10-Q
Table of Contents

 

 

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 June 30, 2017

or

 

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

For the transition period from                      to                     

Commission File Number 0-14492

 

 

FARMERS & MERCHANTS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

OHIO   34-1469491
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification No.)
307 North Defiance Street, Archbold, Ohio   43502
(Address of principal executive offices)   (Zip Code)

(419) 446-2501

Registrant’s telephone number, including area code

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

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

Indicate the number of shares of each of the issuers’ classes of common stock, as of the latest practicable date:

 

Common Stock, No Par Value

 

4,620,580

Class   Outstanding as of July 26, 2017

 

 

 


Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10Q

FARMERS & MERCHANTS BANCORP, INC.

INDEX

 

Form 10-Q Items

       Page  

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements (Unaudited)   
  Condensed Consolidated Balance Sheets - June 30, 2017 and December 31, 2016      3  
  Condensed Consolidated Statements of Income & Comprehensive Income - Three and Six Months Ended June 30, 2017 and June 30, 2016      4  
  Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2017 and June 30, 2016      5  
  Notes to Condensed Consolidated Financial Statements      6-36  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      37-55  

Item 3.

  Qualitative and Quantitative Disclosures About Market Risk      55-56  

Item 4.

  Controls and Procedures      56  

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      56  

Item 1A.

  Risk Factors      56  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      56  

Item 3.

  Defaults Upon Senior Securities      56  

Item 4.

  Mine Safety Disclosures      57  

Item 5.

  Other Information      57  

Item 6.

  Exhibits      57  

Signatures

     58  

Exhibit 3.2

  Code of Regulations of Farmers & Merchants Bancorp, Inc.      59-63  

Exhibit 31.

  Certifications Under Section 302      64-65  

Exhibit 32.

  Certifications Under Section 906      66-67  

101.INS

  XBRL Instance Document (1)   

101.SCH

  XBRL Taxonomy Extension Scheme Document (1)   

101.CAL

  XBRL Taxonomy Extension Calculation Linkbase Document (1)   

101.DEF

  XBRL Taxonomy Extension Definition Linkbase Document (1)   

101.LAB

  XBRL Taxonomy Extension Label Linkbase Document (1)   

101.PRE

  XBRL Taxonomy Extension Presentation Linkbase Document (1)   

 

(1) Pursuant to Rule 406T of Regulation S-T, the interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

 

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Table of Contents

ITEM 1 FINANCIAL STATEMENTS

FARMERS  & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     (in thousands of dollars)  
     June 30, 2017     December 31, 2016  
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 28,613     $ 27,348  

Federal funds sold

     646       974  
  

 

 

   

 

 

 

Total cash and cash equivalents

     29,259       28,322  

Interest-bearing time deposits

     2,541       1,915  

Securities - available-for-sale

     195,582       218,527  

Other securities, at cost

     3,717       3,717  

Loans held for sale

     1,666       2,055  

Loans, net

     783,980       751,310  

Premises and equipment

     20,942       21,457  

Goodwill

     4,074       4,074  

Mortgage servicing rights

     2,230       2,192  

Other real estate owned

     630       774  

Bank owned life insurance

     14,334       14,376  

Other assets

     7,220       7,176  
  

 

 

   

 

 

 

Total Assets

   $ 1,066,175     $ 1,055,895  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities

    

Deposits

    

Noninterest-bearing

   $ 189,770     $ 186,390  

Interest-bearing

    

NOW accounts

     274,236       230,446  

Savings

     226,505       226,537  

Time

     186,964       198,830  
  

 

 

   

 

 

 

Total deposits

     877,475       842,203  

Federal Funds purchased and securities sold under agreements to repurchase

     40,095       70,324  

Federal Home Loan Bank (FHLB) advances

     10,000       10,000  

Dividend payable

     1,144       1,053  

Accrued expenses and other liabilities

     6,226       6,738  
  

 

 

   

 

 

 

Total liabilities

     934,940       930,318  
  

 

 

   

 

 

 

Commitments and Contingencies

    

Stockholders’ Equity

    

Common stock - No par value 10,000,000 shares authorized; issued and outstanding 5,200,000 shares 6/30/17 and 12/31/16

     12,150       11,947  

Treasury Stock - 579,125 shares 6/30/17, 579,125 shares 12/31/16

     (12,267     (12,267

Retained earnings

     131,734       127,869  

Accumulated other comprehensive loss

     (382     (1,972
  

 

 

   

 

 

 

Total stockholders’ equity

     131,235       125,577  
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 1,066,175     $ 1,055,895  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements.

Note: The December 31, 2016, Condensed Consolidated Balance Sheet has been derived from the audited Consolidated Balance Sheet as of that date.

 

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Table of Contents

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME & COMPREHENSIVE INCOME

(Unaudited)

 

     (in thousands of dollars, except per share data)  
     Three Months Ended     Six Months Ended  
     June 30, 2017     June 30, 2016     June 30, 2017     June 30, 2016  

Interest Income

        

Loans, including fees

   $ 9,120     $ 8,362     $ 17,820     $ 16,368  

Debt securities:

        

U.S. Treasury and government agencies

     623       595       1,265       1,175  

Municipalities

     300       380       615       749  

Dividends

     44       37       86       75  

Federal funds sold

     3       2       3       2  

Other

     34       11       56       22  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     10,124       9,387       19,845       18,391  

Interest Expense

        

Deposits

     1,098       885       2,128       1,739  

Federal funds purchased and securities sold under agreements to repurchase

     118       126       231       231  

Borrowed funds

     37       36       73       73  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,253       1,047       2,432       2,043  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income - Before Provision for Loan Losses

     8,871       8,340       17,413       16,348  

Provision for Loan Losses

     25       339       98       616  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income After Provision For Loan Losses

     8,846       8,001       17,315       15,732  

Noninterest Income

        

Customer service fees

     1,330       1,308       2,811       2,786  

Other service charges and fees

     1,209       999       2,080       1,909  

Net gain on sale of loans

     218       234       419       403  

Net gain on sale of available for sale securities

     16       343       47       456  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,773       2,884       5,357       5,554  

Noninterest Expense

        

Salaries and Wages

     3,137       2,840       6,138       5,680  

Employee benefits

     783       715       1,705       1,577  

Net occupancy expense

     374       346       787       724  

Furniture and equipment

     491       443       963       855  

Data processing

     308       361       619       772  

Franchise taxes

     225       225       450       439  

Net loss on sale of other assets owned

     14       —         14       45  

FDIC Assessment

     82       121       165       242  

Mortgage servicing rights amortization

     97       99       181       188  

Other general and administrative

     1,587       1,507       3,147       3,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating expenses

     7,098       6,657       14,169       13,643  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     4,521       4,228       8,503       7,643  

Income Taxes

     1,298       1,254       2,441       2,188  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     3,223       2,974       6,062       5,455  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Net of Tax):

        

Net unrealized gain on available for sale securities

     2,044       649       2,456       2,594  

Reclassification adjustment for gain on sale of available

     (16     (343     (47     (456
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gain on available for sale securities

     2,028       306       2,409       2,138  

Tax expense

     690       104       819       727  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     1,338       202       1,590       1,411  

Comprehensive Income

   $ 4,561     $ 3,176     $ 7,652     $ 6,866  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share - Basic and Diluted

   $ 0.70     $ 0.65     $ 1.31     $ 1.18  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends Declared

   $ 0.25     $ 0.23     $ 0.48     $ 0.45  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements

 

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Table of Contents

FARMERS & MERCHANTS BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     (in thousands of dollars)  
     Six Months Ended  
     June 30, 2017     June 30, 2016  

Cash Flows from Operating Activities

    

Net income

   $ 6,062     $ 5,455  

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

    

Depreciation

     970       735  

Accretion and amortization of available for sale securities, net

     578       547  

Amortization of servicing rights

     181       188  

Amortization of core deposit intangible

     161       161  

Compensation expense related to stock awards

     224       216  

Provision for loan loss

     98       616  

Gain on sale of loans held for sale

     (419     (403

Originations of loans held for sale

     (30,242     (27,493

Proceeds from sale of loans held for sale

     31,658       27,221  

Loss on sale of other assets owned

     14       45  

Gain on sales of securities available for sale

     (47     (456

Change in other assets and other liabilities, net

     (795     (2,878
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,443       3,954  
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Activity in available-for-sale securities:

    

Maturities, prepayments and calls

     14,647       19,734  

Sales

     13,562       42,744  

Purchases

     (3,387     (42,375

Change in interest-bearing time deposits

     (626     (1,960

Proceeds from sales of other assets owned

     14       6  

Additions to premises and equipment

     (469     (1,449

Loan originations and principal collections, net

     (34,184     (45,721
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,443     (29,021
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Net change in deposits

     35,271       31,507  

Net change in federal funds purchased and securities sold under agreements to repurchase

     (30,228     (2,873

Purchase of Treasury Stock

     —         (194

Cash dividends paid on common stock

     (2,106     (2,012
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,937       26,428  
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     937       1,361  
  

 

 

   

 

 

 

Cash and cash equivalents - Beginning of year

     28,322       22,018  
  

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ 29,259     $ 23,379  
  

 

 

   

 

 

 

Supplemental Information

    

Cash paid during the year for:

    

Interest

   $ 2,436     $ 1,998  
  

 

 

   

 

 

 

Income taxes

   $ 2,302     $ 3,208  
  

 

 

   

 

 

 

Noncash investing activities:

    

Transfer of loans to other real estate owned

   $ —       $ 216  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Unaudited Financial Statements.

 

5


Table of Contents
ITEM 1 NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

 

     NOTE 1 BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10Q and Rule 10-01 of Regulation S-X; accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that are expected for the year ended December 31, 2017. The condensed consolidated balance sheet of the Company as of December 31, 2016, has been derived from the audited consolidated balance sheet of the Company as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.

NOTE 2 ASSET PURCHASES

The Company recognized core deposit intangible assets of $1.09 million with the purchase of the Hicksville office on July 9, 2010. These are being amortized over an estimated remaining economic useful life of the deposits of 7 years on a straight line basis.

An office was purchased on December 13, 2013 in Custar, Ohio. Core deposit intangible assets of $1.17 million were recognized and are being amortized over its remaining economic useful life of the deposits of 7 years on a straight line basis.

The amortization expense for the year ended December 31, 2016 was $323 thousand. Of the $245 thousand to be expensed in 2017, $161 thousand has been expensed for the six months ended June 30, 2017.

 

     (In Thousands)  
     Hicksville      Custar      Total  

2017

   $ 78      $ 167      $ 245  

2018

     —          167        167  

2019

     —          167        167  

2020

     —          161        161  
  

 

 

    

 

 

    

 

 

 
   $ 78      $ 662      $ 740  
  

 

 

    

 

 

    

 

 

 

 

6


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

 

     NOTE 3 SECURITIES

 

     The amortized cost and fair value of securities, with gross unrealized gains and losses at June 30, 2017 and December 31, 2016, follows:

 

     (In Thousands)  
     June 30, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available-for-Sale:

        

U.S. Treasury

   $ 15,824      $ —        $ (107    $ 15,717  

U.S. Government agencies

     79,238        3        (883      78,358  

Mortgage-backed securities

     44,527        182        (475      44,234  

State and local governments

     56,572        847        (146      57,273  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 196,161      $ 1,032      $ (1,611    $ 195,582  
  

 

 

    

 

 

    

 

 

    

 

 

 
     (In Thousands)  
     December 31, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Available-for-Sale:

     

U.S. Treasury

   $ 24,920      $ 1      $ (146    $ 24,775  

U.S. Government agencies

     84,266        3        (1,795      82,474  

Mortgage-backed securities

     49,155        185        (879      48,461  

State and local governments

     63,173        634        (990      62,817  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 221,514      $ 823      $ (3,810    $ 218,527  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities will at times depreciate to an unrealized loss position. The Company utilizes the following criteria to assess whether impairment is other than temporary. No one item by itself will necessarily signal that a security should be recognized as an other than temporary impairment.

 

  1. The fair value of the security has significantly declined from book value.

 

  2. A downgrade has occurred that lowered the credit rating to below investment grade (below Baa3 by Moody and BBB – by Standard and Poors.)

 

  3. Dividends have been reduced or eliminated or scheduled interest payments have not been made.

 

  4. The underwater security has longer than 10 years to maturity and the loss position had existed for more than 3 years.

 

  5. Management does not possess both the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

If the impairment is judged to be other than temporary, the cost basis of the individual security shall be written down to fair value, thereby establishing a new cost basis. The new cost basis shall not be changed for subsequent recoveries in fair value. The amount of the write down shall be included in current earnings as a realized loss. The recovery in fair value, if any, shall be recognized in earnings when the security is sold. The table below is presented by category of security and length of time in a continuous loss position. The Company currently does not hold any securities with other than temporary impairment.

 

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

NOTE 3 SECURITIES (Continued)

 

Information pertaining to securities with gross unrealized losses at June 30, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

 

     (In Thousands)  
     June 30, 2017  
     Less Than Twelve Months      Twelve Months & Over  
     Gross Unrealized
Losses
     Fair
Value
     Gross Unrealized
Losses
     Fair
Value
 

U.S. Treasury

   $ (107    $ 15,717      $ —        $ —    

U.S. Government agencies

     (883      67,986        —          —    

Mortgage-backed securities

     (475      34,070        —          —    

State and local governments

     (136      15,683        (10      486  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ (1,601    $ 133,456      $ (10    $ 486  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     (In Thousands)  
     December 31, 2016  
     Less Than Twelve Months      Twelve Months & Over  
     Gross Unrealized
Losses
     Fair
Value
     Gross Unrealized
Losses
     Fair
Value
 

U.S. Treasury

   $ (146    $ 15,745      $ —        $ —    

U.S. Government agencies

     (1,795      77,471        —          —    

Mortgage-backed securities

     (879      36,474        —          —    

State and local governments

     (983      37,540        (7      526  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ (3,803    $ 167,230      $ (7    $ 526  
  

 

 

    

 

 

    

 

 

    

 

 

 

Unrealized losses on securities have not been recognized into income because the issuers’ bonds are of high credit quality, values have only been impacted by rate changes, and the Company has the intent and ability to hold the securities for the foreseeable future. Additionally, the decline in value is primarily due to changes in interest rates since the securities were purchased. The fair value is expected to recover as the bonds approach the maturity date.

Below are the gross realized gains and losses for the three and six months ended June 30.

 

     Three Months
(In Thousands)
     Six Months
(In Thousands)
 
     2017      2016      2017      2016  

Gross realized gains

   $ 27      $ 344      $ 58      $ 467  

Gross realized losses

     (11      (1      (11      (11
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains

   $ 16      $ 343      $ 47      $ 456  
  

 

 

    

 

 

    

 

 

    

 

 

 

Tax expense related to net realized gain

   $ 5      $ 117      $ 16      $ 155  
  

 

 

    

 

 

    

 

 

    

 

 

 

The net realized gains on sales and related tax expense is a reclassification out of accumulated other comprehensive income (loss). The net realized gain is included in net gain on sale of available-for-sale securities and the related tax expense is included in tax expense in the condensed consolidated statements of income and comprehensive income.

 

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

 

     NOTE 3 SECURITIES (Continued)

 

The amortized cost and fair value of debt securities at June 30, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     (In Thousands)  
     Amortized
Cost
     Fair Value  

One year or less

   $ 7,761      $ 7,759  

After one year through five years

     79,151        79,161  

After five years through ten years

     60,908        60,635  

After ten years

     3,814        3,793  
  

 

 

    

 

 

 

Total

   $ 151,634      $ 151,348  

Mortgage-backed securities

     44,527        44,234  
  

 

 

    

 

 

 

Total

   $ 196,161      $ 195,582  
  

 

 

    

 

 

 

Investments with a carrying value of $86.7 million and $129.4 million at June 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and securities sold under repurchase agreements.

Other securities include Federal Home Loan Bank of Cincinnati and Farmer Mac stock as of June 30, 2017 and December 31, 2016.

 

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

 

     NOTE 4 LOANS

Loan balances as of June 30, 2017 and December 31, 2016:

 

     (In Thousands)  

Loans:

   June 30, 2017      December 31, 2016  

Consumer Real Estate

   $ 84,307      $ 86,234  

Agricultural Real Estate

     64,035        62,375  

Agricultural

     83,614        84,563  

Commercial Real Estate

     394,649        377,481  

Commercial and Industrial

     122,950        109,256  

Consumer

     35,394        33,179  

Industrial Development Bonds

     6,617        5,732  
  

 

 

    

 

 

 
     791,566        758,820  

Less: Net deferred loan fees and costs

     (728      (726
  

 

 

    

 

 

 
     790,838        758,094  

Less: Allowance for loan losses

     (6,858      (6,784
  

 

 

    

 

 

 

Loans - Net

   $ 783,980      $ 751,310  
  

 

 

    

 

 

 

 

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

NOTE 4 LOANS (Continued)

 

The following is a maturity schedule by major category of loans as of June 30, 2017:

 

     (In Thousands)  
     Within
One Year
     After One
Year Within
Five Years
     After
Five Years
 

Consumer Real Estate

   $ 2,169      $ 13,628      $ 68,510  

Agricultural Real Estate

     615        4,407        59,013  

Agricultural

     48,450        26,309        8,855  

Commercial Real Estate

     9,486        119,017        266,146  

Commercial and Industrial

     65,799        36,081        21,070  

Consumer

     5,492        22,207        7,695  

Industrial Development Bonds

     832        85        5,700  

The distribution of fixed rate loans and variable rate loans by major loan category is as follows as of June 30, 2017:

 

     (In Thousands)  
     Fixed      Variable  
     Rate      Rate  

Consumer Real Estate

   $ 46,530      $ 37,777  

Agricultural Real Estate

     46,550        17,485  

Agricultural

     32,046        51,568  

Commercial Real Estate

     271,646        123,003  

Commercial and Industrial

     49,881        73,069  

Consumer

     31,071        4,323  

Industrial Development Bonds

     6,617        —    

As of June 30, 2017 and December 31, 2016 one to four family residential mortgage loans amounting to $17.7 and $17.9 million, respectively, have been pledged as security for future loans and existing loans the Bank has received from the Federal Home Loan Bank.

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

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10


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

NOTE 4 LOANS (Continued)

 

The following table represents the contractual aging of the recorded investment (in thousands) in past due loans by portfolio classification of loans as of June 30, 2017 and December 31, 2016, net of deferred loan fees and costs:

 

June 30, 2017    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total
Past Due
     Current      Total
Financing
Receivables
     Recorded
Investment >
90 Days and
Accruing
 

Consumer Real Estate

   $ 424      $ 0      $ 419      $ 843      $ 83,060      $ 83,903      $ —    

Agricultural Real Estate

     —          —          101        101        63,902        64,003        —    

Agricultural

     —          —          —          —          83,771        83,771        —    

Commercial Real Estate

     60        —          —          60        393,991        394,051        —    

Commercial and Industrial

     —          —          —          —          129,675        129,675        —    

Consumer

     26        —          27        53        35,382        35,435        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 510      $ 0      $ 547      $ 1,057      $ 789,781      $ 790,838      $ 0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2016    30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total
Past Due
     Current      Total
Financing
Receivables
     Recorded
Investment >
90 Days and
Accruing
 

Consumer Real Estate

   $ 882      $ 15      $ 507      $ 1,404      $ 84,469      $ 85,873      $ —    

Agricultural Real Estate

     12        —          132        144        62,192        62,336        —    

Agricultural

     101        —          —          101        84,591        84,692        —    

Commercial Real Estate

     60        —          —          60        376,827        376,887        —    

Commercial and Industrial

     —          —          —          —          115,093        115,093        —    

Consumer

     29        6        —          35        33,178        33,213        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,084      $ 21      $ 639      $ 1,744      $ 756,350      $ 758,094      $ 0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

11


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

NOTE 4 LOANS (Continued)

 

The following table presents the recorded investment in nonaccrual loans by class of loans as of June 30, 2017 and December 31, 2016:

 

     (In Thousands)  
     June 30,      December 31,  
     2017      2016  

Consumer Real Estate

   $ 1,069      $ 1,091  

Agricultural Real Estate

     101        132  

Agricultural

     —          —    

Commercial Real Estate

     —          —    

Commercial & Industrial

     153        161  

Consumer

     42        —    
  

 

 

    

 

 

 

Total

   $ 1,365      $ 1,384  
  

 

 

    

 

 

 

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

Commercial Real Estate: Construction, purchase, and refinance of business purpose real estate. Risks include potential construction delays and overruns, vacancies, collateral value subject to market value fluctuations, interest rate, market demands, borrower’s ability to repay in orderly fashion, and others. The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customer’s ability to repay in a changing rate environment before granting loan approval.

Agricultural Real Estate: Purchase of farm real estate or for permanent improvements to the farm real estate. Cash flow from the farm operation is the repayment source and is therefore subject to the financial success of the farm operation.

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

Commercial and Industrial: Loans to proprietorships, partnerships, or corporations to provide temporary working capital and seasonal loans as well as long term loans for capital asset acquisition. Risks include adequacy of cash flow, reasonableness of projections, financial leverage, economic trends, management ability and estimated capital expenditures during the fiscal year. The Bank does employ stress testing on higher balance loans to mitigate risk by ensuring the customer’s ability to repay in a changing rate environment before granting loan approval.

Agricultural: Loans for the production and housing of crops, fruits, vegetables, and livestock or to fund the purchase or re-finance of capital assets such as machinery and equipment and livestock. The production of crops and livestock is especially vulnerable to commodity prices and weather. The vulnerability to commodity prices is offset by the farmer’s ability to hedge their position by the use of the future contracts. The risk related to weather is often mitigated by requiring federal crop insurance.

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

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

 

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

NOTE 4 LOANS (Continued)

 

The Bank uses a nine tier risk rating system to grade its loans. The grade of a loan may change during the life of the loan.

The risk ratings are described as follows.

 

  1. Zero (0) Unclassified. Any loan which has not been assigned a classification.

 

  2. One (1) Excellent. Credit to premier customers having the highest credit rating based on an extremely strong financial condition, which compares favorably with industry standards (upper quartile of Risk Management Association ratios). Financial statements indicate a sound earnings and financial ratio trend for several years with satisfactory profit margins and excellent liquidity exhibited. Prime credits may also be borrowers with loans fully secured by highly liquid collateral such as traded stocks, bonds, certificates of deposit, savings account, etc. No credit or collateral exceptions exist and the loan adheres to the Bank’s loan policy in every respect. Financing alternatives would be readily available and would qualify for unsecured credit. This grade is summarized by high liquidity, minimum risk, strong ratios, and low handling costs.

 

  3. Two (2) Good. Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Loan supported by financial statements containing strong balance sheets, generally with a leverage position less than 1.50, and a history of profitability. Probability of serious financial deterioration is unlikely. Possessing a sound repayment source (and a secondary source), which would allow repayment in a reasonable period of time. Individual loans backed by liquid personal assets, established history and unquestionable character.

 

  4. Three (3) Satisfactory. Satisfactory loans of average or slightly above average risk – having some deficiency or vulnerability to changing economic conditions, but still fully collectible. Projects should normally demonstrate acceptable debt service coverage. Generally, customers should have a leverage position less than 2.00. May be some weakness but with offsetting features of other support readily available. Loans that are meeting the terms of repayment.

Loans may be graded 3 when there is no recent information on which to base a current risk evaluation and the following conditions apply:

At inception, the loan was properly underwritten and did not possess an unwarranted level of credit risk:

 

  a. At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss;

 

  b. The loan exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance;

 

  c. During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the business is in an industry which is known to be experiencing problems. If any of the credit weaknesses is observed, a lower risk grade is warranted.

 

  5. Four (4) Satisfactory / Monitored. A “4” (Satisfactory/Monitored) risk grade may be established for a loan considered satisfactory but which is of average credit risk due to financial weakness or uncertainty. The loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in Satisfactory/Monitored classification is considered acceptable and within normal underwriting guidelines, so long as the loan is given management supervision.

 

  6. Five (5) Special Mention. Loans that possess some credit deficiency or potential weakness which deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future. The key distinctions of a 5 (Special Mention) classification are that (1) it is indicative of an unwarranted level of risk, and (2) weaknesses are considered “potential”, versus “defined”, impairments to the primary source of loan repayment and collateral.

 

  7. Six (6) Substandard. One or more of the following characteristics may be exhibited in loans classified substandard:

 

  a. Loans, which possess a defined credit weakness and the likelihood that a loan will be paid from the primary source, are uncertain. Financial deterioration is underway and very close attention is warranted to ensure that the loan is collected without loss.

 

  b. Loans are inadequately protected by the current net worth and paying capacity of the borrower.

 

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

NOTE 4 LOANS (Continued)

 

  c. The primary source of repayment is weakened, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees.

 

  d. Loans are characterized by the distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

 

  e. Unusual courses of action are needed to maintain a high probability of repayment.

 

  f. The borrower is not generating enough cash flow to repay loan principal; however, continues to make interest payments.

 

  g. The lender is forced into a subordinate position or unsecured collateral position due to flaws in documentation.

 

  h. Loans have been restructured so that payment schedules, terms and collateral represent concessions to the borrower when compared to the normal loan terms.

 

  i. The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

 

  j. There is significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

 

  8. Seven (7) Doubtful. One or more of the following characteristics may be exhibited in loans classified Doubtful:

 

  a. Loans have all of the weaknesses of those classified as Substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.

 

  b. The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

 

  c. The possibility of loss is high, but, because of certain important pending factors which may strengthen the loan, loss classification is deferred until its exact status is known. A Doubtful classification is established deferring the realization of the loss.

 

  9. Eight (8) Loss. Loans are considered uncollectable and of such little value that continuing to carry them as assets on the institution’s financial statements is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

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14


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

NOTE 4 LOANS (Continued)

 

The following table represents the risk category of loans by portfolio class, net of deferred fees and costs, based on the most recent analysis performed as of June 30, 2017 and December 31, 2016:

 

     (In Thousands)  
     Agricultural
Real Estate
     Agricultural      Commercial
Real Estate
     Commercial
and Industrial
     Industrial
Development
Bonds
 

June 30, 2017

              

1-2

   $ 3,610      $ 5,329      $ 817      $ 9,675      $ —    

3

     15,979        29,918        25,203        16,226        3,594  

4

     42,780        47,871        353,823        95,667        3,023  

5

     1,411        492        7,928        800        —    

6

     223        161        6,280        576        —    

7

     —          —          —          114        —    

8

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 64,003      $ 83,771      $ 394,051      $ 123,058      $ 6,617  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Agricultural
Real Estate
     Agricultural      Commercial
Real Estate
     Commercial
and Industrial
     Industrial
Development
Bonds
 

December 31, 2016

              

1-2

   $ 4,399      $ 7,334      $ 677      $ 10,060      $ —    

3

     16,660        31,397        27,858        14,064        2,640  

4

     39,808        44,560        333,523        83,100        3,092  

5

     1,209        1,234        8,321        1,379        —    

6

     260        167        6,508        641        —    

7

     —          —          —          117        —    

8

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 62,336      $ 84,692      $ 376,887      $ 109,361      $ 5,732  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

NOTE 4 LOANS (Continued)

 

For consumer residential real estate, and other, the Company also evaluates credit quality based on the aging status of the loan, as was previously stated, and by payment activity. The following tables present the recorded investment in those classes based on payment activity and assigned risk grading as of June 30, 2017 and December 31, 2016.

 

     (In Thousands)  
     Consumer      Consumer  
     Real Estate      Real Estate  
     June 30,      December 31,  
     2017      2016  

Grade

     

Pass

   $ 83,589      $ 85,322  

Special Mention (5)

     —          25  

Substandard (6)

     229        368  

Doubtful (7)

     85        158  
  

 

 

    

 

 

 

Total

   $ 83,903      $ 85,873  
  

 

 

    

 

 

 

 

     (In Thousands)  
     Consumer - Credit      Consumer - Other  
     June 30,      December 31,      June 30,      December 31,  
     2017      2016      2017      2016  

Performing

   $ 3,797      $ 4,061      $ 31,621      $ 29,120  

Nonperforming

     —          —          17        32  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,797      $ 4,061      $ 31,638      $ 29,152  
  

 

 

    

 

 

    

 

 

    

 

 

 

Information about impaired loans as of June 30, 2017, December 31, 2016 and June 30, 2016 are as follows:

 

     (In Thousands)  
     June 30, 2017      December 31, 2016      June 30, 2016  

Impaired loans without a valuation allowance

   $ 1,024      $ 1,141      $ 997  

Impaired loans with a valuation allowance

     691        711        622  
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 1,715      $ 1,852      $ 1,619  
  

 

 

    

 

 

    

 

 

 

Valuation allowance related to impaired loans

   $ 115      $ 135      $ 217  
  

 

 

    

 

 

    

 

 

 

Total non-accrual loans

   $ 1,365      $ 1,384      $ 1,528  
  

 

 

    

 

 

    

 

 

 

Total loans past-due ninety days or more and still accruing

   $ —        $ —        $ —    

Quarter ended average investment in impaired loans

   $ 1,744      $ 1,684      $ 1,899  

Year to date average investment in impaired loans

   $ 1,789      $ 1,802      $ 1,995  

No additional funds are committed to be advanced in connection with impaired loans.

 

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

NOTE 4 LOANS (Continued)

 

The Bank had approximately $546 thousand of its impaired loans classified as troubled debt restructured (TDR) as of June 30, 2017, $557 thousand as of December 31, 2016 and $656 thousand as of June 30, 2016. During the year-to-date 2017, there were no new loans considered TDR.

The following table represents three and six months ended June 30, 2017.

 

          Pre-     Post-                 Pre-     Post-  
Three Months   Number of     Modification     Modification     Six Months     Number of     Modification     Modification  
June 30, 2017   Contracts     Outstanding     Outstanding     June 30, 2017     Contracts     Outstanding     Outstanding  
    Modified in the     Recorded     Recorded           Modified in the     Recorded     Recorded  

Troubled Debt Restructurings

  Last 3 Months     Investment     Investment     Troubled Debt Restructurings     Last 6 Months     Investment     Investment  
    —         —         —           —       $ —       $ —    

The following table represents three and six months ended June 30, 2016.

 

          Pre-     Post-                 Pre-     Post-  
Three Months   Number of     Modification     Modification     Six Months     Number of     Modification     Modification  
June 30, 2016   Contracts     Outstanding     Outstanding     June 30, 2016     Contracts     Outstanding     Outstanding  
(in thousands)   Modified in the     Recorded     Recorded     (in thousands)     Modified in the     Recorded     Recorded  

Troubled Debt Restructurings

  Last 3 Months     Investment     Investment     Troubled Debt Restructurings     Last 6 Months     Investment     Investment  

Consumer Real Estate

    —         —         —         Consumer Real Estate       1     $ 138     $ 138  

For the three and six month period ended June 30, 2017 and 2016, there were no TDRs that subsequently defaulted after modification.

For the majority of the Bank’s impaired loans, the Bank will apply the fair value of collateral or use a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine fair value of collateral, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained. Until such time that updated appraisals are received, the Bank may discount the collateral value used.

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge-off in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial and agricultural credits are charged down at 120 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-off may be realized as further unsecured positions are recognized.

 

17


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

NOTE 4 LOANS (Continued)

 

The following tables present loans individually evaluated for impairment by class of loans for three months ended June 30, 2017 and June 30, 2016.

 

     (In Thousands)  
                                        QTD  
                          QTD      QTD      Interest  
Three Months Ended June 30, 2017           Unpaid             Average      Interest      Income  
     Recorded      Principal      Related      Recorded      Income      Recognized  
     Investment      Balance      Allowance      Investment      Recognized      Cash Basis  

With no related allowance recorded:

                 

Consumer Real Estate

   $ 923      $ 923      $ —        $ 948      $ 8      $ 6  

Agricultural Real Estate

     101        101        —          101        —          —    

Agricultural

     —          —          —          —          —          —    

Commercial Real Estate

     —          —          —          —          —          —    

Commercial and Industrial

     —          —          —          —          —          —    

Consumer

     —          —          —          —          —          —    

With a specific allowance recorded:

                 

Consumer Real Estate

     85        85        25        87        —          —    

Agricultural Real Estate

     —          —          —          —          —          —    

Agricultural

     —          —          —          —          —          —    

Commercial Real Estate

     492        492        57        493        7        —    

Commercial and Industrial

     114        114        33        115        —          —    

Consumer

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

                 

Consumer Real Estate

   $ 1,008      $ 1,008      $ 25      $ 1,035      $ 8      $ 6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural Real Estate

   $ 101      $ 101      $ —        $ 101      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural

   $ —        $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Real Estate

   $ 492      $ 492      $ 57      $ 493      $ 7      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and Industrial

   $ 114      $ 114      $ 33      $ 115      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ —        $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


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

NOTE 4 LOANS (Continued)

 

     (In Thousands)  
                                        QTD  
                          QTD      QTD      Interest  
Three Months Ended June 30, 2016           Unpaid             Average      Interest      Income  
     Recorded      Principal      Related      Recorded      Income      Recognized  
     Investment      Balance      Allowance      Investment      Recognized      Cash Basis  

With no related allowance recorded:

                 

Consumer Real Estate

   $ 40      $ 40      $ —        $ 25      $ —        $ —    

Agricultural Real Estate

     162        162        —          162        —          —    

Agricultural

     —          —          —          —          —          —    

Commercial Real Estate

     346        346        —          346        6        6  

Commercial and Industrial

     449        449        —          450        6        —    

Consumer

     —          —          —          —          —          —    

With a specific allowance recorded:

                 

Consumer Real Estate

     414        414        61        478        7        6  

Agricultural Real Estate

     —          —          —          —          —          —    

Agricultural

     —          —          —          —          —          —    

Commercial Real Estate

     90        90        90        311        —          —    

Commercial and Industrial

     118        118        66        127        —          —    

Consumer

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

                 

Consumer Real Estate

   $ 454      $ 454      $ 61      $ 503      $ 7      $ 6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural Real Estate

   $ 162      $ 162      $ —        $ 162      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural

   $ —        $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Real Estate

   $ 436      $ 436      $ 90      $ 657      $ 6      $ 6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and Industrial

   $ 567      $ 567      $ 66      $ 577      $ 6      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ —        $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


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

NOTE 4 LOANS (Continued)

 

The following tables present loans individually evaluated for impairment by class of loans for six months ended June 30, 2017 and June 30, 2016.

 

     (In Thousands)  
Six Months Ended June 30, 2017    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     YTD
Average
Recorded
Investment
     YTD
Interest
Income
Recognized
     YTD
Interest
Income
Recognized
Cash Basis
 

With no related allowance recorded:

                 

Consumer Real Estate

   $ 923      $ 923      $ —        $ 976      $ 16      $ 12  

Agricultural Real Estate

     101        101        —          111        —          —    

Agricultural

     —          —          —          —          —          —    

Commercial Real Estate

     —          —          —          —          —          —    

Commercial and Industrial

     —          —          —          —          —          —    

Consumer

     —          —          —          —          —          —    

With a specific allowance recorded:

                 

Consumer Real Estate

     85        85        25        90        —          —    

Agricultural Real Estate

     —          —          —          —          —          —    

Agricultural

     —          —          —          —          —          —    

Commercial Real Estate

     492        492        57        496        13        —    

Commercial and Industrial

     114        114        33        116        —          —    

Consumer

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

                 

Consumer Real Estate

   $ 1,008      $ 1,008      $ 25      $ 1,066      $ 16      $ 12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural Real Estate

   $ 101      $ 101      $ —        $ 111      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural

   $ —        $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Real Estate

   $ 492      $ 492      $ 57      $ 496      $ 13      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and Industrial

   $ 114      $ 114      $ 33      $ 116      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ —        $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


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

NOTE 4 LOANS (Continued)

 

     (In Thousands)  
Six Months Ended June 30, 2016    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     YTD
Average
Recorded
Investment
     YTD
Interest
Income
Recognized
     YTD
Interest
Income
Recognized
Cash Basis
 

With no related allowance recorded:

                 

Consumer Real Estate

   $ 40      $ 40      $ —        $ 91      $ —        $ —    

Agricultural Real Estate

     162        162        —          162        1        —    

Agricultural

     —          —          —          —          —          —    

Commercial Real Estate

     346        346        —          378        14        13  

Commercial and Industrial

     449        449        —          452        12        —    

Consumer

     —          —          —          —          —          —    

With a specific allowance recorded:

                 

Consumer Real Estate

     414        414        61        392        11        9  

Agricultural Real Estate

     —          —          —          —          —          —    

Agricultural

     —          —          —          —          —          —    

Commercial Real Estate

     90        90        90        366        —          —    

Commercial and Industrial

     118        118        66        154        —          —    

Consumer

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals:

                 

Consumer Real Estate

   $ 454      $ 454      $ 61      $ 483      $ 11      $ 9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural Real Estate

   $ 162      $ 162      $ —        $ 162      $ 1      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural

   $ —        $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial Real Estate

   $ 436      $ 436      $ 90      $ 744      $ 14      $ 13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial and Industrial

   $ 567      $ 567      $ 66      $ 606      $ 12      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

   $ —        $ —        $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2017, the Company had $630 thousand of foreclosed residential real estate property obtained by physical possession and $36 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process according to local jurisdictions. As of June 30, 2016, the Company had $673 thousand of foreclosed residential real estate property obtained by physical possession and $512 thousand of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process according to local jurisdictions.

 

21


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

NOTE 4 LOANS (Continued)

 

The Allowance for Loan and Lease Losses (ALLL) has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense. The following tables summarize the activities in the allowance for credit losses.

 

     (In Thousands)  
     Six Months Ended      Twelve Months Ended  
     June 30, 2017      December 31, 2016  

Allowance for Loan & Lease Losses

     

Balance at beginning of year

   $ 6,784      $ 6,057  

Provision for loan loss

     98        1,121  

Loans charged off

     (97      (550

Recoveries

     73        156  
  

 

 

    

 

 

 

Allowance for Loan & Lease Losses

     6,858        6,784  
  

 

 

    

 

 

 

Allowance for Unfunded Loan Commitments & Letters of Credit

   $ 219      $ 217  
  

 

 

    

 

 

 

Total Allowance for Credit Losses

   $ 7,077      $ 7,001  
  

 

 

    

 

 

 

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

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

[Remainder of this page intentionally left blank]

 

22


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

NOTE 4 LOANS (Continued)

 

The following table breaks down the activity within ACL for each loan portfolio classification and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs.

Additional analysis, presented in thousands, related to the allowance for credit losses for three months ended June 30, 2017 and June 30, 2016 is as follows:

 

    Consumer
Real Estate
    Agricultural
Real Estate
    Agricultural     Commercial
Real Estate
    Commercial
and Industrial
    Consumer     Unfunded
Loan
Commitment
& Letters of
Credit
    Unallocated     Total  

Three Months Ended June 30, 2017

                 

ALLOWANCE FOR CREDIT LOSSES:

                 

Beginning balance

  $ 277     $ 244     $ 634     $ 3,008     $ 1,299     $ 397     $ 219     $ 991     $ 7,069  

Charge Offs

    —         —         —         —         —         (53     —         —         (53

Recoveries

    2       —         1       5       3       25       —         —         36  

Provision (Credit)

    (29     9       (39     63       50       38       —         (67     25  

Other Non-interest expense related to unfunded

    —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 250     $ 253     $ 596     $ 3,076     $ 1,352     $ 407     $ 219     $ 924     $ 7,077  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 25     $ —       $ —       $ 57     $ 33     $ —       $ —       $ —       $ 115  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 225     $ 253     $ 596     $ 3,019     $ 1,319     $ 407     $ 219     $ 924     $ 6,962  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ —         —         —         —         —         —         —         —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING RECEIVABLES:

                 

Ending balance

  $ 83,903     $ 64,003     $ 83,771     $ 394,051     $ 129,675     $ 35,435     $ —       $ —       $ 790,838  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 1,008     $ 101     $ —       $ 492     $ 114     $ —       $ —       $ —       $ 1,715  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 82,895     $ 63,902     $ 83,771     $ 393,559     $ 129,561     $ 35,435     $ —       $ —       $ 789,123  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 196     $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ 196  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


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

NOTE 4 LOANS (Continued)

 

    Consumer
Real Estate
    Agricultural
Real Estate
    Agricultural     Commercial
Real Estate
    Commercial
and Industrial
    Consumer     Unfunded
Loan
Commitment
& Letters of
Credit
    Unallocated     Total  

Three Months Ended June 30, 2016

                 

ALLOWANCE FOR CREDIT LOSSES:

                 

Beginning balance

  $ 457     $ 272     $ 548     $ 2,678     $ 1,251     $ 335     $ 220     $ 744     $ 6,505  

Charge Offs

    (63     —         (18     —         —         (93     —         —         (174

Recoveries

    19       —         1       3       3       17       —         —         43  

Provision (Credit)

    —         (43     60       36       (39     106       —         219       339  

Other Non-interest expense related to unfunded

    —         —         —         —         —         —         (1     —         (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 413     $ 229     $ 591     $ 2,717     $ 1,215     $ 365     $ 219     $ 963     $ 6,712  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 61     $ —       $ —       $ 90     $ 66     $ —       $ —       $ —       $ 217  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 352     $ 229     $ 591     $ 2,627     $ 1,149     $ 365     $ 219     $ 963     $ 6,495  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 1       —         —         —         —         —         —         —       $ 1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING RECEIVABLES:

                 

Ending balance

  $ 88,165     $ 60,203     $ 83,433     $ 357,243     $ 110,386     $ 30,485     $ —       $ —       $ 729,915  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 454     $ 162     $ —       $ 436     $ 567     $ —       $ —       $ —       $ 1,619  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 87,711     $ 60,041     $ 83,433     $ 356,807     $ 109,819     $ 30,485     $ —       $ —       $ 728,296  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 410     $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ 410  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


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

NOTE 4 LOANS (Continued)

 

Additional analysis, presented in thousands, related to the allowance for credit losses for six months ended June 30, 2017 and June 30, 2016 is as follows:

 

    Consumer
Real Estate
    Agricultural
Real Estate
    Agricultural     Commercial
Real Estate
    Commercial
and Industrial
    Consumer     Unfunded
Loan
Commitment
& Letters of
Credit
    Unallocated     Total  

Six Months Ended June 30, 2017

                 

ALLOWANCE FOR CREDIT LOSSES:

                 

Beginning balance

  $ 316     $ 241     $ 616     $ 3,250     $ 1,318     $ 394     $ 217     $ 649     $ 7,001  

Charge Offs

    —         —         —         —         —         (97     —         —         (97

Recoveries

    13       —         2       7       6       45       —         —         73  

Provision (Credit)

    (79     12       (22     (181     28       65       —         275       98  

Other Non-interest expense related to unfunded

    —         —         —         —         —         —         2       —         2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 250     $ 253     $ 596     $ 3,076     $ 1,352     $ 407     $ 219     $ 924     $ 7,077  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 25     $ —       $ —       $ 57     $ 33     $ —       $ —       $ —       $ 115  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 225     $ 253     $ 596     $ 3,019     $ 1,319     $ 407     $ 219     $ 924     $ 6,962  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ —         —         —         —         —         —         —         —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING RECEIVABLES:

                 

Ending balance

  $ 83,903     $ 64,003     $ 83,771     $ 394,051     $ 129,675     $ 35,435     $ —       $ —       $ 790,838  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 1,008     $ 101     $ —       $ 492     $ 114     $ —       $ —       $ —       $ 1,715  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 82,895     $ 63,902     $ 83,771     $ 393,559     $ 129,561     $ 35,435     $ —       $ —       $ 789,123  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 196     $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ 196  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


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

NOTE 4 LOANS (Continued)

 

    Consumer
Real Estate
    Agricultural
Real Estate
    Agricultural     Commercial
Real Estate
    Commercial
and Industrial
    Consumer     Unfunded
Loan
Commitment
& Letters of
Credit
    Unallocated     Total  

Six Months Ended June 30, 2016

                 

ALLOWANCE FOR CREDIT LOSSES:

                 

Beginning balance

  $ 339     $ 211     $ 582     $ 2,516     $ 1,228     $ 337     $ 208     $ 844     $ 6,265  

Charge Offs

    (64     —         (18     (3     (20     (153     —         —         (258

Recoveries

    21       —         5       5       5       42       —         —         78  

Provision (Credit)

    117       18       22       199       2       139       —         119       616  

Other Non-interest expense related to unfunded

    —         —         —         —         —         —         11       —         11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 413     $ 229     $ 591     $ 2,717     $ 1,215     $ 365     $ 219     $ 963     $ 6,712  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 61     $ —       $ —       $ 90     $ 66     $ —       $ —       $ —       $ 217  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 352     $ 229     $ 591     $ 2,627     $ 1,149     $ 365     $ 219     $ 963     $ 6,495  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 1       —         —         —         —         —         —         —       $ 1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING RECEIVABLES:

                 

Ending balance

  $ 88,165     $ 60,203     $ 83,433     $ 357,243     $ 110,386     $ 30,485     $ —       $ —       $ 729,915  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

  $ 454     $ 162     $ —       $ 436     $ 567     $ —       $ —       $ —       $ 1,619  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 87,711     $ 60,041     $ 83,433     $ 356,807     $ 109,819     $ 30,485     $ —       $ —       $ 728,296  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 410     $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ 410  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents
ITEM 1 NOTES TO CONDESED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (Continued)

 

 

NOTE 5 EARNINGS PER SHARE

Basic earnings per share are calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to performance based measures. Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Application of the two-class method for participating securities results a more dilutive basic earnings per share as the participating securities are allocated the same amount of income as if they are outstanding for purposes of basic earnings per share. There is no additional potential dilution in calculating diluted earnings per share, therefore basic and diluted earnings per share are the same amounts. Other than the restricted stock plan, the Company has no other stock based compensation plans.

 

     In Thousands  
     Three Months Ended      Year to Date Ended  
     June 30,      June 30,      June 30,      June 30,  
     2017      2016      2017      2016  

Earnings per share

           

Net income

   $ 3,223      $ 2,974      $ 6,062      $ 5,455  

Less: distributed earnings allocated to participating securities

     (11      (9      (21      (17

Less: undistributed earnings allocated to participating securities

     (19      (15      (36      (28
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings available to common shareholders

   $ 3,193      $ 2,950      $ 6,005      $ 5,410  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding including participating securities

     4,620,875        4,605,534        4,620,875        4,607,380  

Less: average unvested restricted shares

     (43,150      (37,905      (43,150      (38,287
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     4,577,725        4,567,629        4,577,725        4,569,093  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings and diluted per share

   $ 0.70      $ 0.65      $ 1.31      $ 1.18  
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 6 FAIR VALUE OF INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values of financial instruments are management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.

The following assumptions and methods were used in estimating the fair value for financial instruments:

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash, cash equivalents and federal funds sold approximate their fair values. Also included in this line item are the carrying amounts of interest-bearing deposits maturing within ninety days which approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

 

27


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

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

Interest Bearing Time Deposits

Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Securities – Available-for-sale

Fair values for securities, excluding Federal Home Loan Bank and Farmer Mac stock, are based on quoted market price, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Other Securities

The carrying value of Federal Home Loan Bank and Farmer Mac stock, listed as “other securities”, approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans Held for Sale

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

Loans, net

For those variable-rate loans that re-price frequently, and with no significant change in credit risk, fair values are based on carrying values. The fair values of the fixed rate and all other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Deposits

The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair value for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

The carrying value of federal funds purchased and securities sold under agreements to repurchase approximates fair values.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate their fair values.

Off Balance Sheet Financial Instruments

Fair values for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter-parties’ credit standing.

FHLB Advances

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

 

28


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

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of June 30, 2017 and December 31, 2016 are reflected below.

 

     (In Thousands)  
     June 30, 2017  
     Carrying
Amount
     Fair
Value
     Level 1      Level 2      Level 3  

Financial Assets:

              

Cash and Cash Equivalents

   $ 29,259      $ 29,259      $ 29,259      $ —        $ —    

Interest-bearing time deposits

     2,541        2,541        —          2,541        —    

Securities - available-for-sale

     195,582        195,582        15,717        178,417        1,448  

Other Securities

     3,717        3,717        —          —          3,717  

Loans held for sale

     1,666        1,666        —          —          1,666  

Loans, net

     783,980        786,555        —          —          786,555  

Interest receivable

     4,010        4,010        —          —          4,010  

Financial Liabilities:

              

Interest bearing Deposits

   $ 500,741      $ 500,774      $ —        $ —        $ 500,774  

Non-interest bearing Deposits

     189,770        189,770        —          189,770        —    

Time Deposits

     186,964        187,675        —          —          187,675  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Deposits

   $ 877,475      $ 878,219      $ —        $ 189,770      $ 688,449  

Federal Funds Purchased and Securities Sold Under Agreement to Repurchase

   $ 40,095      $ 40,095      $ —        $ —        $ 40,095  

Federal Home Loan Bank advances

     10,000        10,041        —          —          10,041  

Interest payable

     252        252        —          —          252  

[Remainder of this page intentionally left blank]

 

29


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

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

     (In Thousands)  
     December 31, 2016  
     Carrying
Amount
     Fair
Value
     Level 1      Level 2      Level 3  

Financial Assets:

              

Cash and Cash Equivalents

   $ 28,322      $ 28,322      $ 28,322      $ —        $ —    

Interest-bearing time deposits

     1,915        1,918        —          1,918        —    

Securities - available-for-sale

     218,527        218,527        24,775        192,334        1,418  

Other Securities

     3,717        3,717        —          —          3,717  

Loans held for sale

     2,055        2,055        —          —          2,055  

Loans, net

     751,310        753,357        —          —          753,357  

Interest receivable

     3,880        3,880        —          —          3,880  

Financial Liabilities:

              

Interest bearing Deposits

   $ 456,983      $ 456,983      $ —        $ —        $ 456,983  

Non-interest bearing Deposits

     186,390        186,390        —          186,390        —    

Time Deposits

     198,830        199,658        —          —          199,658  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Deposits

   $ 842,203      $ 843,031      $ —        $ 186,390      $ 656,641  

Federal Funds Purchased and Securities Sold Under Agreement to Repurchase

   $ 70,324      $ 70,324      $ —        $ —        $ 70,324  

Federal Home Loan Bank advances

     10,000        10,041        —          —          10,041  

Interest payable

     256        256        —          —          256  

Fair Value Measurements

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities in active markets that the Company has the ability to access.

Available-for-sale securities, when quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. The Bank holds some local municipals that the Bank evaluates based on the credit strength of the underlying project. The fair value is determined by valuing similar credit payment streams at similar rates.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

 

30


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

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

The following summarizes financial assets measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

     Assets and Liabilities Measured at Fair
Value on a Recurring Basis (In Thousands)
 

June 30, 2017

   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant
Observable
Inputs
(Level 2)
     Significant
Observable
Inputs
(Level 3)
 

Assets - (Securities Available-for-Sale)

        

U.S. Treasury

   $ 15,717      $ —        $ —    

U.S. Government agencies

     —          78,358        —    

Mortgage-backed securities

     —          44,234        —    

State and local governments

     —          55,825        1,448  
  

 

 

    

 

 

    

 

 

 

Total Securities Available-for-Sale

   $ 15,717      $ 178,417      $ 1,448  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant
Observable
Inputs
(Level 2)
     Significant
Observable
Inputs
(Level 3)
 

Assets - (Securities Available-for-Sale)

        

U.S. Treasury

   $ 24,775      $ —        $ —    

U.S. Government agencies

     —          82,474        —    

Mortgage-backed securities

     —          48,461        —    

State and local governments

     —          61,399        1,418  
  

 

 

    

 

 

    

 

 

 

Total Securities Available-for-Sale

   $ 24,775      $ 192,334      $ 1,418  
  

 

 

    

 

 

    

 

 

 

 

31


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

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

The following table represents the changes in the Level 3 fair-value category of which unobservable inputs are relied upon as of June 30, 2017 and June 30, 2016.

 

     (In Thousands)  
     Fair Value Measurements Using Significant  
     Unobservable Inputs (Level 3)  
     State and Local      State and Local      State and Local  
     Governments      Governments      Governments  
     Tax-Exempt      Taxable      Total  

Balance at January 1, 2017

   $ —        $ 1,418      $ 1,418  

Change in Market Value

     —          30        30  

Payments & Maturities

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2017

   $ —        $ 1,448      $ 1,448  
  

 

 

    

 

 

    

 

 

 
     (In Thousands)  
     Fair Value Measurements Using Significant  
     Unobservable Inputs (Level 3)  
     State and Local      State and Local      State and Local  
     Governments      Governments      Governments  
     Tax-Exempt      Taxable      Total  

Balance at January 1, 2016

   $ 5,904      $ 1,448      $ 7,352  

Change in Market Value

     —          58        58  

Payments & Maturities

     (5,904      —          (5,904
  

 

 

    

 

 

    

 

 

 

Balance at June , 2016

   $ —        $ 1,506      $ 1,506  
  

 

 

    

 

 

    

 

 

 

Most of the Company’s available-for-sale securities, including any bonds issued by local municipalities, have CUSIP numbers or have similar characteristics of those in the municipal markets, making them marketable and comparable as Level 2.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At June 30, 2017 and December 31, 2016, such assets consist primarily of collateral dependent impaired loans. Collateral dependent impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals.)

 

 

32


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

NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

At June 30, 2017 and December 31, 2016, fair value of collateral dependent impaired loans categorized as Level 3 was $577 and $576 thousand, respectively. The specific allocation for impaired loans was $115 and $135 thousand as of June 30, 2017 and December 31, 2016, respectively, which are accounted for in the allowance for loan losses (see Note 4).

Other real estate is reported at either the lower of the fair value of the real estate minus the estimated costs to sell the asset or the cost of the asset. The determination of fair value of the real estate relies primarily on appraisals from third parties. If the fair value of the real estate, minus the estimated costs to sell the asset, is less than the asset’s cost, the deficiency is recognized as a valuation allowance against the asset through a charge to expense. The valuation allowance is therefore increased or decreased, through charges or credits to expense, for changes in the asset’s fair value or estimated selling costs.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:

 

    Fair Value at                Range
                     (Weighted
    June 30, 2017     

Valuation Technique

  

Unobservable Inputs

   Average)
    (In Thousands)                 

State and local government

  $ 1,448      Discounted Cash Flow    Credit strength of underlying project or entity / Discount rate    0-5%

(3.58%)

Collateral dependent Impaired Loans

    577      Collateral based measurements    Discount to reflect current market conditions and ultimate collectability    0-50%

(16.59%)

Other real estate owned - residential

    —        Appraisals    Discount to reflect current market    0-20%

(0.0%)

    Fair Value at                Range
                     (Weighted
    December 31, 2016     

Valuation Technique

  

Unobservable Inputs

   Average)
    (In Thousands)                 

State and local government

  $ 1,418      Discounted Cash Flow    Credit strength of underlying project or entity / Discount rate    0-5%

(3.92%)

Collateral dependent Impaired Loans

    576      Collateral based measurements    Discount to reflect current market conditions and ultimate collectability    0-50%

(18.92%)

Other real estate owned - residential

    144      Appraisals    Discount to reflect current market    0-20%

(0.51%)

 

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

 

     NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

The following table presents impaired loans and other real estate owned as recorded at fair value on June 30, 2017 and December 31, 2016:

 

     Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2017  
     (In Thousands)  
     Balance at
June 30, 2017
     Quoted Prices in Active
Markets for
Identical
Assets (Level 1)
     Significant
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Collateral dependent impaired loans

   $ 577      $ —        $ —        $ 577  

Other real estate owned - residential

     —          —          —          —    
           

 

 

 

Total fair value

            $ 577  
           

 

 

 
     Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2016  
     (In Thousands)  
     Balance at
December 31, 2016
     Quoted Prices in Active
Markets for
Identical
Assets (Level 1)
     Significant
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Collateral dependent impaired loans

   $ 576      $ —        $ —        $ 576  

Other real estate owned - residential

     144        —          —          144  
           

 

 

 

Total fair value

            $ 720  
           

 

 

 

 

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

 

     The Company had $11 million and $17 million in Federal Funds Purchased as of June 30, 2017, and December 31, 2016, respectively. During the same time periods the company also had $29.1 million and $53.3 million in securities sold under agreement to repurchase.

 

     June 30, 2017  
     Remaining Contratual Maturity of the Agreements (In Thousands)  
     Overnight &
Continuous
     Up to 30 days      30-90 days      Greater Than
90 days
     Total  

Federal funds purchased

   $ 11,014      $ —        $ —        $ —        $ 11,014  

Repurchase Agreements;

              

US Treasury & agency securities

   $ 8,370      $ —        $ —        $ 20,711      $ 29,081  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,384      $ —        $ —        $ 20,711      $ 40,095  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2016  
     Remaining Contratual Maturity of the Agreements (In Thousands)  
     Overnight &
Continuous
     Up to 30 days      30-90 days      Greater Than
90 days
     Total  

Federal funds purchased

   $ 17,000      $ —        $ —        $ —        $ 17,000  

Repurchase Agreements;

              

US Treasury & agency securities

   $ 32,814      $ —        $ —        $ 20,510      $ 53,324  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 49,814      $ —        $ —        $ 20,510      $ 70,324  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

NOTE 8 RECENT ACCOUNTING PRONOUNCEMENTS

In January 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.”ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in a accordance with the fair value option for financial instruments. ASU 2016-01 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company is assessing the impact of ASU 2016-01 on its accounting and disclosures

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).”ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures and currently has very limited exposure to the rule.

In June 2016, FASB issued 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration

The ASU is effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently gathering information, reviewing possible vendors and has formed a committee to formulate the methodology to be used. Most importantly, the Company is gathering as much data as possible to enable review scenarios and determine which calculations will produce the most reliable results. . At this time an additional external advisor has not been contracted with though the Bank has been reviewing the use of external software.

 

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

NOTE 8 RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

 

In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230) – Restricted Cash.”ASU-2016-18 provides amendments to cash flow statement classification and presentation to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied using a retrospective transition method to each period presented. Early adoption is permitted including adoption in an interim period. The Company has assessed ASU 2016-18 and does not expect a material impact on its accounting and disclosures as it currently does not have what would be considered “Restricted cash” at this time.

In January 2017, the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805) – Clarifying the Definition of a Business.”ASU 2017-01 provides amendments to clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and adoption is permitted under certain circumstances. the company has assessed ASU 2017-01 and does not expect it to have a material impact on its accounting and disclosures.

In January 2017, the FASB issued ASU No. 2017-04 “Intangibles – Goodwill and other (Topic 350) – Simplifying the Test for Goodwill Impairment” These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company does not expect ASU 2017-04 to have a material impact on its accounting disclosures, as goodwill testing has been completed annually without any impairment concerns.

In March 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-08 “Receivables – Nonrefundable Fees and Other Cost (Subtopic 310-20), Premium Amortization on Purchased Callable Debit Securities.” These amendments shorten the amortization period for certain callable debit securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does have exposure and is assessing the impact of ASU 2017-08 and may choose early adoption. Overall, the Company does not expect it to have a material impact on its accounting.

In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09 “Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting.”These amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 7l8. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 207. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a prospective basis to an award modified on or after the adoption date. The Company adopted ASU 2016-09 on January 1, 207. ASU 2016-09 also requires that companies make an accounting policy election regarding forfeitures, to either estimate the number of awards that are expected to vest or account for them when they occur. The impact of this change and that of the remaining provisions of ASU 2016-09 did not have a significant impact on our financial statements.

 

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

OVERVIEW

The Company obtained greater visibility to the investment community through a series of events in the second quarter of 2017. Following the annual meeting of its shareholders in April and their approval of a quorum change, the Company listed on the NASDAQ Capital Market on May 10th. On June 26th the Company became a part of the Russell 3000 Index. The Company is listed under the symbol, FMAO. These events have caused the liquidity of the stock to improve as measured by the increased average daily volume and may have contributed to a higher market value than before these events took place. The Company believes these steps will help with positioning for future strategic opportunities while benefiting shareholders with greater liquidity and enhanced ease in trading.

The Company continued to emphasize the importance of loan growth to overall profitability for the new year. First half performance for 2017 was solid, though not as strong as the previous first half 2016. It did represent a continuation of 2016’s milestone year. The increases in rate by the Federal Reserve which began in December 2016 provided the stimulus for the prime lending rate to be increased by similar amounts. Many of the Bank’s variable loans have now had spread adjustments raising the base rates equivalent to their floors or above. This has resulted in improved asset yield when coupled with loan growth.

A wet second quarter through the Company’s market area has area farmers with fields in varying levels of growth. Some replanting has occurred. A breakeven to modest performance in 2016 did not harm the agricultural customers though some operating loans have been utilized to fund inputs for 2017. The Bank is not overly concerned as borrowers remain well capitalized and land values have only decreased slightly.

A second quarter automobile loan special increased consumer loans and originations of residential mortgage loans increased. Unemployment rates remain low throughout the market area and competition for employees is high.

Manufacturing activity remains similar to last year. Low gas prices continue to help the local economies. Commercial lending remains firm with the growth in the portfolio dominated by market share increases. The Company’s growth has been largely attributable to expanding relationships with newer customers and acquiring customers from our competitors.

Loan growth drove the improvement in net interest income as compared to last year. Net income after taxes ended the first half 2017 11.1% above first half 2016. The 10.1% increase in net interest income after provision for loan losses resulted in a 11.0% increase in earnings per share for the 2017 first half as compared to 2016’s first half.

NATURE OF ACTIVITIES

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

Our executive offices are located at 307 North Defiance Street, Archbold, Ohio 43502, and our telephone number is (419) 446-2501.

The Bank opened an additional office during April of 2016 in Fort Wayne, Indiana and the office is located within the corporation limits of Huntertown, with a Fort Wayne address. The Bank has continued its expansion strategy and the new office is expected to provide new growth opportunities.

The Bank opened its twenty-fourth location in Bowling Green, Ohio in the fourth quarter 2016. It is the second leased office and was renovated to meet the Bank’s needs before opening.

The Farmers & Merchants State Bank engages in general commercial banking and savings business including commercial, agricultural and residential mortgage, consumer and credit card lending activities. The largest segment of the lending business relates to commercial, both real estate and non-real estate. The type of commercial business ranges from small business to multi-million dollar companies. The loans are a reflection of business located within the Banks’ market area. Because the Bank’s offices are located in Northwest Ohio and Northeast Indiana, a substantial amount of

 

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

NATURE OF ACTIVITIES (Continued)

 

the loan portfolio is comprised of loans made to customers in the farming industry for such items as farm land, farm equipment, livestock and operating loans for seed, fertilizer, and feed. Other types of lending activities include loans for home improvements, and loans for the purchase of autos, trucks, recreational vehicles, motorcycles, and other consumer goods.

The Bank also provides checking account services, as well as savings and time deposit services such as certificates of deposits. In addition, Automated Teller Machines (ATMs) are provided at most branch locations along with other independent locations such as major employers and hospitals in the market area. The Bank has custodial services for Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs). The Bank provides on-line banking access for consumer and business customers. For consumers, this includes bill-pay, on-line statement opportunities and mobile banking. For business customers, it provides the option of electronic transaction origination such as wire and Automated Clearing House (ACH) file transmittal. In addition, the Bank offers remote deposit capture or electronic deposit processing and merchant credit card services. Mobile banking was added in 2012 and has been widely accepted and used by consumers. Over the past couple of years, the Bank has updated its consumer offerings with “Secure” and “Pure” checking in 2014 and with KASASA Cash Back in 2015. During the second quarter 2017, new business checking products were announced and existing business accounts were converted to one of three new products, Business Essential, Edge or Elite. The new products provided customers with new options to bundle services and for the Bank to utilize the full relationship to determine pricing. This was the next step of implementation for the Bank’s “earn to free” strategic initiative. Upgrades to our digital products and services continue to occur in both retail and business lines.

The Bank has established underwriting policies and procedures which facilitate operating in a safe and sound manner in accordance with supervisory and regulatory guidance. Within this sphere of safety and soundness, the Bank’s practice has been to not promote innovative, unproven credit products which may not be in the best interest of the Bank or its customers. The Bank does offer a hybrid mortgage loan. Hybrid loans are loans that start out as a fixed rate mortgage but after a set number of years automatically adjust to an adjustable rate mortgage. The Bank offers a three year fixed rate mortgage after which the interest rate will adjust annually. The majority of the Bank’s adjustable rate mortgages are of this type. In order to offer longer term fixed rate mortgages, the Bank does participate in the Freddie Mac, Farmer Mac and Small Business Lending programs. The Bank also normally retains the servicing rights on these partially or 100% sold loans. In order for the customer to participate in these programs they must meet the requirements established by those agencies. In addition, the Bank does sell some of its longer term fixed rate agricultural mortgages into the secondary market with the aid of a broker.

The Bank does not have a program to fund sub-prime loans. Sub-prime loans are characterized as a lending program or strategy that targets borrowers who pose a significantly higher risk of default than traditional retail banking customers.

All loan requests are reviewed as to credit worthiness and are subject to the Bank’s underwriting guidelines as to secured versus unsecured credit. Secured loans are in turn subject to loan to value (LTV) requirements based on collateral types as set forth in the Bank’s Loan Policy. In addition, credit scores of principal borrowers are reviewed and an approved exception from an additional officer is required should a credit score not meet the Bank’s Loan Policy guidelines.

Consumer Loans:

 

    Maximum loan to value (LTV) for cars, trucks and light trucks vary from 90% to 110% depending on whether direct or indirect.

 

    Loans above 100% are generally due to additional charges for extended warranties and/or insurance coverage periods for wage or death.

 

    Boats, campers, motorcycles, RV’s and Motor Coaches range from 80%-90% based on age of vehicle.

 

    1st or 2nd mortgages on 1-4 family homes range from 75%-90% with “in-house” first real estate mortgages requiring private mortgage insurance on those exceeding 80% LTV.

 

    Raw land LTV maximum ranges from 65%-75% depending on whether or not the property has been improved.

 

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

NATURE OF ACTIVITIES (Continued)

 

Commercial/Agriculture/Real Estate:

 

    Maximum LTVs range from 70%-80% depending on type.

 

    Accounts Receivable: Up to 80% LTV less retainages and greater than 90 days.

Inventory:

 

    Agriculture:

Livestock and grain up to 80% LTV, crops (insured) up to 75% and Warehouse Receipts up to 87%.

 

    Commercial:

Maximum LTV of 50% on raw and finished goods.

 

    Floor plan:

 

    New/used vehicles to 100% of wholesale.

 

    New/Used recreational vehicles and manufactured homes to 80% of wholesale.

Equipment:

 

    New not to exceed 80% of invoice, used NTE 50% of listed book or 75% of appraised value.

 

    Restaurant equipment up to 35% of market value.

 

    Heavy trucks, titled trailers up to NTE 75% LTV and aircraft up to 75% of appraised value.

F&M Investment Services, the brokerage department of the Bank, opened for business in April, 1999. Securities are offered through Raymond James Financial Services, Inc.

In December of 2014, the Company became a financial holding company within the meaning of the Bank Holding Company Act of 1956 as amended (the “Act”), in order to provide the flexibility to take advantage of the expanded powers available to a financial holding company under the Act. Our subsidiary bank is in turn regulated and examined by the Ohio Division of Financial Institutions and the Federal Deposit Insurance Corporation. The activities of our bank subsidiary are also subject to other federal and state laws and regulations. The Company also formed a captive insurance company (the “captive”) in December 2014 which is located in Nevada and regulated by the State of Nevada Division of Insurance.

The Bank’s primary market includes communities located in the Ohio counties of Defiance, Fulton, Henry, Lucas, Williams, Wood and in the Indiana counties of DeKalb and Steuben. In the second quarter of 2016 the Bank added the Indiana county of Allen to its service area with the opening of its newly constructed office in Fort Wayne. In fourth quarter 2016, the Bank opened its 25th office in Bowling Green, Ohio. The new office is located next to Kroger. Bowling Green is home to Bowling Green State University and its nearly 17,000 students and more than 2,000 faculty members. Bowling Green is an exciting market supported by compelling demographics, a strong economic anchor and expanded our presence in Wood County, Ohio. The commercial banking business in this market is highly competitive, with approximately 17 other depository institutions currently doing business in the Bank’s primary market. In our banking activities, we compete directly with other commercial banks, credit unions, farm credit services, and savings and loan institutions in each of our operating localities. In a number of our locations, we compete against entities which are much larger than us. The primary factors in competing for loans and deposits are the rates charged as well as location and quality of the services provided.

At June 30, 2017, we had 274 full time equivalent employees. The employees are not represented by a collective bargaining unit. We provide our employees with a comprehensive benefit program, some of which are contributory. We consider our employee relations to be good.

REGULATORY DEVELOPMENTS

The Bank remains attentive to the current regulatory environment in light of the risk-based approach regulatory agencies use to conduct examinations. The degree of regulatory changes and the complexity of the recent new rules, which lack clarity or guidance on various provisions, and have resulted in uncertainties regarding liability, pose an increased overall risk of noncompliance. Various significant mortgage rules require ongoing monitoring by means of testing, validation of results, additional training, and further research or consultation to assist with ensuring compliance.

 

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

REGULATORY DEVELOPMENTS (Continued)

 

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

New Military Lending Act (MLA) requirements have been implemented. The MLA is intended to protect active duty military service members and their dependents from potentially abusive lending practices. These new requirements resulted in expanded coverage of more types of loans. Safe harbor methods to identify covered borrowers who are military service members or their dependents are utilized. Coverage of credit card accounts will become effective on October 3, 2017.

The Company has implemented Basel III capital rules which began to be phased in for the Company on January 1, 2015. These rules may impact the ability of some financial institutions to pay dividends, though the Company believes itself to be able to maintain its strong capital position and not be limited in that regard.

With regard to all regulatory matters, the Bank remains committed in making good faith efforts to comply with technical requirements of the laws, rules, regulations, and guidance from both federal and state agencies which govern its activities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and the Company follows general practices within the financial services industry in which it operates. At times the application of these principles requires management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements and accompanying notes.

These assumptions, estimates and judgments are based on information available as of the date of the financial statements. As this information changes, the financial statements could reflect different assumptions, estimates and judgments. Certain policies inherently have a greater reliance on assumptions, estimates and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Examples of critical assumptions, estimates and judgments are when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not required to be recorded at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event. These policies, along with the disclosures presented in the notes to the condensed consolidated financial statements and in the management discussion and analysis of the financial condition and results of operations, provide information on how significant assets and liabilities are valued and how those values are determined for the financial statements. Based on the valuation techniques used and the sensitivity of financial statement amounts to assumptions, estimates, and judgments underlying those amounts, management has identified the determination of the ALLL, the valuation of its Mortgage Servicing Rights and the valuation of reals estate acquired through or in lieu of; loan foreclosures (“OREO Property”) as the accounting areas that require the most subjective or complex judgments, and as such could be the most subject to revision as new information becomes available.

OREO Property held for sale and is initially recorded at fair value at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of cost or fair value minus estimated costs to sell.

Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and a write-down is recorded by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. The net income from operations of foreclosed real estate held for sale is reported either in non-interest income or non-interest expense depending upon whether the property is in a gain or loss position overall. At June 30, 2017 OREO property holdings were $630 thousand. OREO totaled $774 thousand and $1.3 million as of December 31, 2016 and June 30, 2016 respectively.

 

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

CRITICAL ACCOUNTING PROLICIES AND ESTIMATES (Continued)

 

The ALLL and ACL represents management’s estimate of probable credit losses inherent in the Bank’s loan portfolio, unfunded loan commitments, and letters of credit at the report date. The ALLL methodology is regularly reviewed for its appropriateness and is approved annually by the Board of Directors. This written methodology is consistent with Generally Accepted Accounting Principles which provides for a consistently applied analysis.

The Bank’s methodology provides an estimate of the probable credit losses either by calculating a specific loss per credit or by applying a composite of historical factors over a relevant period of time with current internal and external factors which may affect credit collectability. Such factors which may influence estimated losses are the conditions of the local and national economy, local unemployment trends, and abilities of lending staff, valuation trends of fixed assets, and trends in credit delinquency, classified credits, and credit losses.

Inherent in most estimates is imprecision. The Bank’s ALLL provides a margin for imprecision with an unallocated portion. Bank regulatory agencies and external auditors periodically review the Bank’s methodology and adequacy of the ALLL. Any required changes in the ALLL or loan charge-offs by these agencies or auditors may have a material effect on the ALLL.

The Bank is required to estimate the value of its Mortgage Servicing Rights. The Bank recognizes as separate assets rights to service fixed rate single-family mortgage loans that it has sold without recourse but services for others for a fee. Mortgage servicing assets are initially recorded at cost, based upon pricing multiples as determined by the purchaser, when the loans are sold. Mortgage servicing assets are carried at the lower of the initial carrying value, adjusted for amortization, or estimated fair value. Amortization is determined in proportion to and over the period of estimated net servicing income using the level yield method. For purposes of determining impairment, the mortgage servicing assets are stratified into like groups based on loan type, term, new versus seasoned and interest rate. The valuation is completed by an independent third party.

The expected and actual rates of mortgage loan prepayments are the most significant factors driving the potential for the impairment of the value of mortgage servicing assets. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced.

The Bank’s mortgage servicing rights relating to loans serviced for others represent an asset. This asset is initially capitalized and included in other assets on the Company’s consolidated balance sheet. The mortgage servicing rights are then amortized against noninterest income in proportion to, and over the period of the estimated future net servicing income of the underlying mortgage servicing rights. The amortization thereof is recorded in non-interest expense. There are a number of factors, however, that can affect the ultimate value of the mortgage servicing rights to the Bank, including the estimated prepayment speed of the loan and the discount rate used to present value the servicing right. For example, if the mortgage loan is prepaid, the Bank will receive fewer servicing fees, meaning that the present value of the mortgage servicing rights is less than the carrying value of those rights on the Bank’s balance sheet. Therefore, in an attempt to reflect an accurate expected value to the Bank of the mortgage servicing rights, the Bank receives a valuation of its mortgage servicing rights from an independent third party. The independent third party’s valuation of the mortgage servicing rights is based on relevant characteristics of the Bank’s loan servicing portfolio, such as loan terms, interest rates and recent national prepayment experience, as well as current national market interest rate levels, market forecasts and other economic conditions. Management, with the advice from its third party valuation firm, reviewed the assumptions related to prepayment speeds, discount rates, and capitalized mortgage servicing income on a quarterly basis. Changes are reflected in the following quarter’s analysis related to the mortgage servicing asset. In addition, based upon the independent third party’s valuation of the Bank’s mortgage servicing rights, management then establishes a valuation allowance by each strata, if necessary, to quantify the likely impairment of the value of the mortgage servicing rights to the Bank. The estimates of prepayment speeds and discount rates are inherently uncertain, and different estimates could have a material impact on the Bank’s net income and results of operations. The valuation allowance is evaluated and adjusted quarterly by management to reflect changes in the fair value of the underlying mortgage servicing rights based on market conditions. The accuracy of these estimates and assumptions by management and its third party valuation specialist can be directly tied back to the fact that management has only been required to record minor valuation allowances through its income statement over time based upon the valuation of each stratum of servicing rights. For more information regarding the estimates and calculations used to establish the ALLL and the value of Mortgage Servicing Rights, please see Note 1 to the consolidated financial statements provided herewith.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES (Continued)

 

For more information regarding the estimates and calculations used to establish the ALLL and the value of Mortgage Servicing Rights, please see Note 1 to the consolidated financial statements provided herewith.

Servicing Rights, please see Note 1 to the consolidated financial statements provided herewith.

MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company plans to continue in its growth mode in 2017 led by loan growth from within our newer markets. The Bank is focused on funding the loan growth with the least expensive source. Growing deposits will also be a focus especially in our newer business checking product lines. These products bundle services and enable customers to choose their wanted levels and offer pricing based on a full relationship and not on just the single account. The Bank was able to grow deposits in the last quarter of 2016 and continued to do so in the first half of 2017. The Bank also decreased the level of pledged securities by offering the Insured Cash Sweep, “ICS” product accessed through the Promontory network of financial institutions. This has provided more availability for sales if warranted to fund loan growth.

Liquidity in terms of cash and cash equivalents ended almost $937 thousand higher as of June 30, 2017 than it was at yearend December 31, 2016. A decrease in securities held along with increased deposits funded the $32.7 million increase in net loans since yearend 2016. The largest loan growth occurred in commercial real estate and commercial and industrial portfolios. Agricultural real estate also experienced an increase. The largest decline was in consumer real estate which was due to sales into the secondary market outpacing new originations.

In comparing to the same prior year period, the June 30, 2017 (net of deferred fees) loan balances of $790.8 million accounted for a $60.9 million or 8.3% increase when compared to 2016’s $729.9 million. The year over year improvement was made up of a 17.8% increase in commercial and industrial loans, a 10.3% increase in commercial real estate loans, a 16.2% increase in consumer loans and lastly a combined increase in agricultural related loans (comprised of a 6.3% increase in agricultural real estate loans and 0.4% increase in non-real estate agricultural loans). Consumer real estate loans decreased by 4.8% while Industrial Development Bonds (“IDB’s”) increased 11.2%. The Company credits the growth to a strong team of lenders focused on providing customers valuable localized services and thereby increasing our market share.

The chart below shows the breakdown of the loan portfolio by category as of June 30 for the last three years, net of deferred fees and costs.

 

     (In Thousands)  
     June-17      June-16      June-15  
     Amount      Amount      Amount  

Consumer Real Estate

   $ 83,903      $ 88,165      $ 86,503  

Agricultural Real Estate

     64,003        60,203        51,469  

Agricultural

     83,771        83,433        74,352  

Commercial Real Estate

     394,051        357,243        279,002  

Commercial and Industrial

     123,058        104,434        95,370  

Consumer

     35,435        30,485        25,160  

Industrial Development Bonds

     6,617        5,952        7,452  
  

 

 

    

 

 

    

 

 

 

Total Loans, net

   $ 790,838      $ 729,915      $ 619,308  
  

 

 

    

 

 

    

 

 

 

While the security portfolio has been utilized to fund loan growth for the last three years, additional sources have been cultivated during 2016 and 2017. The security portfolio decreased $22.9 million in the first six months 2017 from yearend 2016. The amount of pledged investment securities decreased significantly by $42.7 million as compared to yearend and $104.6 million as compared to June 30, 2016. This was accomplished by utilizing Promontory’s Insured Cash Sweep, “ICS”, product to protect Ohio public fund depositors and commercial sweep customers with FDIC coverage rather than pledge securities. This in turn improves liquidity with the additional option of selling unpledged investment securities. As of June 30, 2017, pledged investment securities totaled $86.7 million. The current portfolio is in a net unrealized loss position of $579 thousand. With the exception of stock, which is shown as other securities, all of the Company’s security portfolio is categorized as “available for sale” and as such is recorded at fair value.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (Continued)

 

Management feels confident that liquidity needs for future growth can be met through additional maturities and/or sales from the security portfolio, increased deposits and additional borrowings. For short term needs, the Bank has $111.5 million of unsecured borrowing capacity through its correspondent banks.

Overall assets grew just under 1.0% since yearend 2016 and 4.4% since June 30, 2016. The largest growth was in the loan portfolios.

Deposits accounted for the largest growth within liabilities, up 4.2% or $35.3 million since yearend and 9.3% or $74.6 million over June 30, 2016 balances. Core deposits continue to drive the increase which provided the greatest benefit for both lower cost of funds and the opportunity to generate additional noninterest income. Compared to previous year and last quarter, a movement of funds from securities sold under agreement to repurchase into interest bearing NOW accounts occurred due to utilization of the ICS product previously mentioned. Overall, deposits grew $5.0 million since the yearend 2016 and $38.8 million as compared to a year ago June 30, 2016 excluding the movement of funds from the sweep (securities sold under agreement to repurchase) products. This growth aided the increased liquidity position and funded the loan growth for the periods along with usage of purchased Federal Funds for daily borrowings.

Time deposits decreased during the first half due to the runoff of short term deposits from the Promontory Network. The Promontory Network has been used by the Bank for many years to provide additional FDIC insurance coverage to the Bank’s depositors having deposits with the Bank in excess of the FDIC’s insurance limits by using Promontory’s CDARS product. When the Bank, as a member of the network, places a customer’s deposit using the CDARS service, the deposit is divided into amounts under the standard FDIC insurance maximum and placed with other Network member banks in exchange for certificates of deposit. This makes the full amount placed by the Bank eligible for FDIC coverage. The Bank used the CDARS product in a reciprocal manner previously and expanded into a “one-way” usage whereby the Bank can place or receive time deposits during the last half of 2016. The time deposits utilized were for six months or less and as they matured and were not replaced.

Shareholder’s equity increased by $5.7 million as of the first half of 2017 compared to yearend 2016, as earnings exceeded dividend declarations. Accumulated other comprehensive loss decreased in loss position $1.6 million which encompassed the shift of $47 thousand from unrealized gain to realized gain with the sale of securities since yearend 2016. Dividends paid for the quarter matched the previous quarter though dividends declared increased 8.7% or 2 cents. Compared to June 30, 2016, shareholders’ equity increased $6.3 million. Record profits during 2016 were offset by a change in accumulated other comprehensive income related to the available for sale securities portfolio from a gain of $1.6 million to a loss position of $382 thousand as of June 30, 2017. Profits are also higher in 2017 than 2016 by $607 thousand.

Basel III regulatory capital requirements became effective in 2016. The Bank and Company include a capital conservation buffer as a part of the transition provision. For calendar year 2016, the applicable required capital conservation buffer percentage of 0.625% was the base above which institutions avoid limitations on distributions and certain discretionary bonus payments. For the calendar 2017, the applicable required capital conservation buffer percentage is 1.25%. The total buffer requirement will increase to 2.5% for calendar year 2019. As of June 30, 2017, the Company and the Bank are both positioned well above the 2019 requirement.

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

 

Tier I Leverage Ratio

     11.96

Risk Based Capital Tier I

     14.85

Total Risk Based Capital

     15.68

Stockholders’ Equity/Total Assets

     12.40

Capital Conservation Buffer

     7.68

 

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

 

MATERIAL CHANGES IN RESULTS OF OPERATIONS

Comparison of Results of Interest Earnings and Expenses for three month periods ended June 30, 2017, 2016 and March 31, 2017.

When comparing second quarter 2017 to second quarter 2016, average loan balances grew $57.2 million. This represented a strong 7.9% increase in a one year time period. Interest income on loan balances also experienced an increase of $758 thousand as compared to the same quarter ended June 30, 2016.

In terms of comparison to first quarter 2017, loan interest income was $420 thousand higher in second quarter 2017. The three months of second quarter 2017 had more days at 91 than first quarter had with 90.

The higher levels of loan interest income helped to offset the loss of interest income from the available-for-sale securities portfolio, which decreased in average balances, whether comparing to last quarter or the previous year. The decreased balances were expected as available for sale securities were used as a source of funds for loan growth. The income associated with the security portfolio decreased by $32 thousand in comparison to first quarter 2017and decreased $45 thousand in comparison to the same second quarter 2016. The benefit of the increase in interest income from loans was well above the loss of interest income from the smaller security portfolio.

Overall, interest income for the quarter comparisons was higher for second quarter 2017 by 7.9% or $737 thousand as to second quarter 2016 and higher by 4.1% or $403 thousand as to first quarter 2017.

In terms of annualized yield, for the quarter ended June 30, 2017, it was 4.11% which compares to last quarter’s 3.99% and a year ago second quarter ended June 30, 2016 of 3.99%. The following chart demonstrates the value of increased loan balances in the balance sheet mix, even if offset by lower balances in the securities portfolio. The yields on tax-exempt securities and the portion of the tax-exempt IDB loans included in loans have been tax adjusted based on a 34% tax rate in the charts to follow.

 

     (In Thousands)  
     Quarter to Date Ended June 30, 2017      Yield/Rate  
Interest Earning Assets:    Average Balance      Interest/Dividends      June 30, 2017     June 30, 2016  

Loans

   $ 777,649      $ 9,120        4.69     4.65

Taxable Investment Securities

     154,395        702        1.82     1.60

Tax-exempt Investment Securities

     52,673        265        3.05     3.50

Fed Funds Sold & Interest Bearing Deposits

     14,430        37        1.03     0.57
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Interest Earning Assets

   $ 999,147      $ 10,124        4.11     3.99
  

 

 

    

 

 

    

 

 

   

 

 

 

Change in Quarter to Date June 30, 2017 Interest Income Compared to June 30, 2016 (In Thousands)

 

            Due to         
Interest Earning Assets:    Change      Volume      Due to Rate  

Loans

   $ 758      $ 672      $ 86  

Taxable Investment Securities

     19        (76      95  

Tax-exempt Investment Securities

     (64      (33      (31

Fed Funds Sold & Interest Bearing Deposits

     24        14        10  
  

 

 

    

 

 

    

 

 

 

Total Interest Earning Assets

   $ 737      $ 577      $ 160  
  

 

 

    

 

 

    

 

 

 

Offsetting some of the increase in interest income for the quarter was the increase in cost of funds in 2017. Second quarter 2017 was higher by $206 thousand than second quarter 2016. Since 2016, average interest-bearing deposit balances have increased $64 million and resulted in $213 thousand more in interest expense for the most recent quarter. Additionally, interest expense on Fed Funds Purchased, Securities Sold Under Agreement to Repurchase and FHLB borrowings were down $7 thousand in the second quarter 2017 over the same time frame in 2016.

 

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

MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

 

     (In Thousands)               
     Quarter to Date Ended June 30, 2017      Yield/Rate  
Interest Bearing Liabilities:    Average Balance      Interest/Dividends      June 30, 2017     June 30, 2016  

Savings Deposits

   $ 511,074      $ 574        0.45     0.41

Other Time Deposits

     185,291        524        1.13     0.91

Other Borrowed Money

     10,000        37        1.48     1.44

Fed Funds Purchased & Securities Sold under Agreement to Repurch.

     31,308        118        1.51     0.72
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Interest Bearing Liabilities

   $ 737,673      $ 1,253        0.68     0.58
  

 

 

    

 

 

    

 

 

   

 

 

 

Change in Quarter to Date June 30, 2017 Interest Expense Compared to June 30, 2016 (In Thousands)

 

            Due to         
Interest Bearing Liabilities:    Change      Volume      Due to Rate  

Savings Deposits

   $ 124      $ 77      $ 47  

Other Time Deposits

     89        (15      104  

Other Borrowed Money

     1        —          1  

Fed Funds Purchased & Securities Sold under Agreement to Repurch.

     (8      (147      139  
  

 

 

    

 

 

    

 

 

 

Total Interest Bearing Liabilities

   $ 206      $ (85    $ 291  
  

 

 

    

 

 

    

 

 

 

Overall, net interest spread for the second quarter 2017 is higher than last year and up from last quarter. As the chart below illustrates, higher yields on interest and dividend income did offset the higher interest expense in the most recent quarter when comparing to the same period a year ago or to the previous quarter. Interest expense for the quarter as compared to last quarter increased by $74 thousand, some of which can be attributed to a higher number of days in the current quarter compared to the last quarter.

First quarter 2017 recorded an asset yield of 3.99% for the quarter with cost of funds at 0.65%. Net interest spread and margin for first quarter 2017 were lower at 3.34% and 3.51% respectively as compared to current quarter shown below.

 

     6/30/2017     6/30/2016     3/31/2017  

Interest/Dividend income/yield

     4.11     3.99     3.99

Interest Expense / yield

     0.68     0.58     0.65
  

 

 

   

 

 

   

 

 

 

Net Interest Spread

     3.43     3.41     3.34
  

 

 

   

 

 

   

 

 

 

Net Interest Margin

     3.61     3.56     3.51
  

 

 

   

 

 

   

 

 

 

Net interest income was up $531 thousand for the second quarter 2017 over the same time frame in 2016 due to the increase in loan interest income and partially offset by higher interest expense, as previously mentioned. There has also been a $329 thousand increase in net interest income over first quarter 2017. As the new loans added in 2016 and 2017 generate more income, management expects the benefits of the Company’s strategy of repositioning the balance sheet to continue to widen this margin as measured in dollars.

The discussion will now be separated into two distinct quarter discussions – second quarter comparisons and the two most recent quarter comparisons.

 

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

MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

Comparison of Noninterest Results of Operations – Second Quarter 2017 to Second Quarter 2016

Provision Expense

The ALLL has a direct impact on the provision expense. The increase in the ALLL is funded through recoveries and provision expense. The following tables both deal with the allowance for credit losses. The first table breaks down the activity within ALLL for each loan portfolio class and shows the contribution provided by both the recoveries and the provision along with the reduction of the allowance caused by charge-offs. The second table discloses how much of the ALLL is attributed to each class of the loan portfolio, as well as the percent that each particular class of the loan portfolio represents to the entire loan portfolio in the aggregate. The consumer and consumer real estate loan portfolio accounted for the largest component of charge-offs and recoveries for second quarter of 2017 and 2016. As was mentioned in previous discussion, the commercial real estate portfolio is currently creating a large impact on the ALLL due to the loan growth.

Total provision for loan losses was $314 thousand lower for the second quarter 2017 as compared to the same quarter 2016. Management continues to monitor asset quality, making adjustments to the provision as necessary. Loan charge-offs were $121 thousand higher in second quarter 2016 than the same quarter 2017, recoveries were higher by $7 thousand. Combined net charge-offs were $114 thousand lower in second quarter 2017 than same time period 2016. Past due loans decreased $350 thousand from June 30, 2017 as compared to June 30, 2016, the bulk of which came from the consumer real estate and commercial real estate portfolio but was in the 60-89 days and over 90 days buckets.

The following table breaks down the activity within the ALLL for each loan portfolio class and shows the contribution provided by both recoveries and the provision, along with the reduction of the allowance caused by charge-offs. The time period covered is for three months ended June 30, 2017, 2016, and 2015.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

     In Thousands  
     Three
Months
Ended
June-17
    Three
Months
Ended
June-16
    Three
Months
Ended
June-15
 

Loans, net

   $ 790,838     $ 729,915     $ 619,308  
  

 

 

   

 

 

   

 

 

 

Daily average of outstanding loans

   $ 777,649     $ 720,408     $ 616,998  
  

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses-Apr 1

   $ 6,850     $ 6,285     $ 5,977  

Loans Charged off:

      

Consumer Real Estate

     —         63       —    

Agriculture Real Estate

     —         —         —    

Agricultural

     —         18       —    

Commercial Real Estate

     —         —         85  

Commercial and Industrial

     —         —         389  

Consumer

     53       93       55  
  

 

 

   

 

 

   

 

 

 
     53       174       529  
  

 

 

   

 

 

   

 

 

 

Loan Recoveries:

      

Consumer Real Estate

     2       19       25  

Agriculture Real Estate

     —         —         —    

Agricultural

     1       1       2  

Commercial Real Estate

     5       3       201  

Commercial and Industrial

     3       3       17  

Consumer

     25       17       51  
  

 

 

   

 

 

   

 

 

 
     36       43       296  
  

 

 

   

 

 

   

 

 

 

Net Charge Offs

     17       131       233  

Provision for loan loss

     25       339       183  

Acquisition provision for loan loss

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Allowance for Loan & Lease Losses - Jun 30

     6,858       6,493       5,927  

Allowance for Unfunded Loan Commitments & Letters of Credit Jun 30

     219       219       201  
  

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses - Jun 30

   $ 7,077     $ 6,712     $ 6,128  
  

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs to average Loans outstanding

     0.00     0.02     0.04
  

 

 

   

 

 

   

 

 

 

Ratio of the Allowance for Loan Loss to Nonperforming Loans*

     502.23     424.86     193.50
  

 

 

   

 

 

   

 

 

 

 

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

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off of a loan, whether partial loan balance or full loan balance. A charge down in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of the collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial and agricultural credits are charged down at 120 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-offs may be realized as further unsecured positions are recognized.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

Loans classified as nonaccrual were lower as of June 30, 2017 at $1.4 million compared to $1.5 million as of June 30, 2016.

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

For the majority of the Bank’s impaired loans, including all collateral dependent loans, the Bank will apply the appraised market value methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine appraised market value, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months for chattels and titled vehicles and every two years for real estate. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated appraisals are received, the Bank may discount the collateral value used.

The following table presents the balances for allowance of loan losses by loan type for six months ended June 30, 2017 and June 30, 2016.

 

     (In Thousands)             (In Thousands)         
     June-2017             June-2016         
Balance at End of Period Applicable To:    Amount      % of Loan
Category
     Amount      % of Loan
Category
 

Consumer Real Estate

   $ 250        10.64      $ 413        12.45  

Agricultural Real Estate

     253        8.24        229        8.41  

Agricultural

     596        10.57        591        11.03  

Commercial Real Estate

     3,076        49.72        2,717        48.69  

Commercial and Industrial

     1,352        16.36        1,215        15.46  

Consumer

     407        4.47        365        3.96  

Unallocated

     924        0.00        963        0.00  
  

 

 

       

 

 

    

Allowance for Loan & Lease Losses

     6,858           6,493     

Off Balance Sheet Commitments

     219           219     
  

 

 

       

 

 

    

Total Allowance for Credit Losses

   $ 7,077         $ 6,712     
  

 

 

       

 

 

    

Noninterest Income

Noninterest income was down $111 thousand for the second quarter 2017 over the same time frame in 2016. The Company has seen an increase in its mortgage production volume; however, the gain on the sale of these loans was $16 thousand lower for the second quarter 2017 over the same period in 2016. Loan originations on loans held for sale for the second quarter 2017 were $15.8 million with proceeds from sale at $15.4 million for 2017 which exceeded 2016’s second quarter activity of $15.5 million in originations and $14.8 million in sales. The net result of the activity was 2017 had $16 thousand less revenue on gain of sale on the quarter. The Company was able to better take advantage of market fluctuations in its available-for-sale portfolio and sales on securities in second quarter 2016 than second quarter 2017. The gain was $327 thousand lower in the most recent quarter than the same quarter prior year. The next largest fluctuation in noninterest income was in the combined service fee lines, which was $232 thousand higher than the same quarter last year.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

The impact of mortgage servicing rights, both to income and expense, is shown in the following table which reconciles the value of mortgage servicing rights. The capitalization runs through non-interest income while the amortization thereof is included in non-interest expense. For the second quarter of 2017, mortgage servicing rights caused a net $21 thousand in income, in comparison to $35 thousand for the second quarter of 2016. The lower capitalized additions for 2017 are attributed to a lower mortgage servicing rights value being applied to the originations in 2017 as compared to 2016. For loans of 15 years and less, the value was .712% in the second quarter 2017 versus .821% in second quarter 2016. For loans over 15 years, the value was 1.001% versus 1.026% for the same periods respectively. The carrying value is well below the market value of $3.2 million which indicates any large expense to fund the valuation allowance to be unlikely in 2017.

 

     (In Thousands)  
     2017      2016  

Beginning Balance, January 1

   $ 2,192      $ 2,056  

Capitalized Additions

     219        275  

Amortization

     (181      (188
  

 

 

    

 

 

 

Ending Balance, June 30

     2,230        2,143  

Valuation Allowance

     —          —    
  

 

 

    

 

 

 

Mortgage Servicing Rights, net June 30

   $ 2,230      $ 2,143  
  

 

 

    

 

 

 

Noninterest Expense

For the second quarter 2017, noninterest expenses were $441 thousand higher than for the same quarter in 2016. Salaries, wages, and employee benefits increased $365 thousand, with the addition of the Huntertown and Bowling Green offices, and normal merit increases. Data processing charges decreased $53 thousand for second quarter 2017 compared to the second quarter 2016. Two reasons for the improvement was the negotiation of an extended contract with our core processor and 2016 had the additional cost of upgrading Bank customer debit cards to incorporate EMV chip card technology. Both already better align with our future strategies while controlling costs.

Results overall, net income in the second quarter of 2017 was up $249 thousand as compared to the same quarter last year. The Company has done an exceptional job of growing loans while keeping past dues low. The Company remains strong, stable, and well capitalized and has the capacity to continue to cover the increased costs of expansion and doing business in a less than robust economy.

Comparison of Noninterest Results of Operations – Second Quarter 2017 to First Quarter 2017

Provision Expense

Total provision for loan losses was $48 thousand lower for second quarter 2017 than for first quarter 2017. Loan growth continued in the second quarter, in addition to strong asset quality. The strong asset quality and low net charge-offs offset any need for additional provision above the $25 thousand that was expensed.

Noninterest Income

Since the first quarter 2017, past due loans have decreased by $1.4 million. Though, net charge-offs were higher at $17 thousand for second quarter 2017 compared to first quarter 2017’s $7 thousand.

Noninterest income for the second quarter 2017 was above the first quarter by $189 thousand. The increase is attributed almost entirely to the total services fees and charges. The increased number of business days in the second quarter 2017 as compared to first quarter 2017, provided more opportunity to transact business and generate noninterest income.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

Noninterest Expense

For the second quarter 2017, noninterest expenses were only $27 thousand higher than in first quarter 2017. Mortgage servicing rights amortization was $13 thousand higher than last quarter. In addition, a loss on sale of other assets owned was $14 thousand for the quarter which consisted of a loss on sale of OREO property in the amount of $28 thousand and a gain on the sale of fixed assets in the amount of $14 thousand. Salaries and wages increased by $136 thousand from the previous quarter while employee benefits decreased by $139 thousand over the previous quarter.

Net occupancy expenses decreased from the previous quarter by $39 thousand. The decrease is primarily attributed to the increase in brokerage commission of $55 thousand over first quarter 2017. Of the $19 thousand increase for furniture and fixture expenses over the first quarter, $18 thousand was for maintenance contracts.

General and administrative was up by $27 thousand over first quarter. As the amount is not large, it is made up of many varying activities of which no single one is notable.

Net Income

Overall, net income for the second quarter of 2017 was higher by $384 thousand as compared to the first quarter of 2017. The first quarter of the year has a tendency to lack. This is unchanged from last year. The Company has done an exceptional job of growing loans while keeping past dues low. The growth in loans has spurred the large increase in net interest income that has flowed through to the bottom line. The opening of the new offices may create a slight drag in the short run; however, the Company remains focused on the long term.

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

Comparison of Results of Operation for year to date ended June 30, 2017 and 2016

Interest Income

Higher loan balances created the improvement in the interest income for the first half 2017 as compared to first half 2016. Interest income rose 7.9% or $1.5 million while interest income from loans accounted for the majority of the increase. Offsetting the improvement from loans was a decrease in securities income of $33 thousand. The change in the balance sheet mix along with the loan growth caused the asset yield to improve by 7 basis points to 4.05% for the first half 2017 compared to first half 2016’s 3.98%.

With each quarter of 2017, the loan growth contributes to the continued improvement in asset yield. The growth factor contribution is shown in the charts which follow. Improvement in loan interest income far outweighs the loss for investments decreasing.

The average interest earning asset base was $53.6 million higher in first half 2017 than for first half 2016, an increase of approximately 5.7%.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

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

 

     (In Thousands)               
     Year to Date Ended 6/30/2017      Yield/Rate  
Interest Earning Assets:    Average
Balance
     Interest/
Dividends
     June 30,
2017
    June 30,
2016
 

Loans

   $ 769,931      $ 17,820        4.63     4.64

Taxable Investment Securities

     159,958        1,427        1.78     1.60

Tax-exempt Investment Securities

     53,151        539        3.07     3.47

Fed Funds Sold & Interest Bearing Deposits

     12,314        59        0.96     0.51
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Interest Earning Assets

   $ 995,354      $ 19,845        4.05     3.98
  

 

 

    

 

 

    

 

 

   

 

 

 

Change in Year to Date June 30, 2017 Interest Income Compared to June 30, 2016 (In Thousands)

 

            Due to         
Interest Earning Assets:    Change      Volume      Due to Rate  

Loans

   $ 1,452      $ 1,469      $ (17

Taxable Investment Securities

     74        (84      158  

Tax-exempt Investment Securities

     (107      (51      (56

Fed Funds Sold & Interest Bearing Deposits

     35        14        21  
  

 

 

    

 

 

    

 

 

 

Total Interest Earning Assets

   $ 1,454      $ 1,348      $ 106  
  

 

 

    

 

 

    

 

 

 

Interest Expense

Interest expense was also higher for first half 2017 compared to first half 2016. At $2.4 million, first half 2017 was up $389 thousand as compared to same time period 2016 or 19.1%

The average balance of interest-bearing liabilities was higher by $34.3 million in 2017 than first half 2016. Interest bearing deposits increased $71.4 million while Fed Funds sold and securities sold under agreement to repurchase decreased by $37.1 million. The higher balance coupled with the slight variation of the balance sheet mix, resulted in a 8 basis points increase in the cost of funds at 0.66% for first half 2017 as compared to 2016’s 0.58%. The cost decreased during second quarter as compared to first quarter’s 2017 rate.

The Federal Funds and prime rate increases of 25 basis points in December 2015, December 2016, March and June 2017 has only had a marginal effect on the Bank’s pricing methodologies. Loans with variable rates and floors have had the rates begin to increase over the floors with the 100 basis points increase in prime rate over the last 18 months. This should be evident in the third quarter chart relating to the change report due to volume and rate. On the liability side, the slow pace of the rate increases has placed more pressure on the short term funds. Competition for public funds had caused those short term deposits to price higher. This is evidenced in the change chart as the increase cost is driven more by rate than volume.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

     (In Thousands)               
     Year to Date Ended
June 30, 2017
     Yield/Rate  
Interest Bearing Liabilities:    Average
Balance
     Interest/
Dividends
     June 30,
2017
    June 30,
2016
 

Savings Deposits

   $ 503,137      $ 1,065        0.42     0.40

Other Time Deposits

     189,540        1,063        1.12     0.94

Other Borrowed Money

     10,000        73        1.46     1.46

Fed Funds Purchased & Securities Sold under Agreement to Repurch.

     31,358        231        1.47     0.67
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Interest Bearing Liabilities

   $ 734,035      $ 2,432        0.66     0.58
  

 

 

    

 

 

    

 

 

   

 

 

 

Change in Year to Date June 30, 2017 Interest Expense Compared to June 30, 2016 (In Thousands)

 

            Due to         
Interest Bearing Liabilities:    Change      Volume      Due to Rate  

Savings Deposits

   $ 205      $ 146      $ 59  

Other Time Deposits

     184        13        171  

Other Borrowed Money

     —          —          —    

Fed Funds Purchased & Securities Sold under Agreement to Repurch.

     —          (273      273  
  

 

 

    

 

 

    

 

 

 

Total Interest Bearing Liabilities

   $ 389      $ (114    $ 503  
  

 

 

    

 

 

    

 

 

 

Net Interest Income

Overall, net interest spread and net interest margin figures for the first half 2017 are down from 2016 by one basis point and up seven basis points from 2015. Net interest margin for the first half of 2017 is higher than the same period 2016 and 2015. As the chart below illustrates, both higher yields on interest and dividend income, were offset by higher interest expense resulting in total net interest margin up 3 basis points since the first half of 2016 and over first half 2015 by 11 basis points.

 

     6/30/2017     6/30/2016     6/30/2015  

Interest/Dividend income/yield

     4.05     3.98     3.85

Interest Expense / yield

     0.66     0.58     0.53
  

 

 

   

 

 

   

 

 

 

Net Interest Spread

     3.39     3.40     3.32
  

 

 

   

 

 

   

 

 

 

Net Interest Margin

     3.56     3.55     3.45
  

 

 

   

 

 

   

 

 

 

Net interest income was up $1.1 million in the first half 2017 over the same time frame in 2016 due to the increase in loan income even with higher interest expense, as previously mentioned. New loans added in 2016 and 2017 will continue to generate more income; the benefits of the Company’s strategy of repositioning the balance sheet will continue to grow.

Comparison of Noninterest Results of Operations – First Half 2017 to First Half 2017

Provision Expense

Total provision for loan losses was $518 thousand lower for six months 2017 than for the first six months 2016. While loan growth continued in the first half, strong asset quality continued also. The strong asset quality and lower net charge-offs offset any need for additional provision above the $98 thousand that was expensed.

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

     (In Thousands)  
     Six Months
Ended
    Six Months
Ended
    Six Months
Ended
 
     June-17     June-16     June-15  

Loans, net

   $ 790,838     $ 729,915     $ 619,308  
  

 

 

   

 

 

   

 

 

 

Daily average of outstanding loans

   $ 769,931     $ 706,523     $ 613,915  
  

 

 

   

 

 

   

 

 

 

Allowance for Loan & Lease Losses—January 1

   $ 6,784     $ 6,057     $ 5,905  

Loans Charged off:

      

Consumer Real Estate

     —         64       —    

Agricultural Real Estate

     —         —         —    

Agricultural

     —         18       —    

Commercial Real Estate

     —         3       85  

Commercial and Industrial

     —         20       390  

Consumer

     97       153       146  
  

 

 

   

 

 

   

 

 

 
     97       258       621  
  

 

 

   

 

 

   

 

 

 

Loan Recoveries

      

Consumer Real Estate

     13       21       27  

Agricultural Real Estate

     —         —         —    

Agricultural

     2       5       3  

Commercial Real Estate

     7       5       202  

Commercial and Industrial

     6       5       23  

Consumer

     45       42       91  
  

 

 

   

 

 

   

 

 

 
     73       78       346  
  

 

 

   

 

 

   

 

 

 

Net Charge Offs

     24       180       275  

Provision for loan loss

     98       616       297  
  

 

 

   

 

 

   

 

 

 

Allowance for Loan & Lease Losses—June 30

   $ 6,858     $ 6,493     $ 5,927  

Allowance for Unfunded Loan Commitments & Letters of Credit—June 30

     219       219       201  
  

 

 

   

 

 

   

 

 

 

Total Allowance for Credit Losses—June 30

   $ 7,077     $ 6,712     $ 6,128  
  

 

 

   

 

 

   

 

 

 

Ratio of net charge-offs to average Loans outstanding

     0.00     0.01     0.04
  

 

 

   

 

 

   

 

 

 

Ratio of Allowance for Loan Loss to Nonperforming Loans

     502.23     424.86     193.53
  

 

 

   

 

 

   

 

 

 

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MATERIAL CHANGES IN RESULTS OF OPERATIONS (Continued)

 

Noninterest Income

In comparing past due balances of loans 30+ days, June 30, 2017 balances were $349.4 thousand lower than Jun 30, 2016 balances. Net charge-offs were also lower at $24 thousand for first half 2017 compared to first half 2016’s $180 thousand.

Noninterest income for the first six months 2017 also was below the first half by $197 thousand. The increased number of business days in 2016 as compared to first half 2017, provided more opportunity to transact business and generate noninterest income. All line items in first half 2017 were higher than first half 2016 with the only decrease in gain on available for sale securities by $409 thousand which overshadowed the other improvements in 2017 noninterest income numbers.

Noninterest Expense

Through the first half 2017, noninterest expenses were $526 thousand higher than in first half 2016. The effect of an increase of $458 thousand in salaries and wages was combined with an increase of $128 thousand in employee benefits. Two offices were added in 2016 whose expenses were only partially impacting 2016 and fully impacting 2017 salaries and wages, medical benefits. Higher profit levels are also driving higher incentive accruals for 2017. The other portion of 2017’s increase in employee benefits was derived from higher costs related to medical claims for the period

Data processing fees were $153 thousand lower than last year due to seven year contract extension signed in the third quarter of 2016. It has helped reduce the expense while adding new products and services to better align with our customers’ expectations in the coming years. We have already added additional products in 2017, mainly focused on mobile services and business deposit accounts.

The next largest decrease for 2017 was in the FDIC assessment. This line item on the income statement was down by $77 thousand over first half 2016. Improved FDIC funding and asset quality of the Bank aided to keep this expense below 2016 levels.

Net Income

Overall, net income through the first half of 2017 was up $607 thousand as compared to the first half of 2016. The Company continues to grow loans while keeping past dues low. The growth in loans has spurred the increase in net interest income that has flowed through to the bottom line. The asset quality has kept loan provision down as the allowance for loan loss remains adequate for the level of credit risk. The opening of the new offices has hampered earnings in the short term; however, the Company remains focused on the long term.

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

FORWARD LOOKING STATEMENTS

Statements contained in this portion of the Company’s report may be forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Such forward-looking statements are based on current expectations, but actual results may differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. Other factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Bank’s market area, changes in relevant accounting principles and guidelines and other factors

 

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ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS (Continued)

 

over which management has no control. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results differ from those projected in the forward-looking statements.

 

ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

 

     % Change                         % Change  
Net Interest    to     Rate      Rate     Cumulative      to  

Margin (Ratio)

   Flat Rate     Direction      Changes by     Total ($000)      Flat Rate  

2.94%

     -6.32     Rising        3.00     30,520        -2.19

2.98%

     -4.82     Rising        2.00     30,575        -2.02

3.08%

     -1.78     Rising        1.00     30,980        -0.72

3.14%

     0.00     Flat        0.00     31,204        0.00

3.43%

     9.32     Falling        -1.00     33,067        5.97

3.25%

     3.61     Falling        -2.00     31,723        1.66

3.06%

     -2.57     Falling        -3.00     30,299        -2.90

The net interest margin represents the forecasted twelve month margin. The Company also reviews shocks with a 4.0% fluctuation with a delayed time frame of 10 months and over a 24 month time frame. It also shows the effect rate changes will have on both the margin and net interest income. The goal of the Company is to lengthen the term of some of the Bank’s fixed rate liabilities or sources of funds to decrease the exposure to a rising rate environment. Of course, customer desires also impact the Bank’s ability to attract longer term deposits. Currently, the majority of customers look for terms of twelve months and under while the Bank would prefer 24 months and longer. Some movement into the longer term time deposits has occurred. Compared to five years ago, what the Bank has experienced over the years is a decrease in the time balances of our deposit portfolio, therefore a loss of term funding.

The shock chart currently shows a slight tightening in net interest margin over the next twelve months in an increasing rate environment with an even lower tightening in a falling rate environment beginning at the 300 basis point shock level. With the Federal Reserve having raised its rates, the Company has room for widening should rates fall 1%. Cost of funds are below 0.70% so at even the lowest shock of 100 basis points, the Bank cannot take full advantage and reprice funds to match the level of shock. Since the average duration of the majority of the assets is outside the 12 month shock period, the rising rate environment only shows minor improvement. The majority of the newer loans added to the commercial real estate portfolio begin with an initial fixed rate period of three to five years whose variable adjustment is outside of the current shock time frame. The Bank enhanced its use of the software model during 2012 by including decay rates and key rate ties on certain deposit accounts and continues to review and modify those rates as

 

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ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

 

updated data is compiled. Both enhancements were based on historical performance data of the Bank. Both directional changes are within risk exposure guidelines at all levels. The effect of the rate shocks may be mitigated to the extent that not all lines of business are directly tied to an external index and actual balance sheet composition may differ from prediction.

Overall, what the chart shows is that the Company must concentrate on increasing loan spreads on variable loans and extend the duration on cost of funds where possible. Changes in portfolio and/or balance sheet composition are needed for the margin to improve regardless of any rate shock.

 

ITEM 4 CONTROLS AND PROCEDURES

As of June 30, 2017, an evaluation was performed under the supervision and with the participation of the Company’s management including the CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2017. There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

  PART II OTHER INFORMATION

 

  ITEM 1 LEGAL PROCEEDINGS

None

 

  ITEM 1A RISK FACTORS

There have been no material changes in the risk factors disclosed by Registrant in its Report on Form 10-K for the fiscal year ended December 31, 2016.

 

  ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Treasury stock repurchased the quarter ended June 30, 2017 (1).

 

Period

  (a) Total Number
of Shares Purchased
    (b) Average Price
Paid per Share
    (c) Total Number of Shares
Purchased as Part of Publicly
Announced Plan or Programs
    (d) Maximum Number of Shares
that may yet be purchased under
the Plans or Programs
 

4/1/2017 to 4/30/2017

    —         —         —         200,000  

5/1/2017 to 5/31/2017

    —         —         —         200,000  

6/1/2017 to 6/30/2017

    —         —         —         200,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    —         —         —         200,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) From time to time, the Company purchases shares in the market pursuant to a stock repurchase program publicly announced on January 20, 2017. On that date, the Board of Directors authorized the repurchase of 200,000 common shares between January 20, 2017 and December 31, 2017.

 

  ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None

 

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ITEM 4 CONTROLS AND PROCEDURES (Continued)

 

  PART II OTHER INFORMATION (Continued)

 

 

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable

 

ITEM 5 OTHER INFORMATION

 

ITEM 6 EXHIBITS

 

3.1    Amended Articles of Incorporation of the Registrant (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on July 27, 2016)
3.2    Amended and Restated Code of Regulations of the Registrant.
31.1    Rule 13-a-14(a) Certification - CEO
31.2    Rule 13-a-14(a) Certification - CFO
32.1    Section 1350 Certification - CEO
32.2    Section 1350 Certification - CFO
101.INS    XBRL Instance Document (1)
101.SCH    XBRL Taxonomy Extension Schem Document (1)
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB    XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document (1)

 

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Table of Contents

SIGNATURES

SIGNATURES

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

 

      Farmers & Merchants Bancorp, Inc.,
Date: July 26, 2017     By:  

/s/ Paul S. Siebenmorgen

      Paul S. Siebenmorgen
      President and CEO
Date: July 26, 2017     By:  

/s/ Barbara J. Britenriker

      Barbara J. Britenriker
      Exec. Vice-President and CFO

 

58

EX-3.2

Exhibit 3.2

CODE OF REGULATIONS

OF

FARMERS & MERCHANTS BANCORP, INC.

(Amended and Restated April 20, 2017)

ARTICLE I

SEAL

The Board of Directors may from time to time adopt such seal or seals, if any, as they deem appropriate for the use of the Corporation in transacting its business.

ARTICLE II

SHAREHOLDERS

(a) Annual Meeting. The annual meeting of the shareholders shall be held at the principal office of the Corporation, or at such other place either within or without the State of Ohio as may be specified in the notice required under paragraph (c) of this Article not earlier than the second Tuesday of January nor later than the third Tuesday of April of each year, as shall be fixed by the Board of Directors, at which time there shall be elected a Board of Directors to serve until the end of the term to which they are elected and until their successors are elected and qualified. Any other business may be transacted at the annual meeting without specific notice of such business being given, except such business as may require specific notice by law.

(b) Special Meetings. Special meetings of the shareholders may be called and held as provided by law.

(c) Notice. Notice of each annual or special meeting of the shareholders shall be given in writing either by the President, any Vice President, the Secretary, or any Assistant Secretary, not less than ten (10) days before the meeting. Any shareholder may, at any time, waive any notice required to be given under these Regulations.

(d) Quorum. Except as otherwise provided by the Articles of Incorporation of the Corporation, this Code of Regulations of the Corporation, or by applicable law, thirty-three and one-third percent (331/3%) of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders and a majority of votes cast at any meeting at which a quorum is present shall be decisive of any motion. Although less than a quorum of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified.

(e) Order of Business. At all shareholders’ meetings the order of business shall be as follows unless changed by a majority vote:

 

  1. Reading of minutes of previous meeting and acting thereon;

 

  2. Reports of Directors or Committees;

 

  3. Reports of Officers;

 

  4. Unfinished business;

 

  5. Election of Directors;

 

  6. New or miscellaneous business;

 

  7. Adjournment.

(f) Organization. The President shall preside at all meetings of the shareholders, but in his absence the shareholders shall elect another officer or a shareholder to so preside. The Secretary of the Corporation shall act as Secretary of all meetings of the shareholders, but in the absence of the Secretary at any meeting of the shareholders, the presiding officer may appoint any person to act as Secretary of the meeting.


ARTICLE III

DIRECTORS

(a) Number. The Board of Directors shall be composed of not less than nine (9) nor more than twenty (20) persons, as shall be fixed by the shareholders in accordance with applicable law, who shall be elected annually in accordance with the provisions of the Articles of Incorporation by action of the shareholders. Any Director’s office created by the Directors by reason of an increase in their number may be filled by action of a majority of the Directors then in office.

The number of Directors fixed in accordance with the immediately preceding paragraph may also be increased or decreased by the Directors at a meeting or by action in writing without a meeting, and the number of Directors as so changed shall be the number of Directors until further changed in accordance with this Section; provided, that no such decrease in the number of Directors shall have the effect of shortening the term of any incumbent Director; and provided, further, that the number of Directors shall not be increased by the Directors to more than three Directors beyond the number of Directors as fixed at the most recently held meeting of shareholders called for the purpose of electing Directors.

(b) Qualifications. Each member of the Board of Directors shall be not more than sixty-five (65) years of age on the first day of January of the year prior to his first election. He shall be eligible for continuous re-election until he attains the age of seventy-two (72) years. The foregoing qualification relating to age at the time of becoming a Director shall not be applicable to the first Directors of this corporation; the foregoing qualification relating to continuous re-election until age 72 shall be applicable to the first Directors of this corporation.

Any Director upon attaining the age of seventy-two (72) years shall become and be a Director Emeritus. As such, he shall have the right to attend meetings of the Board of Directors, but without the right to vote and without being charged with the responsibilities or subject to the liabilities of the corporation’s Directors.

(c) Vacancies. Vacancies in the Board of Directors shall be filled as provided by the laws of the State of Ohio then in effect.

(d) Time of Meeting. The Board of Directors shall meet at the principal office of the Corporation, at least annually, immediately following the annual meeting of the shareholders, but the Directors shall have the authority to change the time and place of their said meeting by the adoption of By-Laws or by resolution.

(e) Call and Notice. Meetings of the Board of Directors other than the annual meeting may be called at any time by the President and shall be called by the President upon the request of two members of the Board. Such meetings may be held at any place within or without the State of Ohio. Notice of the annual meeting need not be given and each director shall take notice thereof, but this provision shall not be held to prevent the giving of notice in such manner as the Board may determine. The Board shall decide what notice shall be given and the length of time prior to the meetings that such notice shall be given of all other meetings. Any meeting at which all of the directors are present shall be a valid meeting whether notice thereof was given or not and any business may be transacted at such a meeting.

(f) Presence Through Communications Equipment. Meetings of the Board of Directors, and meetings of any Committee thereof, may be held through any communications equipment if all persons participating can hear each other and participation in a meeting pursuant to this subparagraph (d) shall constitute presence at such a meeting.

(g) By-Laws. The Board of Directors may adopt By-Laws for their own government and that of the Corporation provided such By-Laws are not inconsistent with the Articles of Incorporation or these Regulations.

ARTICLE IV

COMMITTEES

The Board of Directors may, by resolution, designate not less than three (3) of its number to serve on an Executive Committee or such other committee or committees as the Board may from time to time constitute. The Board of Directors may delegate to any such Executive Committee any of the authority of the Directors, however conferred, other than that of filling vacancies among the Directors or in any committee of the Directors. The specific duties and authority of any such committee or committees shall be stated in the resolution constituting the same.


ARTICLE V

OFFICERS

(a) Number. The officers of the Corporation shall be a President, one or more Vice Presidents, a Secretary and a Treasurer. Any two or more of the offices may be held by the same persons, but no officer shall execute, acknowledge, or verify any instrument in more than one capacity if such instrument is required to be executed, acknowledged or verified by two or more officers.

(b) Other Officers. The Board of Directors is authorized in its discretion to establish the offices of Chairman of the Board and Executive Vice President, and shall have the further power to provide for such other officers, assistant officers and agents as it shall deem necessary from time to time and may dispense with any of said offices and agencies at any time.

(c) Election, Term and Removal. At the first meeting of the Board of Directors after the annual meeting of shareholders, the Board shall select one of its members by a majority vote to be President of the Corporation. It shall also select all other officers of the Corporation by a majority vote, but none of such other officers shall be required to be members of the Board, except the Chairman of the Board, if that office is established. All officers of the Corporation shall hold office for one year and until their successors are elected and qualified.

(d) Vacancies and Absence. If any office shall become vacant by reason of the death, resignation, disqualification, or removal of the incumbent thereof, or other cause, the Board of Directors may elect a successor to hold office for the unexpired term in respect to which such vacancy occurred or was created. In case of the absence of any officer of the Corporation or for any reason that the Board of Directors may determine as sufficient, the said Board may delegate the powers and duties of such officer to any other officer or to any director, except where otherwise provided by these Regulations or by statute, for the time being.

ARTICLE VI

DUTIES OF OFFICERS

(a) Chairman of the Board. The Chairman of the Board of Directors, if the Board establishes such office, shall preside at all meetings of the Board, appoint all special or other Committees unless otherwise ordered by the Board, confer with and advise all other officers of the Corporation, and perform such other duties as may be delegated to him from time to time by the Board.

(b) President. The President shall be the Chief Executive Officer and active head of the Corporation, and in the recesses of the Board of Directors and the Executive Committee, if the Board establishes such a committee, shall have general control and management of all its business and affairs. He shall make such recommendations to the Board of Directors, or any committees thereof, as he thinks proper, and he shall bring before said Board such information as may be required touching the business and property of the Corporation. He shall perform generally all the duties incident to the office of President, as required or authorized by law and such as are usually vested in the President of a similar corporation.

(c) Vice Presidents. The Vice Presidents, including the Executive Vice President, if the Board establishes such office, shall perform such duties as may be delegated to them by the Board of Directors, or assigned to them from time to time by the Board of Directors or the President. The Executive Vice President, if the Board establishes such office, or the Vice President, or in the event there shall be more than one Vice President, such Vice President as may be designated by the Board, shall perform the duties and have the powers of the President in case of the absence of the latter from his office, and during such absence such Vice President shall be authorized to exercise all the functions of the President and shall sign all papers and perform all duties as acting President.

(d) Secretary. The Secretary shall keep a record of all proceedings of the Board of Directors, and of all meetings of shareholders, and shall perform such other duties as may be assigned to him by the Board of Directors or the President.

(e) Treasurer. The Treasurer shall have charge of the funds and accounts of the Corporation. He shall keep proper books of account showing all receipts, expenditures and disbursements of the Corporation, with vouchers in support thereof. He shall also from time to time, as required, make reports and statements to the Directors as to the financial condition of the Corporation, and submit detailed statements of receipts and disbursements; he shall perform such other duties as shall be assigned to him from time to time by the Board of Directors or the President.


(f) Bonds of Officers. The Board of Directors shall determine which officers, if any, of the Corporation shall give bond, and the terms and amount thereof, the expense to be paid by the Corporation.

ARTICLE VII

INDEMNIFICATION OF DIRECTORS AND OFFICERS

(a) The Corporation shall indemnify each present and future Director and Officer, his heirs, executors and administrators, and may indemnify any employee or agent, and his heirs, executors and administrators, who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the Corporation, by reason of the fact that he is or was such director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys’ fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, he had reasonable cause to believe that his conduct was unlawful.

(b) The Corporation shall indemnify each present and future Director and Officer, his heirs, executors and administrators, and may indemnify any employee or agent, and his heirs, executors and administrators, who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure judgment in its favor by reason of the fact that he is or was such director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee or agent of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys’ fees, and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court of Common Pleas or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or such other court shall deem proper.

(c) To the extent that a Director, Officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in divisions (a) and (b) above, or in defense of any claim, issue, or matter therein, he shall be indemnified by the Corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection therewith.

(d) Any indemnification under divisions (a) and (b) above, unless ordered by the court, shall be made by the Corporation only as authorized in the specific case upon the determination that indemnification of the Director, Officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in divisions (a) and (b) above. Such determination shall be made (i) by a majority vote of a quorum consisting of directors of the Corporation who were not and are not parties to or threatened with any such action, suit, or proceeding or (ii) if such a quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel other than an attorney, or a firm having associated with it an attorney, who has been retained by or who has performed services for the Corporation or any person to be indemnified within the past five years, or (iii) by the shareholders, or (iv) by the Court of Common Pleas or the court in which such action, suit, or proceeding was brought. If any determination is made hereunder by the directors of the Corporation or by independent legal counsel in connection with a threatened, pending or completed action or suit by or in the right of the Corporation, such determination shall be promptly communicated to the person who threatened or brought such action or suit after it is made.

(e) Expenses, including attorneys’ fees, incurred with respect to any legal matter may be paid by the Corporation prior to the final disposition thereof, as authorized by the directors, upon receipt of an undertaking by or on behalf of the recipient to repay such amount, unless it shall ultimately be determined that he is entitled to indemnification.


(f) Such indemnification shall not be deemed exclusive of any other rights to which such Director, Officer, employee or agent may be entitled under the Articles of Incorporation, these Regulations, any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to, or be available to, a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.

(g) The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under this section.

ARTICLE VIII

STOCK

(a) Certificates of Stock. Each shareholder of this Corporation whose stock has been fully paid for shall be entitled to a certificate or certificates, showing the number of shares registered in his name on the books of the Corporation. Each certificate shall be signed by the Chairman of the Board or the President or any Vice President and by the Secretary, any Assistant Secretary, the Treasurer or any Assistant Treasurer. A full record of each certificate, as issued, shall be entered on the stub thereof.

(b) Transfers of Stock. Shares shall be transferable on the books of the Corporation by the holders thereof in person or by a duly authorized attorney upon surrender of the Certificates therefor with duly executed assignment endorsed thereon or attached thereto. Evidence of authority to endorse any certificate and to request its transfer shall be produced to the Corporation. In case of transfer by executors, administrators, guardians or other legal representatives or fiduciaries, appropriate legal evidence of their authority to act shall be produced and may be required to be filed with the Corporation. No transfer shall be made until the stock certificate in question and such evidence of authority are delivered to the Corporation.

(c) Transfer Agents and Registrars. The Board of Directors may appoint an agent or agents to keep the records of the shares of the Corporation, or to transfer or to register shares, or both, in Ohio or any other state and shall define the duties and liabilities of any such agent or agents.

(d) Lost, Destroyed or Mutilated Certificates. If any certificate of stock in this Corporation becomes worn, defaced or mutilated, the Directors, upon production and surrender thereof, may order the same cancelled, and may issue a new certificate in lieu of the same. If any certificate of stock be lost or destroyed, a new certificate may be issued upon such terms and under such regulations as may be adopted by the Board of Directors.

ARTICLE IX

AMENDMENTS

These Regulations, or any of them, may be altered, amended, added to or repealed as provided by law and the Articles of Incorporation of the Corporation.

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Paul S. Siebenmorgen, President and CEO of Farmers & Merchants Bancorp, Inc., certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Acts Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 26, 2017      

/s/ Paul S. Siebenmorgen

      Paul S. Siebenmorgen
      President and Chief Executive Officer
EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Barbara J. Britenriker, Executive Vice-President and CFO of Farmers & Merchants Bancorp, Inc., certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Farmers & Merchants Bancorp, Inc.;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Acts Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 26, 2017      

/s/ Barbara J. Britenriker

      Barbara J Britenriker
      Executive Vice President and
      Chief Financial Officer
EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Farmers & Merchants Bancorp, Inc. on Form 10-Q for the period ending June 30, 2017 as filed with the Securities and Exchange Commission (“the report”), I, Paul S. Siebenmorgen, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Farmers & Merchants Bancorp, Inc. as of the dates and for the periods expressed in the Report.

 

Date: July 26, 2017      

/s/ Paul S. Siebenmorgen

      Paul S. Siebenmorgen, President and
      Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Farmers & Merchants Bancorp, Inc. and will be retained by Farmers & Merchants Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Farmers & Merchants Bancorp, Inc. on Form 10-Q for the period ending June 30, 2017, as filed with the Securities and Exchange Commission (“the report”), I, Barbara J. Britenriker, Exec. Vice-President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Farmers & Merchants Bancorp, Inc. as of the dates and for the periods expressed in the Report.

 

Date: July 26, 2017      

/s/ Barbara J. Britenriker

      Barbara J. Britenriker, Exec. Vice President
      and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Farmers & Merchants Bancorp, Inc. and will be retained by Farmers & Merchants Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.