fmnb-10q_20180930.htm

 

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

Securities Exchange Act of 1934

For the Quarterly period ended September 30, 2018

Commission file number 001-35296

 

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

 

 

OHIO

 

34-1371693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No)

 

 

 

20 South Broad Street Canfield, OH

 

44406

(Address of principal executive offices)

 

(Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

Not applicable

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

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

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

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

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

 

Class

 

Outstanding at October 31, 2018

Common Stock, No Par Value

 

27,777,161 shares

 

 

 

 

 

 


 

 

Page Number

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (Unaudited)

 

 

 

 

 

Included in Part I of this report:

 

 

 

 

 

Farmers National Banc Corp. and Subsidiaries

 

 

 

 

 

Consolidated Balance Sheets

2

 

Consolidated Statements of Income

3

 

Consolidated Statements of Comprehensive Income

4

 

Consolidated Statement of Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2

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

42

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

Item 4

Controls and Procedures

52

 

 

 

PART II - OTHER INFORMATION

52

 

 

 

Item 1

Legal Proceedings

52

 

 

 

Item 1A

Risk Factors

53

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 3

Defaults Upon Senior Securities

53

 

 

 

Item 4

Mine Safety Disclosures

53

 

 

 

Item 5

Other Information

53

 

 

 

Item 6

Exhibits

54

 

 

SIGNATURES

55

 

 

10-Q Certifications

 

 

 

Section 906 Certifications

 

 

 

 

1


 

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

September 30,

2018

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

19,652

 

 

$

17,785

 

Federal funds sold and other

 

 

55,983

 

 

 

39,829

 

TOTAL CASH AND CASH EQUIVALENTS

 

 

75,635

 

 

 

57,614

 

Securities available for sale

 

 

389,996

 

 

 

392,937

 

Equity securities

 

 

6,892

 

 

 

5,579

 

Loans held for sale

 

 

1,428

 

 

 

272

 

Loans

 

 

1,691,532

 

 

 

1,577,381

 

   Less allowance for loan losses

 

 

13,377

 

 

 

12,315

 

NET LOANS

 

 

1,678,155

 

 

 

1,565,066

 

Premises and equipment, net

 

 

21,482

 

 

 

22,286

 

Goodwill

 

 

38,201

 

 

 

38,201

 

Other intangibles

 

 

6,104

 

 

 

7,168

 

Bank owned life insurance

 

 

34,537

 

 

 

33,877

 

Other assets

 

 

40,248

 

 

 

36,069

 

TOTAL ASSETS

 

$

2,292,678

 

 

$

2,159,069

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

426,689

 

 

$

412,346

 

Interest-bearing

 

 

1,332,022

 

 

 

1,192,373

 

TOTAL DEPOSITS

 

 

1,758,711

 

 

 

1,604,719

 

Short-term borrowings

 

 

264,059

 

 

 

289,565

 

Long-term borrowings

 

 

6,214

 

 

 

6,994

 

Other liabilities

 

 

14,905

 

 

 

15,717

 

TOTAL LIABILITIES

 

 

2,043,889

 

 

 

1,916,995

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common Stock - Authorized 50,000,000 shares in 2018 and 35,000,000 in 2017; issued 28,179,598 in 2018 and 2017

 

 

185,840

 

 

 

186,903

 

Retained earnings

 

 

77,165

 

 

 

59,208

 

Accumulated other comprehensive income (loss)

 

 

(10,671

)

 

 

596

 

Treasury stock, at cost; 402,437 shares in 2018 and 635,550 in 2017

 

 

(3,545

)

 

 

(4,633

)

TOTAL STOCKHOLDERS' EQUITY

 

 

248,789

 

 

 

242,074

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,292,678

 

 

$

2,159,069

 

 

See accompanying notes

 

 

 

2


 

CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands except Per Share Data)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

(Unaudited)

 

September 30,

2018

 

 

September 30,

2017

 

September 30,

2018

 

 

September 30,

2017

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

20,531

 

 

$

17,786

 

$

58,503

 

 

$

51,671

 

Taxable securities

 

 

1,226

 

 

 

1,271

 

 

3,687

 

 

 

3,654

 

Tax exempt securities

 

 

1,461

 

 

 

1,232

 

 

4,172

 

 

 

3,473

 

Dividends

 

 

167

 

 

 

136

 

 

467

 

 

 

374

 

Federal funds sold and other interest income

 

 

178

 

 

 

126

 

 

490

 

 

 

271

 

TOTAL INTEREST AND DIVIDEND INCOME

 

 

23,563

 

 

 

20,551

 

 

67,319

 

 

 

59,443

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,242

 

 

 

1,182

 

 

5,376

 

 

 

3,213

 

Short-term borrowings

 

 

1,353

 

 

 

644

 

 

3,374

 

 

 

1,472

 

Long-term borrowings

 

 

49

 

 

 

50

 

 

142

 

 

 

179

 

TOTAL INTEREST EXPENSE

 

 

3,644

 

 

 

1,876

 

 

8,892

 

 

 

4,864

 

NET INTEREST INCOME

 

 

19,919

 

 

 

18,675

 

 

58,427

 

 

 

54,579

 

Provision for loan losses

 

 

950

 

 

 

950

 

 

2,475

 

 

 

2,950

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

18,969

 

 

 

17,725

 

 

55,952

 

 

 

51,629

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

1,151

 

 

 

1,077

 

 

3,139

 

 

 

3,017

 

Bank owned life insurance income

 

 

219

 

 

 

193

 

 

660

 

 

 

585

 

Trust fees

 

 

1,827

 

 

 

1,608

 

 

5,374

 

 

 

4,809

 

Insurance agency commissions

 

 

567

 

 

 

531

 

 

1,979

 

 

 

1,877

 

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

 

 

(34

)

 

 

0

 

 

11

 

 

 

(1

)

Retirement plan consulting fees

 

 

470

 

 

 

480

 

 

1,314

 

 

 

1,392

 

Investment commissions

 

 

273

 

 

 

184

 

 

844

 

 

 

659

 

Net gains on sale of loans

 

 

804

 

 

 

758

 

 

1,897

 

 

 

2,256

 

Debit card and EFT fees

 

 

814

 

 

 

770

 

 

2,490

 

 

 

2,259

 

Other operating income

 

 

387

 

 

 

457

 

 

1,086

 

 

 

1,147

 

TOTAL NONINTEREST INCOME

 

 

6,478

 

 

 

6,058

 

 

18,794

 

 

 

18,000

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

8,966

 

 

 

8,922

 

 

26,532

 

 

 

26,062

 

Occupancy and equipment

 

 

1,597

 

 

 

1,546

 

 

4,912

 

 

 

4,764

 

State and local taxes

 

 

475

 

 

 

436

 

 

1,413

 

 

 

1,277

 

Professional fees

 

 

687

 

 

 

726

 

 

2,122

 

 

 

2,248

 

Merger related costs

 

 

0

 

 

 

270

 

 

25

 

 

 

436

 

Advertising

 

 

489

 

 

 

405

 

 

1,143

 

 

 

966

 

FDIC insurance

 

 

218

 

 

 

235

 

 

665

 

 

 

704

 

Intangible amortization

 

 

354

 

 

 

379

 

 

1,063

 

 

 

1,108

 

Core processing charges

 

 

778

 

 

 

702

 

 

2,311

 

 

 

2,074

 

Telephone and data

 

 

298

 

 

 

249

 

 

773

 

 

 

732

 

Other operating expenses

 

 

2,318

 

 

 

1,921

 

 

5,775

 

 

 

5,797

 

TOTAL NONINTEREST EXPENSES

 

 

16,180

 

 

 

15,791

 

 

46,734

 

 

 

46,168

 

INCOME BEFORE INCOME TAXES

 

 

9,267

 

 

 

7,992

 

 

28,012

 

 

 

23,461

 

INCOME TAXES

 

 

1,183

 

 

 

2,009

 

 

4,129

 

 

 

5,985

 

NET INCOME

 

$

8,084

 

 

$

5,983

 

$

23,883

 

 

$

17,476

 

EARNINGS PER SHARE - basic

 

$

0.29

 

 

$

0.22

 

$

0.86

 

 

$

0.64

 

EARNINGS PER SHARE - fully diluted

 

$

0.29

 

 

$

0.22

 

$

0.85

 

 

$

0.64

 

 

See accompanying notes

 

3


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

(Unaudited)

 

Sept. 30,

2018

 

 

Sept. 30,

2017

 

Sept. 30,

2018

 

 

Sept. 30,

2017

 

NET INCOME

 

$

8,084

 

 

$

5,983

 

$

23,883

 

 

$

17,476

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) on available for sale securities

 

 

(4,929

)

 

 

(679

)

 

(14,057

)

 

 

5,642

 

Reclassification adjustment for losses realized in income

 

 

27

 

 

 

0

 

 

24

 

 

 

1

 

Net unrealized holding gains (losses)

 

 

(4,902

)

 

 

(679

)

 

(14,033

)

 

 

5,643

 

Income tax effect

 

 

1,030

 

 

 

239

 

 

2,935

 

 

 

(1,976

)

Other comprehensive income (loss), net of tax

 

 

(3,872

)

 

 

(440

)

 

(11,098

)

 

 

3,667

 

TOTAL COMPREHENSIVE INCOME

 

$

4,212

 

 

$

5,543

 

$

12,785

 

 

$

21,143

 

 

See accompanying notes

 

4


 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

For the

Nine Months Ended

Sept. 30, 2018

 

COMMON STOCK

 

 

 

 

Beginning balance

 

$

186,903

 

Issued 233,113 net shares under the Long Term Incentive Plan

 

 

(2,238

)

Stock compensation expense for unvested shares

 

 

1,175

 

Ending balance

 

 

185,840

 

 

 

 

 

 

RETAINED EARNINGS

 

 

 

 

Beginning balance

 

 

59,208

 

Cumulative effect adjustment upon adoption of ASU 2016-01

 

 

169

 

Beginning balance adjusted

 

 

59,377

 

Net income

 

 

23,883

 

Dividends declared at $0.22 per share

 

 

(6,095

)

Ending balance

 

 

77,165

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

Beginning balance

 

 

596

 

Cumulative effect adjustment upon adoption of ASU 2016-01

 

 

(169

)

Beginning balance adjusted

 

 

427

 

Other comprehensive loss

 

 

(11,098

)

Ending balance

 

 

(10,671

)

 

 

 

 

 

TREASURY STOCK, AT COST

 

 

 

 

Beginning balance

 

 

(4,633

)

Issued 304,978 shares under the Long Term Incentive Plan

 

 

2,238

 

Retained 71,865 shares to cover tax withholdings under the Long Term Incentive Plan

 

 

(1,150

)

Ending balance

 

 

(3,545

)

TOTAL STOCKHOLDERS' EQUITY

 

$

248,789

 

 

See accompanying notes.

 

5


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

Nine Months Ended

 

(Unaudited)

 

Sept 30,

2018

 

 

Sept 30,

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

23,883

 

 

$

17,476

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

2,475

 

 

 

2,950

 

Depreciation and amortization

 

 

2,241

 

 

 

2,343

 

Net amortization of securities

 

 

2,258

 

 

 

1,398

 

Security (gains) losses

 

 

(11

)

 

 

1

 

Loss on land and building sales, net

 

 

0

 

 

 

53

 

Stock compensation expense

 

 

1,175

 

 

 

1,368

 

(Gain) on sale of other real estate owned

 

 

(16

)

 

 

(24

)

Earnings on bank owned life insurance

 

 

(660

)

 

 

(585

)

Origination of loans held for sale

 

 

(51,261

)

 

 

(46,518

)

Proceeds from loans held for sale

 

 

51,851

 

 

 

48,328

 

Net gains on sale of loans

 

 

(1,897

)

 

 

(2,256

)

Net change in other assets and liabilities

 

 

(2,084

)

 

 

(3,304

)

NET CASH FROM OPERATING ACTIVITIES

 

 

27,954

 

 

 

21,230

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities and repayments of securities available for sale

 

 

28,993

 

 

 

32,722

 

Proceeds from sales of securities available for sale

 

 

7,065

 

 

 

54,493

 

Purchases of securities available for sale

 

 

(49,370

)

 

 

(100,251

)

Purchase of equity securities

 

 

(1,326

)

 

 

-

 

Purchase of restricted stock

 

 

(1,156

)

 

 

(790

)

Loan originations and payments, net

 

 

(115,586

)

 

 

(106,311

)

Proceeds from sale of other real estate owned

 

 

209

 

 

 

567

 

Purchase of bank owned life insurance

 

 

0

 

 

 

(3,000

)

Additions to premises and equipment

 

 

(336

)

 

 

(567

)

Net cash received in business combinations

 

 

0

 

 

 

16,519

 

NET CASH FROM INVESTING ACTIVITIES

 

 

(131,507

)

 

 

(106,618

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in deposits

 

 

153,992

 

 

 

50,239

 

Net change in short-term borrowings

 

 

(25,506

)

 

 

87,628

 

Repayment of long-term borrowings

 

 

(817

)

 

 

(5,891

)

Cash dividends paid

 

 

(6,095

)

 

 

(4,360

)

NET CASH FROM FINANCING ACTIVITIES

 

 

121,574

 

 

 

127,616

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

18,021

 

 

 

42,228

 

Beginning cash and cash equivalents

 

 

57,614

 

 

 

41,778

 

Ending cash and cash equivalents

 

$

75,635

 

 

$

84,006

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

8,627

 

 

$

4,675

 

Income taxes paid

 

$

5,600

 

 

$

6,200

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate

 

$

22

 

 

$

207

 

Security purchases not settled

 

$

1,118

 

 

$

4,902

 

Issuance of stock awards

 

$

1,088

 

 

$

138

 

Issuance of stock for business combinations

 

$

0

 

 

$

6,443

 

 

See accompanying notes

 

 

 

6


 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (“Company”) is a Financial Holding Company registered under the Bank Holding Company Act of 1956, as amended.  The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”).  The Bank acquired Bowers Insurance Agency, Inc. (“Bowers”) and consolidated the activity of Bowers with Farmers National Insurance (“Insurance”) during 2016.  The Company acquired Monitor Bancorp, Inc. (“Monitor”), the holding company for Monitor Bank in August of 2017 and consolidated all activity within the Bank.  Farmers National Captive, Inc. (“Captive”) was formed during the third quarter of 2016 and is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and its subsidiaries.  The Captive pools resources with thirteen other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves and to provide insurance where not currently available or economically feasible in today’s insurance market place.  The consolidated financial statements also include the accounts of the Bank’s subsidiaries; Insurance and Farmers of Canfield Investment Co. (“Investments”).  The Company provides trust services through its subsidiary, Farmers Trust Company (“Trust”), retirement consulting services through National Associates, Inc. (“NAI”) and insurance services through the Bank’s subsidiary, Insurance.  The consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, along with the Trust, NAI and Captive.  All significant intercompany balances and transactions have been eliminated in the consolidation.

 

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements.  The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented.  The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.  Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.

 

Estimates:

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

 

Segments:

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

 

Equity:

The Company, with the approval of shareholders at the April 2018 annual meeting, increased the authorized shares available for issuance from 35,000,000 to 50,000,000 shares.  Outstanding shares at September 30, 2018 were 27,777,161.

Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income consists of unrealized gains and losses on securities available for sale and changes in the funded status of the post-retirement health plan, which are recognized as separate components of stockholders equity, net of tax effects.  The post-retirement health plan was eliminated during 2017 and the associated balance sheet accounts, including other comprehensive income were reduced to zero.

 

7


 

New Accounting Standards:

During April of 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.  Under current U.S. GAAP, a premium is typically amortized to the maturity date when a callable debt security is purchased at a premium, even if the holder is certain the call will be exercised.  As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.  The new standard shortens the amortization period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument.  The standard takes effect for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  The Company early adopted this ASU effective January 1, 2018 and there was no material impact on its Consolidated Financial Statements.

In June 2016, FASB issued ASU 2016-13: Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Financial institutions and other organizations will now use forward-looking information to perform their credit loss estimates.  Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.  Additionally, the ASU amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration.  ASU 2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  The Company continues to accumulate historical credit information, has established an internal committee and is in the set-up stage of the installation process of new software in preparation of parallel testing in early 2019.  Adoption of ASU 2016-13 will happen on January 1, 2020.  Management has not determined the full impact the new standard will have on the Consolidated Financial Statements.

In February 2016, FASB issued ASU 2016-02 (Topic 842): Leases.  The main objective of ASU 2016-02 is to provide users with useful, transparent, and complete information about leasing transactions.  ASU 2016-02 requires the rights and obligations associated with leasing arrangements be reflected on the balance sheet in order to increase transparency and comparability among organizations.  Under the updated guidance, lessees will be required to recognize a right-to-use asset and a liability to make a lease payment and disclose key information about leasing arrangements.  ASU 2016-02 is effective for public companies for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.  The Company expects the adoption of this ASU could require capitalization of certain leases in the amount of $2.9 million on the balance sheet as an asset and a related liability of equal amount with no material income statement effect.  Therefore the Company does not expect the adoption of this ASU to have a material impact to its Consolidated Financial Statements.

In January 2016, FASB issued ASU 2016-01: Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  The main objective of ASU 2016-01 is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Some of the amendments in ASU 2016-01  include the following: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others.  The Company adopted ASU 2016-01 on January 1, 2018 and recorded a cumulative effect adjustment of $169 thousand increase to retained earnings and a decrease to accumulated other comprehensive income.  The change in fair value for equity securities which is now recorded in net income rather than comprehensive income was not material for the three and nine months ended September 30, 2018.

In May 2014, FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606).  The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The new guidance is effective for the Company’s year ending December 31, 2018 and was adopted as of January 1, 2018.  Interest income is outside of the scope of the new standard and was not impacted by the adoption of the standard.  An evaluation of the Company’s noninterest income streams resulted in no change in revenue recognition since adoption.  Refer to the Revenue from Contracts with Customers footnote for further discussion on the Company’s accounting for revenue sources within the scope of Accounting Standards Codification (“ASC”) 606.

8


 

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy GAAP.  The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.

 

 

Business Combinations:

 

On August 15, 2017, the Company completed the acquisition of Monitor, the holding company for Monitor Bank.  The transaction involved both cash and 465,787 shares of stock totaling $7.5 million.  Pursuant to the terms of the merger agreement, common shareholders of Monitor were entitled to elect to receive consideration in cash or in common shares, without par value, of the Company, subject to an overall limitation of 85% of the Monitor common shares being exchanged for the Company’s common shares and 15% exchanged for cash.  The per share cash consideration of $769.38 is equal to Monitor’s March 31 tangible book value multiplied by 1.25.  Based on the volume weighted average closing price of the Company’s common shares for the 20 trading days ended August 11, 2017 of $14.04, the final stock exchange ratio was 54.80, resulting in an implied value per Monitor common share of $769.38.

Goodwill of $1.0 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the companies.  The goodwill was determined not to be deductible for income tax purposes.  The fair value of other intangible assets of $673 thousand is related to core deposits.

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

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

1,154

 

Stock

 

6,358

 

Fair value of total consideration transferred

$

7,512

 

Fair value of assets acquired

 

 

 

Cash and due from financial institutions

$

17,673

 

Securities available for sale

 

3,057

 

Loans, net

 

19,315

 

Premises and equipment

 

192

 

Core deposit intangible

 

673

 

Other assets

 

272

 

Total assets

 

41,182

 

Fair value of liabilities assumed

 

 

 

Deposits

 

34,586

 

Accrued interest payable and other liabilities

 

121

 

Total liabilities

 

34,707

 

Net assets acquired

$

6,475

 

Goodwill created

 

1,037

 

Total net assets acquired

$

7,512

 

On June 1, 2016, the Bank completed the acquisition of Bowers, and merged all activity of Bowers with Insurance, the Bank’s wholly-owned insurance agency subsidiary.  Bowers is engaged in selling insurance including commercial, farm, home, and auto property/casualty insurance and will help to meet the needs of all the Company’s customers.  The transaction involved both cash and 123,280 shares of stock totaling $3.2 million, including up to $1.2 million of future payments, contingent upon Bowers meeting performance targets, with an estimated fair value at the acquisition date of $880 thousand.  The first of three contingent payments of cash and stock were made, during July 2017, totaling $316 thousand, which reduce the earnout payable to $564 thousand.  Subsequent to the first payment, management conducted a valuation of the contingent consideration and found it necessary to reduce the future payment liability associated with the remaining two payments down to $200 thousand at year end 2017.  The $364 thousand was recorded as a reduction to acquisition related costs in the Consolidated Statements of Income as of December 31, 2017.  The Company conducts this valuation work annually.  The earnout calculation for the second of three contingent payments was completed during June of 2018 and determined that no payment was earned or due.  The acquisition is part of the Company’s plan to increase the levels of noninterest income and to complement the existing insurance services currently being offered.

9


 

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

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

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

1,137

 

Stock

 

1,138

 

Contingent consideration

 

880

 

Fair value of total consideration transferred

$

3,155

 

Fair value of assets acquired

 

 

 

Cash

$

64

 

Premises and equipment

 

290

 

Other assets

 

34

 

Total assets acquired

 

388

 

Fair value of liabilities assumed

 

124

 

Net assets acquired

$

264

 

 

 

 

 

Assets and liabilities arising from acquisition

 

 

 

Identified intangible assets

 

1,630

 

Deferred tax liability

 

(588

)

Goodwill created

 

1,849

 

Total net assets acquired

$

3,155

 

The following table presents pro forma information as if the Monitor acquisition that occurred during August 2017 actually took place at the beginning of 2017.  The pro forma information includes adjustments for merger related costs, amortization of intangibles arising from the transaction and the related income tax effects.  The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effective on the assumed date.

 

 

For Three Months

Ended Sept. 30,

 

 

For Nine Months

Ended Sept. 30,

 

(In thousands of dollars except per share results)

2017

 

 

2017

 

Net interest income

$

18,841

 

 

$

55,408

 

Net income

$

6,016

 

 

$

17,641

 

Basic and diluted earnings per share

$

0.22

 

 

$

0.64

 

 

 

 

10


 

Securities:

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at September 30, 2018 and December 31, 2017 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In Thousands of Dollars)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

6,561

 

 

$

0

 

 

$

(178

)

 

$

6,383

 

State and political subdivisions

 

205,352

 

 

 

707

 

 

 

(4,784

)

 

 

201,275

 

Corporate bonds

 

1,207

 

 

 

0

 

 

 

(24

)

 

 

1,183

 

Mortgage-backed securities - residential

 

154,726

 

 

 

19

 

 

 

(7,318

)

 

 

147,427

 

Collateralized mortgage obligations - residential

 

22,498

 

 

 

0

 

 

 

(1,197

)

 

 

21,301

 

Small Business Administration

 

13,145

 

 

 

0

 

 

 

(718

)

 

 

12,427

 

Totals

$

403,489

 

 

$

726

 

 

$

(14,219

)

 

$

389,996

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In Thousands of Dollars)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

8,986

 

 

$

0

 

 

$

(69

)

 

$

8,917

 

State and political subdivisions

 

188,032

 

 

 

3,614

 

 

 

(643

)

 

 

191,003

 

Corporate bonds

 

1,238

 

 

 

4

 

 

 

(8

)

 

 

1,234

 

Mortgage-backed securities - residential

 

161,635

 

 

 

419

 

 

 

(1,604

)

 

 

160,450

 

Collateralized mortgage obligations - residential

 

17,898

 

 

 

0

 

 

 

(777

)

 

 

17,121

 

Small Business Administration

 

14,608

 

 

 

0

 

 

 

(396

)

 

 

14,212

 

Totals

$

392,397

 

 

$

4,037

 

 

$

(3,497

)

 

$

392,937

 

 

Proceeds from the sale of portfolio securities were $4.5 million and $7.1 million during the three and nine month periods ended September 30, 2018, respectively.  Gross gains of $1 and $7 thousand along with gross losses of $28 and $31 thousand were realized on these sales during the three and nine month periods ended September 30, 2018.  $7 thousand of unrealized losses during the three month period and $35 thousand of unrealized gains during the nine month period were recognized in the income statement for equity securities as a result of adoption of ASU 2016-01.  Proceeds from the sale of portfolio securities were $0 during the three month and $54.5 million during the nine month periods ended September 30, 2017.  Gross gains were $0 and $730 thousand along with gross losses of $0 and $731 thousand during the same three and nine month periods ended September 30, 2017.

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

 

 

 

September 30, 2018

 

(In Thousands of Dollars)

 

Amortized Cost

 

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

Within one year

 

$

10,619

 

 

$

10,621

 

One to five years

 

 

41,968

 

 

 

41,478

 

Five to ten years

 

 

140,200

 

 

 

137,491

 

Beyond ten years

 

 

20,333

 

 

 

19,251

 

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

 

 

190,369

 

 

 

181,155

 

Total

 

$

403,489

 

 

$

389,996

 

 

 

11


 

The following table summarizes the available-for-sale investment securities with unrealized losses at September 30, 2018 and December 31, 2017, aggregated by major security type and length of time in a continuous unrealized loss position.