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FARMERS NATIONAL BANC CORP /OH/ - Quarter Report: 2020 June (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 June 30, 2020

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

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  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, No Par Value

FMNB

The NASDAQ Stock Market

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 July 31, 2020

Common Stock, No Par Value

 

28,179,804 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 Statements of Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

 

Item 2

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

44

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

55

 

 

 

Item 4

Controls and Procedures

56

 

 

 

PART II - OTHER INFORMATION

56

 

 

 

Item 1

Legal Proceedings

56

 

 

 

Item 1A

Risk Factors

56

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

Item 3

Defaults Upon Senior Securities

57

 

 

 

Item 4

Mine Safety Disclosures

57

 

 

 

Item 5

Other Information

57

 

 

 

Item 6

Exhibits

58

 

 

SIGNATURES

59

 

 

10-Q Certifications

 

 

 

Section 906 Certifications

 

 

 

 

1


 

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

June 30,

2020

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

22,134

 

 

$

23,229

 

Federal funds sold and other

 

 

81,820

 

 

 

47,531

 

TOTAL CASH AND CASH EQUIVALENTS

 

 

103,954

 

 

 

70,760

 

Securities available for sale

 

 

475,614

 

 

 

432,233

 

Equity securities

 

 

8,375

 

 

 

7,909

 

Loans held for sale

 

 

3,395

 

 

 

2,600

 

Loans

 

 

2,143,600

 

 

 

1,811,539

 

Less allowance for loan losses

 

 

16,960

 

 

 

14,487

 

NET LOANS

 

 

2,126,640

 

 

 

1,797,052

 

Premises and equipment, net

 

 

25,596

 

 

 

23,817

 

Goodwill

 

 

47,360

 

 

 

38,201

 

Other intangibles, net

 

 

4,506

 

 

 

4,444

 

Bank owned life insurance

 

 

35,939

 

 

 

35,527

 

Other assets

 

 

48,210

 

 

 

36,615

 

TOTAL ASSETS

 

$

2,879,589

 

 

$

2,449,158

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

593,162

 

 

$

434,126

 

Interest-bearing

 

 

1,789,323

 

 

 

1,490,763

 

Brokered time deposits

 

 

57,000

 

 

 

84,075

 

TOTAL DEPOSITS

 

 

2,439,485

 

 

 

2,008,964

 

Short-term borrowings

 

 

3,382

 

 

 

77,050

 

Long-term borrowings

 

 

76,733

 

 

 

45,147

 

Other liabilities

 

 

28,637

 

 

 

18,688

 

TOTAL LIABILITIES

 

 

2,548,237

 

 

 

2,149,849

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common Stock - Authorized 50,000,000 shares; issued 29,577,827 in 2020 and 28,179,598 in 2019

 

 

208,390

 

 

 

186,345

 

Retained earnings

 

 

122,061

 

 

 

108,851

 

Accumulated other comprehensive income (loss)

 

 

20,036

 

 

 

9,826

 

Treasury stock, at cost; 1,398,023 shares in 2020 and 508,859 in 2019

 

 

(19,135

)

 

 

(5,713

)

TOTAL STOCKHOLDERS' EQUITY

 

 

331,352

 

 

 

299,309

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,879,589

 

 

$

2,449,158

 

 

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

 

 

For the Six Months Ended

 

(Unaudited)

 

June 30,

2020

 

 

June 30,

2019

 

 

June 30,

2020

 

 

June 30,

2019

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

24,744

 

 

$

22,324

 

 

$

48,843

 

 

$

43,793

 

Taxable securities

 

 

1,278

 

 

 

1,238

 

 

 

2,825

 

 

 

2,482

 

Tax exempt securities

 

 

1,953

 

 

 

1,638

 

 

 

3,735

 

 

 

3,233

 

Dividends

 

 

137

 

 

 

171

 

 

 

277

 

 

 

346

 

Federal funds sold and other interest income

 

 

30

 

 

 

158

 

 

 

179

 

 

 

354

 

TOTAL INTEREST AND DIVIDEND INCOME

 

 

28,142

 

 

 

25,529

 

 

 

55,859

 

 

 

50,208

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,860

 

 

 

4,359

 

 

 

8,499

 

 

 

7,794

 

Short-term borrowings

 

 

18

 

 

 

631

 

 

 

338

 

 

 

1,862

 

Long-term borrowings

 

 

343

 

 

 

48

 

 

 

799

 

 

 

96

 

TOTAL INTEREST EXPENSE

 

 

4,221

 

 

 

5,038

 

 

 

9,636

 

 

 

9,752

 

NET INTEREST INCOME

 

 

23,921

 

 

 

20,491

 

 

 

46,223

 

 

 

40,456

 

Provision for loan losses

 

 

2,400

 

 

 

750

 

 

 

3,500

 

 

 

1,300

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

21,521

 

 

 

19,741

 

 

 

42,723

 

 

 

39,156

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

753

 

 

 

1,093

 

 

 

1,848

 

 

 

2,167

 

Bank owned life insurance income

 

 

204

 

 

 

208

 

 

 

412

 

 

 

422

 

Trust fees

 

 

1,852

 

 

 

1,821

 

 

 

3,709

 

 

 

3,679

 

Insurance agency commissions

 

 

681

 

 

 

739

 

 

 

1,564

 

 

 

1,542

 

Security gains (losses), including fair value changes for equity securities

 

 

(26

)

 

 

(18

)

 

 

131

 

 

 

(8

)

Retirement plan consulting fees

 

 

408

 

 

 

450

 

 

 

788

 

 

 

808

 

Investment commissions

 

 

304

 

 

 

327

 

 

 

727

 

 

 

587

 

Net gains on sale of loans

 

 

3,658

 

 

 

1,055

 

 

 

5,024

 

 

 

1,726

 

Debit card and EFT fees

 

 

967

 

 

 

887

 

 

 

1,818

 

 

 

1,665

 

Other operating income

 

 

335

 

 

 

567

 

 

 

985

 

 

 

1,184

 

TOTAL NONINTEREST INCOME

 

 

9,136

 

 

 

7,129

 

 

 

17,006

 

 

 

13,772

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,713

 

 

 

9,266

 

 

 

19,944

 

 

 

18,622

 

Occupancy and equipment

 

 

1,675

 

 

 

1,650

 

 

 

3,475

 

 

 

3,367

 

State and local taxes

 

 

583

 

 

 

472

 

 

 

1,047

 

 

 

942

 

Professional fees

 

 

823

 

 

 

887

 

 

 

1,639

 

 

 

1,681

 

Merger related costs

 

 

48

 

 

 

(19

)

 

 

1,367

 

 

 

(19

)

Advertising

 

 

322

 

 

 

442

 

 

 

593

 

 

 

692

 

FDIC insurance

 

 

225

 

 

 

85

 

 

 

450

 

 

 

172

 

Intangible amortization

 

 

331

 

 

 

327

 

 

 

663

 

 

 

654

 

Core processing charges

 

 

934

 

 

 

803

 

 

 

1,795

 

 

 

1,594

 

Telephone and data

 

 

348

 

 

 

217

 

 

 

551

 

 

 

477

 

Other operating expenses

 

 

2,738

 

 

 

2,709

 

 

 

4,953

 

 

 

4,757

 

TOTAL NONINTEREST EXPENSES

 

 

17,740

 

 

 

16,839

 

 

 

36,477

 

 

 

32,939

 

INCOME BEFORE INCOME TAXES

 

 

12,917

 

 

 

10,031

 

 

 

23,252

 

 

 

19,989

 

INCOME TAXES

 

 

1,906

 

 

 

1,488

 

 

 

3,602

 

 

 

3,058

 

NET INCOME

 

$

11,011

 

 

$

8,543

 

 

$

19,650

 

 

$

16,931

 

EARNINGS PER SHARE - basic

 

$

0.39

 

 

$

0.31

 

 

$

0.69

 

 

$

0.61

 

EARNINGS PER SHARE - fully diluted

 

$

0.39

 

 

$

0.31

 

 

$

0.69

 

 

$

0.61

 

 

See accompanying notes

 

3


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

(Unaudited)

 

June 30,

2020

 

 

June 30,

2019

 

 

June 30,

2020

 

 

June 30,

2019

 

NET INCOME

 

$

11,011

 

 

$

8,543

 

 

$

19,650

 

 

$

16,931

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains on available for sale securities

 

 

25,411

 

 

 

9,203

 

 

 

13,194

 

 

 

15,024

 

Reclassification adjustment for (gains) losses realized in income

 

 

(14

)

 

 

(1

)

 

 

(270

)

 

 

33

 

Net unrealized holding gains

 

 

25,397

 

 

 

9,202

 

 

 

12,924

 

 

 

15,057

 

Income tax effect

 

 

(5,333

)

 

 

(1,920

)

 

 

(2,714

)

 

 

(3,150

)

Other comprehensive income, net of tax

 

 

20,064

 

 

 

7,282

 

 

 

10,210

 

 

 

11,907

 

TOTAL COMPREHENSIVE INCOME

 

$

31,075

 

 

$

15,825

 

 

$

29,860

 

 

$

28,838

 

 

See accompanying notes

 

4


 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

For the Three Months Ended

 

(Unaudited)

 

June 30,

2020

 

 

June 30,

2019

 

COMMON STOCK

 

 

 

 

 

 

 

 

Beginning balance

 

$

209,214

 

 

$

186,483

 

Issued 52,469 treasury shares in 2020 and 76,254 treasury shares in 2019 under the Long Term Incentive Plan

 

 

(1,173

)

 

 

(1,140

)

Stock compensation expense for unvested shares

 

 

349

 

 

 

344

 

Ending balance

 

 

208,390

 

 

 

185,687

 

 

 

 

 

 

 

 

 

 

RETAINED EARNINGS

 

 

 

 

 

 

 

 

Beginning balance

 

 

114,351

 

 

 

89,518

 

Net income

 

 

11,011

 

 

 

8,543

 

Dividends declared at $0.11 per share in 2020 and $0.09 per share in 2019

 

 

(3,301

)

 

 

(2,504

)

Ending balance

 

 

122,061

 

 

 

95,557

 

 

 

 

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

Beginning balance

 

 

(28

)

 

 

595

 

Other comprehensive income

 

 

20,064

 

 

 

7,282

 

Ending balance

 

 

20,036

 

 

 

7,877

 

 

 

 

 

 

 

 

 

 

TREASURY STOCK, AT COST

 

 

 

 

 

 

 

 

Beginning balance

 

 

(19,940

)

 

 

(3,645

)

Purchased 0 shares in 2020 and 85,479 shares in 2019

 

 

0

 

 

 

(1,186

)

Issued 85,389 shares in 2020 and 120,017 shares in 2019 under the Long Term Incentive Plan

 

 

1,173

 

 

 

1,140

 

Retained 32,920 shares in 2020 and 43,763 shares in 2019 to cover tax withholdings under the Long Term Incentive Plan

 

 

(368

)

 

 

(605

)

Ending balance

 

 

(19,135

)

 

 

(4,296

)

TOTAL STOCKHOLDERS' EQUITY

 

$

331,352

 

 

$

284,825

 

 

 

5


 

 

 

(In Thousands of Dollars)

 

 

 

For the Six Months Ended

 

(Unaudited)

 

June 30,

2020

 

 

June 30,

2019

 

COMMON STOCK

 

 

 

 

 

 

 

 

Beginning balance

 

$

186,345

 

 

$

186,163

 

Issued 53,803 treasury shares in 2020 and 76,254 treasury shares in 2019 under the Long Term Incentive Plan

 

 

(1,195

)

 

 

(1,140

)

Issued 1,398,229 shares in 2020 as part of a business combination

 

 

22,554

 

 

 

0

 

Stock compensation expense for unvested shares

 

 

686

 

 

 

664

 

Ending balance

 

 

208,390

 

 

 

185,687

 

 

 

 

 

 

 

 

 

 

RETAINED EARNINGS

 

 

 

 

 

 

 

 

Beginning balance

 

 

108,851

 

 

 

83,630

 

Net income

 

 

19,650

 

 

 

16,931

 

Dividends declared at $0.22 per share in 2020 and $0.18 per share in 2019

 

 

(6,440

)

 

 

(5,004

)

Ending balance

 

 

122,061

 

 

 

95,557

 

 

 

 

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

Beginning balance

 

 

9,826

 

 

 

(4,030

)

Other comprehensive income

 

 

10,210

 

 

 

11,907

 

Ending balance

 

 

20,036

 

 

 

7,877

 

 

 

 

 

 

 

 

 

 

TREASURY STOCK, AT COST

 

 

 

 

 

 

 

 

Beginning balance

 

 

(5,713

)

 

 

(3,443

)

Purchased 942,967 shares in 2020 and 100,472 shares in 2019

 

 

(14,238

)

 

 

(1,388

)

Issued 87,389 shares in 2020 and 120,017 shares in 2019 under the Long Term Incentive Plan

 

 

1,195

 

 

 

1,140

 

Retained 33,586 shares in 2020 and 43,763 shares in 2019 to cover tax withholdings under the Long Term Incentive Plan

 

 

(379

)

 

 

(605

)

Ending balance

 

 

(19,135

)

 

 

(4,296

)

TOTAL STOCKHOLDERS' EQUITY

 

$

331,352

 

 

$

284,825

 

 

See accompanying notes.

 

6


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

Six Months Ended

 

(Unaudited)

 

June 30,

2020

 

 

June 30,

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

19,650

 

 

$

16,931

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

3,500

 

 

 

1,300

 

Depreciation and amortization

 

 

1,541

 

 

 

1,428

 

Net amortization of securities

 

 

1,162

 

 

 

1,199

 

Available for sale security (gain) loss

 

 

(270

)

 

 

33

 

Realized (gains) losses on equity securities

 

 

139

 

 

 

(25

)

Loss on premises and equipment sales and disposals, net

 

 

77

 

 

 

16

 

Stock compensation expense

 

 

686

 

 

 

664

 

Loss on adjustment of other real estate owned

 

 

4

 

 

 

59

 

Earnings on bank owned life insurance

 

 

(412

)

 

 

(422

)

Origination of loans held for sale

 

 

(116,360

)

 

 

(23,251

)

Proceeds from loans held for sale

 

 

120,589

 

 

 

25,121

 

Net gains on sale of loans

 

 

(5,024

)

 

 

(1,726

)

Net change in other assets and liabilities

 

 

(6,214

)

 

 

(6,727

)

NET CASH FROM OPERATING ACTIVITIES

 

 

19,068

 

 

 

14,600

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities and repayments of securities available for sale

 

 

20,314

 

 

 

13,746

 

Proceeds from sales of securities available for sale

 

 

15,372

 

 

 

9,646

 

Purchases of securities available for sale

 

 

(37,411

)

 

 

(26,224

)

Proceeds from sales of equity securities

 

 

37

 

 

 

672

 

Purchase of equity securities

 

 

(761

)

 

 

(678

)

Proceeds from redemption of restricted stock

 

 

3,964

 

 

 

8

 

Purchase of restricted stock

 

 

(1,825

)

 

 

0

 

Loan originations and payments, net

 

 

(151,849

)

 

 

(45,602

)

Proceeds from sale of other real estate owned

 

 

126

 

 

 

135

 

Proceeds from land and building sales

 

 

502

 

 

 

62

 

Additions to premises and equipment

 

 

(2,891

)

 

 

(969

)

Net cash paid in business combinations

 

 

(8,136

)

 

 

0

 

NET CASH FROM INVESTING ACTIVITIES

 

 

(162,558

)

 

 

(49,204

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in deposits

 

 

247,270

 

 

 

200,915

 

Net change in short-term borrowings

 

 

(48,668

)

 

 

(153,447

)

Repayment of long-term borrowings

 

 

(1,476

)

 

 

(391

)

Cash dividends paid

 

 

(6,204

)

 

 

(5,004

)

Repurchase of common shares

 

 

(14,238

)

 

 

(1,388

)

NET CASH FROM FINANCING ACTIVITIES

 

 

176,684

 

 

 

40,685

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

33,194

 

 

 

6,081

 

Beginning cash and cash equivalents

 

 

70,760

 

 

 

57,926

 

Ending cash and cash equivalents

 

$

103,954

 

 

$

64,007

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

9,877

 

 

$

9,368

 

Income taxes paid

 

$

0

 

 

$

3,050

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate

 

$

41

 

 

$

268

 

Security purchases not settled

 

$

1,520

 

 

$

5,407

 

Issuance of stock awards

 

$

1,195

 

 

$

1,309

 

Issuance of stock for business combinations

 

$

22,554

 

 

$

0

 

 

See accompanying notes

 

 

7


 

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 consolidated financial statements also include the accounts of the Bank’s subsidiaries; Farmers National Insurance, LLC (“Insurance”) and Farmers of Canfield Investment Co. (“Investments”).  The Company provides trust and retirement consulting services through its subsidiary, Farmers Trust Company (“Trust”), and insurance services through the Bank’s subsidiary, Insurance.  Farmers National Captive, Inc. (“Captive”) 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 eleven 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 include the accounts of the Company, the Bank and its subsidiaries, along with the Trust and Captive.  All significant intercompany balances and transactions have been eliminated in the consolidation.

Corporate Reorganization:

On July 1, 2019, Trust acquired all shares of National Associates, Inc. (“NAI”) from the Company through a corporate reorganization.  The Company was the sole shareholder of Trust and NAI before the reorganization.  The entities were combined into one reporting unit and one operating segment and began reporting as one unit, for both internal and external reports, during the third quarter of 2019.  The combination is part of the Company’s plan to increase efficiencies within the different business lines.

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 2019 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.  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 and western Pennsylvania.  Operations are managed and financial performance is primarily aggregated and reported in two lines of business, the Bank segment and the Trust segment.  During the third quarter of 2019 the Company merged the Retirement Consulting segment into the Trust segment.  In prior periods segment reporting was reported in three segments.

Equity:

There are 50,000,000 shares authorized and available for issuance as of June 30, 2020.  Outstanding shares at June 30, 2020 were 28,179,804.

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 which are recognized as components of stockholders’ equity, net of tax effect.

8


 

Risks and Uncertainties:

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company.  The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections.  The spread of the outbreak has caused significant disruptions in the economy and has disrupted banking and other financial activity in the areas in which the Company operates.  While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread business continuity issues for the Company.  

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout.  Most notably, the Coronavirus Aid, Relief and Economic Security Act (“CARES”) was signed into law at the end of March 2020 as a $2 trillion legislative package.  The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.  The package also includes extensive emergency funding for hospitals and providers.  In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.  As the global response to contain COVID-19 continues or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.  While it is not possible to know the full universe or extent that the impact of COVID-19 will have on the Company’s operations, the Company will disclose potentially material items of which it is aware.

Financial position and results of operations:

The Company’s fee income could be reduced due to COVID-19.  In keeping with guidance from regulators, the Company is actively working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc.  These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis.  During the six month period ended at June 30, 2020 the Company waived $780 thousand in fees.  The Company recognizes the breadth of the economic impact is likely to continue impacting its fee income in future periods.

The Company’s interest income could be reduced due to COVID-19.  In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments.  While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity:

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses.  The Company relies on cash on hand as well as dividends from its subsidiaries.  If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to pay dividends to shareholders.

The Company maintains access to multiple sources of liquidity.  Wholesale funding markets have remained open, but rates for short term funding have recently been volatile.  If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin.  If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

 

9


 

New Accounting Standards:

Reacting to the global markets’ planned shift away from using major interbank reference rates, including the London Interbank Offered Rate (LIBOR), the FASB recently issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to ease the burden of accounting for contract modifications related to reference rate reform. The amendments in ASU 2020-04 create a new Topic in the Codification, ASC 848, Reference Rate Reform, which contains guidance that is designed to simplify how entities account for contracts that are modified to replace LIBOR or other benchmark interest rates with new rates. The amendments in ASU 2020-04 give entities the option to apply expedients and exceptions to contract modifications that are made until December 31, 2022, if certain criteria are met.  If adopted, these amendments and exceptions should be applied to all eligible modifications to contracts that are accounted for under an ASC Topic or industry Subtopic.  The guidance in ASC 848 will not apply to any contract modifications made after December 31, 2022.  Management is still evaluating the ASU and has not adopted it as of June 30, 2020.

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 Company adopted this ASU on January 1, 2020.  The adoption of this guidance did not 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 (modified by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments Credit Losses).  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 changed 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.  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.

In accordance with the accounting relief provisions of CARES, the Bank has postponed the adoption of the current expected credit losses (“CECL”) accounting standards, primarily due to the impact that the COVID-19 pandemic is having on the economy and the lack of reasonable and supportable economic forecasts.  Had the Company adopted CECL as of January 1, 2020, the increase to the allowance for loan losses estimated to have ranged from 15% to 20% of the amount recorded at December 31, 2019, which did not consider potential COVID-19 pandemic related impacts.

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 are 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 adopted this ASU on January 1, 2019.  As disclosed in the lease footnote, certain leases that the Company has in place required the capitalization of $3.6 million on the balance sheet as an asset and a related liability in the same amount with no income statement effect at January 1, 2019.

Business Combinations:

On January 7, 2020, the Company completed the acquisition of Maple Leaf Financial, Inc. (“Maple Leaf”), the parent company of Geauga Savings Bank, with branches located in Cuyahoga and Geauga Counties in Ohio.  The Company expects the acquisition to increase synergies and cost savings resulting from the combining of the two companies.  The transaction involved both cash and 1,398,229 shares of stock totaling $43.0 million.  Pursuant to the terms of the Merger Agreement, common shareholders of Maple Leaf had the right to receive $640.00 in cash or 45.5948 common shares, without par value, of the Company.  Holders of outstanding and unexercised warrants to purchase Maple Leaf Common Shares received an amount in cash equal to the excess of $640.00 over $370.00, the exercise price of such warrants.

Goodwill of $9.2 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 entities.  The goodwill was determined not to be deductible for income tax purposes.  

10


 

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

 

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

20,423

 

Stock

 

22,554

 

Fair value of total consideration transferred

$

42,977

 

Fair value of assets acquired

 

 

 

Cash and due from financial institutions

$

12,287

 

Securities available for sale

 

28,038

 

Loans

 

181,280

 

Premises and equipment

 

229

 

Core deposit intangible

 

725

 

Other assets

 

6,471

 

Total assets

 

229,030

 

Fair value of liabilities assumed

 

 

 

Deposits

 

183,251

 

Long-term borrowings

 

7,946

 

Accrued interest payable and other liabilities

 

4,015

 

Total liabilities

$

195,212

 

Net assets acquired

 

33,818

 

Goodwill created

 

9,159

 

Total net assets acquired

$

42,977

 

 

 

The following table presents pro forma information as if the Maple Leaf acquisition that occurred during January 2020 actually took place at the beginning of 2019.  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 June 30,

 

 

For Six Months Ended June 30,

 

(In thousands of dollars except per share results)

2020

 

 

2019

 

 

2020

 

 

2019

 

Net interest income

$

23,921

 

 

$

22,646

 

 

$

46,403

 

 

$

44,766

 

Net income

$

11,011

 

 

$

8,779

 

 

$

19,670

 

 

$

17,403

 

Basic earnings per share

$

0.39

 

 

$

0.32

 

 

$

0.69

 

 

$

0.63

 

Diluted earnings per share

$

0.39

 

 

$

0.31

 

 

$

0.69

 

 

$

0.62

 

 

 

 

 

Securities:

The following table summarizes the amortized cost and fair value of the available for sale investment securities portfolio at June 30, 2020 and December 31, 2019 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(In Thousands of Dollars)

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

3,790

 

 

$

123

 

 

$

0

 

 

$

3,913

 

State and political subdivisions

 

286,352

 

 

 

18,148

 

 

 

(54

)

 

 

304,446

 

Corporate bonds

 

3,161

 

 

 

149

 

 

 

0

 

 

 

3,310

 

Mortgage-backed securities - residential

 

119,276

 

 

 

5,968

 

 

 

0

 

 

 

125,244

 

Collateralized mortgage obligations - residential

 

31,623

 

 

 

885

 

 

 

(3

)

 

 

32,505

 

Small Business Administration

 

6,049

 

 

 

147

 

 

 

0

 

 

 

6,196

 

Totals

$

450,251

 

 

$

25,420

 

 

$

(57

)

 

$

475,614

 

 

11


 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(In Thousands of Dollars)

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

3,773

 

 

$

41

 

 

$

(3

)

 

$

3,811

 

State and political subdivisions

 

250,905

 

 

 

10,944

 

 

 

(424

)

 

 

261,425

 

Corporate bonds

 

1,238

 

 

 

22

 

 

 

0

 

 

 

1,260

 

Mortgage-backed securities - residential

 

145,886

 

 

 

2,396

 

 

 

(372

)

 

 

147,910

 

Collateralized mortgage obligations - residential

 

11,459

 

 

 

101

 

 

 

(213

)

 

 

11,347

 

Small Business Administration

 

6,534

 

 

 

0

 

 

 

(54

)

 

 

6,480

 

Totals

$

419,795

 

 

$

13,504

 

 

$

(1,066

)

 

$

432,233

 

 

Proceeds from the sale of portfolio securities were $300 thousand and $15.4 million during the three and six month periods ended June 30, 2020, respectively.  Gross gains of $26 and $282 thousand along with gross losses of $12 and $12 thousand were realized on these sales during the three and six month periods ended June 30, 2020.  $40 thousand of realized losses during the three month period and $139 thousand of realized losses during the six month period were recognized in the income statement for equity securities as of June 30, 2020.  Proceeds from the sale of portfolio securities were $500 thousand during the three month and $10.3 million during the six month periods ended June 30, 2019.  Gross gains were $2 and $24 thousand along with gross losses of $2 and $57 thousand during the same three and six month periods ended June 30, 2019. $19 thousand of realized losses and $25 thousand of realized gains during the three and six month periods ended June 30, 2019 were recognized in the income statement for equity securities.

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.

 

 

 

June 30, 2020

 

(In Thousands of Dollars)

 

Amortized Cost

 

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

Within one year

 

$

835

 

 

$

840

 

One to five years

 

 

6,069

 

 

 

6,236

 

Five to ten years

 

 

22,616

 

 

 

23,722

 

Beyond ten years

 

 

263,783

 

 

 

280,871

 

Mortgage-backed, collateralized mortgage obligations and Small Business Administration securities

 

 

156,948

 

 

 

163,945

 

Total

 

$

450,251

 

 

$

475,614

 

 

 

The following table summarizes the available for sale investment securities with unrealized losses at June 30, 2020 and December 31, 2019, aggregated by major security type and length of time in a continuous unrealized loss position.   

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

(In Thousands of Dollars)

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

$

3,050

 

 

$

(54

)

 

$

0

 

 

$

0

 

 

$

3,050

 

 

$

(54

)

Mortgage-backed securities - residential

 

 

2

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2

 

 

 

0

 

Collateralized mortgage obligations - residential

 

 

331

 

 

 

(3

)

 

 

0

 

 

 

0

 

 

 

331

 

 

 

(3

)

Total

 

$

3,383

 

 

$

(57

)

 

$

0

 

 

$

0

 

 

$

3,383

 

 

$

(57

)

12


 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

(In Thousands of Dollars)

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0

 

 

$

0

 

 

$

622

 

 

$

(3

)

 

$

622

 

 

$

(3

)

State and political subdivisions

 

 

30,887

 

 

 

(424

)

 

 

0

 

 

 

0

 

 

 

30,887

 

 

 

(424

)

Corporate bonds

 

 

0

 

 

 

0

 

 

 

100

 

 

 

0

 

 

 

100

 

 

 

0

 

Mortgage-backed securities - residential

 

 

14,435

 

 

 

(98

)

 

 

22,381

 

 

 

(274

)

 

 

36,816

 

 

 

(372

)

Collateralized mortgage obligations - residential

 

 

1,198

 

 

 

(18

)

 

 

7,935

 

 

 

(195

)

 

 

9,133

 

 

 

(213

)

Small Business Administration

 

 

6,479

 

 

 

(54

)

 

 

1

 

 

 

0

 

 

 

6,480

 

 

 

(54

)

Total

 

$

52,999

 

 

$

(594

)

 

$

31,039

 

 

$

(472

)

 

$

84,038

 

 

$

(1,066

)

 

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 ASC Topic 320: Investments - Debt 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.

Due to market changes during the six months of 2020, securities that had unrealized losses for greater than twelve months at December 31, 2019, appreciated and are in an unrealized gain position at June 30, 2020.  Unrealized losses are generally due to changes in interest rates or general market conditions.  As of June 30, 2020 and 2019, debt securities had net unrealized gains of $25.4 million and $10 million, respectively.  These unrealized losses are generally due to changes in interest rates or general market conditions.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports.  Management concluded that the unrealized losses on debt securities were temporary.  Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

As of June 30, 2020, the Company’s security portfolio consisted of 643 securities, 64 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 state and political subdivisions, mortgage-backed securities, and collateralized mortgage obligations 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.  

 

13


 

Loans:

Loan balances were as follows:

 

(In Thousands of Dollars)

 

June 30, 2020

 

 

December 31, 2019

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

200,964

 

 

$

184,311

 

Non-owner occupied

 

 

302,585

 

 

 

287,160

 

Farmland

 

 

142,210

 

 

 

138,702

 

Other

 

 

82,553

 

 

 

93,501

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

447,642

 

 

 

244,172

 

Agricultural

 

 

41,898

 

 

 

46,207

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

315,633

 

 

 

324,964

 

Home equity lines of credit

 

 

90,954

 

 

 

91,958

 

Consumer

 

 

 

 

 

 

 

 

Indirect

 

 

165,624

 

 

 

166,149

 

Direct

 

 

25,419

 

 

 

27,415

 

Other

 

 

10,471

 

 

 

9,485

 

Total originated loans

 

$

1,825,953

 

 

$

1,614,024

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

50,933

 

 

$

35,408

 

Non-owner occupied

 

 

61,739

 

 

 

10,439

 

Farmland

 

 

31,878

 

 

 

35,377

 

Other

 

 

16,568

 

 

 

5,960

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

24,370

 

 

 

11,651

 

Agricultural

 

 

5,570

 

 

 

6,047

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

102,748

 

 

 

63,457

 

Home equity lines of credit

 

 

19,518

 

 

 

19,645

 

Consumer

 

 

 

 

 

 

 

 

Direct

 

 

6,745

 

 

 

6,068

 

Other

 

 

115

 

 

 

154

 

Total acquired loans

 

$

320,184

 

 

$

194,206

 

Net Deferred loan (fees) costs

 

 

(2,537

)

 

 

3,309

 

Allowance for loan losses

 

 

(16,960

)

 

 

(14,487

)

Net loans

 

$

2,126,640

 

 

$

1,797,052

 

 

Purchased credit impaired loans

 

As part of past acquisitions, the Company acquired various loans that displayed evidence of deterioration of credit quality since origination and which it 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)

 

June 30, 2020

 

 

December 31, 2019

 

Commercial real estate

 

 

 

 

 

 

 

 

Non-owner occupied

 

$

642

 

 

$

225

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

638

 

 

 

725

 

Total outstanding balance

 

$

1,280

 

 

$

950

 

Carrying amount, net of allowance of $0 in 2020 and 2019

 

$

1,003

 

 

$

690

 

 

14


 

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

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(In Thousands of Dollars)

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Beginning balance

 

$

89

 

 

$

86

 

 

$

65

 

 

$

93

 

New loans purchased

 

0

 

 

0

 

 

32

 

 

0

 

Accretion of income

 

 

(8

)

 

 

(7

)

 

 

(16

)

 

 

(14

)

Ending balance

 

$

81

 

 

$

79

 

 

$

81

 

 

$

79

 

 

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 and six month periods ended June 30, 2020.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2020 and 2019:

Three Months Ended June 30, 2020

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

6,561

 

 

$

2,621

 

 

$

2,911

 

 

$

2,688

 

 

$

171

 

 

$

14,952

 

Provision for loan losses

 

 

1,349

 

 

 

654

 

 

 

32

 

 

 

186

 

 

 

179

 

 

 

2,400

 

Loans charged off

 

 

(97

)

 

 

(49

)

 

 

(34

)

 

 

(344

)

 

 

0

 

 

 

(524

)

Recoveries

 

 

3

 

 

 

6

 

 

 

13

 

 

 

110

 

 

 

0

 

 

 

132

 

Total ending allowance balance

 

$

7,816

 

 

$

3,232

 

 

$

2,922

 

 

$

2,640

 

 

$

350

 

 

$

16,960

 

 

Six Months Ended June 30, 2020

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,843

 

 

$

2,323

 

 

$

2,875

 

 

$

2,710

 

 

$

736

 

 

$

14,487

 

Provision for loan losses

 

 

2,066

 

 

 

1,149

 

 

 

161

 

 

 

510

 

 

 

(386

)

 

 

3,500

 

Loans charged off

 

 

(97

)

 

 

(247

)

 

 

(142

)

 

 

(787

)

 

 

0

 

 

 

(1,273

)

Recoveries

 

 

4

 

 

 

7

 

 

 

28

 

 

 

207

 

 

 

0

 

 

 

246

 

Total ending allowance balance

 

$

7,816

 

 

$

3,232

 

 

$

2,922

 

 

$

2,640

 

 

$

350

 

 

$

16,960

 

 

Three Months Ended June 30, 2019

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,195

 

 

$

2,157

 

 

$

2,813

 

 

$

2,819

 

 

$

793

 

 

$

13,777

 

Provision for loan losses

 

 

374

 

 

 

46

 

 

 

211

 

 

 

125

 

 

 

(6

)

 

 

750

 

Loans charged off

 

 

0

 

 

 

(14

)

 

 

(126

)

 

 

(448

)

 

 

0

 

 

 

(588

)

Recoveries

 

 

2

 

 

 

10

 

 

 

12

 

 

 

259

 

 

 

0

 

 

 

283

 

Total ending allowance balance

 

$

5,571

 

 

$

2,199

 

 

$

2,910

 

 

$

2,755

 

 

$

787

 

 

$

14,222

 

 

15


 

Six Months Ended June 30, 2019

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,036

 

 

$

2,093

 

 

$

2,837

 

 

$

2,963

 

 

$

663

 

 

$

13,592

 

Provision for loan losses

 

 

533

 

 

 

153

 

 

 

183

 

 

 

307

 

 

 

124

 

 

 

1,300

 

Loans charged off

 

 

0

 

 

 

(58

)

 

 

(147

)

 

 

(949

)

 

 

0

 

 

 

(1,154

)

Recoveries

 

 

2

 

 

 

11

 

 

 

37

 

 

 

434

 

 

 

0

 

 

 

484

 

Total ending allowance balance

 

$

5,571

 

 

$

2,199

 

 

$

2,910

 

 

$

2,755

 

 

$

787

 

 

$

14,222

 

 

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 June 30, 2020 and December 31, 2019.  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:

June 30, 2020

 

(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

 

$

0

 

 

$

2

 

 

$

57

 

 

$

0

 

 

$

0

 

 

$

59

 

Collectively evaluated for impairment

 

 

7,754

 

 

 

3,217

 

 

 

2,820

 

 

 

2,638

 

 

 

350

 

 

 

16,779

 

Acquired loans collectively evaluated for impairment

 

 

62

 

 

 

13

 

 

 

45

 

 

 

2

 

 

 

0

 

 

 

122

 

Acquired with deteriorated credit quality

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total ending allowance balance

 

$

7,816

 

 

$

3,232

 

 

$

2,922

 

 

$

2,640

 

 

$

350

 

 

$

16,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

541

 

 

$

202

 

 

$

3,162

 

 

$

244

 

 

$

0

 

 

$

4,149

 

Loans collectively evaluated for impairment

 

 

726,976

 

 

 

483,243

 

 

 

403,196

 

 

 

207,036

 

 

 

0

 

 

 

1,820,451

 

Acquired loans

 

 

159,992

 

 

 

29,440

 

 

 

121,731

 

 

 

6,834

 

 

 

0

 

 

 

317,997

 

Acquired with deteriorated credit quality

 

 

580

 

 

 

423

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,003

 

Total ending loans balance

 

$

888,089

 

 

$

513,308

 

 

$

528,089

 

 

$

214,114

 

 

$

0

 

 

$

2,143,600

 

 

December 31, 2019

 

(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

 

$

0

 

 

$

2

 

 

$

59

 

 

$

0

 

 

$

0

 

 

$

61

 

Collectively evaluated for impairment

 

 

5,790

 

 

 

2,309

 

 

 

2,777

 

 

 

2,708

 

 

 

736

 

 

 

14,320

 

Acquired loans collectively evaluated for impairment

 

 

53

 

 

 

12

 

 

 

39

 

 

 

2

 

 

 

0

 

 

 

106

 

Acquired with deteriorated credit quality

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total ending allowance balance

 

$

5,843

 

 

$

2,323

 

 

$

2,875

 

 

$

2,710

 

 

$

736

 

 

$

14,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

561

 

 

$

205

 

 

$

3,240

 

 

$

247

 

 

$

0

 

 

$

4,253

 

Loans collectively evaluated for impairment

 

 

702,226

 

 

 

290,017

 

 

 

413,446

 

 

 

208,578

 

 

 

0

 

 

 

1,614,267

 

Acquired loans

 

 

86,431

 

 

 

17,110

 

 

 

82,615

 

 

 

6,173

 

 

 

0

 

 

 

192,329

 

Acquired with deteriorated credit quality

 

 

195

 

 

 

495

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

690

 

Total ending loans balance

 

$

789,413

 

 

$

307,827

 

 

$

499,301

 

 

$

214,998

 

 

$

0

 

 

$

1,811,539

 

16


 

 

The following tables present information related to impaired loans by class of loans as of June 30, 2020 and December 31, 2019:

 

(In Thousands of Dollars)

 

Unpaid Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for

Loan Losses

Allocated

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

$

38

 

 

$

33

 

 

$

0

 

Farmland

 

 

565

 

 

 

508

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

165

 

 

 

124

 

 

 

0

 

Agricultural

 

 

30

 

 

 

29

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,819

 

 

 

2,072

 

 

 

0

 

Home equity lines of credit

 

 

478

 

 

 

382

 

 

 

0

 

Consumer

 

 

555

 

 

 

244

 

 

 

0

 

Subtotal

 

 

4,650

 

 

 

3,392

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

49

 

 

 

49

 

 

 

2

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

615

 

 

 

614

 

 

 

44

 

Home equity lines of credit

 

 

112

 

 

 

94

 

 

 

13

 

Consumer

 

 

0

 

 

 

0

 

 

 

0

 

Subtotal

 

 

776

 

 

 

757

 

 

 

59

 

Total

 

$

5,426

 

 

$

4,149

 

 

$

59

 

17


 

 

(In Thousands of Dollars)

 

Unpaid Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for

Loan Losses

Allocated

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

22

 

 

$

8

 

 

$

0

 

Non-owner occupied

 

 

38

 

 

 

34

 

 

 

0

 

Farmland

 

 

570

 

 

 

519

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

179

 

 

 

141

 

 

 

0

 

Agricultural

 

 

11

 

 

 

11

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,889

 

 

 

2,095

 

 

 

0

 

Home equity lines of credit

 

 

428

 

 

 

344

 

 

 

0

 

Consumer

 

 

480

 

 

 

247

 

 

 

0

 

Subtotal

 

 

4,617

 

 

 

3,399

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

53

 

 

 

53

 

 

 

2

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

795

 

 

 

729

 

 

 

52

 

Home equity lines of credit

 

 

72

 

 

 

72

 

 

 

7

 

Consumer

 

 

0

 

 

 

0

 

 

 

0

 

Subtotal

 

 

920

 

 

 

854

 

 

 

61

 

Total

 

$

5,537

 

 

$

4,253

 

 

$

61

 

 

18


 

The following tables present the average recorded investment in impaired loans by class and interest income recognized by loan class for the three and six month periods ended June 30, 2020 and 2019:

 

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

 

For Three Months Ended

June 30,

 

 

For Three Months Ended

June 30,

 

(In Thousands of Dollars)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

316

 

 

$

0

 

 

$

5

 

Non-owner occupied

 

 

34

 

 

 

37

 

 

 

0

 

 

 

0

 

Farmland

 

 

512

 

 

 

29

 

 

 

6

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

125

 

 

 

146

 

 

 

2

 

 

 

3

 

Agricultural

 

 

29

 

 

 

4

 

 

 

1

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,149

 

 

 

2,552

 

 

 

31

 

 

 

43

 

Home equity lines of credit

 

 

402

 

 

 

360

 

 

 

6

 

 

 

8

 

Consumer

 

 

258

 

 

 

124

 

 

 

7

 

 

 

6

 

Subtotal

 

 

3,509

 

 

 

3,568

 

 

 

53

 

 

 

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Farmland

 

 

0

 

 

 

257

 

 

 

0

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

50

 

 

 

58

 

 

 

1

 

 

 

1

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

628

 

 

 

1,286

 

 

 

6

 

 

 

8

 

Home equity lines of credit

 

 

81

 

 

 

141

 

 

 

1

 

 

 

1

 

Consumer

 

 

0

 

 

 

29

 

 

 

0

 

 

 

0

 

Subtotal

 

 

759

 

 

 

1,771

 

 

 

8

 

 

 

10

 

Total

 

$

4,268

 

 

$

5,339

 

 

$

61

 

 

$

75

 

19


 

 

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

 

For Six Months Ended

June 30,

 

 

For Six Months Ended

June 30,

 

(In Thousands of Dollars)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

324

 

 

$

0

 

 

$

9

 

Non-owner occupied

 

 

34

 

 

 

37

 

 

 

0

 

 

 

0

 

Farmland

 

 

514

 

 

 

14

 

 

 

7

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

129

 

 

 

151

 

 

 

4

 

 

 

5

 

Agricultural

 

 

23

 

 

 

2

 

 

 

2

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,144

 

 

 

2,623

 

 

 

69

 

 

 

86

 

Home equity lines of credit

 

 

385

 

 

 

354

 

 

 

12

 

 

 

13

 

Consumer

 

 

209

 

 

 

118

 

 

 

14

 

 

 

9

 

Subtotal

 

 

3,438

 

 

 

3,623

 

 

 

108

 

 

 

122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Farmland

 

 

0

 

 

 

257

 

 

 

0

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

51

 

 

 

59

 

 

 

2

 

 

 

2

 

Agricultural

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

665

 

 

 

1,302

 

 

 

14

 

 

 

16

 

Home equity lines of credit

 

 

90

 

 

 

168

 

 

 

1

 

 

 

3

 

Consumer

 

 

0

 

 

 

18

 

 

 

0

 

 

 

0

 

Subtotal

 

 

806

 

 

 

1,804

 

 

 

17

 

 

 

21

 

Total

 

$

4,244

 

 

$

5,427

 

 

$

125

 

 

$

143

 

 

Cash basis interest recognized during the three and six month periods ended June 30, 2020 and 2019 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.

20


 

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 June 30, 2020 and December 31, 2019:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

(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

 

$

0

 

 

$

490

 

 

$

6

 

 

$

0

 

Farmland

 

 

8

 

 

 

0

 

 

 

14

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

497

 

 

 

0

 

 

 

567

 

 

 

0

 

Agricultural

 

 

65

 

 

 

0

 

 

 

0

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

956

 

 

 

287

 

 

 

1,234

 

 

 

438

 

Home equity lines of credit

 

 

672

 

 

 

86

 

 

 

669

 

 

 

14

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

569

 

 

 

36

 

 

 

568

 

 

 

120

 

Direct

 

 

271

 

 

 

63

 

 

 

139

 

 

 

70

 

Other

 

 

0

 

 

 

6

 

 

 

0

 

 

 

6

 

Total originated loans

 

$

3,038

 

 

$

968

 

 

$

3,197

 

 

$

648

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

53

 

 

$

0

 

 

$

0

 

 

$

0

 

Non-owner occupied

 

 

860

 

 

 

0

 

 

 

102

 

 

 

0

 

Farmland

 

 

508

 

 

 

0

 

 

 

519

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

514

 

 

 

0

 

 

 

602

 

 

 

0

 

Agricultural

 

 

6

 

 

 

0

 

 

 

9

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

4,639

 

 

 

1,245

 

 

 

659

 

 

 

186

 

Home equity lines of credit

 

 

225

 

 

 

30

 

 

 

239

 

 

 

9

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

136

 

 

 

3

 

 

 

151

 

 

 

24

 

Total acquired loans

 

$

6,941

 

 

$

1,278

 

 

$

2,281

 

 

$

219

 

Total loans

 

$

9,979

 

 

$

2,246

 

 

$

5,478

 

 

$

867

 

 

21


 

The following tables present the aging of the recorded investment in past due loans as of June 30, 2020 and December 31, 2019 by class of loans.  Note that loans modified to defer payments under the CARES Act are included in loans not past due.

 

(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

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

130

 

 

$

0

 

 

$

490

 

 

$

620

 

 

$

199,957

 

 

$

200,577

 

Non-owner occupied

 

 

0

 

 

 

3

 

 

 

0

 

 

 

3

 

 

 

301,994

 

 

 

301,997

 

Farmland

 

 

0

 

 

 

0

 

 

 

8

 

 

 

8

 

 

 

142,014

 

 

 

142,022

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

82,380

 

 

 

82,380

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

73

 

 

 

161

 

 

 

497

 

 

 

731

 

 

 

440,609

 

 

 

441,340

 

Agricultural

 

 

39

 

 

 

233

 

 

 

65

 

 

 

337

 

 

 

41,690

 

 

 

42,027

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,622

 

 

 

108

 

 

 

1,243

 

 

 

2,973

 

 

 

311,882

 

 

 

314,855

 

Home equity lines of credit

 

 

14

 

 

 

0

 

 

 

758

 

 

 

772

 

 

 

90,196

 

 

 

90,968

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

660

 

 

 

68

 

 

 

605

 

 

 

1,333

 

 

 

169,901

 

 

 

171,234

 

Direct

 

 

253

 

 

 

57

 

 

 

334

 

 

 

644

 

 

 

24,905

 

 

 

25,549

 

Other

 

 

7

 

 

 

2

 

 

 

6

 

 

 

15

 

 

 

10,456

 

 

 

10,471

 

Total originated loans:

 

$

2,798

 

 

$

632

 

 

$

4,006

 

 

$

7,436

 

 

$

1,815,984

 

 

$

1,823,420

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

0

 

 

$

53

 

 

$

53

 

 

$

50,876

 

 

$

50,929

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

860

 

 

 

860

 

 

 

60,879

 

 

 

61,739

 

Farmland

 

 

0

 

 

 

0

 

 

 

508

 

 

 

508

 

 

 

31,369

 

 

 

31,877

 

Other

 

 

65

 

 

 

0

 

 

 

0

 

 

 

65

 

 

 

16,503

 

 

 

16,568

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

3,978

 

 

 

314

 

 

 

514

 

 

 

4,806

 

 

 

19,565

 

 

 

24,371

 

Agricultural

 

 

0

 

 

 

0

 

 

 

6

 

 

 

6

 

 

 

5,564

 

 

 

5,570

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,568

 

 

 

922

 

 

 

5,884

 

 

 

8,374

 

 

 

94,374

 

 

 

102,748

 

Home equity lines of credit

 

 

0

 

 

 

0

 

 

 

255

 

 

 

255

 

 

 

19,263

 

 

 

19,518

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

59

 

 

 

0

 

 

 

139

 

 

 

198

 

 

 

6,547

 

 

 

6,745

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

115

 

 

 

115

 

Total acquired loans

 

$

5,670

 

 

$

1,236

 

 

$

8,219

 

 

$

15,125

 

 

$

305,055

 

 

$

320,180

 

Total loans

 

$

8,468

 

 

$

1,868

 

 

$

12,225

 

 

$

22,561

 

 

$

2,121,039

 

 

$

2,143,600

 

22


 

 

(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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

87

 

 

$

0

 

 

$

6

 

 

$

93

 

 

$

183,830

 

 

$

183,923

 

Non-owner occupied

 

 

2

 

 

 

0

 

 

 

0

 

 

 

2

 

 

 

286,522

 

 

 

286,524

 

Farmland

 

 

0

 

 

 

0

 

 

 

14

 

 

 

14

 

 

 

138,501

 

 

 

138,515

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

93,271

 

 

 

93,271

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1,458

 

 

 

573

 

 

 

567

 

 

 

2,598

 

 

 

241,210

 

 

 

243,808

 

Agricultural

 

 

103

 

 

 

77

 

 

 

0

 

 

 

180

 

 

 

46,142

 

 

 

46,322

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

3,811

 

 

 

207

 

 

 

1,672

 

 

 

5,690

 

 

 

318,536

 

 

 

324,226

 

Home equity lines of credit

 

 

270

 

 

 

21

 

 

 

683

 

 

 

974

 

 

 

91,000

 

 

 

91,974

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

1,599

 

 

 

533

 

 

 

688

 

 

 

2,820

 

 

 

168,905

 

 

 

171,725

 

Direct

 

 

537

 

 

 

272

 

 

 

209

 

 

 

1,018

 

 

 

26,549

 

 

 

27,567

 

Other

 

 

153

 

 

 

26

 

 

 

6

 

 

 

185

 

 

 

9,299

 

 

 

9,484

 

Total originated loans

 

$

8,020

 

 

$

1,709

 

 

$

3,845

 

 

$

13,574

 

 

$

1,603,765

 

 

$

1,617,339

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

35,424

 

 

$

35,424

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

102

 

 

 

102

 

 

 

10,317

 

 

 

10,419

 

Farmland

 

 

0

 

 

 

0

 

 

 

519

 

 

 

519

 

 

 

34,858

 

 

 

35,377

 

Other

 

 

69

 

 

 

0

 

 

 

0

 

 

 

69

 

 

 

5,891

 

 

 

5,960

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

47

 

 

 

1

 

 

 

602

 

 

 

650

 

 

 

11,000

 

 

 

11,650

 

Agricultural

 

 

0

 

 

 

8

 

 

 

9

 

 

 

17

 

 

 

6,030

 

 

 

6,047

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,159

 

 

 

448

 

 

 

845

 

 

 

2,452

 

 

 

61,004

 

 

 

63,456

 

Home equity lines of credit

 

 

56

 

 

 

8

 

 

 

248

 

 

 

312

 

 

 

19,333

 

 

 

19,645

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

347

 

 

 

21

 

 

 

175

 

 

 

543

 

 

 

5,525

 

 

 

6,068

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

154

 

 

 

154

 

Total acquired loans

 

$

1,678

 

 

$

486

 

 

$

2,500

 

 

$

4,664

 

 

$

189,536

 

 

$

194,200

 

Total loans

 

$

9,698

 

 

$

2,195

 

 

$

6,345

 

 

$

18,238

 

 

$

1,793,301

 

 

$

1,811,539

 

 

 

Troubled Debt Restructurings:

Total troubled debt restructurings were $4.6 million at June 30, 2020 and December 31, 2019.  The Company has allocated $59 thousand and $61 thousand of specific reserves to loans whose terms have been modified in troubled debt restructurings at June 30, 2020 and December 31, 2019, respectively.  There were no commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings at June 30, 2020 and at December 31, 2019.

23


 

During the three and six month periods ended June 30, 2020 and 2019, 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; a reduction of the contractual monthly payment; a deferral of principal, interest and/or escrow; or a legal concession.  During the three month period ended June 30, 2020, the terms of such loans included a reduction of the stated interest rate of the loan of 2.25% and an extension of the maturity date of 183 months.  During the same three month period in 2019, the terms of such loans included a reduction of the stated interest rate of the loan of 0.24% and an extension of the maturity date of 124 months.  During the six month period ended June 30, 2020, the terms of such loans included a reduction of the stated interest rate of the loan in the range of 1.00% and 2.25% and extensions of the maturity dates on these and other troubled debt restructurings in the range of 168 to 183 months.  During the same six month period in 2019, the terms of such loans included a reduction of the stated interest rate of the loan in the range of 0.24% and 2.74 % and an extension of the maturity date in the range of 86 to 124 months.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three and six month periods ended June 30, 2020 and 2019:

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

Three Months Ended June 30, 2020

 

Number of

 

 

Outstanding

Recorded

 

 

Outstanding

Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1

 

 

$

36

 

 

$

36

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

7

 

 

 

60

 

 

 

60

 

Total originated loans

 

 

8

 

 

$

96

 

 

$

96

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1

 

 

 

12

 

 

 

12

 

Total acquired loans

 

 

1

 

 

$

12

 

 

$

12

 

Total loans

 

 

9

 

 

$

108

 

 

$

108

 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

Six Months Ended June 30, 2020

 

Number of

 

 

Outstanding

Recorded

 

 

Outstanding

Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

21

 

 

$

21

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

6

 

 

 

245

 

 

 

246

 

Home equity lines of credit

 

 

4

 

 

 

100

 

 

 

102

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

17

 

 

 

121

 

 

 

121

 

Other

 

 

1

 

 

 

15

 

 

 

15

 

Total originated loans

 

 

29

 

 

$

502

 

 

$

505

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2

 

 

 

80

 

 

 

80

 

Total acquired loans

 

 

2

 

 

$

80

 

 

$

80

 

Total loans

 

 

31

 

 

$

582

 

 

$

585

 

24


 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

Three Months Ended June 30, 2019

 

Number of

 

 

Outstanding

Recorded

 

 

Outstanding

Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

12

 

 

$

12

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2

 

 

 

55

 

 

 

55

 

Home equity lines of credit

 

 

1

 

 

 

48

 

 

 

48

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

12

 

 

 

85

 

 

 

85

 

Other

 

 

1

 

 

 

18

 

 

 

18

 

Total originated loans

 

 

17

 

 

$

218

 

 

$

218

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Farmland

 

 

1

 

 

 

86

 

 

 

86

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1

 

 

 

24

 

 

 

24

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

3

 

 

 

14

 

 

 

14

 

Total acquired loans

 

 

5

 

 

$

124

 

 

$

124

 

Total loans

 

 

22

 

 

$

342

 

 

$

342

 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

Six Months Ended June 30, 2019

 

Number of

 

 

Outstanding

Recorded

 

 

Outstanding

Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

12

 

 

$

12

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

5

 

 

 

128

 

 

 

130

 

Home equity lines of credit

 

 

2

 

 

 

88

 

 

 

88

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

24

 

 

 

190

 

 

 

190

 

Other

 

 

1

 

 

 

18

 

 

 

18

 

Total originated loans

 

 

33

 

 

$

436

 

 

$

438

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Farmland

 

 

1

 

 

 

86

 

 

 

86

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

3

 

 

 

75

 

 

 

79

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

3

 

 

 

14

 

 

 

14

 

Total acquired loans

 

 

7

 

 

$

175

 

 

$

179

 

Total loans

 

 

40

 

 

$

611

 

 

$

617

 

 

There were $34 thousand and $39 thousand in charge offs and a $32 thousand and $37 thousand increase to the provision for loan losses during the three and six month periods ended June 30, 2020, respectively, as a result of outstanding troubled debt restructurings.  There were $44 thousand and $51 thousand in charge offs during the three and six month periods ended June 30, 2019, respectively. There was a $44 thousand and a $51 thousand increase to the provision during the three and six month period ended June 30, 2019, respectively, as a result of troubled debt restructurings.

25


 

There were two commercial farmland loans and one commercial loan for which there was a payment default within twelve months following the modification of the troubled debt restructuring during the three month and six month period ended June 30, 2020.  There were two commercial farmland loans past due at June 30, 2020.  There was no provision recorded as a result of the defaults during 2020.  A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

There were four commercial loans, one residential real estate loan, one home equity line of credit and one indirect loan for which there was a payment default within twelve months following the modification of the troubled debt restructuring during the three month and six month periods ended June 30, 2019.  There was no provision recorded as a result of the defaults during 2019.  A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

Farmers is offering special financial assistance to support customers who are experiencing financial hardships related to the COVID-19 pandemic.  The following table reports the number and amount of payment deferrals by loan type as of dates listed:  

 

 

March 31, 2020

June 30, 2020

July 24, 2020

 

Outstanding Balance

Number of Loans

Outstanding Balance

Number of Loans

Outstanding Balance

Number of Loans

Commercial real estate

$75,809

78

$43,954

44

$27,717

17

Commercial

11,839

81

8,515

69

5,848

36

Agricultural

1,492

11

8,340

22

2,505

12

Residential real estate

5,506

41

3,785

37

1,397

15

Consumer

2,840

127

1,858

100

539

36

Total

$97,486

338

$66,452

272

$38,006

116

 

The Company offered three month deferrals upon request by the borrowers.  The deferral requests began in the middle of March, 2020 and concluded at the end of the three month deferral period.  The decline in deferred loans and balances was due to the ending of the deferment period and that not all borrowers requested additional deferment.  The Company has granted a second three month deferral period to $23.8 million in commercial real estate loans and $5.7 million in commercial loans, which are included in the amounts detailed above.  The second deferral period was offered to a select group of customers within specific industry codes that may have a higher credit risk.  The Company anticipates that there will be a limited number of business customers with a total of a six month deferral period.  

 

Farmers is also a preferred SBA lender and dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the new Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, so they could obtain SBA approval and receive funding as quickly as possible. At June 30, 2020, the Company had facilitated PPP assistance to 1,675 business customers with an outstanding balance at June 30, 2020, totaling $199.1 million.  

 

 

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 in their respective portfolios on an annual basis.  The Company uses the following definitions for risk ratings:

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.

26


 

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 June 30, 2020 and December 31, 2019, 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

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

196,043

 

 

$

3,046

 

 

$

1,488

 

 

$

200,577

 

Non-owner occupied

 

 

294,761

 

 

 

3,678

 

 

 

3,558

 

 

 

301,997

 

Farmland

 

 

139,841

 

 

 

1,805

 

 

 

376

 

 

 

142,022

 

Other

 

 

81,814

 

 

 

386

 

 

 

180

 

 

 

82,380

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

435,979

 

 

 

1,362

 

 

 

3,999

 

 

 

441,340

 

Agricultural

 

 

41,658

 

 

 

44

 

 

 

325

 

 

 

42,027

 

Total originated loans

 

$

1,190,096

 

 

$

10,321

 

 

$

9,926

 

 

$

1,210,343

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

50,147

 

 

$

99

 

 

$

683

 

 

$

50,929

 

Non-owner occupied

 

 

60,668

 

 

 

51

 

 

 

1,020

 

 

 

61,739

 

Farmland

 

 

29,798

 

 

 

0

 

 

 

2,079

 

 

 

31,877

 

Other

 

 

16,503

 

 

 

0

 

 

 

65

 

 

 

16,568

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

21,695

 

 

 

0

 

 

 

2,676

 

 

 

24,371

 

Agricultural

 

 

5,169

 

 

 

334

 

 

 

67

 

 

 

5,570

 

Total acquired loans

 

$

183,980

 

 

$

484

 

 

$

6,590

 

 

$

191,054

 

Total loans

 

$

1,374,076

 

 

$

10,805

 

 

$

16,516

 

 

$

1,401,397

 

27


 

 

(In Thousands of Dollars)

 

Pass

 

 

Special

Mention

 

 

Sub

standard

 

 

Total

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

177,540

 

 

$

5,357

 

 

$

1,026

 

 

$

183,923

 

Non-owner occupied

 

 

279,103

 

 

 

7,374

 

 

 

47

 

 

 

286,524

 

Farmland

 

 

136,674

 

 

 

1,457

 

 

 

384

 

 

 

138,515

 

Other

 

 

93,082

 

 

 

0

 

 

 

189

 

 

 

93,271

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

238,351

 

 

 

1,673

 

 

 

3,784

 

 

 

243,808

 

Agricultural

 

 

46,283

 

 

 

6

 

 

 

33

 

 

 

46,322

 

Total originated loans

 

$

971,033

 

 

$

15,867

 

 

$

5,463

 

 

$

992,363

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

34,707

 

 

$

110

 

 

$

607

 

 

$

35,424

 

Non-owner occupied

 

 

10,246

 

 

 

54

 

 

 

119

 

 

 

10,419

 

Farmland

 

 

32,112

 

 

 

0

 

 

 

3,265

 

 

 

35,377

 

Other

 

 

5,891

 

 

 

0

 

 

 

69

 

 

 

5,960

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

10,570

 

 

 

0

 

 

 

1,080

 

 

 

11,650

 

Agricultural

 

 

5,617

 

 

 

317

 

 

 

113

 

 

 

6,047

 

Total acquired loans

 

$

99,143

 

 

$

481

 

 

$

5,253

 

 

$

104,877

 

Total loans

 

$

1,070,176

 

 

$

16,348

 

 

$

10,716

 

 

$

1,097,240

 

 

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 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 June 30, 2020, other real estate owned and foreclosure properties were $41 thousand and $241 thousand, respectively.  At December 31, 2019, other real estate owned and foreclosure properties were $19 thousand and $316 thousand, respectively.

The following tables present the recorded investment in residential, consumer indirect and direct auto loans based on payment activity as of June 30, 2020 and December 31, 2019.  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

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

313,612

 

 

$

90,210

 

 

$

170,629

 

 

$

25,215

 

 

$

10,465

 

Nonperforming

 

 

1,243

 

 

 

758

 

 

 

605

 

 

 

334

 

 

 

6

 

Total originated loans

 

$

314,855

 

 

$

90,968

 

 

$

171,234

 

 

$

25,549

 

 

$

10,471

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

96,864

 

 

$

19,263

 

 

$

0

 

 

$

6,606

 

 

$

115

 

Nonperforming

 

 

5,884

 

 

 

255

 

 

 

0

 

 

 

139

 

 

 

0

 

Total acquired loans

 

 

102,748

 

 

 

19,518

 

 

 

0

 

 

 

6,745

 

 

 

115

 

Total loans

 

$

417,603

 

 

$

110,486

 

 

$

171,234

 

 

$

32,294

 

 

$

10,586

 

28


 

 

 

 

Residential Real Estate

 

 

Consumer

 

(In Thousands of Dollars)

 

1-4 Family

Residential

 

 

Home

Equity Lines

of Credit

 

 

Indirect

 

 

Direct

 

 

Other

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

322,554

 

 

$

91,291

 

 

$

171,037

 

 

$

27,358

 

 

$

9,478

 

Nonperforming

 

 

1,672

 

 

 

683

 

 

 

688

 

 

 

209

 

 

 

6

 

Total originated loans

 

$

324,226

 

 

$

91,974

 

 

$

171,725

 

 

$

27,567

 

 

$

9,484

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

62,611

 

 

$

19,397

 

 

$

0

 

 

$

5,893

 

 

$

154

 

Nonperforming

 

 

845

 

 

 

248

 

 

 

0

 

 

 

175

 

 

 

0

 

Total acquired loans

 

 

63,456

 

 

 

19,645

 

 

 

0

 

 

 

6,068

 

 

 

154

 

Total loans

 

$

387,682

 

 

$

111,619

 

 

$

171,725

 

 

$

33,635

 

 

$

9,638

 

 

 

Revenue from Contracts with Customers:

 

All material revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income.  The following table presents the Company’s noninterest income by revenue stream and reportable segment, net of eliminations, for the three and six months ended June 30, 2020 and 2019.

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Totals

 

For Three Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

0

 

 

$

753

 

 

$

753

 

Debit card and EFT fees

 

 

0

 

 

 

967

 

 

 

967

 

Trust fees

 

 

1,852

 

 

 

0

 

 

 

1,852

 

Insurance agency commissions

 

 

0

 

 

 

681

 

 

 

681

 

Retirement plan consulting fees

 

 

408

 

 

 

0

 

 

 

408

 

Investment commissions

 

 

0

 

 

 

457

 

 

 

457

 

Other

 

 

0

 

 

 

4,018

 

 

 

4,018

 

Total noninterest income

 

$

2,260

 

 

$

6,876

 

 

$

9,136

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Totals

 

For Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

0

 

 

$

1,093

 

 

$

1,093

 

Debit card and EFT fees

 

 

0

 

 

 

887

 

 

 

887

 

Trust fees

 

 

1,821

 

 

 

0

 

 

 

1,821

 

Insurance agency commissions

 

 

0

 

 

 

739

 

 

 

739

 

Retirement plan consulting fees

 

 

450

 

 

 

0

 

 

 

450

 

Investment commissions

 

 

0

 

 

 

327

 

 

 

327

 

Other

 

 

0

 

 

 

1,812

 

 

 

1,812

 

Total noninterest income

 

$

2,271

 

 

$

4,858

 

 

$

7,129

 

29


 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Totals

 

For Six Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

0

 

 

$

1,848

 

 

$

1,848

 

Debit card and EFT fees

 

 

0

 

 

 

1,818

 

 

 

1,818

 

Trust fees

 

 

3,709

 

 

 

0

 

 

 

3,709

 

Insurance agency commissions

 

 

0

 

 

 

1,564

 

 

 

1,564

 

Retirement plan consulting fees

 

 

788

 

 

 

0

 

 

 

788

 

Investment commissions

 

 

0

 

 

 

880

 

 

 

880

 

Other

 

 

0

 

 

 

6,399

 

 

 

6,399

 

Total noninterest income

 

$

4,497

 

 

$

12,509

 

 

$

17,006

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Totals

 

For Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

0

 

 

$

2,167

 

 

$

2,167

 

Debit card and EFT fees

 

 

0

 

 

 

1,665

 

 

 

1,665

 

Trust fees

 

 

3,679

 

 

 

0

 

 

 

3,679

 

Insurance agency commissions

 

 

0

 

 

 

1,542

 

 

 

1,542

 

Retirement plan consulting fees

 

 

808

 

 

 

0

 

 

 

808

 

Investment commissions

 

 

0

 

 

 

587

 

 

 

587

 

Other

 

 

0

 

 

 

3,324

 

 

 

3,324

 

Total noninterest income

 

$

4,487

 

 

$

9,285

 

 

$

13,772

 

 

A description of the Company’s revenue streams under ASC 606 follows:

 

Service charges on deposit accounts – The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Management reviewed the deposit account agreements, and determined that the agreements can be terminated at any time by either the Bank or the account holder.  Transaction fees, such as balance transfers, wires and overdraft charges are settled the day the performance obligation is satisfied.  The Bank’s monthly service charges and maintenance fees are for services provided to the customer on a monthly basis are considered a series of services that have the same pattern of transfer each month.  The review of service charges assessed on deposit accounts, included the amount of variable consideration that is a part of the monthly charges.  It was found that the waiver of service charges due to insufficient funds and dormant account fees is immaterial and would not require a change in the accounting treatment for these fees under the new revenue standards.

Debit Card Interchange Fees – Customers and the Bank have an account agreement and maintain deposit balances with the Bank.  Customers use a bank issued debit card to purchase goods and services, and the Bank earns interchange fees on those transactions, typically a percentage of the sale amount of the transaction.  The Bank records the amount due when it receives the settlement from the payment network.  Payments from the payment network are received and recorded into income on a daily basis.  There are no contingent debit card interchange fees recorded by the Company that could be subject to a clawback in future periods.

Trust fees – Services provided to Trust customers are a series of distinct services that have the same pattern of transfer each month.  Fees for trust accounts are billed and drafted from trust accounts monthly.  The Company records these fees on the income statement on a monthly basis.  Fees are assessed based on the total investable assets of the customer’s trust account.  A signed contract between the Company and the customer is maintained for all customer trust accounts with payment terms identified.  It is probable that the fees will be collectible as funds being managed are accessible by the asset manager.  Past history of trust fee income recorded by the Company indicates that it is highly unlikely that a significant reversal could occur.  There are no contingent incentive fees recorded by the Company that could be subject to a clawback in future periods.

30


 

Insurance Agency Commissions – Insurance agency commissions are received from insurance carriers for the agency’s share of commissions from customer premium payments.  These commissions are recorded into income when checks are received from the insurance carriers, and there is no contingent portion associated with these commission checks.  There may be a short time-lag in recording revenue when cash is received instead of recording the revenue when the policy is signed by the customer, but the time lag is insignificant and does not impact the revenue recognition process.

Insurance also receives incentive checks from the insurance carriers for achieving specified levels of production with particular carriers.  These amounts are recorded into income when a check is received, and there are no contingent amounts associated with these payments that may be clawed back by the carrier in the future.  Similar to the monthly commissions explained in the preceding paragraph, there may be a short time-lag in recording incentive revenue on a cash basis as opposed to estimating the amount of incentive revenue expected to be earned, this does not materially impact the recognition of Insurance revenue.  If there were any amounts that would need to be refunded for one specific Insurance customer, management believes the reversal would not be significant.

Other potential situations surrounding the recognition of Insurance revenue include the estimating potential refunds due to the likely cancellation of a percentage of customers cancelling their policies and recording revenue at the time of policy renewals.  Management concluded that since Insurance agency commissions represent only 2.1% of the Company’s total revenue, adjusting the current practice of recording insurance revenue for these situations would not have a material impact on the reporting of total revenue.  

Retirement Plan Consulting Fees – Revenue is recognized based on the level of work performed for the client.  Any payments that are received for work to be performed in the future are recorded in a deferred revenue account, and recorded into income when the fees are earned.  Retirement plan consulting fees represent only 0.87% of the Company’s total revenue, and therefore management has concluded that any adjustment of revenue for one particular customer for a refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.  

Investment Commissions – Investment commissions are earned through the sales of non-deposit investment products to customers of the Company.  The sales are conducted through a third-party broker-dealer.  When the commissions are received and recorded into income on the Bank’s income statement, there is no contingent portion that may need to be refunded back to Cetera.  Investment commissions represent only 1.2% of the Company’s total revenue, and therefore management has concluded that any adjustment of revenue for a particular customer for a refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.  

Other – Income items included in “Other” are Bank owned life insurance income, security gains, net gains on the sale of loans and other operating income.  Any amounts within the scope of ASC 606 are deemed immaterial.

 

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:

31


 

Investment Securities: The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis.  The Company’s service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities and complies fully with ASU 2016-01’s exit pricing requirements.  They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing methods.  The fair values for investment securities, which consist of equity securities that are recorded at fair market value to comply with ASU 2016-01, are determined by quoted market prices in active markets, if available (Level 1).  The equity securities change in fair market value is recorded in the income statements.  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.  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 June 30, 2020 and for the year ended December 31, 2019, 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.

32


 

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

 

 

 

Fair Value Measurements at June 30, 2020 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

 

$

3,913

 

 

$

0

 

 

$

3,913

 

 

$

0

 

State and political subdivisions

 

 

304,446

 

 

 

0

 

 

 

304,446

 

 

 

0

 

Corporate bonds

 

 

3,310

 

 

 

0

 

 

 

3,310

 

 

 

0

 

Mortgage-backed securities-residential

 

 

125,244

 

 

 

0

 

 

 

125,240

 

 

 

4

 

Collateralized mortgage obligations

 

 

32,505

 

 

 

0

 

 

 

32,505

 

 

 

0

 

Small Business Administration

 

 

6,196

 

 

 

0

 

 

 

6,196

 

 

 

0

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities at fair value

 

 

406

 

 

 

406

 

 

 

0

 

 

 

0

 

Other investments measured at net asset value

 

 

7,969

 

 

n/a

 

 

n/a

 

 

n/a

 

Total investment securities

 

$

483,989

 

 

$

406

 

 

$

475,610

 

 

$

4

 

Loan yield maintenance provisions

 

$

5,001

 

 

$

0

 

 

$

5,001

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

5,001

 

 

$

0

 

 

$

5,001

 

 

$

0

 

 

 

 

Fair Value Measurements at December 31, 2019 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

 

$

3,811

 

 

$

0

 

 

$

3,811

 

 

$

0

 

State and political subdivisions

 

 

261,425

 

 

 

0

 

 

 

261,425

 

 

 

0

 

Corporate bonds

 

 

1,260

 

 

 

0

 

 

 

1,260

 

 

 

0

 

Mortgage-backed securities-residential

 

 

147,910

 

 

 

0

 

 

 

147,905

 

 

 

5

 

Collateralized mortgage obligations

 

 

11,347

 

 

 

0

 

 

 

11,347

 

 

 

0

 

Small Business Administration

 

 

6,480

 

 

 

0

 

 

 

6,480

 

 

 

0

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities at fair value

 

 

594

 

 

 

594

 

 

 

0

 

 

 

0

 

Other investments measured at net asset value

 

 

7,315

 

 

n/a

 

 

n/a

 

 

n/a

 

Total investment securities

 

$

440,142

 

 

$

594

 

 

$

432,228

 

 

$

5

 

Loan yield maintenance provisions

 

$

1,898

 

 

$

0

 

 

$

1,898

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

1,898

 

 

$

0

 

 

$

1,898

 

 

$

0

 

 

There were no significant transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 2020 and 2019.  For additional information related to yield maintenance provisions and interest rate swaps see Interest – Rate Swaps note.

 

33


 

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

 

 

 

Investment Securities Available-for-sale (Level 3)

 

 

 

Three Months ended

June 30,

 

 

Six Months ended

June 30,

 

(In Thousands of Dollars)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Beginning Balance

 

$

5

 

 

$

6

 

 

$

5

 

 

$

6

 

Transfers from level 2

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Repayments, calls and maturities

 

 

(1

)

 

 

0

 

 

 

(1

)

 

 

0

 

Ending Balance

 

$

4

 

 

$

6

 

 

$

4

 

 

$

6

 

 

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

 

 

 

Fair Value Measurements at June 30, 2020 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1–4 family residential

 

$

206

 

 

$

0

 

 

$

0

 

 

$

206

 

Consumer indirect

 

 

8

 

 

 

0

 

 

 

0

 

 

 

8

 

 

 

 

Fair Value Measurements at December 31, 2019 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1–4 family residential

 

$

183

 

 

$

0

 

 

$

0

 

 

$

183

 

Consumer

 

 

12

 

 

 

0

 

 

 

0

 

 

 

12

 

 

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $230 thousand with a valuation allowance of $16 thousand at June 30, 2020, resulting in an additional provision for loan losses of $32 thousand and $37 thousand for the three and six months period ending June 30, 2020.  At December 31, 2019, impaired loans had a principal balance of $208 thousand, with a valuation allowance of $13 thousand.  Loans measured at fair value resulted in an additional provision for loan losses of $46 thousand for the three and six month period ending June 30, 2019.  Excluded from the fair value of impaired loans, at June 30, 2020 and December 31, 2019, discussed above are $561 thousand and $583 thousand 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.

34


 

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 June 30, 2020 and December 31, 2019:

 

June 30, 2020

Fair value

 

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Impaired loans

 

 

 

 

 

 

 

 

 

Residential

$

206

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(40.00%) - 47.15%

(17.77%)

Consumer

 

8

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(10.00%) - 10.00%

0.00%

 

December 31, 2019

Fair value

 

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Impaired loans

 

 

 

 

 

 

 

 

 

Residential

$

183

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(24.26%) - 23.74%

14.53%

Consumer

 

12

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(12.95%) - 12.95%

(0.00%)

 

The carrying amounts and estimated fair values of financial instruments not previously disclosed at June 30, 2020 and December 31, 2019 are as follows:

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2020 Using:

 

(In Thousands of Dollars)

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,954

 

 

$

22,134

 

 

$

81,820

 

 

$

0

 

 

$

103,954

 

Restricted stock

 

 

15,048

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

3,395

 

 

 

0

 

 

 

3,497

 

 

 

0

 

 

 

3,497

 

Loans, net

 

 

2,126,640

 

 

 

0

 

 

 

0

 

 

 

2,117,065

 

 

 

2,117,065

 

Accrued interest receivable

 

 

11,259

 

 

 

0

 

 

 

2,946

 

 

 

8,313

 

 

 

11,259

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,439,485

 

 

 

1,902,092

 

 

 

551,608

 

 

 

0

 

 

 

2,453,700

 

Short-term borrowings

 

 

3,382

 

 

 

0

 

 

 

3,382

 

 

 

0

 

 

 

3,382

 

Long-term borrowings

 

 

76,733

 

 

 

0

 

 

 

79,901

 

 

 

0

 

 

 

79,901

 

Accrued interest payable

 

 

822

 

 

 

48

 

 

 

774

 

 

 

0

 

 

 

822

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2019 Using:

 

(In Thousands of Dollars)

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,760

 

 

$

23,229

 

 

$

47,531

 

 

$

0

 

 

$

70,760

 

Restricted stock

 

 

11,729

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

2,600

 

 

 

0

 

 

 

2,678

 

 

 

0

 

 

 

2,678

 

Loans, net

 

 

1,797,052

 

 

 

0

 

 

 

0

 

 

 

1,760,062

 

 

 

1,760,062

 

Accrued interest receivable

 

 

7,552

 

 

 

0

 

 

 

2,578

 

 

 

4,974

 

 

 

7,552

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,008,964

 

 

 

1,457,309

 

 

 

495,222

 

 

 

0

 

 

 

1,952,531

 

Short-term borrowings

 

 

77,050

 

 

 

0

 

 

 

77,050

 

 

 

0

 

 

 

77,050

 

Long-term borrowings

 

 

45,147

 

 

 

0

 

 

 

45,998

 

 

 

0

 

 

 

45,998

 

Accrued interest payable

 

 

1,070

 

 

 

61

 

 

 

1,009

 

 

 

0

 

 

 

1,070

 

 

35


 

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: The Company uses a third party firm that uses cash flow analysis and current market interest rates along with adjustments for credit, liquidity and option risk to conform to the ASU 2016-01 exit price requirement.  Loans in the tables above consist of impaired credits held for investment. In accordance with the loan impairment guidance, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans or the cash flow method for noncollateral dependent loans. Fair value for collateral dependent impaired loans is based upon appraised values adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation is a component of the allowance for loan losses. The Company considers these fair values level 3.

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.

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.

 

 

36


 

Goodwill and Intangible Assets:

 

Goodwill associated with the Company’s purchase of Maple Leaf in January 2020 and other past acquisitions totaled $47.4 million and $38.2 at June 30, 2020 and December 31, 2019.  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 units is determined using a combination of a discounted cash flow method and a guideline public company method.  

Acquired Intangible Assets

Acquired intangible assets were as follows:

 

 

June 30, 2020

 

 

December 31, 2019

 

(In Thousands of Dollars)

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship intangibles

$

7,210

 

 

$

(6,128

)

 

$

7,210

 

 

$

(5,938

)

Non-compete contracts

 

430

 

 

 

(386

)

 

 

430

 

 

 

(384

)

Trade name

 

520

 

 

 

(298

)

 

 

520

 

 

 

(277

)

Core deposit intangible

 

6,980

 

 

 

(3,822

)

 

 

6,254

 

 

 

(3,371

)

Total

$

15,140

 

 

$

(10,634

)

 

$

14,414

 

 

$

(9,970

)

 

Aggregate amortization expense was $331 thousand and $663 thousand for the three and six month periods ended June 30, 2020.  Amortization expense was $327 thousand and $654 thousand for the three and six months ended June 30, 2019.

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

 

2020 (6 months)

$

663

 

2021

 

1,264

 

2022

 

1,090

 

2023

 

617

 

2024

 

314

 

Thereafter

 

558

 

Total

$

4,506

 

 

Leases:

 

The Company has operating leases for branch office locations, vehicles and certain office equipment such as printers, copiers and faxes. The leases have remaining lease terms of 7 months to 10 years, some of which include options to extend the lease for up to 10 years and some of which include options to terminate the leases within 7 months.

The right of use asset and lease liability were $4.8 and $4.9 million as of June 30, 2020.  At June 30, 2019, the right of use asset and lease liability were $3.4 million.

Lease payments made for the three and six month period ended June 30, 2020 were $195 thousand and $390 thousand, while lease payments made for the three and six month period ended June 30, 2019 were $146 thousand and $292 thousand, respectively. Interest expense and amortization expense on finance leases for the three month period ended June 30, 2020 was $34 thousand and $107 thousand, and $57 thousand and $213 thousand for the six month period ended June 30, 2020.  Interest expense and amortization expense on finance leases for the three month period ended June 30, 2019 was $26 thousand and $89 thousand, and $53 thousand and $177 thousand for the six month period ended June 30, 2019.  The weighted-average remaining lease term for all leases was 5.2 years as of June 30, 2020 and the weighted-average discount rate was 3.1%.

 

37


 

Maturities of lease liabilities are as follows as of June 30, 2020:

 

2020 (6 months)

 

$

392

 

2021

 

 

781

 

2022

 

 

607

 

2023

 

 

503

 

2024

 

 

333

 

Thereafter

 

 

3,230

 

Total Payments

 

 

5,846

 

Less: Imputed Interest

 

 

(992

)

Total

 

$

4,854

 

 

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 June 30, 2020 and December 31, 2019 is as follows:

 

 

June 30, 2020

 

 

December 31, 2019

 

Notional amounts (In thousands)

$

42,639

 

 

$

42,178

 

Weighted average pay rate on interest-rate swaps

 

4.63

%

 

 

4.60

%

Weighted average receive rate on interest-rate swaps

 

2.37

%

 

 

4.02

%

Weighted average maturity (years)

 

4.3

 

 

 

4.2

 

Fair value of interest-rate swaps (In thousands)

$

(5,001

)

 

$

(1,898

)

Fair value of loan yield maintenance provisions (In thousands)

$

5,001

 

 

$

1,898

 

 

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 and six month periods ended June 30, 2020 and 2019 there were no net gains or losses recognized in earnings.

 

 

38


 

Earnings Per Share:

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

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (In thousands)

$

11,011

 

 

$

8,543

 

 

$

19,650

 

 

$

16,931

 

Weighted average shares outstanding

 

28,167,920

 

 

 

27,794,821

 

 

 

28,349,404

 

 

 

27,792,438

 

Basic earnings per share

$

0.39

 

 

$

0.31

 

 

$

0.69

 

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (In thousands)

$

11,011

 

 

$

8,543

 

 

$

19,650

 

 

$

16,931

 

Weighted average shares outstanding for basic earnings per share

 

28,167,920

 

 

 

27,794,821

 

 

 

28,349,404

 

 

 

27,792,438

 

Dilutive effect of restricted stock awards

 

111,644

 

 

 

136,379

 

 

 

142,195

 

 

 

157,893

 

Weighted average shares for diluted earnings per share

 

28,279,564

 

 

 

27,931,200

 

 

 

28,491,599

 

 

 

27,950,331

 

Diluted earnings per share

$

0.39

 

 

$

0.31

 

 

$

0.69

 

 

$

0.61

 

 

There were no restricted stock awards that were considered anti-dilutive for the three and six month periods ended June 30, 2020 and 2019.

 

 

Stock Based Compensation:

 

During 2017, the Company, with the approval of shareholders, created the 2017 Equity Incentive Plan (the “2017 Plan”).  The 2017 Plan permits the award of up to 800 thousand shares to the Company’s directors and employees to attract and retain exceptional personnel, motivate performance and most importantly to help align the interests of the Company’s executives with those of the Company’s shareholders.  There were 24,045 service time based share awards and 50,187 performance based share awards granted under the 2017 Plan during the six month period ended June 30, 2020, as shown in the table below.  The actual number of performance based shares issued will depend on the relative performance of the Company’s average return on equity compared to a group of peer companies over a three year vesting period, ending December 31, 2022.  As of June 30, 2020, 401,315 shares are still available to be awarded from the 2017 Plan.    

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 was $349 thousand and $686 thousand for the three and six month periods ended June 30, 2020, respectively.  During the prior periods, the expense recognized was $345 thousand and $664 thousand for the three and six month periods ended June 30, 2019, respectively.  As of June 30, 2020, there was $2.0 million of total unrecognized compensation expense related to the nonvested shares granted under the Plans.  The remaining cost is expected to be recognized over 2.7 years.  

The following is the activity under the Plans during the six month period ended June 30, 2020.

 

 

Six Months Ended June 30, 2020

 

 

Maximum

Awarded

Service

Units

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Maximum

Awarded

Performance

Units

 

 

Weighted

Average

Grant Date

Fair Value

 

Beginning balance - non-vested shares

 

81,165

 

 

$

14.17

 

 

 

192,665

 

 

$

13.72

 

Granted

 

24,045

 

 

 

15.29

 

 

 

50,187

 

 

 

15.93

 

Vested

 

(23,077

)

 

 

14.05

 

 

 

(64,312

)

 

 

13.38

 

Forfeited

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Ending balance - non-vested shares

 

82,133

 

 

$

14.54

 

 

 

178,540

 

 

$

14.47

 

 

The 87,389 shares that vested during the six month period ended June 30, 2020 had a weighted average fair value of $11.31 per share.

 

39


 

Other Comprehensive Income (Loss):

The following table represents the details of other comprehensive income for the three and six month periods ended June 30, 2020 and 2019.

 

 

Three Months Ended June 30, 2020

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

25,411

 

 

$

(5,336

)

 

$

20,075

 

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

 

(14

)

 

 

3

 

 

 

(11

)

Net other comprehensive income

$

25,397

 

 

$

(5,333

)

 

$

20,064

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2019

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

9,203

 

 

$

(1,920

)

 

$

7,283

 

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

 

(1

)

 

 

0

 

 

 

(1

)

Net other comprehensive income

$

9,202

 

 

$

(1,920

)

 

$

7,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2020

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

13,194

 

 

$

(2,771

)

 

$

10,423

 

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

 

(270

)

 

 

57

 

 

 

(213

)

Net other comprehensive income

$

12,924

 

 

$

(2,714

)

 

$

10,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

15,024

 

 

$

(3,150

)

 

$

11,874

 

Reclassification adjustment for losses included in net income (1)

 

33

 

 

 

0

 

 

 

33

 

Net other comprehensive income

$

15,057

 

 

$

(3,150

)

 

$

11,907

 

 

 

(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 was fully implemented on 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 that as of June 30, 2020, 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 phased in beginning January 1, 2016 and increased each year until it was fully implemented at 2.5% on January 1, 2019.  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%.

40


 

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 June 30, 2020 and December 31, 2019, 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.

Actual and required capital amounts and ratios, which do not include the capital conservation buffer, are presented below at June 30, 2020 and December 31, 2019:

 

 

Actual

 

 

Requirement For Capital

Adequacy Purposes:

 

 

To be Well Capitalized

Under Prompt Corrective

Action Provisions:

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

260,980

 

 

12.65

%

 

$

92,862

 

 

4.5

%

 

N/A

 

N/A

 

Bank

 

251,335

 

 

12.20

%

 

 

92,687

 

 

4.5

%

 

$

133,881

 

 

6.5

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

287,209

 

 

13.92

%

 

 

165,089

 

 

8.0

%

 

N/A

 

N/A

 

Bank

 

268,295

 

 

13.03

%

 

 

164,777

 

 

8.0

%

 

 

205,972

 

 

10.0

%

Tier I risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

270,249

 

 

13.10

%

 

 

123,817

 

 

6.0

%

 

N/A

 

N/A

 

Bank

 

251,335

 

 

12.20

%

 

 

123,583

 

 

6.0

%

 

 

164,777

 

 

8.0

%

Tier I leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

270,249

 

 

9.71

%

 

 

111,367

 

 

4.0

%

 

N/A

 

N/A

 

Bank

 

251,335

 

 

9.08

%

 

 

110,775

 

 

4.0

%

 

 

138,469

 

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

247,395

 

 

12.94

%

 

$

86,039

 

 

4.5

%

 

N/A

 

N/A

 

Bank

 

213,507

 

 

11.19

%

 

 

85,854

 

 

4.5

%

 

$

124,011

 

 

6.5

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

264,188

 

 

13.82

%

 

 

152,958

 

 

8.0

%

 

N/A

 

N/A

 

Bank

 

227,994

 

 

11.95

%

 

 

152,629

 

 

8.0

%

 

 

190,787

 

 

10.0

%

Tier I risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

249,701

 

 

13.06

%

 

 

114,719

 

 

6.0

%

 

N/A

 

N/A

 

Bank

 

213,507

 

 

11.19

%

 

 

114,472

 

 

6.0

%

 

 

152,629

 

 

8.0

%

Tier I leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

249,701

 

 

10.69

%

 

 

93,406

 

 

4.0

%

 

N/A

 

N/A

 

Bank

 

213,507

 

 

9.06

%

 

 

94,304

 

 

4.0

%

 

 

117,881

 

 

5.0

%

 

Segment Information:

The reportable segments are determined by the products and services offered, primarily distinguished between banking and trust.  The trust and retirement consulting segments were combined in 2019.   These segments 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

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

6,186

 

 

$

49,238

 

 

$

(3,558

)

 

$

51,866

 

Total assets

 

$

16,389

 

 

$

2,864,313

 

 

$

(1,113

)

 

$

2,879,589

 

41


 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

6,326

 

 

$

37,141

 

 

$

(822

)

 

$

42,645

 

Total assets

 

$

13,892

 

 

$

2,430,784

 

 

$

4,482

 

 

$

2,449,158

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

30

 

 

$

23,991

 

 

$

(100

)

 

$

23,921

 

Provision for loan losses

 

 

0

 

 

 

2,400

 

 

 

0

 

 

 

2,400

 

Service fees, security gains and other noninterest income

 

 

2,322

 

 

 

6,948

 

 

 

(134

)

 

 

9,136

 

Noninterest expense

 

 

1,512

 

 

 

15,300

 

 

 

138

 

 

 

16,950

 

Amortization and depreciation expense

 

 

77

 

 

 

645

 

 

 

68

 

 

 

790

 

Income before taxes

 

 

763

 

 

 

12,594

 

 

 

(440

)

 

 

12,917

 

Income taxes

 

 

160

 

 

 

1,895

 

 

 

(149

)

 

 

1,906

 

Net income

 

$

603

 

 

$

10,699

 

 

$

(291

)

 

$

11,011

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Six Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

64

 

 

$

46,343

 

 

$

(184

)

 

$

46,223

 

Provision for loan losses

 

 

0

 

 

 

3,500

 

 

 

0

 

 

 

3,500

 

Service fees, security gains and other noninterest income

 

 

4,565

 

 

 

12,723

 

 

 

(282

)

 

 

17,006

 

Noninterest expense

 

 

3,029

 

 

 

31,336

 

 

 

571

 

 

 

34,936

 

Amortization and depreciation expense

 

 

153

 

 

 

1,272

 

 

 

116

 

 

 

1,541

 

Income before taxes

 

 

1,447

 

 

 

22,958

 

 

 

(1,153

)

 

 

23,252

 

Income taxes

 

 

304

 

 

 

3,654

 

 

 

(356

)

 

 

3,602

 

Net income

 

$

1,143

 

 

$

19,304

 

 

$

(797

)

 

$

19,650

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

40

 

 

$

20,474

 

 

$

(23

)

 

$

20,491

 

Provision for loan losses

 

 

0

 

 

 

750

 

 

 

0

 

 

 

750

 

Service fees, security gains and other noninterest income

 

 

2,292

 

 

 

4,924

 

 

 

(87

)

 

 

7,129

 

Noninterest expense

 

 

1,520

 

 

 

14,326

 

 

 

274

 

 

 

16,120

 

Amortization and depreciation expense

 

 

92

 

 

 

615

 

 

 

12

 

 

 

719

 

Income before taxes

 

 

720

 

 

 

9,707

 

 

 

(396

)

 

 

10,031

 

Income taxes

 

 

152

 

 

 

1,474

 

 

 

(138

)

 

 

1,488

 

Net income

 

$

568

 

 

$

8,233

 

 

$

(258

)

 

$

8,543

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

78

 

 

$

40,423

 

 

$

(45

)

 

$

40,456

 

Provision for loan losses

 

 

0

 

 

 

1,300

 

 

 

0

 

 

 

1,300

 

Service fees, security gains and other noninterest income

 

 

4,548

 

 

 

9,352

 

 

 

(128

)

 

 

13,772

 

Noninterest expense

 

 

3,121

 

 

 

27,977

 

 

 

413

 

 

 

31,511

 

Amortization and depreciation expense

 

 

184

 

 

 

1,220

 

 

 

24

 

 

 

1,428

 

Income before taxes

 

 

1,321

 

 

 

19,278

 

 

 

(610

)

 

 

19,989

 

Income taxes

 

 

278

 

 

 

3,030

 

 

 

(250

)

 

 

3,058

 

Net income

 

$

1,043

 

 

$

16,248

 

 

$

(360

)

 

$

16,931

 

 

42


 

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

 

 

Contingencies:

 

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, although the Company establishes accruals where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure with respect to adverse claims in legal matters could change in the event of the discovery of additional facts in such matters or upon determinations by judges, juries, administrative agencies, or other finds or fact that are inconsistent with the Company’s evaluations of claims. During 2019, the Company accrued a charge of $505 thousand relating to a pending settlement of a legal contingency. The Company has insurance coverage for this contingency and expects to recover the amount of this estimated charge.  No amount for an expected insurance recovery has been recorded as of June 30, 2020.

 

 

Short-term borrowings:

There were no short-term Federal Home Loan Bank Advances at June 30, 2020.  Short-term Federal Home Loan Bank Advances were $75 million at December 31, 2019.  The Company had $3.0 million and $1.7 million in securities sold under repurchase agreements for the periods ended June 30, 2020 and December 31, 2019, respectively.  In addition, the Company had no Federal funds purchased and has a $350 thousand balance with one lending institution at June 30, 2020 and December 31, 2019.

Securities sold under repurchase agreements are secured by the Bank’s holdings of debt securities issued by U.S. Government sponsored entities and agencies.  These pledged securities which are 105% of the repurchase agreement balances, had a carrying amount of $3.2 million and $1.8 million at June 30, 2020 and December 31, 2019.

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)

 

June 30, 2020

 

 

December 31, 2019

 

Overnight and continuous repurchase agreements

 

 

 

 

 

 

 

 

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

 

$

76

 

 

$

55

 

State and political subdivisions

 

 

1,446

 

 

 

627

 

Mortgage-backed securities - residential

 

 

1,195

 

 

 

948

 

Collateralized mortgage obligations - residential

 

 

315

 

 

 

70

 

Total repurchase agreements

 

$

3,032

 

 

$

1,700

 

 

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.  

 

Long-term borrowings:

There were $67.5 million in long-term Federal Home Loan Bank Advances at June 30, 2020 with a weighted average interest rate of 1.79%.  Long-term Federal Home Loan Bank Advances were $42.8 million at December 31, 2019.  In addition, the Company had two Trust Preferred Debentures with an outstanding balance of $9.3 million at June 30, 2020 and $2.1 million at December 31, 2019.  The final maturity of this Debt is December 31, 2036.

Long-term and short-term FHLB advances are secured by a blanket pledge of residential mortgage, commercial real estate, and multi-family loans totaling $648.0 million and $577.9 million at June 30, 2020 and December 31, 2019, respectively.  Based on this collateral, the Bank is eligible to borrow an additional $580.6 million at June 30, 2020.  Each advance is subject to a prepayment penalty if paid prior to its maturity date.

 

 

43


 

Item 2.

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

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact, but rather statements based on the Company’s current expectations, beliefs and assumptions regarding the future of Farmers’ business, future plans and strategies, projections, anticipated events and trends, its intended results and future performance, the economy and other future conditions. Forward-looking statements are preceded by terms such as “will,” “would,” “should,” “could,” “may,” “expect,” “estimate,” “believe,” “anticipate,” “intend,” “plan” “project,” or variations of these words, or similar expressions. Forward-looking statements are not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control.  Numerous uncertainties, risks, and changes could cause or contribute to Farmers’ actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements.  

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, 2019, as updated in Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q.  

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, which is not intended to be an all-encompassing list, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in any forward-looking statement:

 

 

general economic conditions in markets where the Company conducts business, which could materially impact credit quality trends;

 

effects of the COVID-19 pandemic on the local, national, and international economy, our organization and employees, and our customers and suppliers and their business operations, financial condition, and including our customers’ ability to repay loans;

 

disruptions in the mortgage and lending markets and significant or unexpected fluctuations in interest rates related to COVID-19 and governmental responses, including financial stimulus packages;

 

general business conditions in the banking industry;

 

the regulatory environment;

 

general fluctuations in interest rates;

 

demand for loans in the market areas where the Company conducts business;

 

rapidly changing technology and evolving banking industry standards;

 

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

 

and new service and product offerings by competitors and price pressures.

 

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 the presentation are reasonable, you 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, expect as may be required by applicable law.

Overview

The Company’s results of operations for the quarter ended June 30, 2020 are discussed below.  However, the Company’s past results of operations may not reflect its future operating trends. In March 2020, the COVID-19 pandemic began to affect the U.S. economy and has created additional uncertainty for the Company’s business, particularly for the remainder of 2020.  Regulatory actions in response to the COVID-19 pandemic have varied across jurisdictions and have included closure of nonessential businesses, affecting customers of the Company, although the Company as a financial institution has been considered an essential business.  The duration and extent of these regulatory measures is unknown.

44


 

The Company’s net income for the three months ended June 30, 2020 was $11.0 million, or $0.39 per diluted share, which compares to $8.5 million, or $0.31 per diluted share, for the three months ended June 30, 2019.  Net income excluding acquisition costs (non-GAAP) for the quarter ended June 30, 2020 was $11.1 million or $0.39 per share, compared to $8.5 million or $0.31 per share for the same quarter in 2019.  Annualized return on average assets and annualized return on average equity were 1.56% and 14.02%, respectively, for the three month period ending June 30, 2020, compared to 1.45% and 12.34% for the same three month period in 2019.  Farmers’ annualized return on average tangible equity (non-GAAP) was 16.69% for the quarter ended June 30, 2020 compared to 14.59% for the same quarter in 2019.

Net income for the six months ended June 30, 2020 was $19.7 million, or $0.69 per diluted share, compared to $16.9 million, or $0.61 per diluted share, for the same six month period in 2019.  Annualized return on average assets and return on average equity were 1.44% and 12.81%, respectively, for the six month period ending June 30, 2020, compared to 1.45% and 12.54% for the same period in 2019.  

 

In response to the rapidly evolving COVID-19 pandemic, the Company focused first on the well-being of its people, customers and communities. Preventative health measures were put in place including elimination of business related travel requirements, work from home requirements for all employees able to do so and social distancing precautions for all employees in the office. At the beginning of the pandemic, the Company restricted access to branch lobbies to appointment only, but has now re-opened the lobbies using personal protective equipment and maintaining social distancing guidelines and continues to conduct preventative cleaning at all offices and branches. The Company also focused on business continuity measures, including forming a COVID-19 task force, monitoring potential business interruptions, making improvements to our remote working technology, and conducting regular discussions with our technology vendors.

 

Farmers is offering special financial assistance to support customers who are experiencing financial hardships related to the COVID-19 pandemic. The following table reports the number and amount of payment deferrals by loan type as of dates listed:  

 

 

March 31, 2020

June 30, 2020

July 24, 2020

 

Outstanding

Balance

Number of

Loans

Outstanding

Balance

Number of

Loans

Outstanding

Balance

Number of

Loans

Commercial real estate

$75,809

78

$43,954

44

$27,717

17

Commercial

11,839

81

8,515

69

5,848

36

Agricultural

1,492

11

8,340

22

2,505

12

Residential real estate

5,506

41

3,785

37

1,397

15

Consumer

2,840

127

1,858

100

539

36

Total

$97,486

338

$66,452

272

$38,006

116

 

The Company offered three month deferrals upon request by the borrowers.  The deferral requests began in the middle of March, 2020 and concluded at the end of the three month deferral period.  The decline in deferred loans and balances was due to the ending of the deferment period and that not all borrowers requested additional deferment.  The Company has granted a second three month deferral period to $23.8 million in commercial real estate loans and $5.7 million in commercial loans, which are included in the amounts detailed above.  The second deferral period was offered to a select group of customers within specific industry codes that may have a higher credit risk.  The Company anticipates that there will be a limited number of business customers with a total of a six month deferral period.  

 

Farmers is also a preferred SBA lender and dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the new Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, so they could obtain SBA approval and receive funding as quickly as possible. The Company has facilitated PPP assistance to 1,675 business customers with an outstanding balance at June 30, 2020, totaling $199.1 million.  

 

On January 7, 2020, Farmers announced it completed the merger of Maple Leaf Financial (“Maple Leaf”), the holding company for Geauga Savings Bank, with branches located in Cuyahoga and Geauga Counties in Ohio.  The transaction increased Farmers’ market share in Cuyahoga and Geauga Counties and enables Farmers to continue building local scale throughout Northeast Ohio.  As of January 7, 2020, Maple Leaf had total assets of $277.0 million, which included gross loans of $182.1 million, deposits of $183.1 million and equity of $32.1 million.

 

45


 

Total loans were $2.14 billion at June 30, 2020 compared to $1.81 billion at December 31, 2019, representing an annualized growth rate of 18.3%.  The increase in loans is a result of the Company’s focus on loan growth utilizing a talented lending and credit team, while adhering to a sound underwriting discipline.  The increase in loans has occurred primarily in the PPP category, with $199.1 million in outstanding balances.  Loans now comprise 79.6% of the Bank's second quarter average earning assets at June 30, 2020, unchanged compared to the same period in 2019.  The growth in loans has resulted in a 10.8% increase in tax equated loan interest income, including fees, in the second quarter of 2020 compared to the same quarter in 2019.  A summary of loans summarized by industries that have particular vulnerability to the effects of COVID-19 and their outstanding balance as a percentage of total loans is shown in the following table:

 

 

Outstanding Balance

 

% of total loans

 

Restaurants and Catering Facilities

$

52,134,168

 

 

2.43

%

Hotels

 

42,655,026

 

 

1.98

%

Golf Courses

 

7,665,569

 

 

0.36

%

Energy

 

1,073,850

 

 

0.05

%

Total

$

103,528,613

 

 

4.82

%

 

Non-performing assets to total assets remain at a low level, currently at 0.43%.  Early stage delinquencies, which are loans 30 - 89 days delinquent, also continue to remain at low levels, at $10.3 million, or 0.48% of total loans, at June 30, 2020.  Net charge-offs for the current quarter were $392 thousand, compared to $305 thousand in the same quarter in 2019 and net charge-offs as a percentage of average net loans outstanding is only 0.08% for the quarter ended June 30, 2020, compared to 0.07% in the same quarter in 2019.  Loan modifications due to COVID-19 could negatively impact these ratios.  See Item 1A. Risk Factors in Part II – OTHER INFORMATION of this filing for additional risk factor discussion.  Lending to the energy sector is insignificant and less than 1% of the loan portfolio.

The net interest margin for the three months ended June 30, 2020 was 3.74%, a 10 basis point decrease from the quarter ended June 30, 2019.  In comparing the second quarter of 2020 to the same period in 2019, asset yields decreased 37 basis points, while the cost of interest-bearing liabilities decreased a similar 36 basis points.  Most of the decrease in the asset yields was the result of lower rates earned on loans, declining from 5.14% to 4.75% due to the decrease in the prime lending rate and the addition of the lower yielding PPP loans.  The cost of interest bearing liabilities decreased as the Federal Funds target rate was lowered to a target of 0-0.25% at the start of the COVID-19 pandemic in the United States.  Each of the major interest-bearing liability categories experienced cost decreases compared to one year ago.  The net interest margin is impacted by the additional accretion as a result of the discounted loan portfolios acquired in the previous mergers, which increased the net interest margin by 5 basis points for the quarters ended June 30, 2020 and 2019.

The net interest margin for the six months ended June 30, 2020 was 3.74%, a 9 basis point decrease from the six month period ended June 30, 2019.  Asset yields decreased 22 basis points, while the cost of interest-bearing liabilities decreased 19 basis points.  The reasons for the increases are similar to those for the second quarter discussed above.  The net interest margin is impacted by the additional accretion as a result of the discounted loan portfolios acquired in recent mergers, which increased the net interest margin by 5 basis points for the six months ended June 30, 2020 and 2019.

The Company made progress in its effort to increase noninterest income, which increased 28.15% to $9.1 million for the quarter ended June 30, 2020 compared to $7.1 million in the same quarter of 2019.  Gains on the sales of mortgage loans increased $2.6 million or 246.73%, as lower interest rates prompted an increase in mortgage loan refinancing and new home purchases.  Debit card interchange fees increased $80 thousand or 9.02%, but that increase was offset by $42 thousand or 9.33% less in retirement plan consulting fees and reduced income from SBIC Funds which impacted other operating income.  The Company also experienced a $340 thousand decrease in deposit account service charge income due to a change in consumer behavior and the waiver of some overdraft fees during the COVID-19 pandemic.  For the six month period, noninterest income increased 23.48% to $17.0 million during the first six months of 2020 compared to $13.8 million for the same period of 2019.  The reasons for the increases are similar to those for the second quarter discussed above.

The Company has remained committed to managing its level of noninterest expenses.  Total noninterest expenses for the second quarter of 2020 increased 5.35% to $17.7 million compared to $16.8 million in the same quarter in 2019, primarily as a result of increases in salaries and employee benefits of $447 thousand or 4.82%, FDIC insurance premiums of $140 thousand or 164.71% and core processing charges and telephone and data costs of $131 thousand each.  Other operating expenses also increased $29 thousand or 1.07%,  of which approximately $407 thousand of this increase was the result of an adjustment to mortgage servicing rights resulting from higher than expected mortgage loan payoffs.  These increases were offset by a $505 thousand drop in litigation settlement expense.  Annualized noninterest expenses excluding acquisition costs (non-GAAP) measured as a percentage of quarterly average assets decreased from 2.83% in the second quarter of 2019 to 2.50% in the second quarter of 2020.  For the six month period ended June 30, 2020 noninterest expenses increased 10.74% to $36.5 million compared to $32.9 million for the same period in 2019.  The reasons for the increases are similar to those for the third quarter discussed above.

46


 

The efficiency ratio for the quarter ended June 30, 2020 decreased to 50.75% compared to 58.28% for the same quarter in 2019.  The improvement in mortgage banking income and net interest income, accompanied with careful management of noninterest expenses were the main drivers of the improvement.

The Company’s return on average tangible equity (Non-GAAP) was 16.69% and 15.03% for the three and six month periods ended June 30, 2020 compared to 14.59% and 14.82% for the same periods in 2019.

Return on average tangible equity is a non-U.S. GAAP financial measure and should be considered in addition to, not a substitute for or superior to, financial measures determined in accordance with U.S. GAAP.  With respect to the calculation of the tangible equity for the three and six month periods ended June 30, 2020 and 2019, reconciliations are displayed in the tables below.

Results of Operations The following is a comparison of selected financial ratios and other results at or for the three and six month periods ended June 30, 2020 and 2019:

 

 

 

At or for the Three Months

Ended June 30,

 

 

At or for the Six Months

Ended June 30,

 

(In Thousands, except Per Share Data)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Total assets

 

$

2,879,589

 

 

$

2,405,949

 

 

$

2,879,589

 

 

$

2,405,949

 

Net income

 

$

11,011

 

 

$

8,543

 

 

$

19,650

 

 

$

16,931

 

Diluted earnings per share

 

$

0.39

 

 

$

0.31

 

 

$

0.69

 

 

$

0.61

 

Return on average assets (annualized)

 

 

1.56

%

 

 

1.45

%

 

 

1.44

%

 

 

1.45

%

Return on average equity (annualized)

 

 

14.02

%

 

 

12.34

%

 

 

12.81

%

 

 

12.54

%

Efficiency ratio (tax equivalent basis) (1)

 

 

50.75

%

 

 

58.28

%

 

 

55.04

%

 

 

58.06

%

Equity to asset ratio

 

 

11.48

%

 

 

11.84

%

 

 

11.48

%

 

 

11.84

%

Tangible common equity ratio (2)

 

 

9.88

%

 

 

10.22

%

 

 

9.88

%

 

 

10.22

%

Dividends to net income

 

 

28.15

%

 

 

29.31

%

 

 

31.57

%

 

 

29.56

%

Net loans to assets

 

 

73.85

%

 

 

73.41

%

 

 

73.85

%

 

 

73.41

%

Loans to deposits

 

 

88.87

%

 

 

89.00

%

 

 

88.87

%

 

 

89.00

%

 

(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 June 30, 2020 and 2019, reconciliations of tangible common equity (non-GAAP) to U.S. GAAP total common stockholders’ equity and tangible assets (non-GAAP) to U.S. GAAP total assets are set forth below:

 

 

Reconciliation of Common Stockholders' Equity to Tangible Common Equity

 

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

(In Thousands of Dollars)

 

June 30, 2020

 

 

December 31, 2019

 

 

June 30, 2019

 

Stockholders' equity

 

$

331,352

 

 

$

299,309

 

 

$

284,825

 

Less goodwill and other intangibles

 

 

51,866

 

 

 

42,645

 

 

 

43,298

 

Tangible common equity

 

 

279,486

 

 

 

256,664

 

 

 

241,527

 

Average stockholders' equity

 

 

315,988

 

 

 

300,355

 

 

 

277,746

 

Less average goodwill and other intangibles

 

 

52,052

 

 

 

42,859

 

 

 

43,508

 

Average tangible common equity

 

$

263,936

 

 

$

257,496

 

 

$

234,238

 

 

47


 

Reconciliation of Total Assets to Tangible Assets

 

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

(In Thousands of Dollars)

 

June 30, 2020

 

 

December 31, 2019

 

 

June 30, 2019

 

Total assets

 

$

2,879,589

 

 

$

2,449,158

 

 

$

2,405,949

 

Less goodwill and other intangibles

 

 

51,866

 

 

 

42,645

 

 

 

43,298

 

Tangible assets

 

$

2,827,723

 

 

$

2,406,513

 

 

$

2,362,651

 

Average assets

 

 

2,842,730

 

 

 

2,424,574

 

 

 

2,369,388

 

Less average goodwill and other intangibles

 

 

52,052

 

 

 

42,859

 

 

 

43,508

 

Average tangible assets

 

$

2,790,678

 

 

$

2,381,715

 

 

$

2,325,880

 

 

 

Reconciliation of Net Income, Excluding Acquisition Costs

 

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

(In Thousands of Dollars)

 

June 30, 2020

 

 

December 31, 2019

 

 

June 30, 2019

 

Net Income

 

$

11,011

 

 

$

9,675

 

 

$

8,543

 

Acquisition related costs - tax equated

 

 

41

 

 

 

90

 

 

 

(20

)

Net Income - adjusted

 

$

11,052

 

 

$

9,765

 

 

$

8,523

 

Diluted EPS excluding acquisition costs

 

$

0.39

 

 

$

0.35

 

 

$

0.31

 

 

 

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.

 

48


 

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

June 30, 2020

 

 

June 30, 2019

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (3) (5) (6)

$

2,101,500

 

 

$

24,842

 

 

 

4.75

%

 

$

1,749,828

 

 

$

22,431

 

 

 

5.14

%

Taxable securities (4)

 

197,906

 

 

 

1,278

 

 

 

2.60

 

 

 

195,934

 

 

 

1,238

 

 

 

2.53

 

Tax-exempt securities (4) (6)

 

252,818

 

 

 

2,459

 

 

 

3.91

 

 

 

211,533

 

 

 

2,065

 

 

 

3.92

 

Equity securities (2)

 

17,687

 

 

 

137

 

 

 

3.12

 

 

 

12,055

 

 

 

171

 

 

 

5.69

 

Federal funds sold and other

 

70,279

 

 

 

30

 

 

 

0.17

 

 

 

29,205

 

 

 

158

 

 

 

2.17

 

TOTAL EARNING ASSETS

 

2,640,190

 

 

 

28,746

 

 

 

4.38

 

 

 

2,198,555

 

 

 

26,063

 

 

 

4.75

 

NONEARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

33,977

 

 

 

 

 

 

 

 

 

 

 

34,097

 

 

 

 

 

 

 

 

 

Premises and equipment

 

25,615

 

 

 

 

 

 

 

 

 

 

 

24,543

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(15,525

)

 

 

 

 

 

 

 

 

 

 

(13,908

)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

11,787

 

 

 

 

 

 

 

 

 

 

 

2,651

 

 

 

 

 

 

 

 

 

Other assets (3)

 

146,686

 

 

 

 

 

 

 

 

 

 

 

123,450

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

2,842,730

 

 

 

 

 

 

 

 

 

 

$

2,369,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

493,048

 

 

$

2,181

 

 

 

1.78

%

 

$

401,005

 

 

$

1,984

 

 

 

1.98

%

Brokered time deposits

 

84,198

 

 

 

319

 

 

 

1.52

 

 

 

94,463

 

 

 

559

 

 

 

2.35

 

Savings deposits

 

457,188

 

 

 

267

 

 

 

0.23

 

 

 

416,024

 

 

 

340

 

 

 

0.33

 

Demand deposits

 

823,058

 

 

 

1,093

 

 

 

0.53

 

 

 

631,436

 

 

 

1,476

 

 

 

0.94

 

Short term borrowings

 

12,613

 

 

 

18

 

 

 

0.57

 

 

 

100,199

 

 

 

631

 

 

 

2.53

 

Long term borrowings

 

76,751

 

 

 

343

 

 

 

1.80

 

 

 

5,724

 

 

 

48

 

 

 

3.36

 

TOTAL INTEREST-BEARING LIABILITIES

 

1,946,856

 

 

 

4,221

 

 

 

0.87

 

 

 

1,648,851

 

 

 

5,038

 

 

 

1.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

556,649

 

 

 

 

 

 

 

 

 

 

 

425,672

 

 

 

 

 

 

 

 

 

Other liabilities

 

23,237

 

 

 

 

 

 

 

 

 

 

 

17,119

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

315,988

 

 

 

 

 

 

 

 

 

 

 

177,746

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

2,842,730

 

 

 

 

 

 

 

 

 

 

$

2,269,388

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

 

$

24,525

 

 

 

3.51

%

 

 

 

 

 

$

21,025

 

 

 

3.52

%

Net interest margin

 

 

 

 

 

 

 

 

 

3.74

%

 

 

 

 

 

 

 

 

 

 

3.84

%

 

(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 $1.9 million and $1.0 million for 2020 and 2019, respectively, and is reduced by amortization of $663 thousand and $680 thousand for 2020 and 2019, respectively.

(6)

For 2020, adjustments of $98 thousand and $506 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities.  For 2019, adjustments of $107 thousand and $427 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 21%, less disallowances.

 

49


 

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

 

Six Months Ended

June 30, 2020

 

 

Six Months Ended

June 30, 2019

 

 

AVERAGE

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

 

AVERAGE

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (3) (5) (6)

$

2,014,678

 

 

$

49,039

 

 

 

4.89

%

 

$

1,738,953

 

 

$

44,002

 

 

 

5.10

%

Taxable securities (4)

 

209,139

 

 

 

2,825

 

 

 

2.72

 

 

 

195,871

 

 

 

2,482

 

 

 

2.56

 

Tax-exempt securities (4) (6)

 

242,016

 

 

 

4,702

 

 

 

3.91

 

 

 

209,586

 

 

 

4,076

 

 

 

3.92

 

Equity securities (2) (6)

 

16,996

 

 

 

277

 

 

 

3.28

 

 

 

12,058

 

 

 

346

 

 

 

5.79

 

Federal funds sold and other

 

64,090

 

 

 

179

 

 

 

0.56

 

 

 

31,712

 

 

 

354

 

 

 

2.25

 

TOTAL EARNING ASSETS

 

2,546,919

 

 

 

57,022

 

 

 

4.50

 

 

 

2,188,180

 

 

 

51,260

 

 

 

4.72

 

NONEARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

36,349

 

 

 

 

 

 

 

 

 

 

 

34,011

 

 

 

 

 

 

 

 

 

Premises and equipment

 

25,283

 

 

 

 

 

 

 

 

 

 

 

23,486

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(15,871

)

 

 

 

 

 

 

 

 

 

 

(13,818

)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

13,686

 

 

 

 

 

 

 

 

 

 

 

(873

)

 

 

 

 

 

 

 

 

Other assets (3)

 

135,537

 

 

 

 

 

 

 

 

 

 

 

123,126

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

2,741,903

 

 

 

 

 

 

 

 

 

 

$

2,354,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

494,385

 

 

$

4,623

 

 

 

1.88

%

 

$

384,643

 

 

$

3,642

 

 

 

1.91

%

Brokered time deposits

 

94,846

 

 

 

802

 

 

 

1.69

 

 

 

70,793

 

 

 

825

 

 

 

2.33

 

Savings deposits

 

441,232

 

 

 

588

 

 

 

0.27

 

 

 

418,306

 

 

 

648

 

 

 

0.31

 

Demand deposits

 

756,882

 

 

 

2,486

 

 

 

0.66

 

 

 

610,631

 

 

 

2,679

 

 

 

0.88

 

Short term borrowings

 

37,544

 

 

 

338

 

 

 

1.81

 

 

 

148,723

 

 

 

1,862

 

 

 

2.52

 

Long term borrowings

 

88,491

 

 

 

799

 

 

 

1.82

 

 

 

5,815

 

 

 

96

 

 

 

3.33

 

TOTAL INTEREST-BEARING LIABILITIES

 

1,913,380

 

 

 

9,636

 

 

 

1.01

 

 

 

1,638,911

 

 

 

9,752

 

 

 

1.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

502,710

 

 

 

 

 

 

 

 

 

 

 

427,039

 

 

 

 

 

 

 

 

 

Other liabilities

 

17,289

 

 

 

 

 

 

 

 

 

 

 

15,944

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

308,524

 

 

 

 

 

 

 

 

 

 

 

272,218

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

2,741,903

 

 

 

 

 

 

 

 

 

 

$

2,354,112

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

 

$

47,386

 

 

 

3.49

%

 

 

 

 

 

$

41,508

 

 

 

3.52

%

Net interest margin

 

 

 

 

 

 

 

 

 

3.74

%

 

 

 

 

 

 

 

 

 

 

3.83

%

 

(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 $2.9 million and $1.9 million for 2020 and 2019, respectively, and is reduced by amortization of $1.3 million and $1.4 million for 2020 and 2019.

(6)

For 2020, adjustments of $196 thousand and $967 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities.  For 2019, adjustments of $209 thousand and $843 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 21%, less disallowances.

50


 

Net Interest Income.  Net interest income for the three month period ended June 30, 2020 was $23.9 million compared to $20.5 million for the same period in 2019.  On a tax equivalent basis net interest income was $24.5 million for the second quarter of 2020 compared to $21.0 million for the same period in 2019.  The net interest margin to average earning assets on a fully taxable equivalent basis decreased 10 basis points to 3.74% for the three months ended June 30, 2020, compared to 3.84% for the same three month period in the prior year.  In comparing the quarters ended June 30, 2020 and 2019, yields on earning assets decreased 37 basis points, while the cost of interest bearing liabilities decreased 36 basis points.  Excluding the amortization of premium on time deposits and the accretion of the loan portfolio discount, the net interest margin would have been 5 basis points lower for the quarter ended June 30, 2020.

Net interest income for the six month period ended June 30, 2020 was $46.2 million compared to $40.5 million for the same period in 2019.  On a tax equivalent basis net interest income was $47.4 million for the six month period ended June 30, 2020 compared to $41.5 million for the same period in 2019.  The net interest margin to average earning assets on a fully taxable equivalent basis decreased 9 basis points to 3.74% for the six months ended June 30, 2020, compared to 3.83% for the same six month period in the prior year.  In comparing the six month period ended June 30, 2020 and 2019, yields on earning assets decreased 22 basis points, while the cost of interest bearing liabilities decreased 19 basis points.  Excluding the amortization of premium on time deposits and the accretion of the loan portfolio discount, the net interest margin would have been 5 basis points lower for the six month period ended June 30, 2020.

Noninterest Income. Noninterest income, which increased 28.15% to $9.1 million for the quarter ended June 30, 2020 compared to $7.1 million in the same quarter of 2019.  Gains on the sales of mortgage loans increased $2.6 million or 246.73%, as lower interest rates prompted an increase in mortgage loan refinancing and new home purchases.  Debit card interchange fees increased $80 thousand or 9.02%, but that increase was offset by $42 thousand or 9.33% less in retirement plan consulting fees and reduced income from SBIC Funds which impacted other operating income.  The Company also experienced a $340 thousand decrease in deposit account service charge income due to a change in consumer behavior and the waiver of some overdraft fees during the COVID-19 pandemic.

Noninterest income increased 23.48% to $17.0 million during the first six months of 2020 compared to $13.8 million for the same period of 2019.  The reasons for the increases are similar to those for the second quarter discussed above.

Noninterest Expense.  Total noninterest expenses for the second quarter of 2020 increased 5.35% to $17.7 million compared to $16.8 million in the same quarter in 2019, primarily as a result of increases in salaries and employee benefits of $447 thousand or 4.82%, FDIC insurance premiums of $140 thousand or 164.71% and core processing charges and telephone and data costs of $131 thousand each.  Other operating expenses also increased $29 thousand or 1.07%, of which approximately $407 thousand of this increase was the result of an adjustment to mortgage servicing rights resulting from higher than expected mortgage loan payoffs.  These increases were offset by a $505 thousand drop in litigation settlement expense.  Annualized noninterest expenses excluding acquisition costs (non-GAAP) measured as a percentage of quarterly average assets decreased from 2.83% in the second quarter of 2019 to 2.50% in the second quarter of 2020.

For the six month period ended June 30, 2020 noninterest expenses increased 10.74% to $36.5 million compared to $32.9 million for the same period in 2019.  The reasons for the increases are similar to those for the second quarter discussed above.

The Company’s tax equivalent efficiency ratio for the three month period ended June 30, 2020 was 50.75% compared to 58.28% for the same period in 2019.  The tax equivalent efficiency ratio for the six month period ended June 30, 2020 was 55.04% compared to 58.06% for the six month period ended June 30, 2019.  The improvement in mortgage banking income and net interest income, accompanied with careful management of noninterest expenses were the main drivers of the improvement.

Income Taxes. Income tax expense totaled $1.9 million for the quarter ended June 30, 2020 and $1.5 million for the quarter ended June 30, 2019.  The effective tax rate for the three month period ended June 30, 2020 and 2019 was 14.76 and 14.83%, respectively.

Income tax expense was $3.6 million for the first six months of 2020 and $3.1 million for the first six months of 2019.  The effective tax rate for the six month period ended June 30, 2020 was 15.49%, compared to 15.30% for the same period in 2019.

Other Comprehensive Income.  For the quarter ended June 30, 2020, the change in net unrealized gains or losses on securities, net of reclassifications, resulted in an unrealized gain, net of tax, of $20.1 million, compared to $7.3 million for the same period in 2019.  The positive change in the fair value of securities for the three month period ended June 30, 2020 was the reason for the other comprehensive income increase.

51


 

For the first six months of 2020, the change in net unrealized gains on securities, net of reclassifications, resulted in an unrealized gain, net of tax, of $10.2 million, compared to $11.9 million for the same period in 2019.  The positive change in the fair value of securities for the six month period ended June 30, 2020 and June 30, 2019 was the reason for the other comprehensive income increases.

Financial Condition

Cash and Cash Equivalents.  Cash and cash equivalents increased $33.2 million during the first six months of 2020 from $70.8 million to $104.0 million.  The increase in the cash balance is part of normal fluctuations on the Company’s $2.886 billion balance sheet.  The Company expects cash and cash equivalents to be reduced to December 31, 2019 levels over the next few months as cash is used for loan growth and security portfolio purchases.

Securities.  Securities available-for-sale increased by $43.4 million since December 31, 2019.  The Company intends to maintain the securities portfolio’s current level, as a percentage of total assets, during the remaining months of 2020.

Loans.  Gross loans increased $332.1 million since December 31, 2019.  The increase in loans has occurred across many of the major loan categories but especially the commercial, commercial real estate and residential real estate loan portfolios.  Loans in the PPP category increased to an outstanding balance of $199.1 million.  The Bank also utilized a talented lending and credit team while adhering to sound underwriting discipline to increase the loan portfolio.  The increase in average loan balances along with an increase in market interest rates helped the current quarter’s loan income improve to $24.8 million or 10.71% compared to $22.4 million in the same quarter ended June 30, 2019.  

On a tax equated basis loan income improved by $2.4 million compared to the same quarter in 2019.  The average tax equivalent interest rate on the loan portfolio was 4.75% for the three month period ended June 30, 2020 compared to 5.14% for the same period in 2019.  On a fully tax equivalent basis, loans contributed $49.0 million of total interest income during the six month period ended June 30, 2020 compared to $44.0 million for the same period in 2019.

Allowance for Loan Losses.  The following table indicates key asset quality ratios that management evaluates on an ongoing basis.  The recorded investment balances were used in the calculations.

Asset Quality History

(In Thousands of Dollars)

 

 

6/30/2020

 

 

3/31/2020

 

 

12/31/2019

 

 

9/30/2019

 

 

6/30/2019

 

Nonperforming loans

$

12,225

 

 

$

11,845

 

 

$

6,345

 

 

$

6,749

 

 

$

7,252

 

Nonperforming loans as a % of total loans

 

0.57

%

 

 

0.60

%

 

 

0.35

%

 

 

0.38

%

 

 

0.41

%

Loans delinquent 30-89 days

$

10,336

 

 

$

19,067

 

 

$

11,893

 

 

$

9,076

 

 

$

10,203

 

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

 

0.48

%

 

 

0.97

%

 

 

0.66

%

 

 

0.51

%

 

 

0.57

%

Allowance for loan losses

$

16,960

 

 

$

14,952

 

 

$

14,487

 

 

$

14,261

 

 

$

14,222

 

Allowance for loan losses as a % of loans

 

0.79

%

 

 

0.76

%

 

 

0.80

%

 

 

0.80

%

 

 

0.80

%

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

 

0.92

%

 

 

0.92

%

 

 

0.89

%

 

 

0.90

%

 

 

0.91

%

Allowance for loan losses as a % of nonperforming loans

 

138.73

%

 

 

126.23

%

 

 

228.32

%

 

 

211.31

%

 

 

196.11

%

Annualized net charge-offs to average net loans outstanding

 

0.08

%

 

 

0.13

%

 

 

0.09

%

 

 

0.12

%

 

 

0.07

%

Non-performing assets

$

12,266

 

 

$

11,976

 

 

$

6,364

 

 

$

6,823

 

 

$

7,326

 

Non-performing assets as a % of total assets

 

0.43

%

 

 

0.45

%

 

 

0.26

%

 

 

0.28

%

 

 

0.30

%

Net charge-offs for the quarter

$

392

 

 

$

635

 

 

$

374

 

 

$

511

 

 

$

305

 

 

 

In accordance with the accounting relief provisions of the CARES Act, the Bank has postponed, during the first quarter of 2020, the adoption of the current expected credit losses (“CECL”) accounting standards, primarily due to the impact the COVID-19 pandemic is having on the economy and the lack of reasonable and supportable economic forecasts. 

52


 

For the three months ended June 30, 2020 and 2019, management recorded a $2.4 million and $750 thousand provision for loan losses.  For the six month periods ended June 30, 2020 and 2019 the provision recorded was $3.5 million and $1.3 million, respectively. The larger provision for the current quarter was necessary for the allowance as a result of the impact of increased negative economic factors that exist in the current business environment.  In determining the estimate of the allowance for loan losses, management computes the historical loss percentage based upon the loss history of the past 12 quarters.  The Company believes that using a loss history of the previous 12 quarters helps mitigate volatility in the timing of charge-offs and better reflects probable incurred losses. The allowance for loan losses as a percentage of the total loan portfolio was 0.79% at June 30, 2020 and 0.80% at June 30, 2019.  The loan portfolios acquired at fair market value from previous acquisitions were recorded at fair market value and without an associated allowance for loan loss.  When the acquired loans are excluded, the ratio of allowance for loan losses to total non-acquired loans is 0.92% at June 30, 2020 compared to 0.91% at June 30, 2019.  Early stage delinquencies, which are loans 30 - 89 days delinquent, as a percentage of total loans decreased from 0.57% at June 30, 2019 to 0.48% at June 30, 2020 and non-performing loans as a percentage of total loans increased from 0.41% at June 30, 2019 to 0.57% at June 30, 2020.  The allowance for loan losses to non-performing loans decreased from 196.11% at June 30, 2019 to 138.73% at June 30, 2020.  The amount of loans made to vulnerable industries (Restaurants, Hotels, Golf Courses and Energy) is less than 4.8% of our total loan portfolio.  It is also important to note that the average FICO score of our consumer loan portfolio stands at a healthy 766 and that some of the asset quality ratios could be negatively impacted by loans that have been granted payment deferrals.

Based on the evaluation of the adequacy of the allowance for loan losses, management believes that the allowance for loan losses at June 30, 2020 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 $430.5 million from December 31, 2019 to June 30, 2020, for a balance of $2.44 billion.  The increase in deposits is the result of the addition of $183.3 million in deposits from the Maple Leaf acquisition and the Company’s efforts to increase deposits without causing a significant negative impact to the net interest margin.  Interest bearing accounts and brokered time deposits increased a combined $271.5 million, or 17.24%, during the first six months of 2020. The increase in interest bearing accounts is mostly due to an approximate increase of $43.9 million in public funds deposits and the increased deposits from Maple Leaf.  Money market index accounts increased as customers moved funds out of certificates of deposit during the period.  The Company also believes a portion of the deposit growth is related to business customers adding their PPP loan proceeds in their DDA.  At December 31, 2019 the balance in money market index accounts was $177.4 million and at June 30, 2020 it was $226.7 million, an increase of 27.79%.  The Company’s strategy is to maintain deposit balances.  At June 30, 2020, core deposits, which include, savings and money market accounts, time deposits less than $250 thousand, demand deposits and interest bearing demand deposits represented approximately 92.68% of total deposits.

Borrowings.  Total borrowing balances decreased 34.45% from $122.2 million at December 31, 2019 to $80.1 million at June 30, 2020.  During the six month period ended June 30, 2020 the Company was able to repay a net amount of $75.0 million in short-term FHLB advances as a result of the use of additional brokered time deposits.  The use of brokered time deposits also had a positive impact on the overall cost of funds due to lower interest rates.  While short term borrowings decreased by $73.7 million since December 31, 2019, long term borrowings increased $31.6 million during that same period ended June 30, 2020.  The Bank was able to lock in long term advances from the Federal Home Loan Bank at lower interest rates.

Capital Resources.  Total stockholders’ equity increased $32.0 million, or 10.71%, during the six month period ended June 30, 2020.  The increase in equity is due primarily to an increase in common stock due to the acquisition of Maple Leaf and an increase in other comprehensive income as a result of positive changes in the value of available for sale securities and the net income addition to retained earnings less the amount of dividends paid.  Shareholders received $0.11 per share in cash dividends in the first and second quarters of 2020.  The increased dividends to $0.11 is a 10.00% increase over the $0.10 paid in the last two quarters of 2019.  Book value per share increased from $10.82 per share at December 31, 2019 to $11.76 per share at June 30, 2020.  The Company’s tangible book value, which is a non-GAAP measure, per share also increased, from $9.28 per share at December 31, 2019 to $10.03 per share at June 30, 2020.  The increases in book value and tangible book value per share were also the result of increases to retaied earnings from profit retention.

53


 

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.  Minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III) were phased in from January 1, 2016 through January 1, 2019.  The Company must hold a capital conservation buffer of 2.5% above adequately capitalized risk-based capital ratios during 2020.  At June 30, 2020 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 12.65%, total risk-based capital ratio stood at 13.92%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 13.10% and 9.71%, respectively, at June 30, 2020.  Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of June 30, 2020.

Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to adopt a simple leverage ratio to measure capital adequacy.  The community bank leverage ratio framework removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that opts into the framework. 

The community bank leverage ratio framework was available for banking organizations to use in their March 31, 2020, Call Report.  The Company has not elected to use the new framework as of June 30, 2020.

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, 2019.  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 2019 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 June 30, 2020, this line of credit totaled $35 million of which the Bank had not borrowed against.  In addition, the Company has two revolving lines of credit with correspondent banks totaling $5.4 million. The outstanding balance at June 30, 2020 was $350 thousand.  Management feels that its liquidity position is adequate and continues to monitor the position on a monthly basis.  As of June 30, 2020, the Bank had outstanding balances with the Federal Home Loan Bank of $67.5 million with additional borrowing capacity of approximately $580.6 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.  

54


 

The primary investing activities of the Company are originating loans and purchasing securities.  During the first six months of 2020, net cash used by investing activities amounted to $168.7 million, compared to $49.2 million used in the same period in 2019.  Loan originations used $157.9 million during the first six months of 2020, mainly due to the PPP loans, compared to the $45.6 million used during the same period in 2019.  Purchases of securities available for sale used $37.4 million for the quarter ended June 30, 2020 compared to $26.2 million during the first six months of 2019.

The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings.  Net cash provided by financing activities amounted to $176.7 million for the period ended June 30, 2020, compared to $40.7 million provided in financing activities for the same period in 2019.  There were large swings in two line items during the six month period ended June 30, 2020 compared to the same period last year; changes in short term borrowings used $48.7 million in the six month period ended June 30, 2020, compared to $153.4 million used during the six month period ended June 30, 2019.  There was also $247.3 million provided by deposits during the six month period ended June 30, 2020 compared to $200.9 million provided during the same period ended June 30, 2019.

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 $412.3 million at June 30, 2020 and $372.4 at December 31, 2019.  Additionally, the Company committed up to $8 million in subscriptions in Small Business Investment Company investment funds.  At June 30, 2020 the Company has invested the full $8 million in these funds.

Recent Market and Regulatory Developments

Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies.  Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system.  

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 uncertain interest rate environment that exists today, the Company’s net interest margin could be under additional pressure should interest rates continue to remain low in 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)

 

June 30, 2020

Result

 

 

December 31, 2019

Result

 

 

ALCO

Guidelines

 

Net Interest Income Change

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

 

-1.4

%

 

 

5.9

%

 

 

-15

%

+200

 

 

-1.1

%

 

 

4.0

%

 

 

-10

%

+100

 

 

-0.7

%

 

 

2.1

%

 

 

-5

%

-100

 

 

-1.1

%

 

 

-4.4

%

 

 

-5

%

Net Present Value Of Equity Change

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

 

21.5

%

 

 

21.6

%

 

 

-20

%

+200

 

 

18.8

%

 

 

19.0

%

 

 

-15

%

+100

 

 

11.5

%

 

 

12.6

%

 

 

-10

%

-100

 

 

-13.9

%

 

 

-19.7

%

 

 

-10

%

 

It should be noted that the change in the net present value of equity exceeded policy when the simulation model assumed a sudden decrease in rates of 100 basis points (1%).  This is primarily due to the positive impact on the fair value of assets not being as great as the negative impact on the fair value of certain liabilities.  Specifically, because core deposits typically bear relatively low interest rates, their fair value would be negatively impacted as the rates could not be adjusted by the full extent of the sudden decrease in rates.  Management will continue to monitor the policy exception and may consider changes to the asset/liability position in the future.  The remaining results of the simulations indicate that interest rate change results fall within internal limits established by the Company at June 30, 2020.  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 June 30, 2020, 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

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business.  Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, although the Company establishes accruals where losses are deemed probable and reasonably estimable.  The Company’s assessment of the current exposure with respect to adverse claims in legal matters could change in the event of the discovery of additional facts in such matters or upon determinations by judges, juries, administrative agencies or other finders of fact that are inconsistent with the Company’s evaluation of claims. Additional disclosures relating to charges accrued during 2019 in connection with certain legal proceedings are included in the Contingencies Note.  It is possible that the ultimate resolution of other matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not known.

Item 1A.

Risk Factors

For a discussion of risk factors related to the Company, refer to Part 1, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The following risk factors should be read in conjunction with those risk factors.

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The outbreak of the recent COVID-19 could adversely affect our business, financial condition and results of operations.

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions.  The spread of a highly infectious or contagious disease, such as COVlD-19, has caused severe disruptions in the U.S. economy, which could in turn disrupt the businesses, activities, and operations of our customers, as well as our business and operations.  Moreover, the COVID-19 outbreak has caused significant disruption in the financial markets both globally and in the United States.  The spread of COVID-19, including the time such outbreak takes to wane and the time it takes our markets to return to normal, may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us.  Although we maintain contingency plans, the spread could also negatively impact the business and operations of third-party service providers who perform critical services for us.  The spread of COVID-19, or another highly infectious or contagious disease, or the failure to contain such spread, could have a material adverse effect to our business, financial condition and results of operations.

Adverse changes in the ability or willingness of our customers to meet their repayment obligations to the Company could adversely impact our liquidity, financial condition and results of operations.

Our business consists mainly of making loans to salaried people or other wage earners who generally depend on their earnings to meet their repayment obligations, and our ability to collect on loans depends on the willingness and repayment ability of our customers. Adverse changes in the ability or willingness of a significant portion of our customers to repay their obligations to the Company, whether due to changes in general economic, political or social conditions, the cost of consumer goods, interest rates, natural disasters, acts of war or terrorism, prolonged public health crisis or a pandemic, such as COVID-19, or other causes, or events affecting our customers such as unemployment, major medical expenses, bankruptcy, divorce or death, could have a material effect on our liquidity, financial condition and results of operations.

 

We maintain an allowance for loan losses in our financial statements at a level considered adequate by Management to absorb probable loan losses inherent in the loan portfolio as of the balance sheet date, based on estimates and assumptions at that date. However, the amount of actual future loan losses we may incur is susceptible to changes in economic, operating and other conditions within our various local markets, which may be beyond our control, and such losses may exceed current estimates. Although Management believes that the Company’s allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot estimate loan losses with certainty, and we cannot provide any assurances that our allowance for loan losses will prove sufficient to cover actual loan losses in the future. Loan losses in excess of our reserves may adversely affect our financial condition and results of operations.

 

In any event, any reduced liquidity could negatively impact our ability to be able to fund loans, or to pay the principal and interest on any of our outstanding debt securities at any time, including when due.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities by the issuer.

On July 30, 2019, the Company announced that its Board of Directors authorized the purchase of up to 1,500,000 shares of its common stock in the open market or in privately negotiated transactions, from time to time and subject to market and other conditions.  This 2019 Repurchase Program supersedes the Company’s prior share repurchase program initially approved in 2012 authorizing the purchase of up to 920,000 shares of common stock.  The 2019 Repurchase Program was suspended by the Company during the six month period ended June 30, 2020.

There were no treasury stock activity under the program during the three month period ended June 30, 2020.

 

Item 3.       Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

57


 

Item 6.

Exhibits

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

 

 

 

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 April 20, 2018).

 

 

3.3

Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 17, 2020).

 

 

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 June 30, 2020, formatted in iXBRL (Inline Extensible Business Reporting Language), filed herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements.

 

 

104

The cover page from the Company’s Quarterly report on Form 10-Q for the quarter ended June 30, 2020, has been formatted in Inline XBRL.

 

58


 

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: August 6, 2020

 

/s/ Kevin J. Helmick

Kevin J. Helmick

President and Chief Executive Officer

Dated: August 6, 2020  

 

/s/ Carl D. Culp

Carl D. Culp

Senior Executive Vice President and Treasurer

 

59