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Section 1: 10-Q (FORM 10-Q)

mbcn20190331_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

 

X

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from ___________ to ___________

 

 

 

Commission File Number 001-36613

 

Middlefield Banc Corp.

(Exact Name of Registrant as Specified in its Charter)

 

Ohio

 

34-1585111

State or Other Jurisdiction of

 

I.R.S. Employer Identification No.

Incorporation or Organization

 

 

 

 

 

15985 East High Street, Middlefield, Ohio

 

44062-0035

Address of Principal Executive Offices

 

Zip Code

 

 

 

440-632-1666

 

 

 

Registrant’s Telephone Number, Including Area Code

 

 

 

 

 

 

 

 

 

 

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

 

 

 

 

Securities Registered Pursuant to Section 12(b) of The Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Without Par Value

MBCN

The NASDAQ Stock Market, LLC

(NASDAQ Capital Market)

 

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 X     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 X    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 X

Non-accelerated filer ☐  

Smaller reporting company X

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 Act).  Yes ☐    No X 

 

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

Outstanding at May 7, 2019: 3,256,721

 

 

 

 

 

MIDDLEFIELD BANC CORP.

 

INDEX

 

Part I – Financial Information

 
     

Item 1.

Financial Statements (unaudited)

 

     

 

Consolidated Balance Sheet as of March 31, 2019 and December 31, 2018 3
     

 

Consolidated Statement of Income for the Three Months ended March 31, 2019 and 2018

4

     

 

Consolidated Statement of Comprehensive Income for the Three Months ended March 31, 2019 and 2018

5

     

 

Consolidated Statement of Changes in Stockholders' Equity for the Three Months ended March 31, 2019 and 2018

6

     

 

Consolidated Statement of Cash Flows for the Three Months ended March 31, 2019 and 2018

7

     

 

Notes to Unaudited Consolidated Financial Statements

9

     

Item 2.

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

27

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

     

Item 4.

Controls and Procedures

36

   

Part II – Other Information

 
   

Item 1.

Legal Proceedings

36

     

Item 1a.

Risk Factors

36

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

     

Item 3.

Defaults by the Company on its Senior Securities

36

     

Item 4.

Mine Safety Disclosures

37

     

Item 5.

Other Information

37

     

Item 6.

Exhibits and Reports on Form 8-K

37

     

Signatures

 

42

     

Exhibit 31.1

   
     

Exhibit 31.2

   
     

Exhibit 32

 

 

 

2

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
                 

ASSETS

               

Cash and cash equivalents

  $ 121,045     $ 107,933  

Equity securities, at fair value

    674       616  

Investment securities available for sale, at fair value

    98,114       98,322  

Loans held for sale

    1,230       597  

Loans

    1,004,484       992,109  

Less allowance for loan and lease losses

    7,206       7,428  

Net loans

    997,278       984,681  

Premises and equipment, net

    15,741       13,003  

Goodwill

    15,071       15,071  

Core deposit intangibles

    2,312       2,397  

Bank-owned life insurance

    16,185       16,080  

Accrued interest receivable and other assets

    13,285       9,698  
                 

TOTAL ASSETS

  $ 1,280,935     $ 1,248,398  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing demand

  $ 194,298     $ 203,410  

Interest-bearing demand

    107,246       92,104  

Money market

    178,668       196,685  

Savings

    184,662       222,954  

Time

    375,357       300,914  

Total deposits

    1,040,231       1,016,067  

Short-term borrowings:

               

Federal funds purchased

    -       398  

Federal Home Loan Bank advances

    91,000       90,000  

Total short-term borrowings

    91,000       90,398  

Other borrowings

    11,518       8,803  

Accrued interest payable and other liabilities

    6,487       4,840  

TOTAL LIABILITIES

    1,149,236       1,120,108  
                 

STOCKHOLDERS' EQUITY

               

Common stock, no par value; 10,000,000 shares authorized, 3,642,535 and 3,630,497 shares issued; 3,256,370 and 3,244,332 shares outstanding

    86,437       85,925  

Retained earnings

    58,139       56,037  

Accumulated other comprehensive income (loss)

    641       (154 )

Treasury stock, at cost; 386,165 shares

    (13,518 )     (13,518 )

TOTAL STOCKHOLDERS' EQUITY

    131,699       128,290  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,280,935     $ 1,248,398  

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME  

(Dollar amounts in thousands, except per share data)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

INTEREST AND DIVIDEND INCOME

               

Interest and fees on loans

  $ 12,510     $ 11,054  

Interest-earning deposits in other institutions

    187       119  

Federal funds sold

    7       14  

Investment securities:

               

Taxable interest

    179       169  

Tax-exempt interest

    565       525  

Dividends on stock

    58       59  

Total interest and dividend income

    13,506       11,940  
                 

INTEREST EXPENSE

               

Deposits

    2,945       1,640  

Short-term borrowings

    213       276  

Other borrowings

    96       122  

Total interest expense

    3,254       2,038  
                 

NET INTEREST INCOME

    10,252       9,902  
                 

Provision for loan losses

    240       210  
                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    10,012       9,692  
                 

NONINTEREST INCOME

               

Service charges on deposit accounts

    508       453  

Gain on equity securities

    58       18  

Earnings on bank-owned life insurance

    105       112  

Gain on sale of loans

    37       4  

Other income

    402       199  

Total noninterest income

    1,110       786  
                 

NONINTEREST EXPENSE

               

Salaries and employee benefits

    4,124       3,979  

Occupancy expense

    553       536  

Equipment expense

    235       233  

Data processing costs

    465       477  

Ohio state franchise tax

    259       115  

Federal deposit insurance expense

    130       150  

Professional fees

    431       445  

Advertising expense

    203       228  

Software amortization expense

    145       150  

Core deposit intangible amortization

    85       91  

Other expense

    870       941  

Total noninterest expense

    7,500       7,345  
                 

Income before income taxes

    3,622       3,133  

Income taxes

    611       528  
                 

NET INCOME

  $ 3,011     $ 2,605  
                 

EARNINGS PER SHARE

               

Basic

  $ 0.93     $ 0.81  

Diluted

  $ 0.92     $ 0.80  

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 
                 

Net income

  $ 3,011     $ 2,605  
                 

Other comprehensive income (loss):

               

Net unrealized holding gain (loss) on available-for-sale investment securities

    1,006       (1,912 )

Tax effect

    (211 )     402  
                 

Total other comprehensive income (loss)

    795       (1,510 )
                 

Comprehensive income

  $ 3,806     $ 1,095  

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

 

                           

Accumulated

                 
                           

Other

           

Total

 
   

Common Stock

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Shares

   

Amount

   

Earnings

   

Income (Loss)

   

Stock

   

Equity

 
                                                 

Balance, December 31, 2018

    3,630,497     $ 85,925     $ 56,037     $ (154 )   $ (13,518 )   $ 128,290  
                                                 

Net income

                    3,011                       3,011  

Other comprehensive income

                            795               795  

Dividend reinvestment and purchase plan

    4,522       196                               196  

Stock-based compensation, net

    7,516       316                               316  

Cash dividends ($0.28 per share)

                    (909 )                     (909 )
                                                 

Balance, March 31, 2019

    3,642,535     $ 86,437     $ 58,139     $ 641     $ (13,518 )   $ 131,699  

 

 

                           

Accumulated

                 
                           

Other

           

Total

 
   

Common Stock

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Shares

   

Amount

   

Earnings

   

Income (Loss)

   

Stock

   

Equity

 
                                                 

Balance, December 31, 2017

    3,603,881     $ 84,859     $ 47,431     $ 1,091     $ (13,518 )   $ 119,863  
                                                 

Change in accounting principle for adoption of ASU 2016-01

                    141       (141 )             -  

Change in accounting principle for adoption of ASU 2018-02

                    (187 )     187               -  

Net income

                    2,605                       2,605  

Other comprehensive loss

                            (1,510 )             (1,510 )

Dividend reinvestment and purchase plan

    3,278       161                               161  

Stock-based compensation, net

    1,990       96                               96  

Cash dividends ($0.33 per share)

                    (1,063 )                     (1,063 )
                                                 

Balance, March 31, 2018

    3,609,149     $ 85,116     $ 48,927     $ (373 )   $ (13,518 )   $ 120,152  

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

OPERATING ACTIVITIES

               

Net income

  $ 3,011     $ 2,605  

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

               

Provision for loan losses

    240       210  

Gain on equity securities

    (58 )     (18 )

Depreciation and amortization of premises and equipment, net

    259       231  

Software amortization expense

    145       150  

Financing lease amortization expense

    69       -  

Amortization of premium and discount on investment securities, net

    94       104  

Accretion of deferred loan fees, net

    (259 )     (341 )

Amortization of core deposit intangibles

    85       91  

Stock-based compensation expense

    186       96  

Restricted stock cash portion

    (44 )     -  

Origination of loans held for sale

    (2,556 )     (1,783 )

Proceeds from sale of loans

    1,960       1,313  

Gain on sale of loans

    (37 )     (4 )

Earnings on bank-owned life insurance

    (105 )     (112 )

Deferred income tax

    295       131  

Net gain on other real estate owned

    (43 )     -  

(Increase) decrease in accrued interest receivable

    (200 )     19  

Increase (decrease) in accrued interest payable

    192       (5 )

Other, net

    (2,553 )     (737 )

Net cash provided by operating activities

    681       1,950  
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    3,799       1,380  

Purchases

    (2,679 )     -  

Increase in loans, net

    (12,616 )     (8,669 )

Proceeds from the sale of other real estate owned

    225       -  

Purchase of premises and equipment

    (295 )     (603 )

Purchase of restricted stock

    -       (90 )

Net cash used in investing activities

    (11,566 )     (7,982 )
                 

FINANCING ACTIVITIES

               

Net increase in deposits

    24,164       66,379  

Increase (decrease) in short-term borrowings, net

    602       (56,036 )

Repayment of other borrowings

    (56 )     (10,037 )

Proceeds from dividend reinvestment and purchase plan

    196       161  

Cash dividends

    (909 )     (1,063 )

Net cash provided by (used in) financing activities

    23,997       (596 )
                 

Increase (decrease) in cash and cash equivalents

    13,112       (6,628 )
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    107,933       39,886  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 121,045     $ 33,258  

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

 

   

Three Months Ended

 
   

March 31,

 
   

2019

   

2018

 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 3,062     $ 2,043  
                 

Noncash operating transactions:

               

Operating lease assets added to other, net

  $ (2,101 )   $ -  

Operating lease liabilities added to other, net

    2,101       -  

Noncash investing transactions:

               

Transfers from loans to other real estate owned

  $ 38     $ -  

Transfer of equity securities from investment securities available for sale, at fair value

    -       (625 )

Finance lease assets added to premises and equipment

    (2,771 )     -  

Noncash financing transactions:

               

Finance lease liabilities added to borrowed funds

  $ 2,771     $ -  

 

See accompanying notes to unaudited consolidated financial statements.

 

8

 

 

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 - BASIS OF PRESENTATION

 

The consolidated financial statements of Middlefield Banc Corp. ("Company") include its bank subsidiary, The Middlefield Banking Company (“MBC” or “Middlefield Bank”), and a nonbank asset resolution subsidiary EMORECO, Inc. All significant inter-company items have been eliminated.

 

On March 13, 2019, MBC established a wholly owned subsidiary named Middlefield Investments, Inc. (MII), headquartered in Middlefield, Ohio. This operating subsidiary exists to hold and manage a portion of MBC’s investment portfolio. At March 31, 2019, MII’s assets consist of one cash account. MII may only hold and manage investments for MBC, and may not engage in any other activity without prior approval of the Ohio Division of Financial Institutions. All significant inter-company items have been eliminated between MBC and this subsidiary.

 

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 (“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 Form 10-K for the year ended December 31, 2018.  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.  

 

Recently Adopted Accounting Pronouncements –

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period.  On January 1, 2019, the Company adopted ASU 2016-02 which resulted in the recording of finance lease assets and liabilities of $2.8 million and operating lease assets and liabilities of $2.1 million on the Consolidated Balance Sheet.  See Note 9 to the financial statements.

 

Recently Issued Accounting Pronouncements –

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The CECL model has been completed by the Company and runs concurrently with the existing incurred loss model each month.  Management continues monitoring model output, with final assumption changes expected to be made in the third quarter.  Management anticipates the model to be validated by a third-party by December 31, 2019.

 

9

 

 

 

NOTE 2 REVENUE RECOGNITION

 

In accordance with ASC Topic 606, management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains, gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise 92.0% of the total revenue of the Company.

 

The main types of noninterest income within the scope of the standard are as follows:

 

Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific customer requests or activities that include overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, which is completion of the requested service/transaction.

 

Gains (losses) on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred and the payment terms, that the contract has a true commercial substance and that amounts due from the buyer are reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.

 

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the three months ended March 31:   

 

Noninterest Income

 

2019

   

2018

 

(Dollar amounts in thousands)

               
                 

Service charges on deposit accounts:

               

Overdraft fees

  $ 248     $ 193  

ATM banking fees

    194       201  

Service charges and other fees

    66       59  

Gain on equity securities (a)

    58       18  

Earnings on bank-owned life insurance (a)

    105       112  

Gain on sale of loans (a)

    37       4  

Other income

    402       199  

Total noninterest income

  $ 1,110     $ 786  

 

(a) Not within scope of ASC 606

 

10

 

 

 

NOTE 3 - STOCK-BASED COMPENSATION

 

The Company had no unvested stock options outstanding as of March 31, 2019 and 2018.

 

Stock option activity during the three months ended March 31, 2019 is as follows:

 

           

Weighted-

 
           

average

 
           

Exercise Price

 
   

Shares

   

Per Share

 
                 

Outstanding, January 1, 2019

    7,450     $ 17.55  
                 

Outstanding, March 31, 2019

    7,450     $ 17.55  
                 

Exercisable, March 31, 2019

    7,450     $ 17.55  

 

 

The following table presents the activity during the three months ended March 31, 2019 related to awards of restricted stock:

 

           

Weighted-

 
           

average

 
           

Grant Date Fair

 
   

Units

   

Value Per Unit

 
                 

Nonvested at January 1, 2019

    21,072     $ 41.96  

Granted

    14,565       41.90  

Vested

    (4,970 )     32.40  

Nonvested at March 31, 2019

    30,667     $ 43.48  
                 

Expected to vest at March 31, 2019

    20,715     $ 41.22  

 

The Company recognizes restricted stock forfeitures in the period they occur.

 

Share-based compensation expense of $90,000 and $55,000 was recognized for the three-month periods ended March 31, 2019 and 2018, respectively. Since the shares of restricted stock are historically paid out at the vesting date in a combination of shares and cash, the Company has recorded a liability related to this plan which totals $236,000 and $426,000 at March 31, 2019 and 2018, respectively.

 

The expected remaining compensation expense that will be recognized on restricted stock totals $351,000, of which $113,000 will be recognized in 2019, $110,000 will be recognized in 2020, $110,000 will be recognized in 2021, and $18,000 will be recognized in 2022.

 

11

 

 

 

NOTE 4 - EARNINGS PER SHARE

 

The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the average shares outstanding. Diluted earnings per share adds the dilutive effects of stock options and restricted stock to average shares outstanding.

 

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings-per-share computation.

 

   

For the Three

 
   

Months Ended

 
   

March 31,

 
   

2019

   

2018

 
                 

Weighted-average common shares issued

    3,635,304       3,606,427  
                 

Average treasury stock shares

    (386,165 )     (386,165 )
                 

Weighted-average common shares and common stock equivalents used to calculate basic earnings per share

    3,249,139       3,220,262  
                 

Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share

    6,145       17,807  
                 

Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share

    3,255,284       3,238,069  

 

Options to purchase 7,450 shares of common stock at $17.55 per share, were outstanding during the three months ended March 31, 2019. Also outstanding were 30,667 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

 

Options to purchase 18,250 shares of common stock, at prices ranging from $17.55 to $23.00, were outstanding during the three months ended March 31, 2018. Also outstanding were 14,601 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

 

 

NOTE 5 - FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following levels:

 

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

 

12

 

 

Level III:

Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

This hierarchy requires the use of observable market data when available.

 

The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

           

March 31, 2019

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 7,182     $ -     $ 7,182  

Obligations of states and political subdivisions

    -       70,735       -       70,735  

Mortgage-backed securities in government-sponsored entities

    -       20,197       -       20,197  

Total debt securities

    -       98,114       -       98,114  

Equity securities in financial institutions

    674       -       -       674  

Total

  $ 674     $ 98,114     $ -     $ 98,788  

 

           

December 31, 2018

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 7,471     $ -     $ 7,471  

Obligations of states and political subdivisions

    -       73,093       -       73,093  

Mortgage-backed securities in government-sponsored entities

    -       17,758       -       17,758  

Total debt securities

    -       98,322       -       98,322  

Equity securities in financial institutions

    616       -       -       616  

Total

  $ 616     $ 98,322     $ -     $ 98,938  

 

Investment Securities Available for Sale - The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

 

Equity Securities - Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which no sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are not applied, they are categorized in Level I of the fair value hierarchy. Equity securities traded on inactive markets or valued by reference to similar instruments are generally categorized in Level II of the fair value hierarchy.

 

13

 

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value subsequent to the initial measurement. No such devaluation occurred in the three months ended March 31, 2019.

 

           

March 31, 2019

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a non-recurring basis:

                               

Impaired loans

  $ -     $ -     $ 4,604     $ 4,604  

 

           

December 31, 2018

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a non-recurring basis:

                               

Impaired loans

  $ -     $ -     $ 1,075     $ 1,075  

 

Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the above table exclude estimated selling costs of $1.8 million and $492,000 as of March 31, 2019 and December 31, 2018, respectively.

 

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company uses Level III inputs to determine fair value:

 

   

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

 

 

Fair Value Estimate

 

Valuation Techniques

Unobservable Input

 

Range (Weighted Average)

 

March 31, 2019

                       

Impaired loans

  $ 4,604  

Appraisal of collateral (1)

Appraisal adjustments (2)

   0% to 27.8% (2.3%)  

 

   

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

 

 

Fair Value Estimate

 

Valuation Techniques

Unobservable Input

 

Range (Weighted Average)

 

December 31, 2018

                       

Impaired loans

  $ 1,075  

Appraisal of collateral (1)

Appraisal adjustments (2)

   0% to 100.0% (40.6%)  

 

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable, less any associated allowance.

 

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

14

 

 

The estimated fair value of the Company’s financial instruments not recorded at fair value on a recurring basis is as follows:

 

   

March 31, 2019

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 121,045     $ 121,045     $ -     $ -     $ 121,045  

Loans held for sale

    1,230       -       1,230       -       1,230  

Net loans

    997,278       -       -       993,098       993,098  

Bank-owned life insurance

    16,185       16,185       -       -       16,185  

Federal Home Loan Bank stock

    3,679       3,679       -       -       3,679  

Accrued interest receivable

    3,833       3,833       -       -       3,833  
                                         

Financial liabilities:

                                       

Deposits

  $ 1,040,231     $ 664,874     $ -     $ 375,132     $ 1,040,006  

Short-term borrowings

    91,000       91,000       -       -       91,000  

Other borrowings

    11,518       -       -       11,550       11,550  

Accrued interest payable

    936       936       -       -       936  

 

 

   

December 31, 2018

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 107,933     $ 107,933     $ -     $ -     $ 107,933  

Loans held for sale

    597       -       597       -       597  

Net loans

    984,681       -       -       973,124       973,124  

Bank-owned life insurance

    16,080       16,080       -       -       16,080  

Federal Home Loan Bank stock

    3,679       3,679       -       -       3,679  

Accrued interest receivable

    3,633       3,633       -       -       3,633  
                                         

Financial liabilities:

                                       

Deposits

  $ 1,016,067     $ 715,153     $ -     $ 298,891     $ 1,014,044  

Short-term borrowings

    90,398       90,398       -       -       90,398  

Other borrowings

    8,803       -       -       8,827       8,827  

Accrued interest payable

    744       744       -       -       744  

 

All financial instruments included in the above tables, with the exception of net loans, deposits, and other borrowings, are carried at cost, which approximates the fair value of the instrument.

 

15

 

 

 

NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component net of tax for the three months ended March 31, 2019 and 2018, respectively:

 

(Dollars in thousands)   

Unrealized gains on

available-for-sale securities

(a)

 
         

Balance as of December 31, 2018

  $ (154 )

Other comprehensive income

    795  

Balance at March 31, 2019

  $ 641  
         

Balance as of December 31, 2017

  $ 1,091  

Other comprehensive loss

    (1,510 )

Change in accounting principle, ASC 2016-01 (b)

    (141 )

Change in accounting principle, ASC 2018-02 (b)

    187  

Period change

    (1,464 )

Balance at March 31, 2018

  $ (373 )

 

 

(a)

All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

 

(b)

Reclassifications are the result of the adoption of ASUs 2016-01 and 2018-02 effective for the Company beginning January 1, 2018. The reclassifications are presented within the Consolidated Statement of Changes in Stockholders’ Equity for the affected transitional periods.

 

There were no other reclassifications of amounts from accumulated other comprehensive income for the three months ended March 31, 2019 and 2018.

 

 

NOTE 7 INVESTMENT AND EQUITY SECURITIES

 

The amortized cost and fair values of investment securities available for sale are as follows:

 

   

March 31, 2019

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 7,120     $ 111     $ (49 )   $ 7,182  

Obligations of states and political subdivisions:

                               

Taxable

    501       8       -       509  

Tax-exempt

    69,233       1,057       (64 )     70,226  

Mortgage-backed securities in government-sponsored entities

    20,448       112       (363 )     20,197  

Total

  $ 97,302     $ 1,288     $ (476 )   $ 98,114  

 

16

 

 

   

December 31, 2018

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 7,442     $ 90     $ (61 )   $ 7,471  

Obligations of states and political subdivisions:

                               

Taxable

    502       10       -       512  

Tax-exempt

    72,387       667       (473 )     72,581  

Mortgage-backed securities in government-sponsored entities

    18,185       88       (515 )     17,758  

Total

  $ 98,516     $ 855     $ (1,049 )   $ 98,322  

 

The Company recognized net gains on equity investments of $58,000 and $18,000 for the three months ended March 31, 2019 and 2018, respectively. No net gains on sold equity securities were realized during this period.

 

The amortized cost and fair value of debt securities at March 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

Amortized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Value

 
                 

Due in one year or less

  $ 6,479     $ 6,519  

Due after one year through five years

    1,665       1,683  

Due after five years through ten years

    13,024       13,074  

Due after ten years

    76,134       76,838  

Total

  $ 97,302     $ 98,114  

 

There were no securities sold during the three months ended March 31, 2019 and 2018, respectively.

 

Investment securities with an approximate carrying value of $59.5 million and $63.5 million at March 31, 2019 and December 31, 2018, respectively, were pledged to secure deposits and for other purposes as required by law.

 

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

 

   

March 31, 2019

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollar amounts in thousands)

 

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. government agency securities

  $ -     $ -     $ 2,927     $ (49 )   $ 2,927     $ (49 )

Obligations of states and political subdivisions:

                                               

Tax-exempt

    926       (4 )     7,954       (60 )     8,880       (64 )

Mortgage-backed securities in government-sponsored entities

    2,063       (4 )     12,074       (359 )     14,137       (363 )

Total

  $ 2,989     $ (8 )   $ 22,955     $ (468 )   $ 25,944     $ (476 )

 

17

 

 

   

December 31, 2018

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollar amounts in thousands)

 

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. government agency securities

  $ -     $ -     $ 4,105     $ (61 )   $ 4,105     $ (61 )

Obligations of states and political subdivisions:

                                               

Tax-exempt

    20,451       (286 )     11,053       (187 )     31,504       (473 )

Mortgage-backed securities in government-sponsored entities

    2,068       (9 )     12,257       (506 )     14,325       (515 )

Total

  $ 22,519     $ (295 )   $ 27,415     $ (754 )   $ 49,934     $ (1,049 )

 

There were 39 securities considered temporarily impaired at March 31, 2019.

 

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The Company assesses whether the unrealized loss is other than temporary.

 

OTTI losses are recognized in earnings when the Company has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the Company does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

 

An unrealized loss is generally deemed to be other than temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss of an OTTI is recorded as a component of investment securities gains (losses) in the accompanying Consolidated Statement of Income, while the remaining portion of the impairment loss is recognized in other comprehensive income, provided the Company does not intend to sell the underlying debt security and it is “more likely than not” that the Company will not have to sell the debt security prior to recovery.

 

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for 100% of the total available-for-sale portfolio as of March 31, 2019 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of prolonged unrealized loss positions within the obligations of the state and political subdivisions security portfolio. The Company considers the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

 

 

The length of time and the extent to which the fair value has been less than the amortized cost basis.

 

Changes in the near-term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;

 

The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and, 

 

Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

 

For the three months ended March 31, 2019 and 2018, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI. Management does not believe any individual unrealized loss as of March 31, 2019 or December 31, 2018 represented an other-than-temporary impairment. The unrealized losses on debt securities are primarily the result of interest rate changes. These conditions will not prohibit the Company from receiving its contractual principal and interest payments on these debt securities. The fair value of these debt securities is expected to recover as payments are received on these securities and they approach maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

18

 

 

 

NOTE 8 - LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

 

Major classifications of loans are summarized as follows (in thousands):

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 
                 

Commercial and industrial

  $ 85,756     $ 83,857  

Real estate - construction

    58,019       56,731  

Real estate - mortgage:

               

Residential

    340,483       336,487  

Commercial

    504,289       498,247  

Consumer installment

    15,937       16,787  
      1,004,484       992,109  

Less: Allowance for loan and lease losses

    (7,206 )     (7,428 )
                 

Net loans

  $ 997,278     $ 984,681  

 

The amounts above include deferred loan origination costs of $1.4 million and $1.6 million at March 31, 2019 and December 31, 2018.

 

The Company’s primary business activity is with customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties. The Company also serves the central Ohio market with offices in Dublin, Sunbury, Westerville, and Powell, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses. Interest income is recognized on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Interest payments received on nonaccrual loans are applied against the unpaid principal balance until accrual status is restored.

 

Loan origination fees and certain direct loan origination costs are deferred with the net amount amortized over the contractual life of the loan as an adjustment of the related loan’s yield.

 

19

 

 

The following tables summarize the primary segments of the loan portfolio and allowance for loan and lease losses (in thousands):

 

                   

Real Estate - Mortgage

                 

March 31, 2019

 

Commercial and

industrial

   

Real estate-

construction

   

Residential

   

Commercial

   

Consumer

installment

   

Total

 

Loans:

                                               

Individually evaluated for impairment

  $ 1,825     $ 3,239     $ 1,856     $ 9,049     $ 2     $ 15,971  

Collectively evaluated for impairment

    83,931       54,780       338,627       495,240       15,935       988,513  

Total loans

  $ 85,756     $ 58,019     $ 340,483     $ 504,289     $ 15,937     $ 1,004,484  

 

                   

Real Estate - Mortgage

                 

December 31, 2018

 

Commercial and

industrial

   

Real estate-

construction

   

Residential

   

Commercial

   

Consumer

installment

   

Total

 

Loans:

                                               

Individually evaluated for impairment

  $ 2,570     $ -     $ 1,970     $ 9,533     $ 2     $ 14,075  

Collectively evaluated for impairment

    81,287       56,731       334,517       488,714       16,785       978,034  

Total loans

  $ 83,857     $ 56,731     $ 336,487     $ 498,247     $ 16,787     $ 992,109  

 

                   

Real Estate - Mortgage

                 

March 31, 2019

 

Commercial and

industrial

   

Real estate-

construction

   

Residential

   

Commercial

   

Consumer

installment

   

Total

 

Allowance for loan and lease losses:

                                               

Ending allowance balance attributable to loans:

                                               

Individually evaluated for impairment

  $ 203     $ 661     $ 45     $ 54     $ -     $ 963  

Collectively evaluated for impairment

    383       87       1,578       4,107       88       6,243  

Total ending allowance balance

  $ 586     $ 748     $ 1,623     $ 4,161     $ 88     $ 7,206  

 

                   

Real Estate - Mortgage

                 

December 31, 2018

 

Commercial and

industrial

   

Real estate-

construction

   

Residential

   

Commercial

   

Consumer

installment

   

Total

 

Allowance for loan and lease losses:

                                               

Ending allowance balance attributable to loans:

                                               

Individually evaluated for impairment

  $ 667     $ -     $ 43     $ 643     $ 1     $ 1,354  

Collectively evaluated for impairment

    302       100       1,538       4,008       126       6,074  

Total ending allowance balance

  $ 969     $ 100     $ 1,581     $ 4,651     $ 127     $ 7,428  

 

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial and Industrial (“C&I”), Real Estate Construction, Real Estate - Mortgage which is further segmented into Residential and Commercial Real Estate (“CRE”), and Consumer Installment Loans. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for loan loss for C&I, Real Estate Construction, Residential, and CRE portfolios were partially offset by a decrease in the allowance for the Consumer Installment portfolio.

 

Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance established by the Board of Directors. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.

 

20

 

 

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of the following methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management primarily utilizing the present value of expected cash flows. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

 

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):

 

March 31, 2019

 

Impaired Loans

 
           

Unpaid

         
   

Recorded

    Principal    

Related

 
   

Investment

    Balance    

Allowance

 

With no related allowance recorded:

                       

Commercial and industrial

  $ 671     $ 1,169     $ -  

Real estate - mortgage:

                       

Residential

    1,496       1,660       -  

Commercial

    2,621       2,887       -  

Consumer installment

    2       2       -  

Total

  $ 4,790     $ 5,718     $ -  
                         

With an allowance recorded:

                       

Commercial and industrial

  $ 1,154     $ 1,365     $ 203  

Real estate - construction

    3,239       3,239       661  

Real estate - mortgage:

                       

Residential

    360       411       45  

Commercial

    6,428       6,446       54  

Total

  $ 11,181     $ 11,461     $ 963  
                         

Total:

                       

Commercial and industrial

  $ 1,825     $ 2,534     $ 203  

Real estate - construction

    3,239       3,239       661  

Real estate - mortgage:

                       

Residential

    1,856       2,071       45  

Commercial

    9,049       9,333       54  

Consumer installment

    2       2       -  

Total

  $ 15,971     $ 17,179     $ 963  

 

21

 

 

December 31, 2018

 

Impaired Loans

 
           

Unpaid

         
   

Recorded

    Principal    

Related

 
   

Investment

    Balance    

Allowance

 

With no related allowance recorded:

                       

Commercial and industrial

  $ 207     $ 413     $ -  

Real estate - mortgage:

                       

Residential

    1,306       1,462       -  

Commercial

    1,867       2,186       -  

Total

  $ 3,380     $ 4,061     $ -  
                         

With an allowance recorded:

                       

Commercial and industrial

  $ 2,363     $ 3,013     $ 667  

Real estate - mortgage:

                       

Residential

    664       715       43  

Commercial

    7,666       7,676       643  

Consumer installment

    2       2       1  

Total

  $ 10,695     $ 11,406     $ 1,354  
                         

Total:

                       

Commercial and industrial

  $ 2,570     $ 3,426     $ 667  

Real estate - mortgage:

                       

Residential

    1,970       2,177       43  

Commercial

    9,533       9,862       643  

Consumer installment

    2       2       1  

Total

  $ 14,075     $ 15,467     $ 1,354  

 

The tables above include troubled debt restructuring totaling $3.8 million as of March 31, 2019 and $4.4 million as of December 31, 2018.

 

The following tables present the average balance and interest income by class, recognized on impaired loans (in thousands):

 

   

For the Three Months Ended

March 31, 2019

   

For the Three Months Ended

March 31, 2018

 
   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Average

Recorded

Investment

   

Interest

Income

Recognized

 
                                 

Commercial and industrial

  $ 2,198     $ 30     $ 5,631     $ 187  

Real estate - construction

    1,620       45       283       -  

Real estate - mortgage:

                               

Residential

    1,913       12       2,892       21  

Commercial

    9,291       98       6,719       136  

Consumer installment

    2       -       4       -  

Total

  $ 15,024     $ 185     $ 15,529     $ 344  

 

22

 

 

Management uses a nine-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.  

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death, occurs to raise awareness of a possible credit event.  The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis.  The Credit Department performs an annual review of all commercial relationships with loan balances of $500,000 or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.  The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and/or criticized relationships greater than $125,000.  Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

 

The primary risk of commercial and industrial loans is related to deterioration in the value of collateral securing the loan should foreclosure become necessary. C&I loans are, by nature, secured by less substantial collateral than real estate-secured loans. The primary risk of real estate construction loans is potential delays and disputes during the completion process. The primary risk of residential real estate loans is current economic uncertainties along with the slow recovery in the housing market. The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.

 

The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk-rating system (in thousands):

 

           

Special

                   

Total

 

March 31, 2019

 

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loans

 
                                         

Commercial and industrial

  $ 80,203     $ 3,204     $ 2,349     $