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Section 1: 10-K (ANNUAL REPORT ON FORM 10-K)


 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-K

 

x

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

For the fiscal year ended December 31, 2019

OR

o

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 001-38956

Richmond Mutual Bancorporation, Inc.

(Exact Name of Registrant as Specified in its Charter)

Maryland

 

36-4926041

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

31 North 9th Street, Richmond, Indiana

 

47374

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: (765) 962-2581

 

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, par value $0.01 per share

RMBI

The NASDAQ Stock Market LLC

 

Securities Registered Pursuant to Section 12(g) of the Act:  None

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES o NO x

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES o NO x

 

Indicate by checkmark 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 o



 



 


Indicate by checkmark 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 o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of "large accelerated filer," accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o

Accelerated filer  o

 

 

Non-accelerated filer  x

Smaller reporting company  x

 

 

 

Emerging growth company  x

 

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. o

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2019, the last business day of the registrant's most recently completed second fiscal quarter, was $0. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: As of March 30, 2020, there were 13,526,625 shares of the registrant's common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

PART III of Form 10-K – Portions of the Registrant's Proxy Statement for its 2020 Annual Meeting of Shareholders.



 



RICHMOND MUTUAL BANCORPORATION, INC.

FORM 10-K

TABLE OF CONTENTS

PART I

 

 

 

 

Page

Item 1.

Business

1

Item 1A.

Risk Factors

43

Item 1B.

Unresolved Staff Comments

55

Item 2.

Properties

55

Item 3.

Legal Proceedings

55

Item 4.

Mine Safety Disclosures

55

 

 

 

PART II

 

56

 

 

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

56

Item 6.

Selected Financial Data

57

Item 7.

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

59

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

70

Item 8.

Financial Statements and Supplementary Data

72

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

117

Item 9A.

Controls and Procedures

117

Item 9B.

Other Information

117

 

 

 

PART III

 

118

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

118

Item 11.

Executive Compensation

118

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

119

Item 13.

Certain Relationships and Related Transactions, and Director Independence

119

Item 14.

Principal Accounting Fees and Services

119

 

 

 

PART IV

 

120

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

120

Item 16.

Form 10-K Summary

121

 

 

 

Signatures

 

122

 

 

 




PART I

 

Item 1.   Business

 

The disclosures set forth in this item are qualified by Item 1A. Risk Factors and the section captioned “Special Note Regarding Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.

 

Overview

Richmond Mutual Bancorporation, Inc., a Maryland corporation, which is sometimes referred to in this document as “Richmond Mutual Bancorporation-Maryland,” was formed in February 2019 to serve as a new stock holding company for First Bank Richmond upon completion of the reorganization of First Bank Richmond from the mutual to stock holding company form of organization.  The reorganization was completed on July 1, 2019.  Prior to completion of the reorganization, First Bank Richmond was a wholly owned subsidiary of Richmond Mutual Bancorporation, Inc., a Delaware stock corporation, which is sometimes referred to in this document as “Richmond Mutual Bancorporation-Delaware,” and Richmond Mutual Bancorporation-Delaware was a wholly owned subsidiary of First Mutual of Richmond, Inc., a Delaware non-stock mutual holding company (the “MHC”).  On July 1, 2019, upon the completion of the reorganization, Richmond Mutual Bancorporation-Delaware and the MHC ceased to exist, and First Bank Richmond became a wholly owned subsidiary of Richmond Mutual Bancorporation-Maryland.  In certain circumstances, where appropriate, the terms “Richmond Mutual Bancorporation,” “the Company,” “we, “us” and “our” refer collectively to (i) Richmond Mutual Bancorporation-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the reorganization and (ii) Richmond Mutual Bancorporation-Maryland and First Bank Richmond with respect to discussions in this document involving matters to occur post-reorganization, in each case unless the context indicates another meaning.

 

On February 6, 2019, the Board of Directors of the MHC, the parent mutual holding company of Richmond Mutual Bancorporation-Delaware, adopted a Plan of Reorganization and Stock Offering (the “Plan”). The Plan was approved by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and by the Indiana Department of Financial Institutions (the “Indiana DFI”), as well as the voting members of the MHC at a special meeting of members held on June 19, 2019.  Pursuant to the Plan, upon completion of the transaction, the MHC would convert from a mutual holding company to the stock holding company corporate structure, the MHC and Richmond Mutual Bancorporation-Delaware would cease to exist, and First Bank Richmond would become a wholly owned subsidiary Richmond Mutual Bancorporation-Maryland.  The transaction was completed on July 1, 2019.  In connection with the related stock offering, which was also completed on July 1, 2019, Richmond Mutual Bancorporation-Maryland sold 13,026,625 shares of common stock at $10.00 per share, for gross offering proceeds of approximately $130.3 million in its subscription offering and contributed 500,000 shares and $1.25 million to a newly formed charitable foundation, the First Bank Richmond, Inc. Community Foundation (the “Foundation”).

Richmond Mutual Bancorporation-Maryland is regulated by the Federal Reserve Board and the Indiana DFI.  Our corporate office is located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581.

First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana. The bank was originally established in 1887 as an Indiana state-chartered mutual savings and loan association and in 1935 converted to a federal mutual savings and loan association, operating under the name First Federal Savings and Loan Association of Richmond. In 1993, the bank converted to a state-chartered mutual savings bank and changed its name to First Bank Richmond, S.B. In 1998, the bank, in connection with its non-stock mutual holding company reorganization, converted to a national bank charter operating as First Bank Richmond, National Association. In July 2007, Richmond Mutual Bancorporation-Delaware, the bank’s then current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio.  Mutual Federal Savings Bank was operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when it was combined with the bank through an internal merger transaction that consolidated both banks into a single, more efficient commercial bank charter. In 2017, the bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond. The former Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond.


1



First Bank Richmond provides full banking services through its seven full- and one limited-service offices located in Cambridge City (1), Centerville (1), Richmond (5) and Shelbyville (1), Indiana, its five full service offices located in Piqua (2), Sidney (2) and Troy (1), Ohio, and its loan production office in Columbus, Ohio. Administrative, trust and wealth management services are conducted through First Bank Richmond’s Corporate Office/Financial Center located in Richmond, Indiana. As an Indiana-chartered commercial bank, First Bank Richmond is subject to regulation by the IDFI and the FDIC.  

 

Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by commercial and multi-family real estate, first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases and commercial and industrial loans. We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds.

 

First Bank Richmond generates commercial, mortgage and consumer loans and leases and receives deposits from customers located primarily in Wayne and Shelby Counties, in Indiana and Shelby, Miami and Franklin (no deposits) Counties, in Ohio. We sometimes refer to these counties as our primary market area. First Bank Richmond’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout the United States. Our lease portfolio consists of various kinds of equipment, generally technology-related, such as computer systems, medical equipment and general manufacturing, industrial, construction and transportation equipment. We seek leasing transactions where we believe the equipment leased is integral to the lessee's business. We also provide trust and wealth management services, including serving as executor and trustee under wills and deeds and as guardian and custodian of employee benefits, and manage private investment accounts for individuals and institutions. Total wealth management assets under management and administration were $150.0 million at December 31, 2019.

 

Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market. We also recognize income from the sale of investment securities.

 

At December 31, 2019, on a consolidated basis, we had $986.0 million in assets, $687.3 million in loans and leases, net of allowance, $617.2 million in deposits and $187.8 million in stockholders’ equity.  At December 31, 2019, First Bank Richmond’s total risk-based capital ratio was 19.5%, exceeding the 10.0% requirement for a well-capitalized institution. For the year ended December 31, 2019, we reported a net loss of $14.1 million, compared to net income of $5.7 million for the year ended December 31, 2018.  Our results of operations for the year ended December 31, 2019 were affected by the following non-recurring charges: (i) a $14.3 million estimated after tax charge associated with the termination of our defined benefit plan; (ii) an after tax charge of $4.9 million associated with our contribution to the Foundation which was formed in connection with our reorganization and stock offering completed on July 1, 2019, and (iii) an after tax charge of $1.3 million related to the adoption of a nonqualified deferred compensation plan in the second quarter of 2019.

 

Market Area

 

Our primary market area includes Wayne and Shelby counties in Indiana and Shelby, Miami, and Franklin counties in Ohio. We conduct our business through 12 full service and one limited service banking offices, with seven full service and one limited service offices located in Indiana and five offices situated in Ohio. Our main full service banking office and four other branch offices are located in Richmond (Wayne County), Indiana. We operate two other offices in Wayne County in the towns of Cambridge City and Centerville, and one office in Shelbyville (Shelby County), Indiana, which is situated approximately 25 miles southeast of Indianapolis. Through Mutual Federal, a division of First Bank Richmond, we operate two offices in Sidney (Shelby County), Ohio, and two offices in Piqua and one office in Troy, Ohio (Miami County). We also operate a loan production office in Columbus (Franklin County), Ohio that focuses on commercial and multi-family real estate lending. Administrative, trust and wealth management services are provided at our Corporate Office/Financial Center located in Richmond, Indiana.


2



Indiana. Wayne County had an estimated population in 2019 of 65,600 with a median household income of approximately $56,500. The unemployment rate in December 2019 was 3.0% in Wayne County, as compared to the national and state unemployment rates of 3.4% and 3.0%, respectively. The top employers in Wayne County include Reid Health, Richmond Community Schools, Belden Wire & Cable, Sugar Creek Brandworthy Food Solutions, Richmond State Hospital, and Primex Plastics Corporation. First Bank Richmond operates seven banking offices in Wayne County including five in Richmond, which is the largest city in Wayne County.

 

Richmond is a city in east central Indiana and the county seat of Wayne County. Richmond represents our largest deposit concentration and branch office presence. Richmond had an estimated population of 35,000 in 2019 with a median household income of approximately $41,500. It is favorably located with excellent highway access and has over 6.0 million people within a 100-mile radius. Manufacturing is the primary source of employment, followed by health care and food service. The city is home to a regional hospital, Reid Health, as well as four higher educational institutions: Earlham College, Indiana University East, Purdue Polytechnic University-Richmond, and Ivy Tech Community College.

 

Within Wayne County, we also operate branches in Cambridge City and Centerville, which were initially opened in 1958 and 1959, respectively. Cambridge City is located in the western part of Wayne County approximately 15 miles west of Richmond, and had an estimated population of 1,760 with a median household income of approximately $43,500. The workforce in this community is primarily composed of factory workers and employees in the agricultural sector. Centerville had an estimated population of 2,650 with a median household income of approximately $53,300. It is a residential suburb to Richmond and home to many antique stores. While Wayne County experienced a 4.8% decline in population from 2010 to 2019, the population in Centerville increased by 3.5% during this period. The population growth in Centerville resulted in part from the influx of professionals and the appeal of its school system.

 

Shelbyville, where we operate one branch, is the county seat of Shelby County, Indiana. Shelby County had an estimated population in 2019 of 44,500 with a median household income of approximately $58,600. Shelbyville, which had an estimated population of 19,800 with a median household income of $47,900, is located in central Indiana and within the Indianapolis metropolitan area. Manufacturing and retail trade are the largest employment sectors in Shelby County. The unemployment rate in Shelby County was 2.6% in December 2019 compared to 2.9% in December 2018.

 

Ohio. We operate two offices in Sidney (Shelby County), Ohio, and two offices in Piqua and one office in Troy (Miami County), Ohio. We also operate a loan production office in Columbus, Ohio (Franklin County) that focuses on commercial real estate lending.

 

Sidney is the largest city and the county seat of Shelby County. Sidney is located approximately 35 miles north of Dayton, Ohio and 75 miles west of Columbus, Ohio. Sidney had an estimated population in 2019 of 21,000 with a median household income of approximately $54,900. Manufacturing is the dominant industry among the employee workforce in Shelby County. Leading manufacturing employers in Shelby County include Honda of America Manufacturing, Emerson Climate Technologies, Airstream, NK Parts, and Plastipak Packaging. The unemployment rate in Shelby County was 3.3% in December 2019 compared to 4.1% in December 2018.

 

Miami County is located in west central Ohio and is part of the Dayton metropolitan area. Miami County had an estimated population in 2019 of 105,900 with a median household income of approximately $63,900. Within Miami County, we have offices in Troy, which is the county seat and most populous city, and Piqua. Troy is located 19 miles north of Dayton, while Piqua is located 27 miles north of Dayton. Troy had an estimated population in 2019 of 26,500 with a median household income of approximately $60,500, while Piqua had a population of 20,900 with a median household income of approximately $53,000. Manufacturing is the leading industry employment sector in Miami County, followed by retail trade and health care and social services. The largest employers in Miami County include Upper Valley Medical Center, Clopay Building Products, F&P America, UTC Aerospace Systems, Meijer Distribution Center, ConAgra Foods, American Honda, and Hobart Brothers. The unemployment rate in Miami County was 3.4% in December 2019 compared to 4.2% in December 2018.

 

Columbus, Ohio, where we operate our loan production office, is the state capital of and most populous city in Ohio. Columbus ranked as the 14th most populous city in the United States with an estimated population in 2019 of 897,000 and a median household income of approximately $54,400. Columbus is the county seat of Franklin County, which along with nine other counties comprises the Columbus metropolitan area. The city has a diverse


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economy based on education, government, insurance, banking, defense, aviation, food, clothing, logistics, steel, energy, medical research, health care, hospitality, retail, and technology. Columbus is home to The Ohio State University, one of the largest universities in the nation.

 

The Columbus metropolitan area had an estimated population of 2.1 million and ranked as the 31st most populous metropolitan area in the United States and the second most populous metropolitan area in Ohio, just behind the Cincinnati metropolitan area and slightly ahead of the Cleveland metropolitan area. The unemployment rate in December 2019 was 3.2% for the entire Columbus metropolitan area and 3.1% for Franklin County, compared to 4.0% for the entire Columbus metropolitan area and 3.9% for Franklin County in December 2018.

 

Lending Activities

We offer a full range of lending products, including multi-family and commercial real estate loans (including owner and non-owner occupied real estate loans), commercial and industrial loans (including equipment loans and working capital lines of credit), construction and development loans, residential real estate loans, including home equity loans and lines of credit, and consumer loans. We also engage in lease financing which consists of direct financing leases and is used by our commercial customers to finance purchases of equipment. We offer consumer loans, predominantly as an accommodation to our customers, secured by personal assets such as automobiles or recreational vehicles. Some consumer loans are unsecured, such as small installment loans and certain lines of credit. Lending activities originate from the relationships and efforts of our bankers.

 

Loan Approval Procedures and Authority.  Pursuant to Indiana law, the aggregate amount of loans that First Bank Richmond is permitted to make to any one borrower, or a group of related borrowers, is generally limited to 15% of First Bank Richmond’s unimpaired capital and surplus. An additional amount may be loaned, up to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. At December 31, 2019, based on the 15% limitation, First Bank Richmond’s loans-to-one-borrower limit was approximately $22.4 million.  As of December 31, 2019, First Bank Richmond was in compliance with the loans-to-one-borrower limitations.  At December 31, 2019, our largest lending relationship with one borrower was for $16.6 million consisting of five commercial real estate loans secured by five separate hotels, three in the Dayton, Ohio area and two in the Cincinnati, Ohio area, all with a common guarantor. All of these loans were performing in accordance with their repayment terms at December 31, 2019.

 

Our lending is subject to written underwriting standards and origination procedures set forth in First Bank Richmond’s loan policy. Decisions on loan applications are made on the basis of detailed information submitted by the prospective borrower, credit histories that we obtain, and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan information is primarily designed to determine the borrower’s ability to repay the requested loan, and the more significant items are verified through use of credit reports, bank statements and tax returns. Loans containing a policy exception should have the exception noted in the credit file accompanied by a statement as to the reason for granting the exception. Exceptions must be approved in accordance with First Bank Richmond’s loan policy.

 

All loan approval amounts are based on the aggregate debt, including total balances of outstanding loans and the proposed loan to the individual borrower and any related entity. In compiling the aggregate debt for determining the adequacy of an officer’s loan authority for commercial lending and leases, the following may be excluded: (i) consumer debt not to exceed $100,000, as long as the collateral is in the primary borrower’s name; and (ii) permanent first mortgage on the borrower’s primary residence, as long as the primary residence is in the name of the borrower.

 

First Bank Richmond’s board of directors has the responsibility for approving, on an annual basis, specific lending authority for individual officers, combinations of officers, or loan committees. Garry Kleer, President and Chief Executive Officer of First Bank Richmond, has individual authorization to approve any loan up to $1.5 million. Dean Weinert, President of Mutual Federal, a division of First Bank Richmond based in Ohio, has individual authorization to approve residential mortgage, commercial and consumer loans up to $1.5 million. The lending authorities of our other officers range from $50,000 to $1.0 million, and is granted based upon the ability and experience and need of the individual loan officers, relative to the degree of risk and level of expertise required for handling the different types of loans. Loans that exceed the lending authority of the individual loan officer with exposure up to $1.5 million can be approved by the recommending loan officer and by any one of four designate


4



senior loan officers. Additionally, loans in excess of $1.5 million and up to $2.5 million can be approved by the recommending loan officer and two designated senior loan officers.

 

Loans in excess of $2.5 million up to $5.0 million must be approved by (i) a majority vote of the members of the Officer Loan Committee present at the meeting (which committee currently consists of 12 bank officers), or (ii) if occurring outside an Officer Loan Committee meeting, five individuals, two of whom must be Garry Kleer, Paul Witte or Dean Weinert, plus the recommending loan officer and two additional members of the Officer Loan Committee. All new loans or renewals to relationships graded “substandard” or below in the amount of (i) $250,000 or less must be approved by one of four designated senior loan officers and (ii) over $250,000 but up to and including $1.0 million must be approved by the Officer Loan Committee.

 

Loans in excess of $5.0 million up to our legal lending limit must be approved by (i) a majority vote of the members of the Executive Loan Committee present at the meeting (which committee consists of the First Bank Richmond board of directors (excluding Director Jeffery Jackson), Dean Weinert, Paul Witte and two members of the Mutual Federal Advisory Board), or (ii) if occurring outside an Executive Loan Committee meeting, five members of the Executive Loan Committee. All new loans or renewals to relationships graded “substandard” or below in excess of $1.0 million must be approved by the Executive Loan Committee.

 

Loan and Lease Portfolio Composition. The following table presents information concerning the composition of our loan and lease portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowances for loan and lease losses) as of the dates indicated.

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

 

(Dollars in thousands)

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(1)

 

$

131,294

 

 

 

18.90

%

 

$

132,492

 

 

 

20.05

%

 

$

128,773

 

 

 

22.86

%

 

$

129,336

 

 

 

27.64

%

 

$

130,482

 

 

 

32.14

%

Home equity lines of credit

 

 

6,996

 

 

 

1.01

 

 

 

7,214

 

 

 

1.09

 

 

 

7,245

 

 

 

1.29

 

 

 

7,370

 

 

 

1.58

 

 

 

7,687

 

 

 

1.89

 

Multi-family

 

 

66,002

 

 

 

9.50

 

 

 

43,816

 

 

 

6.63

 

 

 

63,701

 

 

 

11.31

 

 

 

32,624

 

 

 

6.97

 

 

 

20,028

 

 

 

4.93

 

Commercial

 

 

229,410

 

 

 

33.01

 

 

 

211,237

 

 

 

31.97

 

 

 

162,218

 

 

 

28.80

 

 

 

120,098

 

 

 

25.67

 

 

 

89,750

 

 

 

22.10

 

Construction and development

 

 

53,426

 

 

 

7.69

 

 

 

72,955

 

 

 

11.04

 

 

 

27,944

 

 

 

4.96

 

 

 

18,788

 

 

 

4.02

 

 

 

9,805

 

 

 

2.41

 

Total real estate loans

 

 

487,128

 

 

 

70.11

 

 

 

467,714

 

 

 

70.78

 

 

 

389,881

 

 

 

69.22

 

 

 

308,216

 

 

 

65.88

 

 

 

257,752

 

 

 

63.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

13,534

 

 

 

1.95

 

 

 

13,520

 

 

 

2.05

 

 

 

11,628

 

 

 

2.06

 

 

 

10,858

 

 

 

2.32

 

 

 

10,508

 

 

 

2.59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

84,549

 

 

 

12.17

 

 

 

71,854

 

 

 

10.87

 

 

 

61,753

 

 

 

10.97

 

 

 

55,352

 

 

 

11.83

 

 

 

50,269

 

 

 

12.38

 

Direct financing leases

 

 

109,592

 

 

 

15.77

 

 

 

107,735

 

 

 

16.30

 

 

 

99,940

 

 

 

17.75

 

 

 

93,433

 

 

 

19.97

 

 

 

87,580

 

 

 

21.56

 

Total commercial business loans and leases

 

 

194,141

 

 

 

27.94

 

 

 

179,589

 

 

 

27.17

 

 

 

161,693

 

 

 

28.72

 

 

 

147,785

 

 

 

31.80

 

 

 

137,849

 

 

 

33.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans and leases

 

 

694,803

 

 

 

100.00

%

 

 

660,823

 

 

 

100.00

%

 

 

563,202

 

 

 

100.00

%

 

 

467,859

 

 

 

100.00

%

 

 

406,109

 

 

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred fees and discounts

 

 

456

 

 

 

 

 

 

 

468

 

 

 

 

 

 

 

473

 

 

 

 

 

 

 

475

 

 

 

 

 

 

 

436

 

 

 

 

 

Allowance for loan and lease losses

 

 

7,089

 

 

 

 

 

 

 

5,600

 

 

 

 

 

 

 

4,800

 

 

 

 

 

 

 

5,394

 

 

 

 

 

 

 

5,246

 

 

 

 

 

Total loans and leases receivable, net

 

$

687,258

 

 

 

 

 

 

$

654,755

 

 

 

 

 

 

$

557,929

 

 

 

 

 

 

$

461,990

 

 

 

 

 

 

$

400,427

 

 

 

 

 

 

 

(1)

Includes $4.5 million and $5.1 million of loans secured by second mortgages on residential properties at December 31, 2019 and 2018, respectively.


5



Loan Maturity and Repricing. The following table sets forth certain information at December 31, 2019 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Loans with scheduled maturities are reported in the maturity category in which the loan is due. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan and lease losses.

 

 

 

Consumer

 

 

Commercial and

Industrial

 

 

Total

 

Due During Years Ending

December 31,

 

Amount

 

 

Weighted

Average

Rate

 

 

Amount

 

 

Weighted

Average

Rate

 

 

Amount

 

 

Weighted

Average

Rate

 

 

 

(Dollars in thousands)

 

2020(1)

 

$

1,149

 

 

 

5.25

%

 

$

27,523

 

 

 

4.90

%

 

$

28,672

 

 

 

4.92

%

2021

 

 

976

 

 

 

5.69

 

 

 

4,976

 

 

 

5.08

 

 

 

5,952

 

 

 

5.18

 

2022

 

 

1,908

 

 

 

5.05

 

 

 

2,169

 

 

 

5.04

 

 

 

4,077

 

 

 

5.04

 

2023 and 2024

 

 

6,669

 

 

 

4.74

 

 

 

15,425

 

 

 

4.79

 

 

 

22,094

 

 

 

4.77

 

2025 to 2029

 

 

2,286

 

 

 

4.69

 

 

 

25,059

 

 

 

4.79

 

 

 

27,345

 

 

 

4.78

 

2030 to 2034

 

 

503

 

 

 

6.03

 

 

 

5,756

 

 

 

5.19

 

 

 

6,259

 

 

 

5.26

 

2035 and following

 

 

43

 

 

 

3.75

 

 

 

3,641

 

 

 

5.04

 

 

 

3,684

 

 

 

5.03

 

Total

 

$

13,534

 

 

 

4.93

%

 

$

84,549

 

 

 

4.89

%

 

$

98,083

 

 

 

4.89

%

 

 

(1)

Includes demand loans, loans having no stated maturity and overdraft loans.

 

The total amount of loans set forth in the table above due after December 31, 2020 which have pre-determined or fixed interest rates is $37.1 million, while the total amount of loans due after this date which have floating or adjustable interest rates is $32.3 million.

 

Residential Mortgage Lending. We make one- to four-family residential real estate loans and home equity loans and lines of credit secured by the borrower’s primary residence. In addition, we may periodically purchase residential loans, which we refer to as brokered mortgages, primarily during periods of reduced loan demand in our primary market areas and at times to support our Community Reinvestment Act lending activities, although we have not purchased any brokered mortgage loans in the last six years. Any such purchases are made generally consistent with our underwriting standards for residential mortgage loans. At December 31, 2019, $138.3 million, or 19.9%, of our total loan and lease portfolio was secured by residential real estate, consisting of $126.8 million of one- to four-family residential real estate loans, including $4.5 million of home equity loans and $7.0 million of home equity lines of credit. Brokered mortgage loans totaled $819,000 of our total residential mortgage loan portfolio at December 31, 2019.

 

We originate both fixed-rate and adjustable-rate one- to four-family residential real estate loans. At December 31, 2019, 72.3% of our one- to four-family residential real estate loans were fixed-rate loans, and 27.7% of such loans were adjustable-rate loans.  Most of our loans are underwritten using generally-accepted secondary market underwriting guidelines. We typically sell most of the conforming, fixed-rate one- to four-family loans we originate into the secondary market to Fannie Mae and, to a lesser extent, the FHLB of Indianapolis. Loans that are sold into the secondary market to Fannie Mae or the FHLB of Indianapolis are sold with the servicing retained to maintain the client relationship and to generate noninterest income. The sale of mortgage loans provides a source of non-interest income through the gain on sale, reduces our interest rate risk, provides a stream of servicing income, enhances liquidity and enables us to originate more loans at our current capital level than if we held the loans in our loan portfolio. Our pricing strategy for mortgage loans includes establishing interest rates that are competitive with other financial institutions and consistent with our internal asset and liability management objectives. During the year ended December 31, 2019, we originated $42.2 million one- to four-family fixed-rate mortgage loans and $4.5 million one- to four-family adjustable rate mortgage (“ARM”) loans, and sold $20.7 million of these loans without recourse to Fannie Mae and the FHLB of Indianapolis. See “- Loan Originations, Purchases, Sales, Repayments and Servicing.”

 

We also make a limited amount of Federal Housing Administration (“FHA”) loans, U.S. Department of Veterans Affairs (“VA”) loans and U.S. Department of Agriculture (“USDA”) loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA, VA and USDA guidelines. During the year ended December 31, 2019, we originated and sold $495,000 in the aggregate of FHA, VA and USDA loans.


6



Substantially all of the one- to four-family residential mortgage loans we retain in our portfolio consist of fixed-rate loans that do not satisfy acreage limits, income, credit, conforming loan limits (i.e., jumbo mortgages) or various other requirements imposed by Fannie Mae or are adjustable-rate loans. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy Fannie Mae credit requirements because of personal and financial reasons (i.e., bankruptcy, length of time employed, etc.), and other aspects, which do not conform to Fannie Mae’s guidelines. Such borrowers may have higher debt-to-income ratios, or the loans are secured by unique properties in rural markets for which there are no sales of comparable properties to support the value according to secondary market requirements. We may require additional collateral or lower loan-to-value ratios to reduce the risk of these loans. We believe that these loans satisfy the needs of borrowers in our market area. As a result, subject to market conditions, we intend to continue to originate these types of loans. We also retain jumbo loans which exceed the conforming loan limits and therefore are not eligible to be purchased by Fannie Mae. At December 31, 2019, $23.7 million or 18.7% of our one- to four-family loan portfolio consisted of jumbo loans.

 

We generally underwrite our one- to four-family loans based on the applicant’s employment and credit history and the appraised value of the subject property. We generally lend up to 89% of the lesser of the appraised value or purchase price for one- to four-family first mortgage loans and non-owner occupied first mortgage loans. For first mortgage loans with a loan-to-value ratio in excess of 89%, we may require private mortgage insurance or other credit enhancement to help mitigate the risk. Fixed-rate loans secured by one- to four-family residences may have contractual maturities of up to 30 years. All of these loans are fully amortizing, with payments due monthly. Properties securing our one- to four-family loans are typically appraised by independent fee appraisers who are selected in accordance with criteria approved by the Loan Committee. For loans that are less than $250,000, we may use an automated valuation model, in lieu of an appraisal. We require title insurance policies on all first mortgage real estate loans originated over $100,000. Homeowners, liability, fire and, if required, flood insurance policies are also required for one-to four-family loans. Our real estate loans generally contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property.

 

ARM loans are offered with annual adjustments and life-time rate caps that vary based on the product, generally with a maximum annual rate change of 2.0% and a maximum overall rate change of 6.0%. We generally use the rate on one-year Treasury Bills to re-price our ARM loans. As a consequence of using caps, the interest rates on ARM loans may not be as rate sensitive as our cost of funds. Furthermore, because loan indexes may not respond perfectly to changes in market interest rates, upward adjustments on loans may occur more slowly than increases in our cost of interest-bearing liabilities, especially during periods of rapidly increasing interest rates. Because of these characteristics, future yields on ARM loans may not be sufficient to offset increases in our cost of funds.

 

ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s payment increases, which increases the potential for default. We continue to offer our fully amortizing ARM loans with a fixed interest rate for the first one, three, five or seven years, followed by a periodic adjustable interest rate for the remaining term.

 

The average balance of our one- to four-family residential loans secured by first mortgages was approximately $83,000 at December 31, 2019.

 

We originate fixed-rate home equity loans and fixed- and variable-rate lines of credit secured either by a first or second lien on the borrower’s primary residence. Our home equity loans are fixed rate fully amortizing loans with terms of up to 15 years and are generally originated in amounts, together with the amount of the existing first mortgage, of up to 89% of the appraised value of the subject property. Home equity loans originated with a loan to value ratio in excess of 80.0% are subject to a higher origination fee and higher interest rate than home equity loans with loan to value ratios of 80% or less. If the home equity loan is for home improvements, the improvements to be made to the property may be considered when calculating the loan to value ratio. If the loan to value ratio on the property is sufficient, regardless of the improvements to be made, the proceeds may be disbursed directly to the borrower. When the appraised value is dependent on the improvements to meet the loan to value requirement, the proceeds are held by us until we receive reasonable assurance that the improvements have been completed. The loan officers, at their discretion, may use a limited appraisal or a recertification of value on these types of loans. At December 31, 2019, home equity loans totaled $4.5 million, or 0.7% of our total loan and lease portfolio.

 

Home equity lines of credit may be either fixed- or adjustable -rate and are typically originated in amounts, together with the amount of the existing first mortgage, of up to 89% of the appraised value of the subject property. Home equity lines of credit originated with a loan to value ratio in excess of 80% are subject to a higher interest rate


7



than home equity lines of credit with loan to value ratios of 80% or less. Home equity lines of credit with an adjustable rate of interest adjust quarterly and are based on the Wall Street Journal Prime rate, plus a margin. Our fixed rate lines have a five year draw period and our adjustable rate lines have a 10 year draw period, during which time the funds may be paid down and redrawn up to the committed amount. Once the draw period has lapsed, the borrower either pays off the loan balance, or a new loan is negotiated. We charge an annual fee on each home equity line of credit and require a monthly payment of 0.9% of the outstanding balance drawn during the period, plus interest. At December 31, 2019, home equity lines of credit totaled $7.0 million, or 1.0% of our total loan and lease portfolio, with adjustable-rate home equity lines of credit totaling $4.5 million and fixed rate home equity lines making up the remaining balance.  At December 31, 2019, unfunded commitments on home equity lines of credit totaled $10.7 million.

 

We do not engage in originating interest only, negative amortization, option adjustable rate or subprime loans and have no established program to originate or purchase these loans. Subprime loans are defined as loans that at the time of loan origination had a FICO credit score of less than 660. Of the $50.2 million in one- to four- family loans, including home equity loans and lines of credit, originated in 2019, only $4.4 million, or 8.8%, were to borrowers with a credit score under 660.

 

Multi-family and Commercial Real Estate Lending. We originate commercial real estate loans, including loans secured by multi-family residential properties, office buildings, hotels, industrial properties, retail buildings, medical and professional buildings, restaurants and various other commercial properties located principally in our primary market area.  As of December 31, 2019, $295.4 million or 42.5% of our total loan and lease portfolio was secured by commercial and multi-family real estate, of which $72.2 million, or 10.4% of our total loan and lease portfolio, was secured by property located in the Columbus, Ohio market.  Multi-family loans totaled $66.0 million of the $295.4 million commercial and multi-family real estate loan portfolio, or 9.5% of our total loan and lease portfolio, at December 31, 2019.  Of the remaining $229.4 million of this portfolio, approximately $155.2 million was secured by income producing, or non-owner-occupied commercial real estate. We also purchase and participate, from time to time, in multi-family and commercial real estate loans from other financial institutions, which amounts are included in our multi-family and commercial real estate loan portfolios. Such loans are independently underwritten according to our policies. At December 31, 2019, our purchased multi-family and commercial real estate loan participations totaled $20.3 million, or 6.9% of our total multi-family and commercial real estate loan portfolios.

 

Multi-family and commercial real estate loans generally are priced at a higher rate of interest than one- to four-family residential loans. Typically, these loans have higher loan balances, are more difficult to evaluate and monitor, and involve a greater degree of risk than one- to four-family residential loans. Often payments on loans secured by commercial or multi-family properties are dependent on the successful operation and management of the property; therefore, repayment of these loans may be affected by adverse conditions in the real estate market or the economy. We generally require and obtain loan guarantees from financially capable parties based upon the review of personal financial statements. If the borrower is a corporation, we generally require and obtain personal guarantees from the corporate principals based upon a review of their personal financial statements and individual credit reports. In addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis by requiring periodic financial statement updates.

 

Our commercial and multi-family real estate loans generally have initial terms of 10 to 20 years and amortization terms of up to 25 years, with a balloon payment at the end of the initial term, and may be fixed-rate or adjustable-rate loans. Our adjustable-rate multi-family and commercial real estate loans are generally tied to a margin above the prime rate or the applicable treasury rate. The maximum loan-to-value ratio of our multi-family and commercial real estate loans is generally 80% of the lower of cost or appraised value of the property securing the loan. At December 31, 2019, 14.4% of our multi-family and commercial real estate loans were fixed-rate loans and 85.6% were adjustable-rate loans.

 

We consider a number of factors in originating multi-family and commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of


8



the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service ratio of at least 1.10x.  All multi-family and commercial real estate loans in excess of $500,000 are appraised by outside independent appraisers. We require property and casualty insurance and also require flood insurance if the property is determined to be in a flood zone area.

 

In addition, we generally require a Phase I Environmental Audit as a condition of making all multi-family and commercial real estate loans in excess of $1.0 million, which audit is performed by a qualified environmental consulting firm. The Phase I Environmental Audit includes appropriate inquiry into previous ownership and uses of the real estate to satisfactorily comply with the “Innocent Landowner Defense Amendment” to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). The results and recommendations of the audit must be acceptable to us prior to loan closing.  For loans less than $1.0 million but greater than $150,000, a full Phase I Environmental Audit is not be required, although an environmental investigation is typically performed by qualified bank personnel or a third party to determine if a full Phase I Environmental Audit should be done.

 

At December 31, 2019, the average loan size of our outstanding multi-family and commercial real estate loans was $790,000, and the largest of such loans was an $8.0 million loan secured by a first mortgage on a multi-family development located in the Columbus, Ohio metropolitan area. This loan was performing in accordance with its repayment terms at December 31, 2019.  We had 30 other commercial and multi-family real estate loans with an outstanding balance in excess of $3.0 million at December 31, 2019, all of which were performing in accordance with their repayment terms at December 31, 2019.  Our largest lending relationship at December 31, 2019 with one borrower was for $16.6 million consisting of five commercial real estate loans secured by five separate hotels, three in the Dayton, Ohio area and two in the Cincinnati, Ohio area, all with a common guarantor. All of these loans were performing in accordance with their repayment terms at December 31, 2019.

 

Multi-family and commercial real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the repayment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for multi-family and commercial real estate than residential properties. If we foreclose on a commercial or multi-family real estate loan, the marketing and liquidation period to convert the real estate asset to cash can be a lengthy process with substantial holding costs. In addition, vacancies, deferred maintenance, repairs and market stigma can result in prospective buyers expecting sale price concessions to offset their real or perceived economic losses for the time it takes them to return the property to profitability. Depending on the individual circumstances, initial charge-offs and subsequent losses on multi-family and commercial real estate loans can be unpredictable and substantial.

 

The composition of, and location of the underlying collateral securing, our multi-family and commercial real estate loan portfolio at December 31, 2019 was as follows:

 

Type of Security

 

Indiana

 

 

Ohio

 

 

Other

 

 

Total

 

 

% of Total

in Category

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office buildings

 

$

20,100

 

 

$

28,717

 

 

$

75

 

 

$

48,892

 

 

 

16.6

%

Multi-family/Apartment buildings

 

 

37,288

 

 

 

28,333

 

 

 

381

 

 

 

66,002

 

 

 

22.3

 

Hotels

 

 

18,774

 

 

 

28,742

 

 

 

 

 

 

47,516

 

 

 

16.1

 

Industrial building

 

 

19,463

 

 

 

13,926

 

 

 

 

 

 

33,389

 

 

 

11.3

 

Retail

 

 

22,528

 

 

 

10,880

 

 

 

 

 

 

33,408

 

 

 

11.3

 

Medical

 

 

16,724

 

 

 

3,475

 

 

 

 

 

 

20,199

 

 

 

6.9

 

Automotive

 

 

12,494

 

 

 

1,533

 

 

 

 

 

 

14,027

 

 

 

4.7

 

Restaurants

 

 

5,058

 

 

 

4,382

 

 

 

 

 

 

9,440

 

 

 

3.2

 

Campgrounds/Golf Courses/Leisure Activities

 

 

6,171

 

 

 

1,410

 

 

 

 

 

 

7,581

 

 

 

2.6

 

Agricultural

 

 

3,278

 

 

 

776

 

 

 

470

 

 

 

4,524

 

 

 

1.5

 

Other

 

 

3,413

 

 

 

4,507

 

 

 

2,514

 

 

 

10,434

 

 

 

3.5

 

Total

 

$

165,291

 

 

$

126,681

 

 

$

3,440

 

 

$

295,412

 

 

 

100.0

%

 


9



Commercial and Industrial Lending. We make secured and unsecured commercial and industrial loans, including commercial lines of credit, working capital loans, term loans, equipment financing, acquisition, expansion and development loans, letters of credit and other loan products, principally in our primary market area. These loans are made based primarily on historical and projected cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. We take as collateral a lien on general business assets including, among other things, available real estate, accounts receivable, inventory and equipment and generally obtain a personal guaranty of the borrower or principal. Our operating lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit and term loans typically are reviewed annually. As of December 31, 2019, we had $84.5 million of commercial and industrial loans, representing 12.2% of our total loan and lease portfolio.

 

The terms of our commercial and industrial loans vary by purpose and by type of underlying collateral. We typically make equipment loans for a term of five years or less at fixed or adjustable rates, with the loan fully amortized over the term. Terms greater than five years may be appropriate in some circumstances, based upon the useful life of the underlying asset being financed or if some form of credit enhancement, such as an SBA guarantee, is obtained. Loans to support working capital typically have terms not exceeding one year and are usually secured by accounts receivable, inventory and personal guarantees of the principals of the business. The interest rates charged on loans vary with the degree of risk and loan amount and are further subject to competitive pressures, money market rates, the availability of funds and government regulations. For loans secured by accounts receivable and inventory, principal is typically repaid as the assets securing the loan are converted into cash (monitored on a monthly or more frequent basis as determined necessary in the underwriting process), and for loans secured with other types of collateral, principal is typically due at maturity.

 

In general, commercial and industrial loans may involve increased credit risk and, therefore, typically yield a higher return. The increased risk in commercial and industrial loans derives from the expectation that such loans generally are serviced principally from the operations of the business, and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan. In addition, the collateral securing commercial and industrial loans generally includes moveable property such as equipment and inventory, which may decline in value more rapidly than we anticipate, exposing us to increased credit risk. As a result of these additional complexities, variables and risks, commercial and industrial loans require extensive underwriting and servicing.

 

At December 31, 2019, the average loan size of our outstanding commercial and industrial loans was $214,000, and our largest outstanding commercial and industrial loan was a capital improvement loan totaling $4.3 million to a manufacturing company located in Richmond, Indiana secured by a first lien on all business assets of the borrower.  This loan was performing in accordance with its repayment terms at December 31, 2019.  We had five other commercial and industrial loans with an outstanding balance in excess of $3.0 million at December 31, 2019, all of which were performing in accordance with their repayment terms at December 31, 2018.

 

Construction and Development Lending. We originate loans to finance the construction of commercial real estate projects, such as multi-family housing, industrial, office and retail centers. We also originate residential construction loans to borrowers and builders secured by single-family residences. On a much smaller scale, we may originate loans for the acquisition and development of residential or commercial land into buildable lots.  At December 31, 2019, our construction and development loan portfolio totaled $53.4 million, or 7.7% of our total loan and lease portfolio, consisting of $50.1 million in commercial construction loans and $3.3 million in residential construction loans.  At December 31, 2019, we had unfunded construction loan commitments totaling $36.5 million and $272,000 in commercial and residential construction loans, respectively.

 

Our commercial construction loans are typically made to builders/developers that have an established record of successful project completion and loan repayment. We conduct periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans based on the percentage of completion. Underwriting guidelines for our commercial construction loans are similar to those described above for our commercial real estate lending. General liability, builder’s risk hazard insurance, title insurance, and flood insurance (as applicable, for properties located or to be built in a designated flood hazard area) are also required on all construction and development loans.

 


10



Our commercial construction loans have terms that typically range from one to two years depending on factors such as the type and size of the development and the financial strength of the borrower/guarantor. Commercial construction loans are typically structured with an interest only period during the construction phase. Commercial construction loans are underwritten to either mature, or transition to a traditional amortizing loan, at the completion of the construction phase. The loan-to-value ratio on our commercial construction loans, as established by independent appraisal, typically will not exceed 80% of the appraised value on a completed basis or the cost of completion, whichever is less. These loans generally include an interest reserve of 1% to 5% of the loan commitment amount. The average outstanding loan size in our commercial construction loan portfolio was approximately $1.0 million at December 31, 2019.

 

Commercial construction loans on property built for speculative purposes that has not sold in a period of eighteen months after completion will require re-margining at no more than 89% of current appraised value and monthly amortization based on a 25 year payout.  At December 31, 2019, $18.5 million, or 36.9%, of our total commercial construction loan portfolio consisted of speculative construction loans.

 

We finance the construction of pre-sold owner occupied, one- to four-family residential properties in our market areas to builders and prospective homeowners. Our residential construction loans are originated primarily on a construction/permanent basis with such loans converting to an amortizing loan following the completion of the construction phase. Our residential construction loans generally provide for the payment of interest only during the construction phase, which is typically up to nine months. We do not make speculative construction loans to a builder for homes that are not pre-sold.  The average outstanding residential construction loan balance was approximately $145,000 at December 31, 2019.

 

Residential construction loans are made with a maximum loan-to-value ratio of the lower of 80% of the cost or appraised value at completion. Commitments to fund residential construction loans generally are made subject to an appraisal of the property by an independent licensed appraiser. Loan proceeds are disbursed after inspection by a third party inspector based on the percentage of completion method.

 

On a more limited basis, we also make land loans to developers, builders and individuals to finance the commercial development of improved lots or unimproved land. In making land loans, we follow underwriting policies and disbursement and monitoring procedures similar to those for commercial construction loans. These land loans also involve additional risks because the loan amount is based on the projected value of the lots after development. We make these loans for up to 65% of the estimated value of raw land and up to 75% of the estimated value of developed land, with a term of up to two years with interest only payments, payable monthly.

 

Construction loans generally involve greater credit risk than long-term financing on improved, owner occupied real estate. In the event a loan is made on property that is not yet approved for the planned development or improvements, there is a risk that necessary approvals will not be granted or will be delayed. Risk of loss on a construction loan also depends upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also carry the risk that construction will not be completed on time in accordance with specifications and projected costs. In addition, repayment of these loans can be dependent on the sale or rental of the property to third parties, and the ultimate sale or rental of the property may not occur as anticipated. Other risks may include the fraudulent diversion of construction funds, the filing of mechanics liens by contractors, subcontractors or suppliers, or the contractor’s failure to complete the construction of the project.

 

We seek to address the forgoing risks associated with construction and development lending by developing and adhering to underwriting policies, disbursement procedures and monitoring practices. Specifically, we (i) seek to diversify loans in our market areas, (ii) evaluate and document the creditworthiness of the borrower and the viability of the proposed project, (iii) obtain an appraisal of the property by an independent licensed appraiser, (iv) limit loan-to-value ratios to specified levels, (v) control disbursements on construction loans on the basis of on-site inspections by third party inspectors, and (vi) monitor economic conditions in each market. No assurances, however, can be given that these practices will be successful in mitigating the risks of construction and development lending.


11



At December 31, 2019, our largest construction and land development loan had an outstanding balance of $8.0 million and was secured by a first mortgage on a 258-unit apartment development in the Columbus, Ohio metropolitan area.  At December 31, 2019, this loan was performing according to its repayment terms. We had four other construction and development loans with an outstanding balance in excess of $3.0 million at December 31, 2019, all of which were performing in accordance with their repayment terms at that date.

 

Lease Financing. We conduct our leasing operations through First Federal Leasing, a division of First Bank Richmond. Our lease financing operation consists of direct financing leases which are used by commercial customers to finance purchases such as medical, computer and manufacturing equipment, industrial assets, construction and transportation equipment, and a wide variety of other commercial equipment. We rely solely on brokers and other third party originators to generate our lease transactions. The nature of our business requires the use of brokers and third party originators as it focuses on transactions generally ranging between $2,500 and $200,000 (with an average size of $45,000) with terms of 24 to 72 months. Our risk management profile centers on internally rated “A” quality credits.  At December 31, 2019, our direct finance leasing portfolio totaled $109.6 million, or 15.8% of our total loan and lease portfolio.

 

At lease inception, we record an asset (net investment) representing the aggregate future minimum lease payments and deferred incremental direct costs less unearned income. Income is recognized over the life of the lease to approximate a level rate of return on the net investment.

 

To generate deal flow, we work with over 100 brokers and third party originators across the country, some of which are one person shops and others more established companies, with most of the volume coming from less than 20 referral sources that we know well. We have operated with this model since we commenced leasing operations in 1989 and have developed strong procedures to minimize fraud and concentration risk. The leases are processed by us through our lease origination software, which allows brokers to populate the fields with customer information and attach credit documentation, streamlining the data collection process. There is no automated approval process. Each lease application is reviewed by a credit administrator and then sent to a credit underwriter for review and approval. We have procedures in place to check and underwrite all the data we receive from the brokers and third party originators, including ensuring that the potential lessee is operating from the location given and tracking the performance of each vendor.

 

The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant and generally require that the applicant have a minimum FICO score of 675. A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. In addition to an evaluation of the applicant’s financial condition, a determination is made of the probable adequacy of the primary and secondary sources of repayment, such as personal guarantees, to be relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthiness.

 

We generally file a UCC-1 financing statement on all of our lease transaction to perfect our interest in the equipment, except in the case of (i) titled equipment, where we would require the title in lieu of the UCC financing statement, (ii) transactions under $5,000 or (iii) for equipment with very little value, such as computer software. Perfection gives us a claim to the collateral that is superior to someone that obtains a lien through the judicial process subsequent to the perfection of a security interest.  The failure to perfect a security interest does not render the security interest unenforceable against the borrower. However, failure to perfect a security interest risks avoidance of the security interest in bankruptcy or subordination to the claims of third parties.

 

At December 31, 2019, our largest leasing relationship was with the State of Arkansas consisting of more than 3,000 leases totaling approximately $13.2 million in lease receivables, all of which were performing in accordance with the lease terms.

 

Consumer Lending. We offer a variety of secured and unsecured consumer loans to individuals who reside or work in our market area, including new and used automobile loans, motorcycle loans, boat loans, recreational vehicle loans, mobile home loans and loans secured by certificates of deposit. Most of our consumer loans are made as an accommodation to our existing customers.  At December 31, 2019, our consumer loan portfolio totaled $13.5 million, or 1.9% of our total loan and lease portfolio, including $1.9 million of unsecured consumer loans.

 


12



Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

 

Originations, Sales and Purchases of Loans

 

Our loan originations are generated by our loan personnel operating at our office locations. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations can vary from period to period. During the year ended December 31, 2019, we originated $147.0 million of fixed rate loans and $91.9 million of adjustable rate loans, compared to $141.6 million of fixed rate loans and $146.7 million of adjustable rate loans during the year ended December 31, 2018.  

 

The following tables provide information regarding our origination for the dates indicated:

 

 

 

2019

 

 

 

Fixed Rate

 

 

Floating or

Adjustable Rate

 

 

Total

 

 

 

(Dollars in thousands)

 

Residential real estate (1)

 

$

42,172

 

 

$

4,460

 

 

$

46,632

 

Home equity lines of credit

 

 

2,329

 

 

 

1,264

 

 

 

3,593

 

Multi-family and commercial real estate

 

 

3,905

 

 

 

38,237

 

 

 

42,142

 

Construction and development

 

 

31,656

 

 

 

26,425

 

 

 

58,081

 

Consumer

 

 

6,734

 

 

 

 

 

 

6,734

 

Commercial and Industrial

 

 

8,735

 

 

 

21,534

 

 

 

30,269

 

Direct finance leasing

 

 

51,501

 

 

 

 

 

 

51,501

 

Total

 

$

147,032

 

 

$

91,920

 

 

$

238,952

 

 

 

(1)

Includes $4.5 million of fixed-rate and no adjustable-rate loans secured by second mortgages on residential properties.

 

 

 

 

2018

 

 

 

Fixed Rate

 

 

Floating or

Adjustable Rate

 

 

Total

 

 

 

(Dollars in thousands)

 

Residential real estate (1)

 

$

37,325

 

 

$

6,673

 

 

$

43,998

 

Home equity lines of credit

 

 

1,714

 

 

 

1,720

 

 

 

3,434

 

Multi-family and commercial real estate

 

 

16,473

 

 

 

75,246

 

 

 

91,719

 

Construction and development

 

 

8,770

 

 

 

25,330

 

 

 

34,100

 

Consumer

 

 

7,367

 

 

 

750

 

 

 

8,117

 

Commercial and Industrial

 

 

16,284

 

 

 

36,954

 

 

 

53,238

 

Direct finance leasing

 

 

53,686

 

 

 

 

 

 

53,686

 

Total

 

$

141,619

 

 

$

146,673

 

 

$

288,292

 

 

 

(1)

Includes $2.5 million of fixed-rate and no adjustable-rate loans secured by second mortgages on residential properties.

 

We consider our balance sheet as well as market conditions on an ongoing basis in making decisions as to whether to hold residential loans we originate for investment or to sell these loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. We sell the majority of the fixed-rate conforming and eligible jumbo one- to four-family residential real estate loans that we originate, generally on a servicing-retained basis, while retaining some non-eligible fixed-rate and adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to repricing of our loan portfolio. All FHA, VA and USDA loans we originate are sold on a servicing-released, non-recourse basis in accordance with FHA, VA and


13



USDA guidelines. For the years ended December 31, 2019, 2018 and 2017, we sold $27.2 million, $20.7 million, and $21.1 million of one- to four-family residential real estate loans, respectively.

 

We recognize, at the time of sale, the cash gain or loss on the sale of the loans based on the difference between the net cash proceeds received and the carrying value of the loans sold. Subject to market and economic conditions, management intends to continue this sales activity in future periods to generate gain on sale income.

 

From time to time, we may purchase loan participations secured by properties within and outside of our primary lending market area in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. At December 31, 2019, we had 18 loans totaling $25.7 million in which we were not the lead lender, all of which were performing in accordance with their original repayment terms. We also have sold portions of loans we originate that exceeded our loans-to-one borrower legal lending limit or for risk diversification.  Historically, we have not purchased whole loans. Pursuant to our growth strategy, however, we may purchase whole loans in the future.

 

Delinquencies and Non-Performing Assets

 

Delinquency Procedures for Owner Occupied One- to Four-Family Residential and Consumer Loans. Prior to an owner-occupied residential real estate or consumer loan payment reaching 30 days past due, our loan officers and/or members of our loan collection department typically will contact the customer. If a loan payment becomes 30 days past due, we mail a late notice and we also place telephone calls to the borrower. These loan collection efforts continue until a loan becomes more than 90 days past due, at which point we would generally refer the loan for foreclosure proceedings unless management determines that it is in the best interest of First Bank Richmond to work further with the borrower to arrange a workout plan. A workout plan generally is done if we believe that the borrower will be able to keep the loan current and in no event more often than one time per year, and two times in a three-year period.

 

Once the loan is more than 90 days past due, a demand notice will be sent to the borrower requiring payments to be brought current within 10 days for non-real estate secured loans and 30 days for real estate secured loans. The foreclosure process generally would begin when a loan becomes 120 days delinquent. From time to time we may accept deeds in lieu of foreclosure. Foreclosed real estate will be booked into other real estate owned. In most cases, the real estate will be listed with a realtor for sale if an accepted purchase offer is not received within 30 days of the bank taking title. For equipment and titled vehicles, if the borrower is unwilling to surrender the collateral voluntarily, a repossession company will be hired to repossess the collateral. Vehicles and other personal property will be sold in a commercially reasonable manner according to the property.

 

Delinquency Procedures for Commercial and Multi-family and Commercial Real Estate Loans and Leases. When a commercial loan or commercial or multi-family real estate loan or lease becomes 10 days past due, we contact the customer by mailing a late notice. The loan officer assigned to the account may also contact the borrower. If the loan continues past due, the loan officer will continue to contact the borrower to determine the cause of the past due payment(s) and arrange for payments. This information will be discussed with the commercial loan manager to determine the nature of the past due payment and, if necessary, to develop a plan to bring the past due payment(s) current and determine if the likelihood of repayment is in question. The loan will also be evaluated for a change to the risk rating. Depending on the circumstances, the lender and commercial loan manager may develop a plan to protect First Bank Richmond’s interest in the loan. If necessary, First Bank Richmond will engage an attorney to pursue further collection efforts.

 

Loan officers are required to complete a “problem loan workout report” on all loans over $500,000 that are rated as criticized or classified. The plans outlined in these reports detail the specific strategies proposed to resolve the defined credit weaknesses, the current condition of the relationship, identify the specific sources of repayment, give a current valuation of all collateral, the position we hold in all collateral, an analysis of all current financial information including cash flows, a timeline for specific actions to occur in the workout plan and set guidelines that would trigger consideration for grading changes. The reports also include an up to date accounting for any expenses that have been incurred on that account. Additional trigger dates for legal proceedings and or foreclosure action are generally discussed in the report in detail. In most cases a decision to foreclose or pursue other legal action on a problem credit will be determined at 120 days past due. In some cases, however, it may be in First Bank Richmond’s best interests to delay such action. The reason for delays are discussed and a trigger date established for final action.


14



Loans and Leases Past Due and Nonperforming Assets. Loans and leases are reviewed on a regular basis. Management determines that a loan or lease is impaired or nonperforming when it is probable at least a portion of the loan or lease will not be collected in accordance with the original terms due to a deterioration in the financial condition of the borrower or the value of the underlying collateral if the loan is collateral dependent. When a loan or lease is determined to be impaired, the measurement of the loan or lease in the allowance for loan and lease losses is based on present value of expected future cash flows, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-accrual loans and leases are loans and leases for which collectability is questionable and, therefore, interest on such loans will no longer be recognized on an accrual basis. All loans and leases that become 90 days or more delinquent are placed on non-accrual status unless the loan is well secured and in the process of collection.

 

When we acquire real estate as a result of foreclosure, the real estate is classified as foreclosed assets or Other Real Estate Owned. Foreclosed assets are recorded at the lower of carrying amount or fair value, less estimated costs to sell. Soon after acquisition, we order a new appraisal, or evaluation when acceptable, to determine the current market value of the property. Any excess of the recorded value of the loan over the market value of the property is charged against the allowance for loan and lease losses, or, if the existing allowance is inadequate, charged to expense, in either case during the applicable period of such determination. After acquisition, all costs incurred in maintaining the property are expensed.

 

Delinquent Loans and Leases. The following table shows our delinquent loans and leases by the type of loan or lease and number of days delinquent as of December 31, 2019.

 

 

 

Loans Delinquent For:

 

 

 

60-89 Days

 

 

90 Days and Over

 

 

Total Loans Delinquent

60 Days or More

 

 

 

Number

 

 

Amount

 

 

Percent
of

Loan

Category

 

 

Number

 

 

Amount

 

 

Percent
of

Loan

Category

 

 

Number

 

 

Amount

 

 

Percent
of

Loan

Category

 

 

 

(Dollars in thousands)

 

Real Estate Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(1)

 

 

7

 

 

$

240

 

 

 

0.2

%

 

 

48

 

 

$

2,452

 

 

 

1.9

%

 

 

55

 

 

$

2,692

 

 

 

.02

%

Home equity lines of credit

 

 

1

 

 

 

36

 

 

 

0.5

 

 

 

1

 

 

 

15

 

 

 

0.2

 

 

 

2

 

 

 

51

 

 

 

0.7

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

184

 

 

 

0.1

 

 

 

1

 

 

 

184

 

 

 

0.1

 

Construction or development

 

 

1

 

 

 

257

 

 

 

0.5

 

 

 

1

 

 

 

249

 

 

 

0.5

 

 

 

2

 

 

 

506

 

 

 

0.9

 

Total Real Estate Loans

 

 

9

 

 

 

533

 

 

 

0.1

 

 

 

 

51

 

 

 

2,900

 

 

 

0.6

 

 

 

60

 

 

 

3,433

 

 

 

0.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

5

 

 

 

35

 

 

 

0.3

 

 

 

1

 

 

 

15

 

 

 

0.1

 

 

 

6

 

 

 

50

 

 

 

0.4

 

Commercial and industrial

 

 

2

 

 

 

1,092

 

 

 

1.3

 

 

 

4

 

 

 

438

 

 

 

0.5

 

 

 

6

 

 

 

1,530

 

 

 

1.8

 

Direct financing leases

 

 

2

 

 

 

29

 

 

 

0.0

 

 

 

2

 

 

 

79

 

 

 

0.1

 

 

 

4

 

 

 

108

 

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

18

 

 

$

1,689

 

 

 

0.2

%

 

 

58

 

 

$

3,432

 

 

 

0.5

%

 

 

76

 

 

$

5,121

 

 

 

0.7

%

 

 

(1)

Includes loans secured by first and second mortgages on residential properties.

 

Nonperforming Loans and Leases. We generally cease accruing interest on our loans and leases when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan or lease is currently performing. A loan or lease may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan or lease is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans and leases generally is applied against principal or interest and is recognized on a cash basis. Generally, loans and leases are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

 

Nonperforming loans and leases totaled $3.8 million or 0.55% of total loans and leases at December 31, 2019, $4.6 million or 0.69% of total loans and leases at December 31, 2018 and $4.5 million or 0.80% of total loans and leases at December 31, 2017.  The decrease in nonperforming loans at December 31, 2019, compared to the prior year primarily was the result of the charge-off of three commercial and industrial loans totaling $901,000 during 2019 which were classified as nonaccrual troubled debt restructurings during 2018.


15



Troubled Debt Restructurings. Loans are accounted for as troubled debt restructurings when a borrower is experiencing financial difficulties that lead to a restructuring of the loan, and First Bank Richmond grants a concession to the borrower that it would not otherwise consider. These concessions include a modification of terms, such as a reduction of the stated interest rate or loan balance, a reduction of accrued interest, an extension of the maturity date at an interest rate lower than current market rate for a new loan with similar risk, or some combination thereof to facilitate payment. Troubled debt restructurings are considered impaired loans. No additional loan commitments were outstanding to our troubled debt restructured borrowers at December 31, 2019.

 

Loans on non-accrual status at the date of modification are initially classified as non-accrual troubled debt restructurings.  At December 31, 2019, we had $598,000 in non-accrual troubled debt restructurings, none of which were in the process of foreclosure at December 31, 2019.  Our policy provides that troubled debt restructured loans are returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring.  Satisfactory payment performance is generally no less than six consecutive months of timely payments.  At December 31, 2019, we had no loans or leases classified as accruing troubled debt restructurings.  

 

Foreclosed Assets. Foreclosed assets consist of property acquired through formal foreclosure, in-substance foreclosure or by deed in lieu of foreclosure, and are recorded at the lower of recorded investment or fair value less estimated costs to sell. Write-downs from recorded investment to fair value, which are required at the time of foreclosure, are charged to the allowance for loan and lease losses. After transfer, adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines occur. We had $0 in foreclosed assets at December 31, 2019.

 

Nonperforming Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. The improvement in total non-performing assets from 2015 through 2017 resulted primarily from the resolution of older non-performing commercial real estate loans most of which were secured by property located outside our primary market area. Foreclosed assets include assets acquired in settlement of loans.


16



 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Non-accrual loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(2)

 

$

315

 

 

$

357

 

 

$

320

 

 

$

844

 

 

 $

1,359

 

Home equity lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

342

 

 

 

743

 

 

 

181

 

 

 

2,032

 

 

 

8,937

 

Construction and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

494

 

 

 

1,177

 

 

 

2,609

 

 

 

2,557

 

 

 

1,343

 

Direct financing leases

 

 

74

 

 

 

202

 

 

 

25

 

 

 

124

 

 

 

72

 

Total non-accruing loans and leases(1)

 

 

1,225

 

 

 

2,479

 

 

 

3,135

 

 

 

5,557

 

 

 

11,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing loans and leases delinquent more than 90 days:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(2)

 

 

2,256

 

 

 

1,913

 

 

 

1,310

 

 

 

1,961

 

 

 

976

 

Home equity lines of credit

 

 

15

 

 

 

15

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

116

 

Construction and development

 

 

249

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

15

 

 

 

38

 

 

 

 

 

 

38

 

 

 

9

 

Commercial and industrial

 

 

3

 

 

 

130

 

 

 

68

 

 

 

8

 

 

 

317

 

Direct financing leases

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

 

Total accruing loans and leases delinquent more than 90 days

 

 

2,587

 

 

 

2,096

 

 

 

1,378

 

 

 

2,007

 

 

 

1,418

 

Total non-performing loans and leases

 

 

3,812

 

 

 

4,575

 

 

 

4,513

 

 

 

7,564

 

 

 

13,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(2)

 

 

 

 

 

176

 

 

 

34

 

 

 

72

 

 

 

301

 

Home equity lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

3,672

 

 

 

793

 

Construction and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct financing leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total foreclosed assets

 

 

 

 

 

176

 

 

 

34

 

 

 

3,744

 

 

 

1,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing assets

 

$

3,812

 

 

$

4,751

 

 

$

4,547

 

 

$

11,308

 

 

$

14,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings (accruing):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70

 

Home equity lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

152

 

 

 

170

 

Direct financing leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total trouble debt restructuring (accruing)

 

$

0

 

 

$

0

 

 

$

0

 

 

$

152

 

 

$

240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-performing loans to total loans

 

 

0.55

%

 

 

0.69

%

 

 

0.80

%

 

 

1.62

%

 

 

3.23

%

Total non-performing assets to total assets

 

 

0.39

%

 

 

0.56

%

 

 

0.60

%

 

 

1.63

%

 

 

2.11

%

Total non-performing assets and troubled debt restructurings (accruing) to total assets

 

 

0.39

%

 

 

0.56

%

 

 

0.60

%

 

 

1.65

%

 

 

2.14

%

 

 

(1)

Non-accrual loans and leases include $598,000, $1.6 million, $2.7 million, $2.8 million and $6.5 million, of troubled debt restructurings for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively.

 

(2)

Includes loans secured by first and second mortgages on residential properties.


17



Interest income that would have been recorded for the year ended December 31, 2019 had non-accruing loans been current according to their original terms amounted to $106,000, of which none was recorded.

 

Other Loans and Leases of Concern.   Other loans and leases of concern are those loans and leases that are currently accruing interest and are not considered impaired, but which we are monitoring because the financial information of the borrower causes us concerns as to their ability to comply with their loan repayment terms. Potential problem loans and leases, not included in the non-performing asset table above, totaled $5.4 million at December 31, 2019.

 

Classified Assets. Our regulators require that we classify loans and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

 

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan and lease losses in an amount deemed prudent by management and approved by the board of directors. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by our regulators, which may order the establishment of additional general or specific loss allowances.

 

In accordance with our loan policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or if the loan possesses weaknesses although currently performing. If a loan deteriorates in asset quality, the classification is changed to “special mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.” Management reviews the status of each impaired loan on our watch list on a quarterly basis.

 

On the basis of this review of our assets, our classified assets at the dates indicated were as follows:

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Watch and special mention

 

$

13,473

 

 

$

3,782

 

 

$

550

 

Substandard

 

 

8,072

 

 

 

7,695

 

 

 

7,378

 

Doubtful

 

 

74

 

 

 

202

 

 

 

25

 

Loss

 

 

 

 

 

 

 

 

 

Total classified assets

 

$

21,619

 

 

$

11,679

 

 

$

7,953

 

 

 

Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan and lease portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan and lease portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Because of uncertainties associated with regional economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that management’s estimate of probable credit


18



losses inherent in the loan and lease portfolio and the related allowance may change materially in the near-term. The allowance is increased by a provision for loan and lease losses, which is charged to expense and reduced by full and partial charge-offs, net of recoveries. Changes in the allowance relating to impaired loans and leases are charged or credited to the provision for loan and lease losses. Management’s periodic evaluation of the adequacy of the allowance is based on various factors, including, but not limited to, management’s ongoing review and grading of loans and leases, facts and issues related to specific loans and leases, historical loan and lease loss and delinquency experience, trends in past due and non-accrual loans and leases, existing risk characteristics of specific loans or loan pools, the fair value of underlying collateral, current economic conditions and other qualitative and quantitative factors which could affect potential credit losses.

 

As an integral part of their examination process, the Indiana DFI and the FDIC will periodically review our allowance for loan and lease losses, and as a result of such reviews, we may have to adjust our allowance for loan and lease losses. However, regulatory agencies are not directly involved in the process for establishing the allowance for loan and lease losses as the process is our responsibility and any increase or decrease in the allowance is the responsibility of management.


19



Allowance for Loan and Lease Losses. The following table sets forth an analysis of our allowance for loan and lease losses at the dates and for the periods indicated.

 

 

 

Years Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Balance at beginning of period:

 

$

5,600

 

 

$

4,800

 

 

$

5,394

 

 

$

5,246

 

 

$

6,266

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(1)

 

 

66

 

 

 

121

 

 

 

1,842

 

 

 

772

 

 

 

376

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

15

 

 

 

 

 

 

 

 

 

81

 

 

 

619

 

Construction and development

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

Total real estate loans

 

 

81

 

 

 

121

 

 

 

1,842

 

 

 

868

 

 

 

995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

123

 

 

 

57

 

 

 

57

 

 

 

92

 

 

 

145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

909

 

 

 

1,033

 

 

 

265

 

 

 

225

 

 

 

680

 

Direct financing leases

 

 

315

 

 

 

454

 

 

 

304

 

 

 

345

 

 

 

534

 

Total commercial business loans and leases

 

 

1,224

 

 

 

1,487

 

 

 

569

 

 

 

570

 

 

 

1,214

 

Total charge offs

 

 

1,428

 

 

 

1,665

 

 

 

2,468

 

 

 

1,530

 

 

 

2,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(1)

 

 

64

 

 

 

137

 

 

 

101

 

 

 

57

 

 

 

53

 

Home equity

 

 

 

 

 

2

 

 

 

2

 

 

 

2

 

 

 

 

Multi-family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

19

 

 

 

308

 

 

 

38

 

 

 

141

 

 

 

41

 

Construction and development

 

 

 

 

 

17

 

 

 

35

 

 

 

17

 

 

 

12

 

Total real estate loans

 

 

83

 

 

 

464

 

 

 

176

 

 

 

217

 

 

 

106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

26

 

 

 

31

 

 

 

29

 

 

 

30

 

 

 

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

10

 

 

 

26

 

 

 

21

 

 

 

40

 

 

 

93

 

Direct financing leases

 

 

198

 

 

 

264

 

 

 

278

 

 

 

236

 

 

 

249

 

Total commercial business loans and leases

 

 

208

 

 

 

290

 

 

 

299

 

 

 

276

 

 

 

342

 

Total recoveries

 

 

317

 

 

 

785

 

 

 

504

 

 

 

523

 

 

 

504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs

 

 

1,111

 

 

 

880

 

 

 

1,964

 

 

 

1,007

 

 

 

1,850

 

Additions charged to operations

 

 

2,600

 

 

 

1,680

 

 

 

1,370

 

 

 

1,155

 

 

 

830

 

Balance at end of period

 

$

7,089

 

 

$

5,600

 

 

$

4,800

 

 

$

5,394

 

 

$

5,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs during the period to average loans outstanding during the period

 

 

0.16

%

 

 

0.14

%

 

 

0.38

%

 

 

0.23

%

 

 

0.48

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs during the period to average non-performing assets

 

 

26.1

%

 

 

18.93

%

 

 

24.77

%

 

 

7.89

%

 

 

11.05

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as a percentage of non- performing assets

 

 

185.97

%

 

 

117.87

%

 

 

105.56

%

 

 

47.70

%

 

 

36.88

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as a percentage of total gross loans and leases receivable (end of period)

 

 

1.02

%

 

 

0.85

%

 

 

0.85

%

 

 

1.15

%

 

 

1.29

%

 

 

(1)

Includes loans secured by first and second mortgages on residential properties.


20



Allocation of Allowance for Loan and Lease Losses. The following table sets forth the allowance for loan and lease losses allocated by category, the total balances by category, and the percent of loans and leases in each category to total loans and leases at the dates indicated. The allowance for loan and lease losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories. At the dates indicated, we had no unallocated allowance for loan and lease losses. 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

Amount

 

 

Percent of
loans and
leases in
each
category to
total loans

 

 

Amount

 

 

Percent of
loans and
leases in
each
category to
total loans

 

 

Amount

 

 

Percent of
loans and
leases in
each
category to
total loans

 

 

Amount

 

 

Percent of
loans and
leases in
each
category to
total loans

 

 

Amount

 

 

Percent of
loans and
leases in
each
category to
total loans

 

 

 

(Dollars in thousands)

 

Allocated at end of period to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential(1)

 

$

109

 

 

 

20.0

%

 

$

139

 

 

 

21.1

%

 

$

257

 

 

 

24.2

%

 

$

359

 

 

 

29.2

%

 

$

933

 

 

 

34.0

%

Commercial(2)

 

 

4,564

 

 

 

50.1

 

 

 

3,147

 

 

 

49.7

 

 

 

2,424

 

 

 

45.0

 

 

 

1,829

 

 

 

36.7

 

 

 

1,956

 

 

 

29.5

 

Total real estate loans

 

 

4,673

 

 

 

70.1

 

 

 

3,286

 

 

 

70.8

 

 

 

2,681

 

 

 

69.2

 

 

 

2,188

 

 

 

65.9

 

 

 

2,889

 

 

 

63.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

138

 

 

 

2.0

 

 

 

108

 

 

 

2.0

 

 

 

119

 

 

 

2.1

 

 

 

128

 

 

 

2.3

 

 

 

120

 

 

 

2.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1,852

 

 

 

12.1

 

 

 

1,817

 

 

 

10.9

 

 

 

1,663

 

 

 

11.0

 

 

 

1,421

 

 

 

11.8

 

 

 

751

 

 

 

12.3

 

Direct financing leases

 

 

426

 

 

 

15.8

 

 

 

389

 

 

 

16.3

 

 

 

337

 

 

 

17.7

 

 

 

1,657

 

 

 

20.0

 

 

 

1,486

 

 

 

21.6

 

Total commercial business loans and leases

 

 

2,278

 

 

 

27.9

 

 

 

2,206

 

 

 

27.2

 

 

 

2,000

 

 

 

28.7

 

 

 

3,078

 

 

 

31.8

 

 

 

2,237

 

 

 

33.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans and leases

 

$

7,089

 

 

 

100.0

%

 

$

5,600

 

 

 

100.0

%

 

$

4,800

 

 

 

100.0

%

 

$

5,394

 

 

 

100.0

%

 

$

5,246

 

 

 

100.0

%

 

 

(1)

Includes residential mortgage loans, home equity loans and lines of credit, and residential construction loans.

 

(2)

Includes commercial and multi-family real estate loans and commercial construction loans.

 

At December 31, 2019, our allowance for loan and lease losses represented 1.0% of total loans and leases and 186.0% of non-performing loans and leases. There were $1.1 million in net loan and lease charge-offs during the year ended December 31, 2019.

 

Although we believe that we use the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan and lease losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of any portion of our loan or lease portfolio deteriorates as a result. Any material increase in the allowance for loan and lease losses may adversely affect our financial condition and results of operations.

 

Investment Activities

 

General. First Bank Richmond has the legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises and municipal governments, deposits at the Federal Home Loan Bank of Indianapolis, certificates of deposit of federally insured institutions, investment grade corporate bonds and investment grade marketable equity securities. We also are required to maintain an investment in Federal Home Loan Bank of Indianapolis and Federal Home Loan Bank of Cincinnati stock.


21



The objectives of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help mitigate interest rate and market risk, to diversify our assets, and to maximize the rate of return on invested funds within the context of our interest rate and credit risk objectives. First Bank Richmond’s board of directors is responsible for adopting our investment policy. The strategies utilized to meet the objective of our investment policy are established by our Asset/Liability Committee, which consists of at least three board members, the President and Chief Executive Officer, and the Chief Financial Officer of First Bank Richmond. The Asset/Liability Committee meets quarterly, or more often if necessary, to insure that investment policies and strategies are consistent with both First Bank Richmond’s investment guidelines and market conditions. The Asset/Liability Committee reviews the investment policy at least annually and recommends any revisions, if necessary, to the board of directors of First Bank Richmond.

 

Our President and Chief Executive Officer and our Chief Financial Officer are responsible for the management of our investment portfolio, subject to the direction and guidance of the Asset/ Liability Committee. Various factors are considered when making decisions regarding our investment portfolio, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases. All investment transactions are reviewed at the next regularly scheduled meeting of the board of directors. Our investment securities are usually classified as available-for-sale; however, the purchasing officer has the option, at the time of purchase, to designate individual securities as held-to-maturity, available-for-sale, or trading.  At December 31, 2019, we had $201.8 million of securities, at fair value, classified as available-for-sale, $15.9 million of securities, at cost, classified as held-to-maturity, and no securities classified as trading.

 

We may from time to time invest in “special situation” investments in order to earn profits or to hedge against interest rate risk. These investments may include interest rate swaps and/or interest rate caps. These investments are handled on a case-by-case basis requiring the advice and counsel of the Asset/Liability Committee. The President and/or Chief Financial Officer can act on his own authority for investments under $400,000. However, once this authority is utilized, it must be reauthorized at the next Asset/Liability Committee meeting. While we have the authority under applicable law to invest in derivative securities, we had no investments in derivative securities at December 31, 2019.

 

In connection with managing our investment securities portfolio, we will solicit and receive advice from approved broker/dealers, recognizing the extensive resources and valuable experience that they can provide. However, the final decision concerning all investment activities will be the responsibility of our President and the Chief Financial Officer with the approval of the Asset/Liability Committee. We evaluate each broker/dealer on its financial strength, expertise, and acceptable business practices. Annually, the Asset/Liability Committee will review and reaffirm the list of approved brokers/dealers. The Asset/Liability Committee, in addition to its annual review, may choose to make changes to this list throughout the year.

 

We held common stock of the FHLB of Indianapolis and the FHLB of Cincinnati in connection with our borrowing activities totaling $7.6 million at December 31, 2019.  For the year ended December 31, 2019, First Bank Richmond received a total of $371,000 in dividends from these FHLBs. Our required investment in the stock of the FHLBs is based on a predetermined formula, carried at cost and evaluated for impairment. We may be required to purchase additional FHLB stock if we increase borrowings in the future. 


22



The table below sets forth information regarding the composition of our securities portfolio and other investments at the dates indicated.  At December 31, 2019, our securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government or its agencies.

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Book
Value

 

 

Fair
Value

 

 

Book
Value

 

 

Fair
Value

 

 

Book
Value

 

 

Fair
Value

 

 

 

(In thousands)

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and federal agency

 

$

39,259

 

 

$

39,020

 

 

$

40,812

 

 

$

38,010

 

 

$

40,892

 

 

$

38,726

 

State and municipal obligations

 

 

45,635

 

 

 

45,840

 

 

 

30,531

 

 

 

29,789

 

 

 

24,011

 

 

 

23,364

 

Government sponsored mortgage-backed securities

 

 

117,769

 

 

 

116,911

 

 

 

56,945

 

 

 

54,670

 

 

 

57,858

 

 

 

56,254

 

Other

 

 

13

 

 

 

13

 

 

 

13

 

 

 

13

 

 

 

13

 

 

 

13

 

Total securities available for sale

 

 

202,676

 

 

 

201,784

 

 

 

128,301

 

 

 

122,482

 

 

 

122,774

 

 

 

118,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

 

15,917

 

 

 

16,156

 

 

 

18,580

 

 

 

18,543

 

 

 

22,392

 

 

 

22,443

 

Other(1)

 

 

 

 

 

 

 

 

2,500

 

 

 

5,110

 

 

 

2,500

 

 

 

5,132

 

Total securities held to maturity

 

 

15,917

 

 

 

16,156

 

 

 

21,080

 

 

 

23,653

 

 

 

24,896

 

 

 

27,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB stock

 

 

7,600

 

 

 

7,600

 

 

 

6,561

 

 

 

6,561

 

 

 

6,717

 

 

 

6,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

$

226,193

 

 

$

225,540

 

 

$

155,942

 

 

$

152,696

 

 

$

154,383

 

 

$

152,649

 

 

 

(1)

Consisted of trust preferred securities issued by the MHC through a statutory trust. Following completion of the reorganization and stock offering on July 1, 2019, we redeemed these trust preferred securities utilizing a portion of the net proceeds from our initial public offering. See “–Source of Funds - Borrowed Funds” below.


23



Portfolio Maturities and Yields. The following table sets forth the stated maturities and weighted average yields of investment securities, excluding Federal Reserve Bank and FHLB stock, at December 31, 2019.  Weighted average yields on tax-exempt securities are presented on a tax-equivalent basis using a combined federal and state marginal tax rate of approximately 25.9%. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. Weighted average yield calculations on investment securities available for sale do not give effect to changes in fair value that are reflected as a component of equity.

 

 

 

1 year or less

 

 

Over 1 year to 5 years

 

 

Over 5 to 10 years

 

 

Over 10 years

 

 

Total Securities

 

 

 

Amortized
Cost

 

 

Weighted
Average
Yield

 

 

Amortized
Cost

 

 

Weighted
Average
Yield

 

 

Amortized
Cost

 

 

Weighted
Average
Yield

 

 

Amortized
Cost

 

 

Weighted
Average
Yield

 

 

Amortized
Cost

 

 

Weighted
Average
Yield

 

 

Fair
Value

 

 

 

(Dollars in thousands)

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government, SBA pools and federal agency

 

$

 

 

 

%

 

$

8,996

 

 

 

1.82

%

 

$

20,833

 

 

 

2.46

%

 

$

9,430

 

 

 

2.41

%

 

$

39,259

 

 

 

2.30

%

 

$

39,020

 

State and municipal obligations

 

 

308

 

 

 

2.74

 

 

 

7,409

 

 

 

2.48

 

 

 

14,883

 

 

 

2.41

 

 

 

23,035

 

 

 

2.27

 

 

 

45,635

 

 

 

2.35

 

 

 

45,840

 

Government sponsored mortgage backed securities

 

 

1

 

 

 

8.18

 

 

 

43

 

 

 

3.57

 

 

 

6,860

 

 

 

1.65

 

 

 

110,865

 

 

 

2.08

 

 

 

117,769

 

 

 

2.05

 

 

 

116,911

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Total securities available for sale

 

 

309

 

 

 

2.75

 

 

 

16,448

 

 

 

2.12

 

 

 

42,576

 

 

 

2.31

 

 

 

143,343

 

 

 

2.13

 

 

 

202,676

 

 

 

2.17

 

 

 

201,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

 

2,427

 

 

 

2.32

 

 

 

9,653

 

 

 

2.81

 

 

 

2,777

 

 

 

3.89

 

 

 

1,060

 

 

 

5.28

 

 

 

15,917

 

 

 

3.09

 

 

 

16,156

 

Other(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

 

 

2,427

 

 

 

2.32

 

 

 

9,653

 

 

 

2.81

 

 

 

2,777

 

 

 

2.81

 

 

 

1,060

 

 

 

5.28

 

 

 

15,917

 

 

 

3.09

 

 

 

16,156

 

Total investment securities

 

$

2,736

 

 

 

2.37

%

 

$

26,101

 

 

 

2.38

%

 

$

45,353

 

 

 

2.38

%

 

$

144,403

 

 

 

2.15

%

 

$

218,593

 

 

 

2.24

%

 

$

217,940

 

 

Sources of Funds

 

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily FHLB advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, loan and mortgage-backed securities prepayments, maturities and calls of available-for-sale securities, retained earnings and income on earning assets. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.

 

Deposits. We offer deposit accounts to consumers and businesses having a wide range of interest rates and terms. Our deposits consist of savings deposit accounts, NOW and demand accounts and certificates of deposit. We solicit deposits in our market areas as well as online through our website. We also participate in reciprocal deposit services for our customers through the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) networks.  We primarily rely on competitive pricing policies, marketing and customer service to attract and retain these deposits. We also accept brokered deposits from deposit brokers.  At December 31, 2019, our brokered deposits totaled $56.7 million, or 9.2% of total deposits, with an average interest rate of 1.97% and a 10 month weighted-average maturity, compared to $124.5 million, or 20.1% of total deposits, with an average interest rate of 2.07% and a 13 month weighted-average maturity at December 31, 2018.  Our reliance on brokered deposits may increase our overall cost of funds.

 

Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. Our ability


24



to gather deposits is impacted by the competitive markets in which we operate, which include numerous financial institutions of varying sizes offering a wide range of products. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates. Additionally, we concentrate on gathering deposits from both existing commercial loan clients and new commercial prospects which positively impacts our lower cost deposits and assists in retaining full service clients. At December 31, 2019, our core deposits, which are deposits other than certificates of deposit in excess of $250,000 and brokered deposits, totaled $516.7 million, representing 84.0% of total deposits.

 

Our largest banking office based on deposits is our main office in Richmond, Indiana, which had total deposits of $155.1 million or 25.1% of our total deposits at December 31, 2019.  Approximately 69.6% ($429.6 million) of our total deposits were held in our Wayne County, Indiana offices as of December 31, 2019, with 58.6% ($361.9 million) of those deposits held in our five Richmond, Indiana offices. Overall, $463.4 million or 75.1% of our total deposits were held in Indiana branches and $153.8 million or 24.9% were held in Ohio branches as of December 31, 2019.

 

The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, primarily checking, NOW and Super NOW checking accounts. At December 31, 2019, we were in compliance with these reserve requirements.

 

The following table sets forth our total deposit activities for the periods indicated.

 

 

 

Years Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

620,637

 

 

$

560,395

 

 

$

516,302

 

Net deposits (withdrawals)

 

 

(11,436

 

 

54,594

 

 

 

40,297

 

Interest credited

 

 

8,018

 

 

 

5,648

 

 

 

3,796

 

Ending balance

 

$

617,219

 

 

$

620,637

 

 

$

560,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease)

 

$

(3,418

 

$

60,242

 

 

$

44,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent increase (decrease)

 

 

(0.6)

%

 

 

10.7

%

 

 

8.5

%


25



The following tables set forth the distribution of total deposit accounts, by account type, for the periods indicated.

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Amount

 

 

Percent
of Total

 

 

Amount

 

 

Percent
of Total

 

 

Amount

 

 

Percent
of Total

 

 

 

(Dollars in thousands)

 

Transaction and Savings Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

164,275

 

 

 

26.6

%

 

$

159,460

 

 

 

25.7

%

 

$

155,200

 

 

 

27.7

%

Savings

 

 

73,471

 

 

 

11.9

 

 

 

68,627

 

 

 

11.0

 

 

 

66,782

 

 

 

11.9

 

Money market

 

 

98,058

 

 

 

15.9

 

 

 

84,129

 

 

 

13.6

 

 

 

88,092

 

 

 

15.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-certificates

 

 

335,804

 

 

 

54.4

 

 

 

312,216

 

 

 

50.3

 

 

 

310,074

 

 

 

55.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.00 – 1.00%

 

 

28,638

 

 

 

4.6

 

 

 

28,266

 

 

 

4.6

 

 

 

44,562

 

 

 

8.0

 

1.01 – 2.00%

 

 

98,382

 

 

 

15.9

 

 

 

135,637

 

 

 

21.9

 

 

 

193,703

 

 

 

34.5

 

2.01 – 3.00%

 

 

143,158

 

 

 

23.2

 

 

 

143,327

 

 

 

23.0

 

 

 

11,746

 

 

 

2.1

 

3.01 – 4.00%

 

 

11,237

 

 

 

1.8

 

 

 

1,191

 

 

 

0.2

 

 

 

310

 

 

 

0.1

 

Over 4.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates

 

 

281,415

 

 

 

45.6

 

 

 

308,421

 

 

 

49.7

 

 

 

250,321

 

 

 

44.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

$

617,219

 

 

 

100.0

%

 

$

620,637

 

 

 

100.0

%

 

$

560,395

 

 

 

100.0

%


26



The following table indicates the time deposit accounts classified by rate and maturity at December 31, 2019.

 

 

 

0.00-

1.00%

 

 

1.01-

2.00%

 

 

2.01-

3.00%

 

 

Over

3.00%

 

 

Total

 

 

Percent

of
Total

 

 

 

(Dollars in thousands)

 

Certificate accounts maturing in quarter ending:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

$

4,502

 

 

$

11,965

 

 

$

31,381

 

 

$

 

 

$

47,848

 

 

 

17.00

%

June 30, 2020

 

 

4,141

 

 

 

8,373

 

 

 

16,113

 

 

 

18

 

 

 

28,645

 

 

 

10.18

 

September 30, 2020

 

 

4,672

 

 

 

17,377

 

 

 

39,535

 

 

 

52

 

 

 

61,636

 

 

 

21.91

 

December 31, 2020

 

 

8,447

 

 

 

30,394

 

 

 

17,675

 

 

 

1,169

 

 

 

57,685

 

 

 

20.50

 

March 31, 2021

 

 

2,407

 

 

 

4,330

 

 

 

9,989

 

 

 

1,281

 

 

 

18,007

 

 

 

6.40

 

June 30, 2021

 

 

2,579

 

 

 

4,952

 

 

 

6,487

 

 

 

 

 

 

14,018

 

 

 

4.98

 

September 30, 2021

 

 

310

 

 

 

2,926

 

 

 

1,349

 

 

 

16

 

 

 

4,601

 

 

 

1.63

 

December 31, 2021

 

 

910

 

 

 

2,959

 

 

 

686

 

 

 

 

 

 

4,555

 

 

 

1.62

 

March 31, 2022

 

 

167

 

 

 

3,677

 

 

 

2,254

 

 

 

 

 

 

6,098

 

 

 

2.17

 

June 30, 2022

 

 

319

 

 

 

1,839

 

 

 

2,858

 

 

 

 

 

 

5,016

 

 

 

1.78

 

September 30, 2022

 

 

100

 

 

 

966

 

 

 

3,477

 

 

 

 

 

 

4,543

 

 

 

1.61

 

December 31, 2022

 

 

83

 

 

 

2,526

 

 

 

5,049

 

 

 

 

 

 

7,658

 

 

 

2.72

 

Thereafter

 

 

1

 

 

 

6,098

 

 

 

6,305

 

 

 

8,701

 

 

 

21,105

 

 

 

7.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

28,638

 

 

$

98,382

 

 

$

143,158

 

 

$

11,237

 

 

$

281,415

 

 

 

100.00

%