

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

106,448

 

 

$

490

 

 

$

2,495

 

 

$

109,433

 

Non-owner occupied

 

 

162,465

 

 

 

522

 

 

 

2,461

 

 

 

165,448

 

Farmland

 

 

34,057

 

 

 

0

 

 

 

58

 

 

 

34,115

 

Other

 

 

69,947

 

 

 

325

 

 

 

270

 

 

 

70,542

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

167,062

 

 

 

2,720

 

 

 

950

 

 

 

170,732

 

Agricultural

 

 

24,395

 

 

 

253

 

 

 

25

 

 

 

24,673

 

Total originated loans

 

$

564,374

 

 

$

4,310

 

 

$

6,259

 

 

$

574,943

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

58,655

 

 

$

707

 

 

$

1,566

 

 

$

60,928

 

Non-owner occupied

 

 

23,577

 

 

 

1,195

 

 

 

177

 

 

 

24,949

 

Farmland

 

 

53,039

 

 

 

0

 

 

 

1,165

 

 

 

54,204

 

Other

 

 

14,060

 

 

 

464

 

 

 

142

 

 

 

14,666

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

30,543

 

 

 

311

 

 

 

2,772

 

 

 

33,626

 

Agricultural

 

 

14,856

 

 

 

685

 

 

 

483

 

 

 

16,024

 

Total acquired loans

 

$

194,730

 

 

$

3,362

 

 

$

6,305

 

 

$

204,397

 

Total loans

 

$

759,104

 

 

$

7,672

 

 

$

12,564

 

 

$

779,340

 

 

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses.  For residential, consumer indirect and direct loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.  In the 1-4 family residential real estate portfolio at March 31, 2017, there were $381 thousand of other real estate owned properties and $813 thousand of properties in foreclosure.  Other real estate owned and foreclosure properties were $357 thousand and $371 thousand at December 31, 2016, respectively.

The following tables present the recorded investment in residential, consumer indirect and direct auto loans based on payment activity as of March 31, 2017 and December 31, 2016.  Nonperforming loans are loans past due 90 days or more and still accruing interest and nonaccrual loans.

 

 

 

Residential Real Estate

 

 

Consumer

 

(In Thousands of Dollars)

 

1-4 Family Residential

 

 

Home Equity Lines of Credit

 

 

Indirect

 

 

Direct

 

 

Other

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

234,979

 

 

$

62,350

 

 

$

166,199

 

 

$

28,029

 

 

$

7,499

 

Nonperforming

 

 

2,324

 

 

 

281

 

 

 

630

 

 

 

7

 

 

 

18

 

Total originated loans

 

$

237,303

 

 

$

62,631

 

 

$

166,829

 

 

$

28,036

 

 

$

7,517

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

106,978

 

 

$

33,448

 

 

$

0

 

 

$

19,368

 

 

$

156

 

Nonperforming

 

 

526

 

 

 

210

 

 

 

0

 

 

 

175

 

 

 

0

 

Total acquired loans

 

 

107,504

 

 

 

33,658

 

 

 

0

 

 

 

19,543

 

 

 

156

 

Total loans

 

$

344,807

 

 

$

96,289

 

 

$

166,829

 

 

$

47,579

 

 

$

7,673

 

 

25

 


 

 

 

Residential Real Estate

 

 

Consumer

 

(In Thousands of Dollars)

 

1-4 Family Residential

 

 

Home Equity Lines of Credit

 

 

Indirect

 

 

Direct

 

 

Other

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

221,476

 

 

$

59,362

 

 

$

160,977

 

 

$

26,772

 

 

$

7,596

 

Nonperforming

 

 

2,224

 

 

 

320

 

 

 

736

 

 

 

74

 

 

 

16

 

Total originated loans

 

$

223,700

 

 

$

59,682

 

 

$

161,713

 

 

$

26,846

 

 

$

7,612

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

111,087

 

 

$

34,567

 

 

$

0

 

 

$

21,498

 

 

$

247

 

Nonperforming

 

 

931

 

 

 

228

 

 

 

0

 

 

 

184

 

 

 

0

 

Total acquired loans

 

 

112,018

 

 

 

34,795

 

 

 

0

 

 

 

21,682

 

 

 

247

 

Total loans

 

$

335,718

 

 

$

94,477

 

 

$

161,713

 

 

$

48,528

 

 

$

7,859

 

 

 

Interest-Rate Swaps:

The Company uses a program that utilizes interest-rate swaps as part of its asset/liability management strategy.  The interest-rate swaps are used to help manage the Company’s interest rate risk position and not as derivatives for trading purposes.  The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements.

The objective of the interest-rate swaps is to protect the related fixed rate commercial real estate loans from changes in fair value due to changes in interest rates.  The Company has a program whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap.  The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges.  Accordingly, both instruments are carried at fair value and changes in fair value are reported in current period earnings.

Summary information about these interest-rate swaps at periods ended March 31, 2017 and December 31, 2016 is as follows:

 

 

March 31, 2017

 

 

December 31, 2016

 

Notional amounts (In thousands)

$

32,303

 

 

$

34,360

 

Weighted average pay rate on interest-rate swaps

 

4.36

%

 

 

4.34

%

Weighted average receive rate on interest-rate swaps

 

3.26

%

 

 

3.04

%

Weighted average maturity (years)

 

4.6

 

 

 

4.8

 

Fair value of combined interest-rate swaps (In thousands)

$

629

 

 

$

685

 

 

The fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other liabilities, respectively, in the consolidated balance sheets.  Changes in the fair value of the yield maintenance provisions and interest-rate swaps are reported in earnings, as other noninterest income in the consolidated statements of income.  For the three month period ended March 31, 2017 and 2016 there were no net gains or losses recognized in earnings.

 

 

26

 


 

Earnings Per Share:

The computation of basic and diluted earnings per share is shown in the following table:

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

Basic EPS

 

 

 

 

 

 

 

Net income (In thousands)

$

5,783

 

 

$

4,798

 

Weighted average shares outstanding

 

27,278,314

 

 

 

27,047,168

 

Basic earnings per share

$

0.21

 

 

$

0.18

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Net income (In thousands)

$

5,783

 

 

$

4,798

 

Weighted average shares outstanding for basic earnings per share

 

27,278,314

 

 

 

27,047,168

 

Dilutive effect of restricted stock awards

 

62,668

 

 

 

10,670

 

Weighted average shares for diluted earnings per share

 

27,340,982

 

 

 

27,057,838

 

Diluted earnings per share

$

0.21

 

 

$

0.18

 

 

There were no restricted stock awards that were considered anti-dilutive for the three month periods ended March 31, 2017 and 2016.

 

 

Stock Based Compensation:

During 2012, the Company, with the approval of shareholders, created the 2012 Equity Incentive Plan (the “Plan”).  The Plan permits the award of up to 500 thousand shares to the Company’s directors and employees to promote the Company’s long-term financial success by motivating performance through long-term incentive compensation and to better align the interests of its employees with those of its shareholders.  There were no additional service time based or performance based shares granted under the Plan during the three month period ended March 31, 2017 as detailed in the table below.  The actual number of performance based stock awards issued will depend on certain performance conditions which are mainly average return on equity compared to a group of peer companies over a three year vesting period.

The restricted stock awards were granted with a fair value price equal to the market price of the Company’s common stock at the date of the grant.  Expense recognized for the Plan was $180 thousand and $201 thousand for the three month periods ended March 31, 2017 and 2016, respectively.  As of March 31, 2017, there was $2.2 million of total unrecognized compensation expense related to the nonvested shares granted under the Plan.  The remaining cost is expected to be recognized over 1.8 years.  

The following is the activity under the Plan during the three month period ended March 31, 2017.

 

 

Three Months Ended March 31, 2017

 

 

Maximum Awarded Units

 

 

Weighted Average

Grant Date Fair

Value

 

Beginning unvested units

 

499,390

 

 

$

8.30

 

Granted

 

0

 

 

 

0

 

Vested

 

(18,928

)

 

 

7.00

 

Forfeited

 

0

 

 

 

0

 

Ending unvested units

 

480,462

 

 

$

8.35

 

 

 

Other Comprehensive Income:

The following table represents the details of other comprehensive income for the three month periods ended March 31, 2017 and 2016.

 

 

Three Months Ended March 31, 2017

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

Unrealized holding gains on available-for-sale securities during the period

$

375

 

 

$

(132

)

 

$

243

 

Reclassification adjustment for (gains) included in net income (1)

 

(13

)

 

 

4

 

 

 

(9

)

Net unrealized gains on available-for-sale securities

$

362

 

 

$

(128

)

 

$

234

 

 

 

27

 


 

 

Three Months Ended March 31, 2016

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

Unrealized holding gains on available-for-sale securities during the period

$

3,357

 

 

$

(1,175

)

 

$

2,182

 

Reclassification adjustment for (gains) losses included in net income (1)

 

0

 

 

 

0

 

 

 

0

 

Net unrealized gains on available-for-sale securities

$

3,357

 

 

$

(1,175

)

 

$

2,182

 

 

 

(1)

Pre-tax reclassification adjustments relating to available-for-sale securities are reported in security gains and the tax impact is included in income tax expense on the consolidated statements of income.

 

 

Regulatory Capital Matters

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.  The new minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III) are being phased in and began on January 1, 2015 and will continue through January 1, 2019.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action by regulators that, if undertaken, could have a direct material effect on the financial statements.  Management believes as of March 31, 2017, the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

The FDIC and other federal banking regulators revised the risk-based capital requirements applicable to financial holding companies and insured depository institutions, including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”).

 

The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets.  The leverage ratio is calculated by dividing tier 1 capital by adjusted average total assets.

 

Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements.  The capital conservation buffer phase in began January 1, 2016 and will increase each year until fully implemented at 2.5% on January 1, 2019.  The additional capital conservation buffer is 1.25% for the year of 2017 and was 0.625% during 2016.  Excluding the additional buffer, Basel III requires the Company and the Bank to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0% and (iv) a minimum leverage ratio of at least 4.0%.

 

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If only adequately capitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.  At March 31, 2017 and December 31, 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed the institution’s category.

28

 


 

Actual and required capital amounts and ratios are presented below at March 31, 2017 and December 31, 2016:

 

 

Actual

 

 

Requirement For Capital

Adequacy Purposes:

 

 

To be Well Capitalized

Under Prompt Corrective

Action Provisions:

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

184,259

 

 

11.75

%

 

$

70,564

 

 

4.5

%

 

N/A

 

N/A

 

Bank

 

174,265

 

 

11.13

%

 

 

70,433

 

 

4.5

%

 

$

101,736

 

 

6.5

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

197,751

 

 

12.61

%

 

 

125,447

 

 

8.0

%

 

N/A

 

N/A

 

Bank

 

185,584

 

 

11.86

%

 

 

125,214

 

 

8.0

%

 

 

156,517

 

 

10.0

%

Tier I risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

186,432

 

 

11.89

%

 

 

94,085

 

 

6.0

%

 

N/A

 

N/A

 

Bank

 

174,265

 

 

11.13

%

 

 

93,910

 

 

6.0

%

 

 

125,214

 

 

8.0

%

Tier I leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

186,432

 

 

9.47

%

 

 

78,762

 

 

4.0

%

 

N/A

 

N/A

 

Bank

 

174,265

 

 

8.91

%

 

 

78,271

 

 

4.0

%

 

 

97,839

 

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

180,475

 

 

11.69

%

 

$

69,474

 

 

4.5

%

 

N/A

 

N/A

 

Bank

 

171,064

 

 

11.12

%

 

 

69,244

 

 

4.5

%

 

$

100,020

 

 

6.5

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

193,487

 

 

12.53

%

 

 

123,509

 

 

8.0

%

 

N/A

 

N/A

 

Bank

 

181,916

 

 

11.82

%

 

 

123,101

 

 

8.0

%

 

 

153,877

 

 

10.0

%

Tier I risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

182,635

 

 

11.83

%

 

 

92,632

 

 

6.0

%

 

N/A

 

N/A

 

Bank

 

171,064

 

 

11.12

%

 

 

92,326

 

 

6.0

%

 

 

123,101

 

 

8.0

%

Tier I leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

182,635

 

 

9.41

%

 

 

77,596

 

 

4.0

%

 

N/A

 

N/A

 

Bank

 

171,064

 

 

8.91

%

 

 

76,792

 

 

4.0

%

 

 

95,990

 

 

5.0

%

 

 

Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

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

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

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

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis.  This service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities.  They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing methods.  The fair values for investment securities are determined by quoted market prices in active markets, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination.  

29

 


 

Such inputs may include interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates.  Inputs used are derived principally from observable market data (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort.  For the period ended March 31, 2017 and for the year ended December 31, 2016, the fair value of Level 3 investment securities was immaterial.

Derivative Instruments: The fair values of derivative instruments are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: At the time loans are considered impaired, collateral dependent impaired loans are valued at the lower of cost or fair value and non-collateral dependent loans are valued based on discounted cash flows.  Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses.  For collateral dependent loans fair value is commonly based on recent real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals.  These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.  Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.  On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value.

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

 

 

 

Fair Value Measurements at March 31, 2017 Using:

 

(In Thousands of Dollars)

 

Carrying Value

 

 

Quoted Prices in

Active Markets

for Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

 

$

5,422

 

 

$

0

 

 

$

5,422

 

 

$

0

 

State and political subdivisions

 

 

165,025

 

 

 

0

 

 

 

165,025

 

 

 

0

 

Corporate bonds

 

 

1,041

 

 

 

0

 

 

 

1,041

 

 

 

0

 

Mortgage-backed securities-residential

 

 

169,178

 

 

 

0

 

 

 

169,167

 

 

 

11

 

Collateralized mortgage obligations

 

 

19,811

 

 

 

0

 

 

 

19,811

 

 

 

0

 

Small Business Administration

 

 

16,241

 

 

 

0

 

 

 

16,241

 

 

 

0

 

Equity securities

 

 

354

 

 

 

354

 

 

 

0

 

 

 

0

 

Total investment securities

 

$

377,072

 

 

$

354

 

 

$

376,707

 

 

$

11

 

Loan yield maintenance provisions

 

$

629

 

 

$

0

 

 

$

629

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

629

 

 

$

0

 

 

$

629

 

 

$

0

 

30

 


 

 

 

 

Fair Value Measurements at December 31, 2016 Using:

 

(In Thousands of Dollars)

 

Carrying Value

 

 

Quoted Prices  in

Active Markets

for Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

 

$

5,921

 

 

$

0

 

 

$

5,921

 

 

$

0

 

State and political subdivisions

 

 

155,303

 

 

 

0

 

 

 

155,303

 

 

 

0

 

Corporate bonds

 

 

1,339

 

 

 

0

 

 

 

1,339

 

 

 

0

 

Mortgage-backed securities-residential

 

 

169,682

 

 

 

0

 

 

 

169,670

 

 

 

12

 

Collateralized mortgage obligations

 

 

20,693

 

 

 

0

 

 

 

20,693

 

 

 

0

 

Small Business Administration

 

 

16,706

 

 

 

0

 

 

 

16,706

 

 

 

0

 

Equity securities

 

 

351

 

 

 

351

 

 

 

0

 

 

 

0

 

Total investment securities

 

$

369,995

 

 

$

351

 

 

$

369,632

 

 

$

12

 

Loan yield maintenance provisions

 

$

685

 

 

$

0

 

 

$

685

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

685

 

 

$

0

 

 

$

685

 

 

$

0

 

 

There were no significant transfers between Level 1 and Level 2 during the three month periods ended March 31, 2017 and 2016.  For additional information related to yield maintenance provisions and interest rate swaps see Interest –Rate Swaps note.

 

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

 

 

Three Months ended March 31,

 

(In Thousands of Dollars)

 

2017

 

 

2016

 

Beginning Balance

 

$

12

 

 

$

15

 

Total unrealized gains or losses:

 

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

0

 

 

 

0

 

Repayments, calls and maturities

 

 

(1

)

 

 

(1

)

Ending Balance

 

$

11

 

 

$

14

 

 

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

 

 

 

Fair Value Measurements at March 31, 2017 Using:

 

(In Thousands of Dollars)

 

Carrying Value

 

 

Quoted Prices  in

Active Markets

for Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

23

 

 

$

0

 

 

$

0

 

 

$

23

 

1–4 family residential

 

 

139

 

 

 

0

 

 

 

0

 

 

 

139

 

Consumer

 

 

3

 

 

 

0

 

 

 

0

 

 

 

3

 

Other real estate owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1–4 family residential

 

 

16

 

 

 

0

 

 

 

0

 

 

 

16

 

 

31

 


 

 

 

Fair Value Measurements at December 31, 2016 Using:

 

(In Thousands of Dollars)

 

Carrying Value

 

 

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

23

 

 

$

0

 

 

$

0

 

 

$

23

 

Farmland

 

 

339

 

 

 

0

 

 

 

0

 

 

 

339

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

113

 

 

 

0

 

 

 

0

 

 

 

113

 

1–4 family residential

 

 

77

 

 

 

0

 

 

 

0

 

 

 

77

 

Consumer

 

 

2

 

 

 

0

 

 

 

0

 

 

 

2

 

Other real estate owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1–4 family residential

 

 

16

 

 

 

0

 

 

 

0

 

 

 

16

 

 

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $188 thousand with a valuation allowance of $23 thousand at March 31, 2017, resulting in $4 thousand in additional provision for loan losses for the three month period.  At December 31, 2016, impaired loans had a principal balance of $727 thousand, with a valuation allowance of $173 thousand.  Loans measured at fair value at March 31, 2016 resulted in no additional provision for loan losses for the three month period ending March 31, 2016.  Excluded from the fair value of impaired loans, at March 31, 2017 and December 31, 2016, discussed above are $2.0 million of loans classified as troubled debt restructurings and measured using the present value of cash flows, which is not considered an exit price.

Impaired commercial real estate loans, both owner-occupied and non-owner occupied are valued by independent external appraisals.  These external appraisals are prepared using the sales comparison approach and income approach valuation techniques.  Management makes subsequent unobservable adjustments to the impaired loan appraisals.  Impaired loans other than commercial real estate and other real estate owned are not considered material.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods ended March 31, 2017 and December 31, 2016:

 

March 31, 2017

Fair value

 

 

Valuation Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Impaired loans

 

 

 

 

 

 

 

 

 

Commercial real estate

$

23

 

 

Sales Comparison

 

Adjustment for differences between comparable sales

 

(24.02%)

Residential

 

139

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(12.97%) - 14.22%

(3.38%)

Consumer

 

3

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(15.97%) - 15.97%

0.00%

Other Real Estate owned residential

 

16

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(10.36%) - 17.10%

(1.90%)

 

32

 


 

December 31, 2016

Fair value

 

 

Valuation Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Impaired loans

 

 

 

 

 

 

 

 

 

Commercial real estate

$

23

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(24.02%)

 

 

339

 

 

Quoted price for loan relationship

 

Offer price

 

35.77%

Commercial

 

113

 

 

Quoted price for loan relationship

 

Offer price

 

34.98%

Residential

 

77

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(12.97%) - 14.22%

(3.38%)

Consumer

 

2

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(20.00%) - 20.00%

(0.00%)

Other Real Estate owned residential

 

16

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(10.36%) - 17.10%

(1.90%)

 

The carrying amounts and estimated fair values of financial instruments not previously disclosed at March 31, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2017 Using:

 

(In Thousands of Dollars)

 

Carrying Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,251

 

 

$

19,577

 

 

$

41,674

 

 

$

0

 

 

$

61,251

 

Restricted stock

 

 

9,974

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

1,098

 

 

 

0

 

 

 

1,128

 

 

 

0

 

 

 

1,128

 

Loans, net

 

 

1,450,142

 

 

 

0

 

 

 

0

 

 

 

1,445,211

 

 

 

1,445,211

 

Mortgage servicing rights

 

 

928

 

 

 

0

 

 

 

928

 

 

 

0

 

 

 

928

 

Accrued interest receivable

 

 

5,797

 

 

 

0

 

 

 

2,032

 

 

 

3,765

 

 

 

5,797

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,540,220

 

 

 

1,306,295

 

 

 

230,755

 

 

 

0

 

 

 

1,537,050

 

Short-term borrowings

 

 

235,228

 

 

 

0

 

 

 

235,228

 

 

 

0

 

 

 

235,228

 

Long-term borrowings

 

 

9,841

 

 

 

0

 

 

 

9,798

 

 

 

0

 

 

 

9,798

 

Accrued interest payable

 

 

507

 

 

 

35

 

 

 

472

 

 

 

0

 

 

 

507

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2016 Using:

 

(In Thousands of Dollars)

 

Carrying Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,778

 

 

$

19,678

 

 

$

22,100

 

 

$

0

 

 

$

41,778

 

Restricted stock

 

 

9,583

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

355

 

 

 

0

 

 

 

365

 

 

 

0

 

 

 

365

 

Loans, net

 

 

1,416,783

 

 

 

0

 

 

 

0

 

 

 

1,406,951

 

 

 

1,406,951

 

Mortgage servicing rights

 

 

854

 

 

 

0

 

 

 

854

 

 

 

0

 

 

 

854

 

Accrued interest receivable

 

 

5,504

 

 

 

0

 

 

 

1,924

 

 

 

3,580

 

 

 

5,504

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,524,756

 

 

 

1,289,037

 

 

 

232,410

 

 

 

0

 

 

 

1,521,447

 

Short-term borrowings

 

 

198,460

 

 

 

0

 

 

 

198,460

 

 

 

0

 

 

 

198,460

 

Long-term borrowings

 

 

15,036

 

 

 

0

 

 

 

15,009

 

 

 

0

 

 

 

15,009

 

Accrued interest payable

 

 

507

 

 

 

35

 

 

 

472

 

 

 

0

 

 

 

507

 

 

33

 


 

The methods and assumptions used to estimate fair value, not previously described, are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2.  The Company has determined that cash on hand and non-interest bearing due from bank accounts are Level 1 whereas interest bearing federal funds sold and other are Level 2.

Restricted Stock: It is not practical to determine the fair value of restricted stock due to restrictions placed on its transferability.

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification.  Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Loan servicing rights: Fair value is based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model utilizes interest rate, prepayment speed and default rate assumptions that market participants would use in estimating future net servicing income (Level 2).

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest receivable and payable approximate fair value resulting in a Level 1, Level 2 or Level 3 classification.  The classification is the result of the association with securities, loans and deposits.

Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings, and money market accounts – are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification.  The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification.  Fair value for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Off-balance Sheet Instruments: The fair value of commitments is not considered material.

 

 

34

 


 

Segment Information:

The reportable segments are determined by the products and services offered, primarily distinguished between banking, trust and retirement consulting operations.  They are also distinguished by the level of information provided to the chief operating decision makers in the Company, who use such information to review performance of various components of the business, which are then aggregated.  Loans, investments, and deposits provide the revenues in the banking operation.  All operations are domestic. Significant segment totals are reconciled to the financial statements as follows:

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

4,617

 

 

$

37,994

 

 

$

2,824

 

 

$

(646

)

 

$

44,789

 

Total assets

 

$

11,225

 

 

$

2,009,727

 

 

$

3,590

 

 

$

1,945

 

 

$

2,026,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

4,681

 

 

$

38,235

 

 

$

2,884

 

 

$

(646

)

 

$

45,154

 

Total assets

 

$

10,980

 

 

$

1,948,800

 

 

$

3,528

 

 

$

2,805

 

 

$

1,966,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

26

 

 

$

17,525

 

 

$

0

 

 

$

(20

)

 

$

17,531

 

Provision for loan losses

 

 

0

 

 

 

1,050

 

 

 

0

 

 

 

0

 

 

 

1,050

 

Service fees, security gains and other noninterest income

 

 

1,678

 

 

 

3,769

 

 

 

513

 

 

 

(73

)

 

 

5,887

 

Noninterest expense

 

 

1,199

 

 

 

12,120

 

 

 

372

 

 

 

43

 

 

 

13,734

 

Amortization and depreciation expense

 

 

69

 

 

 

735

 

 

 

63

 

 

 

12

 

 

 

879

 

Income before taxes

 

 

436

 

 

 

7,389

 

 

 

78

 

 

 

(148

)

 

 

7,755

 

Income taxes

 

 

152

 

 

 

1,937

 

 

 

27

 

 

 

(144

)

 

 

1,972

 

Net Income

 

$

284

 

 

$

5,452

 

 

$

51

 

 

$

(4

)

 

$

5,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

20

 

 

$

16,747

 

 

$

0

 

 

$

(20

)

 

$

16,747

 

Provision for loan losses

 

 

0

 

 

 

780

 

 

 

0

 

 

 

0

 

 

 

780

 

Service fees, security gains and other noninterest income

 

 

1,521

 

 

 

2,961

 

 

 

489

 

 

 

(25

)

 

 

4,946

 

Noninterest expense

 

 

1,152

 

 

 

11,627

 

 

 

371

 

 

 

390

 

 

 

13,540

 

Amortization and depreciation expense

 

 

76

 

 

 

714

 

 

 

89

 

 

 

25

 

 

 

904

 

Income before taxes

 

 

313

 

 

 

6,587

 

 

 

29

 

 

 

(460

)

 

 

6,469

 

Income taxes

 

 

107

 

 

 

1,696

 

 

 

10

 

 

 

(142

)

 

 

1,671

 

Net Income

 

$

206

 

 

$

4,891

 

 

$

19

 

 

$

(318

)

 

$

4,798

 

 

The Bank segment includes Farmers National Insurance and Farmers of Canfield Investment Co.

 

 

35

 


 

Goodwill and Intangible Assets:

 

Goodwill associated with the Bank’s purchase of the Bowers group in June 2016 and the Company’s purchase of NBOH in June 2015, Tri-State in October 2015, NAI in July of 2013 and Trust in 2009 totaled $37.2 million at March 31, 2017 and $37.2 million at December 31, 2016.  The Bowers group acquisition is more fully described in the Business Acquisitions footnote.  Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Management performs goodwill impairment testing on an annual basis as of September 30. The fair value of the reporting unit is determined based on a discounted cash flow model.  

Acquired Intangible Assets

Acquired intangible assets were as follows:

 

 

March 31, 2017

 

 

December 31, 2016

 

(In Thousands of Dollars)

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship intangibles

$

7,210

 

 

$

(4,420

)

 

$

7,210

 

 

$

(4,253

)

Non-compete contracts

 

430

 

 

 

(362

)

 

 

430

 

 

 

(357

)

Trade name

 

520

 

 

 

(129

)

 

 

520

 

 

 

(113

)

Core deposit intangible

 

5,582

 

 

 

(1,206

)

 

 

5,582

 

 

 

(1,029

)

Total

$

13,742

 

 

$

(6,117

)

 

$

13,742

 

 

$

(5,752

)

 

Aggregate amortization expense was $365 thousand for the three month period ended March 31, 2017.  Amortization expense was $337 thousand for the three months ended March 31, 2016.

Estimated amortization expense for each of the next five periods and thereafter:

 

2017 (Nine months)

$

1,094

 

2018

 

1,334

 

2019

 

1,222

 

2020

 

1,119

 

2021

 

1,058

 

Thereafter

 

1,798

 

TOTAL

$

7,625

 

 

 

Short-term borrowings:

There were $150 million in short-term Federal Home Loan Bank Advances at March 31, 2017 with a weighted average interest rate of 0.89%.  Short-term Federal Home Loan Bank Advances were $120 million at December 31, 2016.  The Company had $84.9 million and $78.1 million in securities sold under repurchase agreements for the periods ended March 31, 2017 and December 31, 2016, respectively.  In addition, the Company had no Federal funds purchased and has a $350 thousand balance on business lines of credit with one lending institution at March 31, 2017 and December 31, 2016.

The following table provides a disaggregation of the obligation by the class of collateral pledged for short-term financing obtained through the sales of repurchase agreements:

 

(In Thousands of Dollars)

March 31, 2017

 

 

December 31, 2016

 

Overnight and continuous repurchase agreements

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

6,903

 

 

$

6,555

 

State and political subdivisions

 

12,378

 

 

 

12,304

 

Mortgage-backed securities - residential

 

58,604

 

 

 

52,628

 

Collateralized mortgage obligations - residential

 

6,993

 

 

 

6,623

 

Total repurchase agreements

$

84,878

 

 

$

78,110

 

 

Management believes the risks associated with the agreements are minimal and, in the case of collateral decline, the Company has additional investment securities available to adequately pledge as guarantees for the repurchase agreements.  

36

 


 

Item 2.

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

Forward Looking Statements

Discussions in this report that are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” and “plan”) are forward-looking statements that involve risks and uncertainties.  Any forward-looking statement is not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information.  Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “Commission”), including without limitation, the risk factors disclosed in Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Many of these factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on those forward-looking statements.  The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting the Company, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in these forward-looking statements:

 

general economic conditions in market areas where we conduct business, which could materially impact credit quality trends;

 

business conditions in the banking industry;

 

the regulatory environment;

 

fluctuations in interest rates;

 

demand for loans in the market areas where we conduct business;

 

rapidly changing technology and evolving banking industry standards;

 

competitive factors, including increased competition with regional and national financial institutions;

 

new service and product offerings by competitors and price pressures; and other like items.

Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position.  There can be no assurance that future results will meet expectations.  While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement.  In addition, these statements speak only as of the date made.  The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

On March 13, 2017, Farmers entered into an agreement and plan of merger with Monitor Bancorp, Inc. (Monitor), the holding company for The Monitor Bank, located in Holmes County, Ohio.  This transaction is expected to close during the third quarter of 2017.  This transaction will serve as an entrance into the attractive Holmes County market for Farmers. Monitor has an excellent core deposit base and has been a solid earner with strong asset quality. This transaction will help Farmers continue to grow its market share, balance sheet and earnings.  As of December 31, 2016, Monitor had total assets of $43.3 million, which included net loans of $22.3 million and deposits of $37.2 million. For the year ended December 31, 2016, Monitor’s return on average assets and return on average equity were 0.74% and 5.44%, respectively.

The Captive, which was formed during the third quarter of 2016, is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and its affiliates.  The Captive provides insurance to thirteen other third party insurance captives for which insurance may not be currently available or economically feasible in today’s insurance marketplace.  The entity was created to spread a limited amount of risk among all members of the captive pool.

On June 1, 2016, the Bank completed the acquisition of the Bowers group, and merged the Bowers group with Insurance, the Bank’s wholly-owned insurance agency subsidiary. Bowers will continue to operate out of its Cortland, Ohio location and will enhance the Company’s current product line up, and offer broader options of commercial, farm, home, and auto property/casualty insurance carriers to meet all the needs of all the Company’s customers.  The transaction involved both cash and 123,280 shares of stock totaling $3.2 million, including up to $1.2 million of future payments, contingent upon Bowers meeting performance targets.  Goodwill of $1.8 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of synergies and the cost savings

37

 


 

resulting from the combining of the companies.  The goodwill was determined not to be deductible for income tax purposes.  The fair value of other intangible assets of $1.6 million is related to client relationships, company name and noncompetition agreements.

Net income for the three months ended March 31, 2017 was $5.8 million, or $0.21 per diluted share, which compares to $4.8 million, or $0.18 per diluted share, for the three months ended March 31, 2016.  Excluding expenses related to acquisition activities, net income for the two periods was $5.8 million or $0.22 per diluted share and $5.0 million or $0.19 per diluted share, respectively.  The Company believes that this non-GAAP financial measure provides both management and investors a more complete understanding of the underlying operational results and trends.

Annualized return on average assets and return on average equity were 1.17% and 10.87%, respectively, for the three month period ending March 31, 2017, compared to 1.03% and 9.41% for the same period in 2016.  Excluding expenses related to acquisition activities, the annualized return on average assets and return on average equity for the quarter ended March 31, 2017 were 1.18% and 10.96% compared to 1.07% and 9.81% for the same quarter in 2016.

Net income excluding merger related costs is a non-U.S. GAAP financial measure and should be considered in addition to, not asubstitute for or superior to, financial measures determined in accordance with U.S. GAAP.  With respect to the calculation of the actual unaudited net income excluding costs related to acquisition activities for the three month periods ended March 31, 2017 and 2016, reconciliations are displayed in the below table.

 

 

For the Three Months Ended March 31,

 

(In Thousands of Dollars)

 

2017

 

 

 

2016

 

Reconciliation of Net Income, Excluding Costs Related to Acquisition Activities

 

 

 

 

 

 

 

Income before income taxes - Reported

$

7,755

 

 

$

6,469

 

Acquisition Costs

 

62

 

 

 

289

 

Income before income taxes - Adjusted

 

7,817

 

 

 

6,758

 

Income tax expense

 

1,987

 

 

 

1,746

 

Net income - Adjusted

$

5,830

 

 

$

5,012

 

 

Total loans were $1.46 billion at March 31, 2017, compared to $1.43 billion at December 31, 2016, representing an annualized growth rate of 9.61%.  The increase in loans is a direct result of Farmers’ focus on loan growth utilizing a talented lending and credit team, while adhering to a sound underwriting discipline. Most of the increase in loans has occurred in the commercial real estate, commercial and industrial, residential real estate and consumer loan portfolios.  Loans now comprise 77.9% of the Bank's first quarter average earning assets at March 31, 2017, an improvement compared to 75.3% at the same time in 2016.  This improvement along with the growth in earning assets organically and through merger activity has resulted in a 7.8% increase in tax equated loan income from the first quarter of 2017 to the same quarter in 2016.

Non-performing assets to total assets remain at a low level, currently at 0.34%.  Early stage delinquencies also continue to remain at low levels, at $8.3 million, or 0.57% of total loans, at March 31, 2017.  Net charge-offs for the current quarter were $583 thousand, compared to $368 thousand in the same quarter in 2016; however, total net charge-offs as a percentage of average net loans outstanding is only 0.16% for the quarter ended March 31, 2017.  Lending to the energy sector is insignificant and less than 1% of the loan portfolio.

The net interest margin for the three months ended March 31, 2017 was 4.01%, a 6 basis points decrease from the quarter ended March 31, 2016.  In comparing the first quarter of 2017 to the same period in 2016, asset yields decreased 1 basis point, while the cost of interest-bearing liabilities increased 8 basis points.  The net interest margin is impacted by the additional accretion as a result of the discounted loan portfolios acquired in the NBOH and Tri-State mergers, which increased the net interest margin by 5 and 9 basis points for the quarters ended March 31, 2017 and 2016, respectively.

Noninterest income increased 19% to $5.9 million for the quarter ended March 31, 2017 compared to $4.9 million in 2016.  Gains on the sale of mortgage loans increased $205 thousand, or 51% in the current year’s quarter compared to the same quarter in 2016. Insurance agency commissions increased $535 thousand in comparing the same two quarters due mainly to the acquisition of the Bowers Group.  Trust fees increased $182 thousand or 12.2% in comparing the first quarter of 2017 to the same quarter in 2016.

Farmers has remained committed to managing the level of noninterest expenses.  Total noninterest expenses for the first quarter of 2017 increased slightly to $14.6 million compared to $14.4 million in the same quarter in 2016, primarily as a result of an increase in salaries and employee benefits of $733 thousand, offset by a $423 thousand decrease in other operating expenses.  It is important to note that annualized noninterest expenses measured as a percentage of quarterly average assets decreased from 3.07% in the first quarter of 2016 to 2.92% in the first quarter of 2017.  

38

 


 

The efficiency ratio for the quarter ended March 31 2017 improved to 58.8% compared to 62.7% for the same quarter in 2016. The main factors leading to this improvement were the increase in net interest income and noninterest income, the decrease in merger related costs, along with the stabilized level of noninterest expenses relative to average assets as explained in the preceding paragraphs.

Results of Operations

The following is a comparison of selected financial ratios and other results at or for the three month periods ended March 31, 2017 and 2016:

 

 

At or for the Three Months

Ended March 31,

 

(In Thousands, except Per Share Data)

2017

 

 

2016

 

Total Assets

$

2,026,487

 

 

$

1,860,307

 

Net Income

$

5,783

 

 

$

4,798

 

Basic and Diluted Earnings Per Share

$

0.21

 

 

$

0.18

 

Return on Average Assets (Annualized)

 

1.17

%

 

 

1.03

%

Return on Average Equity (Annualized)

 

10.87

%

 

 

9.41

%

Efficiency Ratio (tax equivalent basis) (1)

 

58.79

%

 

 

62.65

%

Equity to Asset Ratio

 

10.76

%

 

 

10.96

%

Tangible Common Equity Ratio (2)

 

8.74

%

 

 

8.88

%

Dividends to Net Income

 

23.40

%

 

 

22.45

%

Net Loans to Assets

 

71.56

%

 

 

70.21

%

Loans to Deposits

 

94.89

%

 

 

90.98

%

 

(1)

The ratio is calculated by dividing noninterest expenses by the sum of net interest income and noninterest income.  The Company strives for a lower efficiency ratio.  This efficiency ratio measure is not required by any regulatory agency but provides meaningful information to management and investors since a lower ratio indicates the Company is using their assets more effectively to generate profits.  

(2)

The tangible common equity ratio is calculated by dividing total common stockholders’ equity by total assets, after reducing both amounts by intangible assets.  The tangible common equity ratio is not required by U.S. GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of the Company’s capital levels.  Since there is no authoritative requirement to calculate the tangible common equity ratio, the Company’s tangible common equity ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry.  Tangible common equity and tangible assets are non-U.S. GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S. GAAP.  With respect to the calculation of the actual unaudited tangible common equity ratio as of March 31, 2017 and 2016, reconciliations of tangible common equity to U.S. GAAP total common stockholders’ equity and tangible assets to U.S. GAAP total assets are set forth below:

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

(In Thousands of Dollars)

 

2017

 

 

 

2016

 

 

 

2016

 

Reconciliation of Common Stockholders' Equity to Tangible Common Equity

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

$

218,062

 

 

$

213,216

 

 

$

203,982

 

Less Goodwill and Other Intangibles

 

44,789

 

 

 

45,154

 

 

 

42,574

 

Tangible Common Equity

 

173,273

 

 

 

168,062

 

 

 

161,408

 

Period End Outstanding Shares

 

27,067

 

 

 

27,048

 

 

 

26,924

 

Tangible Book Value

$

6.40

 

 

$

6.21

 

 

$

5.99

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

(In Thousands of Dollars)

 

2017

 

 

 

2016

 

 

 

2016

 

Reconciliation of Total Assets to Tangible Assets

 

 

 

 

 

 

 

 

 

 

 

Total Assets

$

2,026,487

 

 

$

1,966,113

 

 

$

1,860,307

 

Less Goodwill and Other Intangibles

 

44,789

 

 

 

45,154

 

 

 

42,574

 

Tangible Assets

$

1,981,698

 

 

$

1,920,959

 

 

$

1,817,733

 

 

39

 


 

Net Interest Income. The following schedule details the various components of net interest income for the periods indicated.  All asset yields are calculated on a tax-equivalent basis where applicable.  Security yields are based on amortized cost.

 

 

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 2017

 

 

March 31, 2016

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (3) (5) (6)

$

1,436,494

 

 

$

16,638

 

 

 

4.70

%

 

$

1,292,415

 

 

$

15,430

 

 

 

4.80

%

Taxable securities (4)

 

211,711

 

 

 

1,118

 

 

 

2.14

 

 

 

260,677

 

 

 

1,437

 

 

 

2.22

 

Tax-exempt securities (4) (6)

 

152,913

 

 

 

1,639

 

 

 

4.35

 

 

 

128,527

 

 

 

1,356

 

 

 

4.24

 

Equity securities (2)

 

9,924

 

 

 

115

 

 

 

4.70

 

 

 

9,559

 

 

 

113

 

 

 

4.75

 

Federal funds sold and other

 

34,234

 

 

 

63

 

 

 

0.75

 

 

 

24,957

 

 

 

38

 

 

 

0.61

 

TOTAL EARNING ASSETS

 

1,845,276

 

 

 

19,573

 

 

 

4.30

 

 

 

1,716,135

 

 

 

18,374

 

 

 

4.31

 

NONEARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

32,594

 

 

 

 

 

 

 

 

 

 

 

37,917

 

 

 

 

 

 

 

 

 

Premises and equipment

 

23,286

 

 

 

 

 

 

 

 

 

 

 

24,227

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(10,925

)

 

 

 

 

 

 

 

 

 

 

(9,076

)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

(4,323

)

 

 

 

 

 

 

 

 

 

 

3,084

 

 

 

 

 

 

 

 

 

Other assets (3)

 

115,176

 

 

 

 

 

 

 

 

 

 

 

109,171

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

2,001,084

 

 

 

 

 

 

 

 

 

 

$

1,881,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

235,153

 

 

$

500

 

 

 

0.86

%

 

$

243,511

 

 

$

409

 

 

 

0.68

%

Savings deposits

 

520,081

 

 

 

170

 

 

 

0.13

 

 

 

529,921

 

 

 

151

 

 

 

0.11

 

Demand deposits

 

384,602

 

 

 

244

 

 

 

0.26

 

 

 

317,513

 

 

 

147

 

 

 

0.19

 

Short term borrowings

 

249,505

 

 

 

327

 

 

 

0.53

 

 

 

215,477

 

 

 

175

 

 

 

0.33

 

Long term borrowings

 

12,291

 

 

 

78

 

 

 

2.57

 

 

 

22,021

 

 

 

118

 

 

 

2.16

 

TOTAL INTEREST-BEARING LIABILITIES

 

1,401,632

 

 

 

1,319

 

 

 

0.38

 

 

 

1,328,443

 

 

 

1,000

 

 

 

0.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

369,477

 

 

 

 

 

 

 

 

 

 

 

334,919

 

 

 

 

 

 

 

 

 

Other liabilities

 

14,156

 

 

 

 

 

 

 

 

 

 

 

13,110

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

215,819

 

 

 

 

 

 

 

 

 

 

 

204,986

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

2,001,084

 

 

 

 

 

 

 

 

 

 

$

1,881,458

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

 

$

18,254

 

 

 

3.92

%

 

 

 

 

 

$

17,374

 

 

 

4.01

%

Net interest margin

 

 

 

 

 

 

 

 

 

4.01

%

 

 

 

 

 

 

 

 

 

 

4.07

%

 

(1)

Rates are calculated on an annualized basis.

(2)

Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.

(3)

Non-accrual loans and overdraft deposits are included in other assets.

(4)

Includes unamortized discounts and premiums.  Average balance and yield are computed using the average historical amortized cost.

(5)

Interest on loans includes fee income of $925 thousand and $875 thousand for 2017 and 2016, respectively, and is reduced by amortization of $646 thousand and $593 thousand for 2017 and 2016, respectively.

(6)

For 2017, adjustments of $155 thousand and $568 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. For 2016, adjustments of $160 thousand and $467 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities.  These adjustments are based on a marginal federal income tax rate of 35%, less disallowances.

40

 


 

Net Interest Income.  Tax equivalent net interest income was $19.6 million for the first quarter of 2017 compared to $18.4 million for the same period in 2016.  The net interest margin to average earning assets on a fully taxable equivalent basis decreased 6 basis points to 4.01% for the three months ended March 31, 2017, compared to 4.07% for the same three month period in the prior year.  In comparing the quarters ended March 31, 2017 and 2016, yields on earning assets decreased 1 basis point, while the cost of interest bearing liabilities increased 8 basis points.  The decreased margin is mainly due to the pressure on increasing deposit rates as the FED continues to raise the federal funds interest rate.  Excluding the amortization of premium on time deposits and Federal Home Loan Bank (“FHLB”) advances along with the accretion of the loan portfolio discount, the net interest margin would have been 5 basis points lower for the quarter ended March 31, 2017.

Noninterest Income.  Noninterest income increased 19% to $5.9 million for the quarter ended March 31, 2017 compared to $4.9 million in 2016.  Insurance agency commissions increased $535 thousand for the three month period ended March 31, 2017 compared to the three month period in 2016.  Most of this increase is related to the acquisition, in June of 2016, of the Bowers group insurance agency.  Gains on the sale of mortgage loans increased $205 thousand or 51% and trust fees increased $182 thousand or 12.2% in comparing the same two quarters.  In addition, debit card interchange fees also supplied a boost in the first quarter of 2017 compared to the same time period in 2016, increasing 4% or $27 thousand.

Noninterest Expense.  Noninterest expense totaled $14.6 million for the three month period ended March 31, 2017, which was $169 thousand or 1.2% more than the $14.4 million during the same quarter in 2016.  Excluding merger related expense in the three month periods ended March 31, 2017 and 2016, noninterest expenses would have increased $396 thousand in the current year quarter.  The increase is primarily the result of increased levels of expense due to the acquisition of the Bowers group on June 1, 2016.  Although the additional costs were spread over most expense categories, salaries and employee benefits increased 9.7%, or $733 thousand, during the current quarter compared to the same quarter in 2016, mostly as a result of the additional insurance company employees.  Annualized salaries and employee benefits as a percent of quarterly average assets increase slightly from 1.61% in the first quarter of 2016 to 1.68% in the first quarter of 2017.  

The Company’s tax equivalent efficiency ratio for the three month period ended March 31, 2017 was 58.8% compared to 62.7% for the same period in 2016.  The positive change in the efficiency ratio was the result of decreased merger related costs and the stabilization of non-interest expenses, supplemented by the improvements to net interest income and noninterest income.

Income Taxes.  Income tax expense totaled $2.0 million for the quarter ended March 31, 2017 and $1.7 million for the quarter ended March 31, 2016.  The effective tax rate for the three month period ended March 31, 2017 was 25.4% compared to the effective tax rate of 25.8% for the same period in 2016.  

Other Comprehensive Income.  For the quarter ended March 31, 2017, the change in net unrealized gains or losses on securities, net of reclassifications, resulted in an unrealized gain, net of tax, of $234 thousand, compared to an unrealized gain of $2.2 million for the same period in 2016.  The decrease in fair value of securities for the three month period ended March 31, 2017 compared to 2016 is the result of normal market interest rate fluctuations.

Financial Condition

Cash and Cash Equivalents.  Cash and cash equivalents increased $19.5 million during the first three months of 2017 from $41.8 million to $61.3 million.  The increase in the cash balance is part of the normal fluctuations on the Company’s $2.026 billion balance sheet. There are $9.9 million in security purchases that will settle in early April 2017 that will reduce the cash balance.  After those settlements, the Company expects the levels to remain relatively steady over the next few months.

Securities.  Securities available-for-sale increased by $7.1 million since December 31, 2016.  The Company intends to maintain the securities portfolio’s current level, as a percentage of total assets, during the remaining months of 2017.

Loans.  Gross loans increased $33.8 million since December 31, 2016.  Most of the increase in loans has occurred in the commercial real estate, commercial and industrial, residential real estate loan portfolios and consumer loan portfolios.  The Bank utilized a talented lending and credit team while adhering to sound underwriting discipline to increase the loan portfolio.  The increase in loan balances was enough to overcome the lower rate of return on the portfolio and help the current quarter’s tax equated loan income to improve by $1.2 million compared to the same quarter in 2016.  

The average tax equivalent interest rate on the loan portfolio was 4.70% for the three month period ended March 31, 2017 compared to 4.80% for the same period in 2016.  On a fully tax equivalent basis, loans contributed $16.6 million of total interest income during the three month period ended March 31, 2017 compared to $15.4 million for the same period in 2016.

41

 


 

 Allowance for Loan Losses.  The following table indicates key asset quality ratios that management evaluates on an ongoing basis. The unpaid principal balance of non-performing loans and non-performing assets was used in the calculation of amounts and ratios on the table below for quarters prior to the current quarter ended March 31, 2017.  Recorded investment amounts were used in the calculations.

 

 

Asset Quality History

(In Thousands of Dollars)

 

 

3/31/2017

 

 

12/31/2016

 

 

9/30/2016

 

 

6/30/2016

 

 

3/31/2016

 

Nonperforming loans

$

6,553

 

 

$

8,170

 

 

$

8,003

 

 

$

8,360

 

 

$

9,710

 

Nonperforming loans as a % of total loans

 

0.45

%

 

 

0.58

%

 

 

0.57

%

 

 

0.62

%

 

 

0.74

%

Loans delinquent 30-89 days

$

8,258

 

 

$

12,746

 

 

$

10,987

 

 

$

11,371

 

 

$

10,072

 

Loans delinquent 30-89 days as a % of total loans

 

0.57

%

 

 

0.89

%

 

 

0.79

%

 

 

0.84

%

 

 

0.77

%

Allowance for loan losses

$

11,319

 

 

$

10,852

 

 

$

10,518

 

 

$

9,720

 

 

$

9,390

 

Allowance for loan losses as a % of loans

 

0.77

%

 

 

0.76

%

 

 

0.75

%

 

 

0.72

%

 

 

0.71

%

Allowance for loan losses as a % of non-acquired loans

 

1.02

%

 

 

1.03

%

 

 

1.05

%

 

 

1.04

%

 

 

1.08

%

Allowance for loan losses as a % of nonperforming loans

 

172.73

%

 

 

132.82

%

 

 

131.43

%

 

 

116.27

%

 

 

96.70

%

Annualized net charge-offs to average net loans outstanding

 

0.16

%

 

 

0.20

%

 

 

0.09

%

 

 

0.20

%

 

 

0.11

%

Non-performing assets

$

6,871

 

 

$

8,652

 

 

$

8,509

 

 

$

8,932

 

 

$

10,265

 

Non-performing assets as a % of total assets

 

0.34

%

 

 

0.44

%

 

 

0.43

%

 

 

0.46

%

 

 

0.55

%

Net charge-offs for the quarter

$

583

 

 

$

656

 

 

$

312

 

 

$

660

 

 

$

368

 

 

For the three months ended March 31, 2017, management recorded a $1.1 million provision for loan losses, compared to providing $780 thousand over the same three month period in the prior year.  The larger provision for the current quarter was mainly a result of the larger portfolio and slightly higher than normal charge-offs.  Loan growth over the first three months of 2017 was 9.6% on an annualized basis.  The allowance for loan losses as a percentage of the total loan portfolio was 0.77% at March 31, 2017 compared to 0.71% at March 31, 2016.  The loan portfolios acquired at fair market value during the NBOH and Tri-State mergers were recorded without an associated allowance for loan losses during 2015.  When the acquired loans are excluded the ratio of allowance for loan losses to total non-acquired loans is 1.02% at March 31, 2017 compared to 1.08% at March 31, 2016.  Early stage delinquencies as a percentage of total loans decreased from 0.77% at March 31, 2016 to 0.57% at March 31, 2017 and non-performing loans as a percentage of total loans decreased from 0.74% at March 31, 2016 to 0.45% at March 31, 2017.  With the reduction in the percentage of non-performing loans to total loans as compared to March 31, 2016 the percentage of the allowance for loan losses to non-performing loans increased from 96.70% at March 31, 2016 to 172.73% at March 31, 2017.

Based on the evaluation of the adequacy of the allowance for loan losses, management believes that the allowance for loan losses at March 31, 2017 is adequate and reflects probable incurred losses in the portfolio.  The provision for loan losses is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio.  Management evaluates the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry standards and other relevant factors.  Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

Deposits.  Total deposits increased $15.5 million from December 31, 2016 to March 31, 2017, for a balance of $1.5 billion.  The increase in deposits is the result of the Company’s efforts to increase deposits without causing a significant negative impact to the net interest margin during the first three months of 2017.  Non-interest bearing demand deposits and interest bearing deposits both had increases between December 31, 2016 and March 31, 2017.  Non-interest bearing deposits increased by $7.5 million or 2.1% during the three month period and interest bearing deposits increased $7.9 million or 0.7%.  Money market index accounts decreased.  At December 31, 2016 the balance was $312.7 million and at March 31, 2017 it was $300 million, a decrease of 4.2%.  The Company’s strategy is to grow deposit balances, to help supply the needs of the growing loan portfolio, while pricing deposit rates to remain competitive within the market.  At March 31, 2017, core deposits, which include savings and money market accounts, time deposits less than $250 thousand, demand deposits and interest bearing demand deposits represented approximately 97.2% of total deposits.

Borrowings.  Total borrowing balances increased 14.8% from $213.5 million at December 31, 2016 to $245.1 million at March 31, 2017.  During the three month period ended March 31, 2017 the Company added $36.8 million in net short-term FHLB advances.  The increase in borrowings is a result of the effort to maintain the security portfolio’s current balance.

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Capital Resources.  Total stockholders’ equity increased $4.8 million, or 2.3%, during the three month period ended March 31, 2017.  The increase is due to the net income addition to retained earnings less the amount of dividends paid.  Shareholders received $0.05 per share in cash dividends in the first quarter of 2017, which is a 25% increase over the $0.04 paid each quarter in 2016.  Book value per share increased from $7.88 per share at December 31, 2016 to $8.06 per share at March 31, 2017.  The Company’s tangible book value per share also increased, from $6.21 per share at December 31, 2016 to $6.40 per share at March 31, 2017.  The increases in book value and tangible book value per share were also the result of increase to retained earnings from profit retention.

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company.  New minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III) are being phased in from January 1, 2015 through January 1, 2019.  The Company must hold a capital conservation buffer of 1.25% above adequately capitalized risk-based capital ratios during 2017.  At March 31, 2017 the Company is required to maintain 4.5% common equity tier 1 to risk weighted assets excluding the conservation buffer to be adequately capitalized.  The Company’s common equity tier 1 to risk weighted assets was 11.75%, total risk-based capital ratio stood at 12.61%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 11.89% and 9.47%, respectively, at March 31, 2017.  Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of March 31, 2017.

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company has identified three accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements.  These policies relate to determining the adequacy of the allowance for loan losses, if there is any impairment of goodwill or other intangible, and estimating the fair value of assets acquired and liabilities assumed in connection with the merger activity.  Additional information regarding these policies is included in the notes to the aforementioned 2016 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combination), Note 4 (Loans), and the sections captioned “Loan Portfolio.”

U.S. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill.  Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired.  The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Company’s subsidiaries to provide quality, cost-effective services in a competitive marketplace.  The goodwill value is supported by revenue that is in part driven by the volume of business transacted.  A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods.  U.S. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The fair value of the goodwill is estimated by reviewing the past and projected operating results for the subsidiaries and comparable industry information.

Liquidity

The Company maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers.  The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds.  The Company’s ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition.  The Company’s objective in liquidity management is to maintain the ability to meet loan commitments, purchase securities or to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings.  Principal sources of liquidity for the Company include assets considered relatively liquid, such as federal funds sold, cash and due from banks, as well as cash flows from maturities and repayments of loans, and securities.

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed.  These other sources include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at major domestic banks.  At March 31, 2017, these lines of credit totaled $25 million of which the Bank had not borrowed against.  In addition, the Company has two revolving lines of credit with correspondent banks totaling $6.5 million.  The outstanding balance at March 31, 2017 was $350 thousand.  Management feels that its liquidity position is adequate and continues to monitor the position on a monthly basis.  As of March 31, 2017, the Bank had outstanding balances with the FHLB of $157.7 million with additional borrowing capacity of approximately $120.1 million with the FHLB, as well as access to the Federal Reserve Discount Window, which provides an additional source of funds.  The Bank views its membership in the FHLB as a solid source of liquidity.  

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The primary investing activities of the Company are originating loans and purchasing securities. During the first three months of 2017, net cash used by investing activities amounted to $32.4 million, compared to $9.1 million used in the same period in 2016.  Loan originations were robust and used $34.4 million during the first three months of 2017 compared to the $19.2 million used during the same period in 2016. The cash used in investing activities during this period can be attributed to the strong lending activity in most of the loan types. Proceeds from the sale of securities available for sale were $43.3 million for the quarter ended March 31, 2017 compared to $10 thousand during the first three months of 2016.  Conversely, purchases of securities available for sale amounted to $54.9 million used during the first three months of 2017 compared to $2 million used during the same period in 2016.  

The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings.  Net cash provided by financing activities amounted to $61.3 million for the period ended March 31, 2017, compared to $34.6 million provided in financing activities for the same period in 2016. There were large swings in two line items during the three month period ended March 31, 2017 compared to the same period last year. Deposits provided $15.5 million compared to $36.8 million used during the three month periods ended March 31, 2017 and 2016, respectively. Changes in short term borrowings used $36.8 million in the three month period ended March 31, 2017 compared to providing $50.2 million during the three month period ended March 31, 2016.  There was also $216 thousand used from long-term borrowing repayments in the three month period ended March 31, 2016 compared to $5.2 million used in the same period this year.  

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk.  These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets.  The Bank’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments.  Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The same credit policies are used in making commitments as are used for on-balance sheet instruments.  Collateral is required in instances where deemed necessary.  Undisbursed balances of loans closed include funds not disbursed but committed for construction projects.  Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit.  Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  Those guarantees are primarily used to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Total unused commitments were $310.2 million at March 31, 2017 and $321.9 at December 31, 2016.  Additionally, the Company has committed up to a $8 million subscription in Small Business Investment Company investment funds.  At March 31, 2017 the Company had invested $4.2 million in these funds.

Recent Market and Regulatory Developments

Various legislation affecting financial institutions and the financial industry will likely continue to be introduced in Congress, and such legislation may further change banking statutes and the operating environment of the Company in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries.  With the enactment of the Dodd-Frank Act, the nature and extent of future legislative and regulatory changes affecting financial institutions remains very unpredictable at this time.

Also, such statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment.  Any such change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company.

 

 

Item  3.

Quantitative and Qualitative Disclosures About Market Risk

The Company’s ability to maximize net income is dependent, in part, on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities.  Because a large portion of assets and liabilities of the Company are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company.  Additionally, the Company’s balance sheet is slightly asset sensitive and in the rising interest rate environment that exists today, the Company’s net interest margin should maintain relatively stable levels throughout the near future.  

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The Company considers the primary market exposure to be interest rate risk.  Simulation analysis is used to monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income.  The following table shows the effect on net interest income and the net present value of equity in the event of a sudden and sustained 300 basis point increase or 100 basis point decrease in market interest rates:

 

Changes In Interest Rate

(basis points)

 

March 31,

2017

Result

 

 

December 31,

2016

Result

 

 

ALCO

Guidelines

 

Net Interest Income Change

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

 

-1.8

%

 

 

-0.1

%

 

 

15

%

+200

 

 

-1.0

%

 

 

0.2

%

 

 

10

%

+100

 

 

-0.5

%

 

 

0.3

%

 

 

5

%

-100

 

 

-3.2

%

 

 

-3.4

%

 

 

5

%

Net Present Value Of Equity Change

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

 

-3.9

%

 

 

-1.3

%

 

 

20

%

+200

 

 

-0.8

%

 

 

0.6

%

 

 

15

%

+100

 

 

0.9

%

 

 

1.4

%

 

 

10

%

-100

 

 

-6.2

%

 

 

-0.4

%

 

 

10

%

 

The results of the simulations indicate that all interest rate change results fall within internal limits established by the Company at March 31, 2017.  A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis.  The Company has no market risk sensitive instruments held for trading purposes, nor does it hold derivative financial instruments, and does not plan to purchase these instruments in the near future.

 

 

Item  4.

Controls and Procedures

Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective.  There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

In the opinion of management there are no outstanding legal actions that will have a material adverse effect on the Company’s financial condition or results of operations.

Item 1A.

Risk Factors

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities by the issuer.

On September 28, 2012, the Company announced that its Board of Directors approved a stock repurchase program that authorizes the repurchase of up to 920,000 shares of its outstanding common stock in the open market or in privately negotiated transactions. There were no shares purchased during the three month period ended March 31, 2017.  There are 245,866 shares that may still be repurchased under this program.  

Item 3.

Defaults Upon Senior Securities

Not applicable.

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Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

 

 

 

46

 


 

Item 6.

Exhibits

The following exhibits are filed or incorporated by reference as part of this report:

 

   2.1

Agreement and Plan of Merger by and among Monitor Bancorp, Inc., Farmers National Banc Corp. and FMNB Merger Subsidiary II, LLC, dated as of March 13, 2017 (incorporated by reference from Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 17, 2017)

 

 

   3.1

Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on October 3, 2001 (File No. 333-70806)).

 

 

  3.2

Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2013).

 

 

  3.3

Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011 filed with the Commission on August 9, 2011).

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Kevin J. Helmick, President and Chief Executive Officer of the Company (filed herewith).

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Carl D. Culp, Executive Vice President, Chief Financial Officer and Treasurer of the Company (filed herewith).

 

 

32.1

Certification pursuant to 18 U.S.C. Section 1350 of Kevin J. Helmick, President and Chief Executive Officer of the Company (filed herewith).

 

 

32.2

Certification pursuant to 18 U.S.C. Section 1350 of Carl D. Culp, Executive Vice President, Chief Financial Officer and Treasurer of the Company (filed herewith).

 

 

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; and (v) Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text.

 

*

Constitutes a management contract or compensatory plan or arrangement.

 

 

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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 NATIONAL BANC CORP.

Dated: May 9, 2017

 

/s/ Kevin J. Helmick

Kevin J. Helmick
President and Chief Executive Officer

Dated: May 9, 2017

 

/s/ Carl D. Culp

Carl D. Culp
Executive Vice President and Treasurer

 

48