fmnb-10q_20150930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

Securities Exchange Act of 1934

For the Quarterly period ended September 30, 2015

Commission file number 001-35296

 

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

 

 

OHIO

 

34-1371693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No)

 

 

 

20 South Broad Street Canfield, OH

 

44406

(Address of principal executive offices)

 

(Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

Not applicable

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

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

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

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

 

Class

 

Outstanding at October 31, 2015

Common Stock, No Par Value

 

26,971,084 shares

 

 

 

 

 

 

 


 

Page Number

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (Unaudited)

 

 

 

 

 

Included in Part I of this report:

 

 

 

 

 

Farmers National Banc Corp. and Subsidiaries

 

 

 

 

 

Consolidated Balance Sheets

2

 

Consolidated Statements of Income

3

 

Consolidated Statements of Comprehensive Income

4

 

Consolidated Statement of Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2

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

35

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

Item 4

Controls and Procedures

45

 

 

 

PART II - OTHER INFORMATION

45

 

 

 

Item 1

Legal Proceedings

45

 

 

 

Item 1A

Risk Factors

46

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 3

Defaults Upon Senior Securities

46

 

 

 

Item 4

Mine Safety Disclosures

46

 

 

 

Item 5

Other Information

46

 

 

 

Item 6

Exhibits

47

 

 

SIGNATURES

48

 

 

10-Q Certifications

 

 

 

Section 906 Certifications

 

 

 

 

1

 


CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

September 30,

2015

 

 

December 31,

2014

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

16,430

 

 

$

11,410

 

Federal funds sold and other

 

 

17,914

 

 

 

16,018

 

TOTAL CASH AND CASH EQUIVALENTS

 

 

34,344

 

 

 

27,428

 

Securities available for sale

 

 

379,138

 

 

 

389,829

 

Loans held for sale

 

 

566

 

 

 

511

 

Loans

 

 

1,183,016

 

 

 

663,852

 

Less allowance for loan losses

 

 

8,294

 

 

 

7,632

 

NET LOANS

 

 

1,174,722

 

 

 

656,220

 

Premises and equipment, net

 

 

23,338

 

 

 

17,049

 

Goodwill

 

 

32,272

 

 

 

5,591

 

Other intangibles

 

 

6,993

 

 

 

3,222

 

Bank owned life insurance

 

 

25,746

 

 

 

16,367

 

Other assets

 

 

30,678

 

 

 

20,750

 

TOTAL ASSETS

 

$

1,707,797

 

 

$

1,136,967

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

299,136

 

 

$

184,697

 

Interest-bearing

 

 

1,031,113

 

 

 

731,006

 

TOTAL DEPOSITS

 

 

1,330,249

 

 

 

915,703

 

Short-term borrowings

 

 

163,429

 

 

 

59,136

 

Long-term borrowings

 

 

16,272

 

 

 

28,381

 

Other liabilities

 

 

11,696

 

 

 

10,187

 

TOTAL LIABILITIES

 

 

1,521,646

 

 

 

1,013,407

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common Stock - Authorized 35,000,000 shares; issued 26,294,014 in 2015

 

 

 

 

 

 

 

 

and 19,031,059 in 2014

 

 

165,344

 

 

 

106,021

 

Retained earnings

 

 

23,948

 

 

 

20,944

 

Accumulated other comprehensive income

 

 

1,335

 

 

 

1,093

 

Treasury stock, at cost; 619,447 shares in 2015 and 622,447 in 2014

 

 

(4,476

)

 

 

(4,498

)

TOTAL STOCKHOLDERS' EQUITY

 

 

186,151

 

 

 

123,560

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

1,707,797

 

 

$

1,136,967

 

 

See accompanying notes

 

 

 

2

 


CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands except Per Share Data)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

(Unaudited)

 

Sept. 30,

2015

 

 

Sept. 30,

2014

 

 

Sept. 30,

2015

 

 

Sept. 30,

2014

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,385

 

 

$

7,950

 

 

$

29,703

 

 

$

23,023

 

Taxable securities

 

 

1,369

 

 

 

1,803

 

 

 

4,421

 

 

 

5,512

 

Tax exempt securities

 

 

783

 

 

 

605

 

 

 

2,060

 

 

 

1,900

 

Dividends

 

 

48

 

 

 

47

 

 

 

142

 

 

 

142

 

Federal funds sold and other interest income

 

 

9

 

 

 

8

 

 

 

20

 

 

 

17

 

TOTAL INTEREST AND DIVIDEND INCOME

 

 

15,594

 

 

 

10,413

 

 

 

36,346

 

 

 

30,594

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

909

 

 

 

987

 

 

 

2,675

 

 

 

3,070

 

Short-term borrowings

 

 

59

 

 

 

11

 

 

 

86

 

 

 

35

 

Long-term borrowings

 

 

88

 

 

 

130

 

 

 

306

 

 

 

396

 

TOTAL INTEREST EXPENSE

 

 

1,056

 

 

 

1,128

 

 

 

3,067

 

 

 

3,501

 

NET INTEREST INCOME

 

 

14,538

 

 

 

9,285

 

 

 

33,279

 

 

 

27,093

 

Provision for loan losses

 

 

1,220

 

 

 

425

 

 

 

2,520

 

 

 

1,055

 

NET INTEREST INCOME AFTER PROVISION FOR

   LOAN LOSSES

 

 

13,318

 

 

 

8,860

 

 

 

30,759

 

 

 

26,038

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

929

 

 

 

711

 

 

 

2,204

 

 

 

1,915

 

Bank owned life insurance income

 

 

184

 

 

 

115

 

 

 

488

 

 

 

342

 

Trust fees

 

 

1,482

 

 

 

1,561

 

 

 

4,638

 

 

 

4,610

 

Insurance agency commissions

 

 

130

 

 

 

85

 

 

 

394

 

 

 

255

 

Security gains

 

 

3

 

 

 

1

 

 

 

48

 

 

 

85

 

Retirement plan consulting fees

 

 

423

 

 

 

395

 

 

 

1,705

 

 

 

1,392

 

Investment commissions

 

 

332

 

 

 

378

 

 

 

886

 

 

 

815

 

Net gains on sale of loans

 

 

415

 

 

 

114

 

 

 

694

 

 

 

250

 

Other operating income

 

 

787

 

 

 

520

 

 

 

2,074

 

 

 

1,446

 

TOTAL NONINTEREST INCOME

 

 

4,685

 

 

 

3,880

 

 

 

13,131

 

 

 

11,110

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,244

 

 

 

5,330

 

 

 

18,449

 

 

 

15,448

 

Occupancy and equipment

 

 

1,368

 

 

 

1,145

 

 

 

3,680

 

 

 

3,395

 

State and local taxes

 

 

400

 

 

 

222

 

 

 

888

 

 

 

685

 

Professional fees

 

 

738

 

 

 

648

 

 

 

1,760

 

 

 

1,814

 

Merger related cost

 

 

2,499

 

 

 

0

 

 

 

4,656

 

 

 

0

 

Advertising

 

 

344

 

 

 

250

 

 

 

843

 

 

 

727

 

FDIC insurance

 

 

256

 

 

 

184

 

 

 

611

 

 

 

555

 

Intangible amortization

 

 

304

 

 

 

192

 

 

 

638

 

 

 

575

 

Core processing charges

 

 

643

 

 

 

418

 

 

 

1,406

 

 

 

1,168

 

Other operating expenses

 

 

1,725

 

 

 

1,387

 

 

 

4,428

 

 

 

3,928

 

TOTAL NONINTEREST EXPENSES

 

 

15,521

 

 

 

9,776

 

 

 

37,359

 

 

 

28,295

 

INCOME BEFORE INCOME TAXES

 

 

2,482

 

 

 

2,964

 

 

 

6,531

 

 

 

8,853

 

INCOME TAXES

 

 

625

 

 

 

688

 

 

 

1,651

 

 

 

2,035

 

NET INCOME

 

$

1,857

 

 

$

2,276

 

 

$

4,880

 

 

$

6,818

 

EARNINGS PER SHARE - basic and diluted

 

$

0.07

 

 

$

0.12

 

 

$

0.23

 

 

$

0.36

 

 

See accompanying notes

 

 

 

3

 


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

(Unaudited)

 

September 30,

2015

 

 

September 30,

2014

 

 

September 30,

2015

 

 

September 30,

2014

 

NET INCOME

 

$

1,857

 

 

$

2,276

 

 

$

4,880

 

 

$

6,818

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains on available for sale securities

 

 

3,557

 

 

 

527

 

 

 

421

 

 

 

7,547

 

Reclassification adjustment for (gains) realized in income

 

 

(3

)

 

 

(1

)

 

 

(48

)

 

 

(85

)

Net unrealized holding gains

 

 

3,554

 

 

 

526

 

 

 

373

 

 

 

7,462

 

Income tax effect

 

 

(1,244

)

 

 

(184

)

 

 

(131

)

 

 

(2,612

)

Other comprehensive income, net of tax

 

 

2,310

 

 

 

342

 

 

 

242

 

 

 

4,850

 

TOTAL COMPREHENSIVE INCOME

 

$

4,167

 

 

$

2,618

 

 

$

5,122

 

 

$

11,668

 

 

See accompanying notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

For the Nine Months

Ended September 30,

2015

 

COMMON STOCK

 

 

 

Beginning balance

 

$

106,021

 

Issued 7,262,955 shares as part of business acquisitions

 

 

59,048

 

Stock compensation expense for 320,980 shares

 

 

275

 

Ending balance

 

 

165,344

 

 

 

 

 

 

RETAINED EARNINGS

 

 

 

 

Beginning balance

 

 

20,944

 

Net income

 

 

4,880

 

Dividends declared at $.09 per share

 

 

(1,876

)

Ending balance

 

 

23,948

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME

 

 

 

 

Beginning balance

 

 

1,093

 

Other comprehensive income

 

 

242

 

Ending balance

 

 

1,335

 

 

 

 

 

 

TREASURY STOCK, AT COST

 

 

 

 

Beginning balance

 

 

(4,498

)

Reissued 3,000 shares under the Equity Incentive Plan

 

 

22

 

Ending balance

 

 

(4,476

)

TOTAL STOCKHOLDERS' EQUITY

 

$

186,151

 

 

See accompanying notes.

5

 


CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

Nine Months Ended

 

(Unaudited)

 

September 30,

2015

 

 

September 30,

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

4,880

 

 

$

6,818

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

2,520

 

 

 

1,055

 

Depreciation and amortization

 

 

1,689

 

 

 

1,487

 

Net amortization of securities

 

 

1,510

 

 

 

1,105

 

Security gains

 

 

(48

)

 

 

(85

)

Stock compensation expense

 

 

275

 

 

 

0

 

Loss on sale of other real estate owned

 

 

18

 

 

 

22

 

Earnings on bank owned life insurance

 

 

(488

)

 

 

(342

)

Origination of loans held for sale

 

 

(12,295

)

 

 

(11,599

)

Proceeds from loans held for sale

 

 

12,934

 

 

 

11,112

 

Net gains on sale of loans

 

 

(694

)

 

 

(250

)

Net change in other assets and liabilities

 

 

(2,978

)

 

 

(1,006

)

NET CASH FROM OPERATING ACTIVITIES

 

 

7,323

 

 

 

8,317

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities and repayments of securities available for sale

 

 

44,047

 

 

 

35,868

 

Proceeds from sales of securities available for sale

 

 

58,240

 

 

 

34,169

 

Purchases of securities available for sale

 

 

(41,346

)

 

 

(42,496

)

Loan originations and payments, net

 

 

(91,721

)

 

 

(17,884

)

Proceeds from sale of other real estate owned

 

 

552

 

 

 

64

 

Purchase of bank owned life insurance

 

 

(6,000

)

 

 

0

 

Additions to premises and equipment

 

 

(1,160

)

 

 

(888

)

Net cash received in business acquisitions

 

 

21,303

 

 

 

0

 

NET CASH FROM INVESTING ACTIVITIES

 

 

(16,085

)

 

 

8,833

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in deposits

 

 

(9,115

)

 

 

(2,216

)

Net change in short-term borrowings

 

 

38,756

 

 

 

(9,585

)

Repayment of long-term borrowings

 

 

(12,109

)

 

 

(1,205

)

Cash dividends paid

 

 

(1,876

)

 

 

(1,685

)

Proceeds from reissuance of treasury shares

 

 

22

 

 

 

32

 

Acquisition of treasury shares

 

 

0

 

 

 

(1,710

)

NET CASH FROM FINANCING ACTIVITIES

 

 

15,678

 

 

 

(16,369

)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

6,916

 

 

 

781

 

Beginning cash and cash equivalents

 

 

27,428

 

 

 

27,513

 

Ending cash and cash equivalents

 

$

34,344

 

 

$

28,294

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

2,955

 

 

$

3,532

 

Income taxes paid

 

$

1,780

 

 

$

1,205

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate

 

$

734

 

 

$

297

 

Security purchases not settled

 

$

0

 

 

$

3,008

 

Issuance of stock for business acquisitions

 

$

59,048

 

 

$

0

 

 

See accompanying notes

 

 

 

6

 


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (“Company”) is a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”). The Company acquired First National Bank of Orrville (“First National Bank”) a subsidiary of National Bancshares Corporation (“NBOH”) during the second quarter of this year and consolidated all of First National Bank’s activity with the Bank. The Company provides trust services through its subsidiary, Farmers Trust Company (“Trust”), retirement consulting services through National Associates, Inc. (“NAI”) and insurance services through the Bank’s subsidiary, Farmers National Insurance (“Insurance”).  In addition to the Insurance subsidiary, the Bank has created Farmers of Canfield Investment Co. (“Investments”), with the primary purpose of investing in municipal securities. The consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, along with the Trust and NAI. All significant intercompany balances and transactions have been eliminated in the consolidation.

 

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2014 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year. Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.

 

Estimates:

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

 

Segments:

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

 

Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists of unrealized gains and losses on securities available for sale and changes in the funded status of the post-retirement health plan, which are recognized as separate components of equity, net of tax effects. For all periods presented there was no change in the funded status of the post-retirement health plan.

 

Business Acquisitions:

 

On October 1, 2015, the Company completed the acquisition of Tri-State 1st Banc, Inc. (“Tri-State”), the parent company of 1st National Community Bank (“FNCB”). Pursuant to the terms of the Merger Agreement, common shareholders of Tri-State were entitled to receive 1.747 common shares, without par value, of the Company (the “Company Common Shares”), or $14.20 in cash, for each common share, without par value, of Tri-State (the “Tri-State Common Shares”), subject to proration provisions specified in the Merger Agreement that provide for a targeted aggregate split of total consideration consisting of 75% Company Common Shares and 25% cash. Preferred shareholders of Tri-State received $13.60 in cash for each share of Series A Preferred Stock, without par value, of

Tri-State. Total consideration actually paid was in the form of $3.6 million in cash and $10.7 million worth of the Company’s stock on October 1, 2015. Management is still in the process of estimating the fair market value of the assets acquired and the liabilities assumed. Since the business combination was completed on October 1, 2015 results of operations and statements of condition will be reported in the fourth quarter of this year.

 

7

 


 

On June 19, 2015, the Company completed the acquisition of all outstanding stock of National Bancshares Corporation (“NBOH”), the parent company of First National Bank of Orrville (“First National Bank”). The transaction involved both cash and 7,262,955 shares of stock totaling $74.8 million. First National Bank of Orrville branches became branches of Farmers National Bank of Canfield.  Pursuant to the Agreement, each shareholder of NBOH received either $32.15 per share in cash or 4.034 shares of Farmers’ common stock, subject to an overall limitation of 80% of the shares of NBOH being exchanged for stock and 20% for cash.

 

Goodwill of $26.7 million, which is recorded on the balance sheet of the Bank, arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the companies.  The goodwill is not expected to be deductible for income tax purposes.  The fair value of other intangible assets of $4.4 million is related to core deposits.  The following table summarizes the consideration paid for NBOH and the amounts of the assets acquired and liabilities assumed on the closing date of the acquisition.

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

15,732

 

Stock

 

59,048

 

Fair value of total consideration transferred

$

74,780

 

Assets acquired and liabilities assumed

 

 

 

Cash and due from financial institutions

$

37,035

 

Securities available for sale

 

51,340

 

Net loans

 

430,035

 

Premises and equipment

 

6,105

 

Bank owned life insurance

 

2,891

 

Core deposit intangible

 

4,409

 

Other assets

 

7,996

 

Total assets

 

539,811

 

Fair value of liabilities assumed

 

 

 

Deposits

 

423,661

 

Short-term borrowings

 

65,537

 

Accrued interest payable and other liabilities

 

2,514

 

Total liabilities

 

491,712

 

Net assets acquired

$

48,099

 

Goodwill created

 

26,681

 

Total net assets acquired

$

74,780

 

 

Valuation of some assets acquired or created including but not limited to net loans and goodwill are preliminary and could be subject to change.

 

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2014.  The pro forma information includes adjustments for amortization of intangibles arising from the transaction and the related income tax effects.  The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effective on the assumed dates.

 

 

For Three Months Ended September 30,

 

 

For Nine Months Ended
September 30,

 

(In thousands of dollars except per share results)

2014

 

 

2015

 

2014

 

Net interest income

$

13,856

 

 

$

42,949

 

$

40,073

 

Net income

$

3,819

 

 

$

9,023

 

$

10,945

 

Basic and diluted earnings per share

$

0.15

 

 

$

0.35

 

$

0.43

 

 

On July 1, 2013, the Company completed the acquisition of all outstanding stock of the retirement planning consultancy National Associates, Inc. (“NAI”) of Rocky River, Ohio. The transaction involved both cash and stock totaling $4.4 million, including up to $1.5 million of future cash payments contingent upon NAI meeting income performance targets based on growth in EBITDA with an initial fair value of $920 thousand. The measurement period is defined, in essence, as “the twelve month period ending on the second anniversary of the closing date.”  Based on actual EBITDA growth the Company recognized $495 thousand and $1.3 million of

8

 


expense during the three and nine month periods ended September 30, 2015 after writing the fair value down to $156 thousand in 2014.  The final payment of $1.5 million was made to satisfy the contingent consideration clause of the agreement during the period ended September 30, 2015.

 

 

 

Securities:

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at September 30, 2015 and December 31, 2014 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(In Thousands of Dollars)

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

18,873

 

 

$

277

 

 

$

(1

)

 

$

19,149

 

State and political subdivisions

 

123,731

 

 

 

1,685

 

 

 

(760

)

 

 

124,656

 

Corporate bonds

 

1,032

 

 

 

6

 

 

 

(4

)

 

 

1,034

 

Mortgage-backed securities - residential

 

197,506

 

 

 

2,512

 

 

 

(1,018

)

 

 

199,000

 

Collateralized mortgage obligations

 

15,352

 

 

 

2

 

 

 

(562

)

 

 

14,792

 

Small Business Administration

 

20,577

 

 

 

1

 

 

 

(377

)

 

 

20,201

 

Equity securities

 

202

 

 

 

109

 

 

 

(5

)

 

 

306

 

Totals

$

377,273

 

 

$

4,592

 

 

$

(2,727

)

 

$

379,138

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(In Thousands of Dollars)

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

24,515

 

 

$

418

 

 

$

(112

)

 

$

24,821

 

State and political subdivisions

 

90,369

 

 

 

2,183

 

 

 

(671

)

 

 

91,881

 

Corporate bonds

 

936

 

 

 

3

 

 

 

(8

)

 

 

931

 

Mortgage-backed securities - residential

 

223,216

 

 

 

2,395

 

 

 

(1,249

)

 

 

224,362

 

Collateralized mortgage obligations

 

25,988

 

 

 

98

 

 

 

(911

)

 

 

25,175

 

Small Business Administration

 

23,193

 

 

 

1

 

 

 

(775

)

 

 

22,419

 

Equity securities

 

120

 

 

 

121

 

 

 

(1

)

 

 

240

 

Totals

$

388,337

 

 

$

5,219

 

 

$

(3,727

)

 

$

389,829

 

 

 

Proceeds from the sale of portfolio securities were $3.4 million during the three month period and $58.2 million during the nine month periods ended September 30, 2015. Gross gains of $30 thousand and $139 thousand and gross losses of $27 thousand and $91 thousand were realized on these sales during the three and nine month periods ended September 30, 2015. Gross gains from the sale of portfolio securities were $2 thousand and $335 thousand along with gross losses of $1 thousand and $250 thousand during the three and nine month periods ended September 30, 2014.   

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

 

 

 

September 30, 2015

 

(In Thousands of Dollars)

 

Amortized Cost

 

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

Within one year

 

$

17,435

 

 

$

17,597

 

One to five years

 

 

67,442

 

 

 

68,170

 

Five to ten years

 

 

49,766

 

 

 

50,142

 

Beyond ten years

 

 

8,993

 

 

 

8,930

 

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

 

 

233,435

 

 

 

233,993

 

Total

 

$

377,071

 

 

$

378,832

 

 

 

9

 


The following table summarizes the investment securities with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by major security type and length of time in a continuous unrealized loss position.

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

(In Thousands of Dollars)

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

101

 

 

$

0

 

 

$

200

 

 

$

(1

)

 

$

301

 

 

$

(1

)

State and political subdivisions

 

28,130

 

 

 

(270

)

 

 

13,539

 

 

 

(490

)

 

 

41,669

 

 

 

(760

)

Corporate bonds

 

0

 

 

 

0

 

 

 

479

 

 

 

(4

)

 

 

479

 

 

 

(4

)

Mortgage-backed securities - residential

 

48,146

 

 

 

(235

)

 

 

42,337

 

 

 

(783

)

 

 

90,483

 

 

 

(1,018

)

Collateralized mortgage obligations

 

0

 

 

 

0

 

 

 

13,292

 

 

 

(562

)

 

 

13,292

 

 

 

(562

)

Small Business Administration

 

0

 

 

 

0

 

 

 

20,116

 

 

 

(377

)

 

 

20,116

 

 

 

(377

)

Equity securities

 

36

 

 

 

(5

)

 

 

0

 

 

 

0

 

 

 

36

 

 

 

(5

)

Total

$

76,413

 

 

$

(510

)

 

$

89,963

 

 

$

(2,217

)

 

$

166,376

 

 

$

(2,727

)

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

(In Thousands of Dollars)

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

498

 

 

$

(2

)

 

$

10,159

 

 

$

(110

)

 

$

10,657

 

 

$

(112

)

State and political subdivisions

 

987

 

 

 

(11

)

 

 

24,063

 

 

 

(660

)

 

 

25,050

 

 

 

(671

)

Corporate bonds

 

0

 

 

 

0

 

 

 

476

 

 

 

(8

)

 

 

476

 

 

 

(8

)

Mortgage-backed securities - residential

 

25,770

 

 

 

(202

)

 

 

55,576

 

 

 

(1,047

)

 

 

81,346

 

 

 

(1,249

)

Collateralized mortgage obligations

 

0

 

 

 

0

 

 

 

19,541

 

 

 

(911

)

 

 

19,541

 

 

 

(911

)

Small Business Administration

 

0

 

 

 

0

 

 

 

22,319

 

 

 

(775

)

 

 

22,319

 

 

 

(775

)

Equity securities

 

26

 

 

 

(1

)

 

 

0

 

 

 

0

 

 

 

26

 

 

 

(1

)

Total

$

27,281

 

 

$

(216

)

 

$

132,134

 

 

$

(3,511

)

 

$

159,415

 

 

$

(3,727

)

 

10

 


Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities are generally evaluated for OTTI under FASB Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income or loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

As of September 30, 2015, the Company’s security portfolio consisted of 411 securities, 135 of which were in an unrealized loss position. The majority of the unrealized losses on the Company’s securities are related to its holdings of mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities, and Small Business Administration securities as discussed below.

Unrealized losses on debt securities issued by state and political subdivisions have not been recognized into income. These securities have maintained their investment grade ratings and management does not have the intent and does not expect to be required to sell these securities before their anticipated recovery. The fair value is expected to recover as the securities approach their maturity date.

All of the Company’s holdings of collateralized mortgage obligations and residential mortgage-backed securities were issued by U.S. government-sponsored entities. Unrealized losses on these securities have not been recognized into income. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, the issues are guaranteed by the issuing entity which the U.S. government has affirmed its commitment to support, and because the Company does not have the intent to sell these residential mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be OTTI.

Management does not believe any unrealized losses on Small Business Administration securities represent an other-than-temporary impairment. The securities are issued and backed by the full faith and credit of the U.S. government and the Company does not have the intent and does not anticipate that it will be required to sell these securities before their anticipated recovery. The fair value of these securities is expected to recover as they approach their maturity.

11

 


Loans:

Loan balances were as follows:

 

(In Thousands of Dollars)

 

September 30,

2015

 

 

December 31,

2014

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

99,736

 

 

$

74,829

 

Non-owner occupied

 

 

130,327

 

 

 

122,228

 

Other

 

 

47,841

 

 

 

26,137

 

Commercial

 

 

140,402

 

 

 

120,493

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

165,625

 

 

 

153,055

 

Home equity lines of credit

 

 

37,282

 

 

 

31,255

 

Consumer

 

 

 

 

 

 

 

 

Indirect

 

 

124,709

 

 

 

120,931

 

Direct

 

 

14,588

 

 

 

9,071

 

Other

 

 

4,302

 

 

 

3,626

 

Subtotal

 

$

764,812

 

 

$

661,625

 

Net deferred loan costs

 

 

2,482

 

 

 

2,227

 

Allowance for loan losses

 

 

(8,294

)

 

 

(7,632

)

Total originated loans

 

$

759,000

 

 

$

656,220

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

111,620

 

 

$

0

 

Non-owner occupied

 

 

20,429

 

 

 

0

 

Other

 

 

32,228

 

 

 

0

 

Commercial

 

 

64,324

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

117,234

 

 

 

0

 

Home equity lines of credit

 

 

40,445

 

 

 

0

 

Consumer

 

 

 

 

 

 

 

 

Direct

 

 

29,442

 

 

 

0

 

Total acquired loans

 

$

415,722

 

 

$

0

 

Net loans

 

$

1,174,722

 

 

$

656,220

 

 

 

Purchased credit impaired loans

 

As part of the NBOH acquisition the Company acquired various loans that displayed evidence of deterioration of credit quality since origination and which was probable that all contractually required payments would not be collected.  The carrying amounts and contractually required payments of these loans which are included in the loan balances above are summarized in the following tables:

 

(In Thousands of Dollars)

 

September 30,

2015

 

Commercial real estate

 

 

 

 

Owner occupied

 

$

835

 

Non-owner occupied

 

 

418

 

Commercial

 

 

957

 

Total outstanding balance

 

$

2,210

 

Net carrying value

 

$

2,210

 

12

 


 

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

 

(In Thousands of Dollars)

 

September 30,

2015

 

Beginning balance

 

$

0

 

New loans purchased

 

361

 

Accretion of income

 

 

(19

)

Ending balance

 

$

342

 

 

Contractually required payments receivable of loans purchased during the year:

 

(In Thousands of Dollars)

September 30,

2015

 

Commercial real estate

 

 

 

Owner occupied

$

930

 

Non-owner occupied

 

492

 

Commercial

 

1,116

 

Total

$

2,538

 

 

 

 

 

Cash flows expected to be collected at acquisition

$

2,811

 

Fair value of acquired loans at acquisition

$

2,811

 

 

 

Cash flows expected to be collected on the purchased credit impaired loans (“PCI”) are estimated at least annually unless specific factors warrant otherwise. The key assumptions considered include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income and principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary.  There were no adjustments to forecasted cash flows that impacted the allowance for loan losses for the three or nine months ended September 30, 2015.

 

 

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine month periods ended September 30, 2015 and 2014:

Three Months Ended September 30, 2015

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,633

 

 

$

1,280

 

 

$

1,548

 

 

$

1,825

 

 

$

0

 

 

$

7,286

 

Provision for loan losses

 

 

365

 

 

 

84

 

 

 

83

 

 

 

530

 

 

 

158

 

 

 

1,220

 

Loans charged off

 

 

0

 

 

 

(36

)

 

 

(46

)

 

 

(549

)

 

 

0

 

 

 

(631

)

Recoveries

 

 

103

 

 

 

8

 

 

 

60

 

 

 

248

 

 

 

0

 

 

 

419

 

Total ending allowance balance

 

$

3,101

 

 

$

1,336

 

 

$

1,645

 

 

$

2,054

 

 

$

158

 

 

$

8,294

 

Nine Months Ended September 30, 2015

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,676

 

 

$

1,420

 

 

$

1,689

 

 

$

1,663

 

 

$

184

 

 

$

7,632

 

Provision for loan losses

 

 

820

 

 

 

197

 

 

 

142

 

 

 

1,387

 

 

 

(26

)

 

 

2,520

 

Loans charged off

 

 

(520

)

 

 

(291

)

 

 

(287

)

 

 

(1,648

)

 

 

0

 

 

 

(2,746

)

Recoveries

 

 

125

 

 

 

10

 

 

 

101

 

 

 

652

 

 

 

0

 

 

 

888

 

Total ending allowance balance

 

$

3,101

 

 

$

1,336

 

 

$

1,645

 

 

$

2,054

 

 

$

158

 

 

$

8,294

 

 

13

 


 

Three Months Ended September 30, 2014

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,722

 

 

$

1,076

 

 

$

1,784

 

 

$

1,518

 

 

$

256

 

 

$

7,356

 

Provision for loan losses

 

 

(449

)

 

 

322

 

 

 

301

 

 

 

353

 

 

 

(102

)

 

 

425

 

Loans charged off

 

 

0

 

 

 

(6

)

 

 

(245

)

 

 

(505

)

 

 

0

 

 

 

(756

)

Recoveries

 

 

30

 

 

 

14

 

 

 

23

 

 

 

241

 

 

 

0

 

 

 

308

 

Total ending allowance balance

 

$

2,303

 

 

$

1,406

 

 

$

1,863

 

 

$

1,607

 

 

$

154

 

 

$

7,333

 

Nine Months Ended September 30, 2014

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

2,752

 

 

$

1,219

 

 

$

1,964

 

 

$

1,419

 

 

$

214

 

 

$

7,568

 

Provision for loan losses

 

 

(463

)

 

 

185

 

 

 

378

 

 

 

1,015

 

 

 

(60

)

 

 

1,055

 

Loans charged off

 

 

(90

)

 

 

(25

)

 

 

(525

)

 

 

(1,602

)

 

 

0

 

 

$

(2,242

)

Recoveries

 

 

104

 

 

 

27

 

 

 

46

 

 

 

775

 

 

 

0

 

 

 

952

 

Total ending allowance balance

 

$

2,303

 

 

$

1,406

 

 

$

1,863

 

 

$

1,607

 

 

$

154

 

 

$

7,333

 

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2015 and December 31, 2014. The recorded investment in loans includes the unpaid principal balance and unamortized loan origination fees and costs, but excludes accrued interest receivable, which is not considered to be material:

 

September 30, 2015

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to

   loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

628

 

 

$

148

 

 

$

69

 

 

$

0

 

 

$

0

 

 

$

845

 

Collectively evaluated for impairment

 

 

2,473

 

 

 

1,188

 

 

 

1,576

 

 

 

2,054

 

 

 

158

 

 

 

7,449

 

Acquired loans

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total ending allowance balance

 

$

3,101

 

 

$

1,336

 

 

$

1,645

 

 

$

2,054

 

 

$

158

 

 

$

8,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

5,963

 

 

$

726

 

 

$

3,541

 

 

$

71

 

 

$

0

 

 

$

10,301

 

Loans collectively evaluated for impairment

 

 

271,236

 

 

 

139,364

 

 

 

198,906

 

 

 

147,487

 

 

 

0

 

 

 

756,993

 

Acquired loans

 

 

163,023

 

 

 

63,367

 

 

 

157,679

 

 

 

29,442

 

 

 

 

 

 

 

413,511

 

Acquired with deteriorated credit quality

 

 

1,254

 

 

 

957

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,211

 

Total ending loans balance

 

$

441,476

 

 

$

204,414

 

 

$

360,126

 

 

$

177,000

 

 

$

0

 

 

$

1,183,016

 

 

14

 


December 31, 2014

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to

   loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

514

 

 

$

272

 

 

$

88

 

 

$

0

 

 

$

0

 

 

$

874

 

Collectively evaluated for impairment

 

 

2,162

 

 

 

1,148

 

 

 

1,601

 

 

 

1,663

 

 

 

184

 

 

 

6,758

 

Total ending allowance balance

 

$

2,676

 

 

$

1,420

 

 

$

1,689

 

 

$

1,663

 

 

$

184

 

 

$

7,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

7,139

 

 

$

1,940

 

 

$

3,425

 

 

$

93

 

 

$

0

 

 

$

12,597

 

Loans collectively evaluated for impairment

 

 

215,434

 

 

 

118,210

 

 

 

180,428

 

 

 

137,183

 

 

 

0

 

 

 

651,255

 

Total ending loans balance

 

$

222,573

 

 

$

120,150

 

 

$

183,853

 

 

$

137,276

 

 

$

0

 

 

$

663,852

 

 

The following tables present information related to impaired loans by class of loans as of September 30, 2015 and December 31, 2014:

 

(In Thousands of Dollars)

 

Unpaid Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for Loan Losses

Allocated

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,989

 

 

$

1,773

 

 

$

0

 

Non-owner occupied

 

 

591

 

 

 

372

 

 

 

0

 

Commercial

 

 

620

 

 

 

391

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,697

 

 

 

2,351

 

 

 

0

 

Home equity lines of credit

 

 

486

 

 

 

266

 

 

 

0

 

Consumer

 

 

178

 

 

 

71

 

 

 

0

 

Subtotal

 

 

6,561

 

 

 

5,224

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

2,839

 

 

 

2,321

 

 

 

573

 

Non-owner occupied

 

 

1,498

 

 

 

1,497

 

 

 

55

 

Commercial

 

 

516

 

 

 

335

 

 

 

148

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

857

 

 

 

836

 

 

 

67

 

Home equity lines of credit

 

 

88

 

 

 

88

 

 

 

2

 

Subtotal

 

 

5,798

 

 

 

5,077

 

 

 

845

 

Total

 

$

12,359

 

 

$

10,301

 

 

$

845

 

15

 


 

(In Thousands of Dollars)

 

Unpaid Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for

Loan Losses

Allocated

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

2,448

 

 

$

2,318

 

 

$

0

 

Non-owner occupied

 

 

391

 

 

 

391

 

 

 

0

 

Commercial

 

 

531

 

 

 

511

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,421

 

 

 

2,156

 

 

 

0

 

Home equity lines of credit

 

 

476

 

 

 

251

 

 

 

0

 

Consumer

 

 

185

 

 

 

93

 

 

 

0

 

Subtotal

 

 

6,452

 

 

 

5,720

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

2,882

 

 

 

2,882

 

 

 

446

 

Non-owner occupied

 

 

1,548

 

 

 

1,548

 

 

 

68

 

Commercial

 

 

1,444

 

 

 

1,429

 

 

 

272

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

944

 

 

 

928

 

 

 

85

 

Home equity lines of credit

 

 

90

 

 

 

90

 

 

 

3

 

Subtotal

 

 

6,908

 

 

 

6,877

 

 

 

874

 

Total

 

$

13,360

 

 

$

12,597

 

 

$

874

 

 

 

 

16

 


The following tables present the average recorded investment in impaired loans by class and interest income recognized by loan class for the three and nine month periods ended September 30, 2015 and 2014:

 

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

 

For Three Months Ended September 30,

 

 

For Three Months Ended September 30,

 

(In Thousands of Dollars)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,809

 

 

$

1,939

 

 

$

42

 

 

$

9

 

Non-owner occupied

 

 

374

 

 

 

399

 

 

 

10

 

 

 

6

 

Commercial

 

 

395

 

 

 

1,496

 

 

 

6

 

 

 

4

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,267

 

 

 

2,077

 

 

 

41

 

 

 

16

 

Home equity lines of credit

 

 

270

 

 

 

363

 

 

 

4

 

 

 

2

 

Consumer

 

 

63

 

 

 

138

 

 

 

4

 

 

 

0

 

Subtotal

 

 

5,178

 

 

 

6,412

 

 

 

107

 

 

 

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

2,324

 

 

 

2,068

 

 

 

12

 

 

 

25

 

Non-owner occupied

 

 

1,503

 

 

 

1,563

 

 

 

20

 

 

 

20

 

Commercial

 

 

336

 

 

 

413

 

 

 

1

 

 

 

1

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

860

 

 

 

1,062

 

 

 

9

 

 

 

10

 

Home equity lines of credit

 

 

88

 

 

 

91

 

 

 

1

 

 

 

1

 

Consumer

 

 

0

 

 

 

7

 

 

 

0

 

 

 

0

 

Subtotal

 

 

5,111

 

 

 

5,204

 

 

 

43

 

 

 

57

 

Total

 

$

10,289

 

 

$

11,616

 

 

$

150

 

 

$

94

 

17

 


 

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

 

For Nine Months Ended

September 30,

 

 

For Nine Months Ended

September 30,

 

(In Thousands of Dollars)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

2,115

 

 

$

2,042

 

 

$

87

 

 

$

20

 

Non-owner occupied

 

 

380

 

 

 

399

 

 

 

23

 

 

 

14

 

Commercial

 

 

422

 

 

 

1,500

 

 

 

17

 

 

 

13

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,167

 

 

 

1,689

 

 

 

110

 

 

 

44

 

Home equity lines of credit

 

 

265

 

 

 

269

 

 

 

11

 

 

 

6

 

Consumer

 

 

78

 

 

 

185

 

 

 

11

 

 

 

0

 

Subtotal

 

 

5,427

 

 

 

6,084

 

 

 

259

 

 

 

97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

1,987

 

 

 

1,982

 

 

 

60

 

 

 

76

 

Non-owner occupied

 

 

1,520

 

 

 

1,576

 

 

 

60

 

 

 

61

 

Commercial

 

 

636

 

 

 

632

 

 

 

3

 

 

 

3

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

917

 

 

 

1,277

 

 

 

29

 

 

 

31

 

Home equity lines of credit

 

 

89

 

 

 

121

 

 

 

3

 

 

 

3

 

Consumer

 

 

0

 

 

 

5

 

 

 

0

 

 

 

0

 

Subtotal

 

 

5,149

 

 

 

5,593

 

 

 

155

 

 

 

174

 

Total

 

$

10,576

 

 

$

11,677

 

 

$

414

 

 

$

271

 

 

Cash basis interest recognized during the three and nine month periods ended September 30, 2015 and 2014 was materially equal to interest income recognized.

Nonaccrual loans and loans past due 90 days or more still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

18

 


The following table presents the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of September 30, 2015 and December 31, 2014:

 

 

 

September 30, 2015

 

 

December 31, 2014

 

(In Thousands of Dollars)

 

Nonaccrual

 

 

Loans Past Due

90 Days or More

Still Accruing

 

 

Nonaccrual

 

 

Loans Past Due

90 Days or More

Still Accruing

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

3,376

 

 

$

0

 

 

$

3,315

 

 

$

44

 

Non-owner occupied

 

 

32

 

 

 

0

 

 

 

41

 

 

 

0

 

Commercial

 

 

553

 

 

 

0

 

 

 

1,645

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,468

 

 

 

578

 

 

 

2,742

 

 

 

195

 

Home equity lines of credit

 

 

120

 

 

 

159

 

 

 

139

 

 

 

40

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

219

 

 

 

164

 

 

 

90

 

 

 

193

 

Direct

 

 

33

 

 

 

1

 

 

 

36

 

 

 

0

 

Other

 

 

0

 

 

 

5

 

 

 

0

 

 

 

1

 

Total originated loans

 

$

6,801

 

 

$

907

 

 

$

8,008

 

 

$

473

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

$

115

 

 

$

0

 

 

$

0

 

 

$

0

 

Commercial

 

 

1,321

 

 

 

0

 

 

 

0

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

158

 

 

 

29

 

 

 

0

 

 

 

0

 

Home equity lines of credit

 

 

77

 

 

 

7

 

 

 

0

 

 

 

0

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

85

 

 

 

0

 

 

 

0

 

 

 

0

 

Total acquired loans

 

$

1,756

 

 

$

36

 

 

$

0

 

 

$

0

 

Total loans

 

$

8,557

 

 

$

943

 

 

$

8,008

 

 

$

473

 

 

19

 


The following table presents the aging of the recorded investment in past due loans as of September 30, 2015 and December 31, 2014 by class of loans:

 

(In Thousands of Dollars)

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or More Past Due

and Nonaccrual

 

 

Total Past

Due

 

 

Loans Not

Past Due

 

 

Total

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

0

 

 

$

3,376

 

 

$

3,376

 

 

$

96,128

 

 

$

99,504

 

Non-owner occupied

 

 

0

 

 

 

19

 

 

 

32

 

 

 

51

 

 

 

129,960

 

 

 

130,011

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

47,684

 

 

 

47,684

 

Commercial

 

 

80

 

 

 

0

 

 

 

553

 

 

 

633

 

 

 

139,457

 

 

 

140,090

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,590

 

 

 

657

 

 

 

3,046

 

 

 

5,293

 

 

 

159,872

 

 

 

165,165

 

Home equity lines of credit

 

 

33

 

 

 

45

 

 

 

279

 

 

 

357

 

 

 

36,925

 

 

 

37,282

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

1,575

 

 

 

322

 

 

 

383

 

 

 

2,280

 

 

 

126,389

 

 

 

128,669

 

Direct

 

 

121

 

 

 

0

 

 

 

34

 

 

 

155

 

 

 

14,433

 

 

 

14,588

 

Other

 

 

16

 

 

 

27

 

 

 

5

 

 

 

48

 

 

 

4,253

 

 

 

4,301

 

Total originated loans:

 

$

3,415

 

 

$

1,070

 

 

$

7,708

 

 

$

12,193

 

 

$

755,101

 

 

$

767,294

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

141

 

 

$

0

 

 

$

0

 

 

$

141

 

 

$

111,479

 

 

$

111,620

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

20,429

 

 

 

20,429

 

Other

 

 

0

 

 

 

0

 

 

 

115

 

 

 

115

 

 

 

32,113

 

 

 

32,228

 

Commercial

 

 

415

 

 

 

280

 

 

 

1,321

 

 

 

2,016

 

 

 

62,308

 

 

 

64,324

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

923

 

 

 

7

 

 

 

187

 

 

 

1,117

 

 

 

116,117

 

 

 

117,234

 

Home equity lines of credit

 

 

11

 

 

 

31

 

 

 

84

 

 

 

126

 

 

 

40,319

 

 

 

40,445

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

444

 

 

 

236

 

 

 

85

 

 

 

765

 

 

 

28,677

 

 

 

29,442

 

Total acquired loans

 

$

1,934

 

 

$

554

 

 

$

1,792

 

 

$

4,280

 

 

$

411,442

 

 

$

415,722

 

Total loans

 

$

5,349

 

 

$

1,624

 

 

$

9,500

 

 

$

16,473

 

 

$

1,166,543

 

 

$

1,183,016

 

 

 

(In Thousands of Dollars)

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or More

Past Due

and Nonaccrual

 

 

Total Past

Due

 

 

Loans Not

Past Due

 

 

Total

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

0

 

 

$

3,359

 

 

$

3,359

 

 

$

71,272

 

 

$

74,631

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

41

 

 

 

41

 

 

 

121,872

 

 

 

121,913

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

26,029

 

 

 

26,029

 

Commercial

 

 

0

 

 

 

0

 

 

 

1,645

 

 

 

1,645

 

 

 

118,505

 

 

 

120,150

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,892

 

 

 

546

 

 

 

2,937

 

 

 

5,375

 

 

 

147,223

 

 

 

152,598

 

Home equity lines of credit

 

 

205

 

 

 

92

 

 

 

179

 

 

 

476

 

 

 

30,779

 

 

 

31,255

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

2,136

 

 

 

406

 

 

 

283

 

 

 

2,825

 

 

 

121,754

 

 

 

124,579

 

Direct

 

 

108

 

 

 

18

 

 

 

36

 

 

 

162

 

 

 

8,909

 

 

 

9,071

 

Other

 

 

17

 

 

 

6

 

 

 

1

 

 

 

24

 

 

 

3,602

 

 

 

3,626

 

Total loans

 

$

4,358

 

 

$

1,068

 

 

$

8,481

 

 

$

13,907

 

 

$

649,945

 

 

$

663,852

 

 

 

20

 


Troubled Debt Restructurings:

Total troubled debt restructurings were $8.2 million and $8.1 million at September 30, 2015 and December 31, 2014, respectively. The Company has allocated $272 thousand and $242 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2015 and December 31, 2014. There were no commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings at September 30, 2015 and $25 thousand at December 31, 2014.

During the three and nine month periods ended September 30, 2015 and 2014, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a deferral of principal payments; or a legal concession.

Troubled debt restructuring modifications involved a reduction of the notes stated interest rate in the range of 0.38% and 2.75%. There were also extensions of the maturity dates on these and other troubled debt restructurings in the range of 9 months to 120 months.

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three and nine month periods ended September 30, 2015 and 2014:

 

 

 

 

 

 

 

Pre-Modification

 

 

Post-Modification

 

Three Months Ended September 30, 2015

 

Number of

 

 

Outstanding Recorded

 

 

Outstanding Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

5

 

 

$

153

 

 

$

153

 

Indirect

 

 

3

 

 

 

25

 

 

 

25

 

Total loans

 

 

8

 

 

$

178

 

 

$

178

 

 

 

 

 

 

 

 

Pre-Modification

 

 

Post-Modification

 

Nine Months Ended September 30, 2015

 

Number of

 

 

Outstanding Recorded

 

 

Outstanding Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

2

 

 

$

801

 

 

$

801

 

Commercial

 

 

1

 

 

 

8

 

 

 

8

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

10

 

 

 

700

 

 

 

700

 

Home equity lines of credit

 

 

1

 

 

 

50

 

 

 

50

 

Indirect

 

 

5

 

 

 

61

 

 

 

61

 

Total loans

 

 

19

 

 

$

1,620

 

 

$

1,620

 

 

 

 

 

 

 

 

Pre-Modification

 

 

Post-Modification

 

Three Months Ended September 30, 2014

 

Number of

 

 

Outstanding Recorded

 

 

Outstanding Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

1

 

 

$

303

 

 

$

316

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

5

 

 

 

235

 

 

 

235

 

Home equity lines of credit

 

 

1

 

 

 

17

 

 

 

17

 

Indirect

 

 

2

 

 

 

37

 

 

 

37

 

Consumer

 

 

1

 

 

 

11

 

 

 

11

 

Total

 

 

10

 

 

$

603

 

 

$

616

 

21

 


 

 

 

 

 

 

 

Pre-Modification

 

 

Post-Modification

 

Nine Months Ended September 30, 2014

 

Number of

 

 

Outstanding Recorded

 

 

Outstanding Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Troubled Debt Restructurings:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

1

 

 

$

303

 

 

$

316

 

Non-owner occupied

 

 

2

 

 

 

408

 

 

 

408

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

19

 

 

 

1,017

 

 

 

1,034

 

Home equity lines of credit

 

 

4

 

 

 

105

 

 

 

105

 

Indirect

 

 

2

 

 

 

37

 

 

 

37

 

Consumer

 

 

1

 

 

 

11

 

 

 

11

 

Total

 

 

29

 

 

$

1,881

 

 

$

1,911

 

    

 

There were $23 thousand in charge offs and a $23 thousand increase to the provision for loan losses during the three month period ended September 30, 2015, as a result of troubled debt restructurings. There were $110 thousand in charge offs and a $85 thousand increase to the provision for loan losses during the nine month period ended September 30, 2015, as a result of troubled debt restructurings.  There were $10 thousand in charge offs with no increase to the provision for loan losses during the three month period ended September 30, 2014, as a result of troubled debt restructurings.  There were $42 thousand in charge offs resulting in an $11 thousand increase to the provision for loan losses during the nine month period ended September 30, 2014.

 

There was one commercial real estate loan for which there was a payment default within twelve months following the modification of the troubled debt restructuring during the three and nine month periods ended September 30, 2015.  This loan was past due at September 30, 2015.  There was no provision recorded as a result of this default during 2015.  A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

There was one residential real estate loan modified as a troubled debt restructuring for which there was a payment default within the twelve months following the modification during the three and nine month period ended September 30, 2014. This loan was past due at September 30, 2014.  There was no effect on the provision for loan losses as a result of the default during 2014. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

 

 

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $750 thousand, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management also affirms the risk ratings for the loans and leases in their respective portfolios on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

22

 


As of September 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(In Thousands of Dollars)

 

Pass

 

 

Special

Mention

 

 

Sub

standard

 

 

Doubtful

 

 

Not Rated

 

 

Total

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

93,742

 

 

$

1,086

 

 

$

4,676

 

 

$

0

 

 

$

0

 

 

$

99,504

 

Non-owner occupied

 

 

126,594

 

 

 

469

 

 

 

2,948

 

 

 

0

 

 

 

0

 

 

 

130,011

 

Other

 

 

47,383

 

 

 

0

 

 

 

301

 

 

 

0

 

 

 

0

 

 

 

47,684

 

Commercial

 

 

137,153

 

 

 

875

 

 

 

2,063

 

 

 

0

 

 

 

0

 

 

 

140,091

 

Total originated loans

 

$

404,872

 

 

$

2,430

 

 

$

9,988

 

 

$

0

 

 

$

0

 

 

$

417,290

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

110,497

 

 

$

0

 

 

$

1,123

 

 

$

0

 

 

$

0

 

 

$

111,620

 

Non-owner occupied

 

 

18,573

 

 

 

1,346

 

 

 

510

 

 

 

0

 

 

 

0

 

 

 

20,429

 

Other

 

 

31,636

 

 

 

477

 

 

 

115

 

 

 

0

 

 

 

0

 

 

 

32,228

 

Commercial

 

 

60,319

 

 

 

2,684

 

 

 

1,321

 

 

 

0

 

 

 

0

 

 

 

64,324

 

Total acquired loans

 

$

221,025

 

 

$

4,507

 

 

$

3,069

 

 

$

0

 

 

$

0

 

 

$

228,601

 

Total loans

 

$

625,897

 

 

$

6,937

 

 

$

13,057

 

 

$

0

 

 

$

0

 

 

$

645,891

 

 

(In Thousands of Dollars)

 

Pass

 

 

Special

Mention

 

 

Sub

standard

 

 

Doubtful

 

 

Not Rated

 

 

Total

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

66,036

 

 

$

2,534

 

 

$

6,061

 

 

$

0

 

 

$

0

 

 

$

74,631

 

Non-owner occupied

 

 

115,159

 

 

 

3,760

 

 

 

2,994

 

 

 

0

 

 

 

0

 

 

 

121,913

 

Other

 

 

25,710

 

 

 

0

 

 

 

319

 

 

 

0

 

 

 

0

 

 

 

26,029

 

Commercial

 

 

114,409

 

 

 

1,566

 

 

 

4,175

 

 

 

0

 

 

 

0

 

 

 

120,150

 

Total loans

 

$

321,314

 

 

$

7,860

 

 

$

13,549

 

 

$

0

 

 

$

0

 

 

$

342,723

 

 

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential, consumer indirect and direct loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

The following table presents the recorded investment in residential, consumer indirect and direct auto loans based on payment activity as of September 30, 2015 and December 31, 2014. Nonperforming loans are loans past due 90 days or more and still accruing interest and nonaccrual loans.

 

 

 

Residential Real Estate

 

 

Consumer

 

(In Thousands of Dollars)

 

1-4 Family Residential

 

 

Home Equity Lines of Credit

 

 

Indirect

 

 

Direct

 

 

Other

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

162,119

 

 

$

37,003

 

 

$

128,286

 

 

$

14,555

 

 

$

4,296

 

Nonperforming

 

 

3,046

 

 

 

279

 

 

 

383

 

 

 

33

 

 

 

5

 

Total originated loans

 

$

165,165

 

 

$

37,282

 

 

$

128,669

 

 

$

14,588

 

 

$

4,301

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

117,047

 

 

$

40,361

 

 

$

0

 

 

$

29,357

 

 

$

0

 

Nonperforming

 

 

187

 

 

 

84

 

 

 

0

 

 

 

85

 

 

 

0

 

Total acquired loans

 

 

117,234

 

 

 

40,445

 

 

 

0

 

 

 

29,442

 

 

 

0

 

Total loans

 

$

282,399

 

 

$

77,727

 

 

$

128,669

 

 

$

44,030

 

 

$

4,301

 

23

 


 

 

 

Residential Real Estate

 

 

Consumer

 

(In Thousands of Dollars)

 

1-4 Family Residential

 

 

Home Equity Lines of Credit

 

 

Indirect

 

 

Direct

 

 

Other

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

149,661

 

 

$

31,076

 

 

$

124,296

 

 

$

9,035

 

 

$

3,625

 

Nonperforming

 

 

2,937

 

 

 

179

 

 

 

283

 

 

 

36

 

 

 

1

 

Total

 

$

152,598

 

 

$

31,255

 

 

$

124,579

 

 

$

9,071

 

 

$

3,626

 

 

 

 

Interest-Rate Swaps:

The Company uses a program that utilizes interest-rate swaps as part of its asset/liability management strategy. The interest-rate swaps are used to help manage the Company’s interest rate risk position and not as derivatives for trading purposes. The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements.

The objective of the interest-rate swaps is to protect the related fixed rate commercial real estate loans from changes in fair value due to changes in interest rates. The Company has a program whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap. The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges. Accordingly, both instruments are carried at fair value and changes in fair value are reported in current period earnings.

Summary information about these interest-rate swaps at periods ended September 30, 2015 and December 31, 2014 is as follows:

 

 

September 30, 2015

 

 

December 31, 2014

 

Notional amounts (In thousands)

$

34,802

 

 

$

31,459

 

Weighted average pay rate on interest-rate swaps

 

4.23

%

 

 

4.26

%

Weighted average receive rate on interest-rate swaps

 

2.64

%

 

 

2.67

%

Weighted average maturity (years)

 

4.0

 

 

 

5.9

 

Fair value of combined interest-rate swaps (In thousands)

$

1,131

 

 

$

638

 

 

The fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other liabilities, respectively, in the consolidated balance sheets. Changes in the fair value of the yield maintenance provisions and interest-rate swaps are reported in earnings, as other noninterest income in the consolidated statements of income. For the three and nine month periods ended September 30, 2015 and 2014 there were no net gains or losses recognized in earnings.

 

24

 


Earnings Per Share:

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (In thousands)

$

1,857

 

 

$

2,276

 

 

$

4,880

 

 

$

6,818

 

Weighted average shares outstanding

 

25,710,795

 

 

 

18,716,094

 

 

 

21,204,754

 

 

 

18,761,352

 

Basic earnings per share

$

0.07

 

 

$

0.12

 

 

$

0.23

 

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (In thousands)

$

1,857

 

 

$

2,276

 

 

$

4,880

 

 

$

6,818

 

Weighted average shares out-standing for basic

   earnings per share

 

25,710,795

 

 

 

18,716,094

 

 

 

21,204,754

 

 

 

18,761,352

 

Dilutive effect of restricted stock awards

 

6,059

 

 

 

974

 

 

 

4,384

 

 

 

367

 

Weighted average shares for diluted earnings per share

 

25,716,854

 

 

 

18,717,068

 

 

 

21,209,138

 

 

 

18,761,719

 

Diluted earnings per share

$

0.07

 

 

$

0.12

 

 

$

0.23

 

 

$

0.36

 

 

There were no restricted stock awards that were considered anti-dilutive for the three and nine month periods ended September 30, 2015 and 2014.

 

Stock Based Compensation:

During 2012, the Company, with the approval of shareholders, created the 2012 Equity Incentive Plan (the “Plan”). The Plan permits the award of up to 500 thousand shares to the Company’s directors and employees to promote the Company’s long-term financial success by motivating performance through long-term incentive compensation and to better align the interests of its employees with those of its shareholders.  There were 279,023 additional shares awarded under the Plan during the nine month period ended September 30, 2015. Expense recognized for the Plan was $159 thousand and $275 thousand for the three and nine month periods ended September 30, 2015.  As of September 30, 2015, there was $2.1 million of total unrecognized compensation expense related to the nonvested shares granted under the Plan.  The remaining cost is expected to be recognized over 2.9 years. There were 46,957 shares awarded and $29 thousand and $87 thousand of expense recognized for the Plan for the three and nine month periods ended September 30, 2014.  

The following is the activity under the Plan during the nine months ended September 30, 2015:

 

 

Restricted Stock Units

 

 

Units

 

 

Weighted Average

Grant Date Fair

Value

 

Nonvested at January 1, 2015

 

46,957

 

 

$

7.39

 

Granted

 

279,023

 

 

 

7.96

 

Vested

 

0

 

 

 

0

 

Forfeited

 

(5,000

)

 

 

7.88

 

Nonvested at September 30, 2015

 

320,980

 

 

$

7.88

 

 

 

Other Comprehensive Income:

The following table represents the detail of other comprehensive income for the three and nine month periods ended September 30, 2015 and 2014.

 

 

Three Months Ended September 30, 2015

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

3,557

 

 

$

(1,245

)

 

$

2,312

 

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

 

(3

)

 

 

1

 

 

 

(2

)

Net unrealized gains on available-for-sale securities

$

3,554

 

 

$

(1,244

)

 

$

2,310

 

25

 


 

 

Nine Months Ended September 30, 2015

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

421

 

 

$

(148

)

 

$

273

 

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

 

(48

)

 

 

17

 

 

 

(31

)

Net unrealized gains on available-for-sale securities

$

373

 

 

$

(131

)

 

$

242

 

 

 

Three Months Ended September 30, 2014

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

527

 

 

$

(184

)

 

$

343

 

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

 

(1

)

 

 

0

 

 

 

(1

)

Net unrealized gains on available-for-sale securities

$

526

 

 

$

(184

)

 

$

342

 

 

 

Nine Months Ended September 30, 2014

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

7,547

 

 

$

(2,642

)

 

$

4,905

 

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

 

(85

)

 

 

30

 

 

 

(55

)

Net unrealized gains on available-for-sale securities

$

7,462

 

 

$

(2,612

)

 

$

4,850

 

    

(1) Pre-tax reclassification adjustments relating to available-for-sale securities are reported in security gains and the tax impact is included in income tax expense on the consolidated statements of income.

 

 

Regulatory Capital Matters

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action by regulators that, if undertaken, could have a direct material effect on the financial statements. Management believes as of September 30, 2015, the Company and Bank meet all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2015 and December 31, 2014, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

26

 


Actual and required capital amounts and ratios are presented below at September 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

 

Requirement For
Capital Adequacy Purposes:

 

 

To be Well Capitalized Under Prompt Corrective Action Provisions:

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

160,627

 

 

12.24

%

 

$

59,058

 

 

4.50

%

 

N/A

 

N/A

 

Bank

 

145,893

 

 

11.15

%

 

 

58,890

 

 

4.50

%

 

$

85,063

 

 

6.50

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

168,968

 

 

12.87

%

 

 

104,991

 

 

8.00

%

 

N/A

 

N/A

 

Bank

 

154,187

 

 

11.78

%

 

 

104,693

 

 

8.00

%

 

 

130,866

 

 

10.00

%

Tier 1 risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

160,627

 

 

12.24

%

 

 

78,744

 

 

6.00

%

 

N/A

 

N/A

 

Bank

 

145,893

 

 

11.15

%

 

 

78,520

 

 

6.00

%

 

 

104,693

 

 

8.00

%

Tier 1 leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

160,627

 

 

9.59

%

 

 

67,018

 

 

4.00

%

 

N/A

 

N/A

 

Bank

 

145,893

 

 

8.77

%

 

 

66,568

 

 

4.00

%

 

 

83,210

 

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

121,340

 

 

16.48

%

 

$

58,523

 

 

8.00

%

 

N/A

 

N/A

 

Bank

 

114,321

 

 

15.56

%

 

 

58,773

 

 

8.00

%

 

$

73,466

 

 

10.00

%

Tier 1 Capital to risk weighted assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

113,654

 

 

15.43

%

 

 

29,262

 

 

4.00

%

 

N/A

 

N/A

 

Bank

 

106,689

 

 

14.52

%

 

 

29,386

 

 

4.00

%

 

 

44,079

 

 

6.00

%

Tier 1 Capital to average assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

113,654

 

 

10.03

%

 

 

45,313

 

 

4.00

%

 

N/A

 

N/A

 

Bank

 

106,689

 

 

9.37

%

 

 

45,565

 

 

4.00

%

 

 

56,956

 

 

5.00

%

 

 

Fair Value:

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

27

 


The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis. This service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities. They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing methods. The fair values for investment securities are determined by quoted market prices in active markets, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates. Inputs used are derived principally from observable market data (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort. For the period ended September 30, 2015 and for the year ended December 31, 2014, the fair value of Level 3 investment securities was immaterial.

Derivative Instruments: The fair values of derivative instruments are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: At the time loans are considered impaired, collateral dependent impaired loans are valued at the lower of cost or fair value and non-collateral dependent loans are valued based on discounted cash flows. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value.

28

 


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

 

 

 

Fair Value Measurements at September 30, 2015 Using:

 

(In Thousands of Dollars)

 

Carrying Value

 

 

Quoted Prices  in Active Markets for Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government

   sponsored entities

 

$

19,149

 

 

$

0

 

 

$

19,149

 

 

$

0

 

State and political subdivisions

 

 

124,656

 

 

 

0

 

 

 

124,656

 

 

 

0

 

Corporate bonds

 

 

1,034

 

 

 

0

 

 

 

1,034

 

 

 

0

 

Mortgage-backed securities-residential

 

 

199,000

 

 

 

0

 

 

 

198,985

 

 

 

15

 

Collateralized mortgage obligations

 

 

14,792

 

 

 

0

 

 

 

14,792

 

 

 

0

 

Small Business Administration

 

 

20,201

 

 

 

0

 

 

 

20,201

 

 

 

0

 

Equity securities

 

 

306

 

 

 

306

 

 

 

0

 

 

 

0

 

Total investment securities

 

$

379,138

 

 

$

306

 

 

$

378,817

 

 

$

15

 

Yield maintenance provisions

 

$

1,131

 

 

$

0

 

 

$

1,131

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

1,131

 

 

$

0

 

 

$

1,131

 

 

$

0

 

 

 

 

Fair Value Measurements at December 31, 2014 Using:

 

(In Thousands of Dollars)

 

Carrying Value

 

 

Quoted Prices  in Active Markets for Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government

   sponsored entities

 

$

24,821

 

 

$

0

 

 

$

24,821

 

 

$

0

 

State and political subdivisions

 

 

91,881

 

 

 

0

 

 

 

91,881

 

 

 

0

 

Corporate bonds

 

 

931

 

 

 

0

 

 

 

931

 

 

 

0

 

Mortgage-backed securities-residential

 

 

224,362

 

 

 

0

 

 

 

224,352

 

 

 

10

 

Collateralized mortgage obligations

 

 

25,175

 

 

 

0

 

 

 

25,175

 

 

 

0

 

Small Business Administration

 

 

22,419

 

 

 

0

 

 

 

22,419

 

 

 

0

 

Equity securities

 

 

240

 

 

 

240

 

 

 

0

 

 

 

0

 

Total investment securities

 

$

389,829

 

 

$

240

 

 

$

389,579

 

 

$

10

 

Yield maintenance provisions

 

$

638

 

 

$

0

 

 

$

638

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

638

 

 

$

0

 

 

$

638

 

 

$

0

 

 

There were no significant transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2015 and 2014.

 

29

 


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

 

(In Thousands of Dollars)

 

Three Months ended September 30,

 

 

Nine Months ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Beginning Balance

 

$

16

 

 

$

10

 

 

$

10

 

 

$

10

 

Total unrealized gains or losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Repayments

 

 

(1

)

 

 

0

 

 

 

(1

)

 

 

0

 

Acquired and/or purchased

 

 

0

 

 

 

0

 

 

 

6

 

 

 

0

 

Ending Balance

 

$

15

 

 

$

10

 

 

$

15

 

 

$

10

 

 

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

 

 

 

Fair Value Measurements at September 30, 2015 Using:

 

(In Thousands of Dollars)

 

Carrying Value

 

 

Quoted Prices  in Active Markets for Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

1,225

 

 

$

0

 

 

$

0

 

 

$

1,225

 

Commercial

 

 

110

 

 

 

0

 

 

 

0

 

 

 

110

 

1–4 family residential

 

 

42

 

 

 

0

 

 

 

0

 

 

 

42

 

 

 

 

Fair Value Measurements at December 31, 2014 Using:

 

(In Thousands of Dollars)

 

Carrying Value

 

 

Quoted Prices  in Active Markets for Identical Assets
(Level 1)

 

 

Significant Other Observable Inputs
(Level 2)

 

 

Significant Unobservable Inputs
(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

807

 

 

$

0

 

 

$

0

 

 

$

807

 

1–4 family residential

 

 

63

 

 

 

0

 

 

 

0

 

 

 

63

 

Other real estate owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

45

 

 

 

0

 

 

 

0

 

 

 

45

 

 

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $2.1 million with a valuation allowance of $689 thousand at September 30, 2015, resulting in an additional provision for loan losses of $567 thousand and $777 thousand for the three and nine month periods, respectively. At December 31, 2014, impaired loans had a principal balance of $988 thousand, with a valuation allowance of $117 thousand. Loans measured at fair value at September 30, 2014 resulted in an additional provision for loan losses of $338 thousand and $554 thousand during the three and nine month periods ended September 30, 2014.  Excluded from the fair value of impaired loans, at September 30, 2015 and December 31, 2014, discussed above are $3.0 million and $4.2 million of loans classified as troubled debt restructurings and measured using the present value of cash flows, which are not carried at fair value.

Impaired commercial real estate loans, both owner-occupied and non-owner occupied are valued by independent external appraisals. These external appraisals are prepared using the sales comparison approach and income approach valuation techniques. Management makes subsequent unobservable adjustments to the impaired loan appraisals. Impaired loans other than commercial real estate and other real estate owned are not considered material.

30

 


The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods ended September 30, 2015 and December 31, 2014:

 

September 30, 2015

Fair value

 

 

Valuation Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Impaired loans

 

 

 

 

 

 

 

 

 

Commercial real estate

$

317

 

 

Sales comparison

 

Adjustment for differences between earning multiplier

 

-17.04% - 26.67%

(-2.96%)

Commercial real estate

 

908

 

 

Income approach

 

Adjustment for differences between earning multiplier

 

-49.42% - 40.89%

(35.33%)

Commercial

 

110

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

-2.11% - 2.11%

(0%)

Residential

 

42

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

-13.49% - 15.90%

(-10.65%)

 

December 31, 2014

Fair value

 

 

Valuation Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Impaired loans

 

 

 

 

 

 

 

 

 

Commercial

$

807

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

-27.43% - 32.86%

(9.96%)

Residential

 

63

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

-18.32% - 24.16%

(-14.02%)

Other real estate owned

 

45

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

-12.86% - 11.97%

(-5.79%)

 

The carrying amounts and estimated fair values of financial instruments not previously disclosed at September 30, 2015 and December 31, 2014 are as follows:

 

 

 

 

 

 

 

Fair Value Measurements at September 30, 2015 Using:

 

(In Thousands of Dollars)

 

Carrying Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,344

 

 

$

16,430

 

 

$

17,914

 

 

$

0

 

 

$

34,344

 

Restricted stock

 

 

7,456

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

566

 

 

 

0

 

 

 

581

 

 

 

0

 

 

 

581

 

Loans, net

 

 

1,174,722

 

 

 

0

 

 

 

0

 

 

 

1,166,909

 

 

 

1,166,909

 

Accrued interest receivable

 

 

5,285

 

 

 

0

 

 

 

2,215

 

 

 

3,070

 

 

 

5,285

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,330,249

 

 

 

1,080,591

 

 

 

248,827

 

 

 

0

 

 

 

1,329,418

 

Short-term borrowings

 

 

163,429

 

 

 

0

 

 

 

163,429

 

 

 

0

 

 

 

163,429

 

Long-term borrowings

 

 

16,272

 

 

 

0

 

 

 

17,693

 

 

 

0

 

 

 

17,693

 

Accrued interest payable

 

 

514

 

 

 

26

 

 

 

488

 

 

 

0

 

 

 

514

 

31

 


 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2014 Using:

 

(In Thousands of Dollars)

 

Carrying Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,428

 

 

$

11,410

 

 

$

16,018

 

 

$

0

 

 

$

27,428

 

Restricted stock

 

 

4,224

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

511

 

 

 

0

 

 

 

523

 

 

 

0

 

 

 

523

 

Loans, net

 

 

656,220

 

 

 

0

 

 

 

0

 

 

 

658,993

 

 

 

658,993

 

Accrued interest receivable

 

 

3,237

 

 

 

0

 

 

 

1,645

 

 

 

1,592

 

 

 

3,237

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

915,703

 

 

 

708,752

 

 

 

206,708

 

 

 

0

 

 

 

915,460

 

Short-term borrowings

 

 

59,136

 

 

 

0

 

 

 

59,136

 

 

 

0

 

 

 

59,136

 

Long-term borrowings

 

 

28,381

 

 

 

0

 

 

 

28,837

 

 

 

0

 

 

 

28,837

 

Accrued interest payable

 

 

402

 

 

 

2

 

 

 

400

 

 

 

0

 

 

 

402

 

 

The methods and assumptions used to estimate fair value, not previously described, are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. The Company has determined that cash on hand and non-interest bearing due from bank accounts are Level 1 whereas interest bearing federal funds sold and other are Level 2.

Restricted Stock: It is not practical to determine the fair value of restricted stock due to restrictions placed on its transferability.

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest receivable and payable approximate fair value resulting in a Level 1, Level 2 or Level 3 classification. The classification is the result of the association with securities, loans and deposits.

Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings, and money market accounts – are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair value for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Off-balance Sheet Instruments: The fair value of commitments is not considered material.

 

Segment Information:

The reportable segments are determined by the products and services offered, primarily distinguished between banking, trust and retirement consulting operations. They are also distinguished by the level of information provided to the chief operating decision makers in the Company, who use such information to review performance of various components of the business, which are then aggregated. Loans, investments, and deposits provide the revenues in the banking operation. All operations are domestic.

32

 


Significant segment totals are reconciled to the financial statements as follows:

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

5,047

 

 

$

30,952

 

 

$

3,266

 

 

$

0

 

 

$

39,265

 

Total assets

 

$

10,696

 

 

$

1,691,424

 

 

$

4,143

 

 

$

1,534

 

 

$

1,707,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

5,285

 

 

$

0

 

 

$

3,528

 

 

$

0

 

 

$

8,813

 

Total assets

 

$

10,643

 

 

$

1,121,505

 

 

$

4,356

 

 

$

463

 

 

$

1,136,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

16

 

 

$

14,525

 

 

$

0

 

 

$

(3

)

 

$

14,538

 

Provision for loan losses

 

 

0

 

 

 

1,220

 

 

 

0

 

 

 

0

 

 

 

1,220

 

Service fees, security gains and other noninterest income

 

 

1,505

 

 

 

2,824

 

 

 

423

 

 

 

(67

)

 

 

4,685

 

Noninterest expense

 

 

1,161

 

 

 

11,909

 

 

 

381

 

 

 

1,264

 

 

 

14,715

 

Amortization and depreciation expense

 

 

84

 

 

 

632

 

 

 

90

 

 

 

0

 

 

 

806

 

Income (loss) before taxes

 

 

276

 

 

 

3,588

 

 

 

(48

)

 

 

(1,334

)

 

 

2,482

 

Income taxes

 

 

95

 

 

 

783

 

 

 

(16

)

 

 

(237

)

 

 

625

 

Net Income (Loss)

 

$

181

 

 

$

2,805

 

 

$

(32

)

 

$

(1,097

)

 

$

1,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

46

 

 

$

33,243

 

 

$

0

 

 

$

(10

)

 

$

33,279

 

Provision for loan losses

 

 

0

 

 

 

2,520

 

 

 

0

 

 

 

0

 

 

 

2,520

 

Service fees, security gains and other noninterest income

 

 

4,708

 

 

 

6,917

 

 

 

1,705

 

 

 

(199

)

 

 

13,131

 

Noninterest expense

 

 

3,598

 

 

 

26,924

 

 

 

1,143

 

 

 

3,841

 

 

 

35,506

 

Amortization and depreciation expense

 

 

255

 

 

 

1,328

 

 

 

270

 

 

 

0

 

 

 

1,853

 

Income before taxes

 

 

901

 

 

 

9,388

 

 

 

292

 

 

 

(4,050

)

 

 

6,531

 

Income taxes

 

 

307

 

 

 

2,005

 

 

 

100

 

 

 

(761

)

 

 

1,651

 

Net Income

 

$

594

 

 

$

7,383

 

 

$

192

 

 

$

(3,289

)

 

$

4,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

13

 

 

$

9,276

 

 

$

0

 

 

$

(4

)

 

$

9,285

 

Provision for loan losses

 

 

0

 

 

 

425

 

 

 

0

 

 

 

0

 

 

 

425

 

Service fees, security gains and other

   noninterest income

 

 

1,575

 

 

 

1,971

 

 

 

395

 

 

 

(61

)

 

 

3,880

 

Noninterest expense

 

 

1,234

 

 

 

7,794

 

 

 

421

 

 

 

327

 

 

 

9,776

 

Income before taxes

 

 

354

 

 

 

3,028

 

 

 

(26

)

 

 

(392

)

 

 

2,964

 

Income taxes

 

 

121

 

 

 

708

 

 

 

(9

)

 

 

(132

)

 

 

688

 

Net Income

 

$

233

 

 

$

2,320

 

 

$

(17

)

 

$

(260

)

 

$

2,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33

 


(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Retirement

Consulting

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Nine Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

39

 

 

$

27,065

 

 

$

0

 

 

$

(11

)

 

$

27,093

 

Provision for loan losses

 

 

0

 

 

 

1,055

 

 

 

0

 

 

 

0

 

 

 

1,055

 

Service fees, security gains and other

   noninterest income

 

 

4,666

 

 

 

5,265

 

 

 

1,392

 

 

 

(213

)

 

 

11,110

 

Noninterest expense

 

 

3,614

 

 

 

22,528

 

 

 

1,245

 

 

 

908

 

 

 

28,295

 

Income before taxes

 

 

1,091

 

 

 

8,747

 

 

 

147

 

 

 

(1,132

)

 

 

8,853

 

Income taxes

 

 

374

 

 

 

1,987

 

 

 

50

 

 

 

(376

)

 

 

2,035

 

Net Income

 

$

717

 

 

$

6,760

 

 

$

97

 

 

$

(756

)

 

$

6,818

 

    

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

 

Goodwill and Intangible Assets:

 

Goodwill associated with the Company’s purchase of First National Bank of Orrville in June of 2015, National Associates, Inc. in July of 2013 and Farmers Trust Company in 2009 totaled $32.3 million at September 30, 2015 and $5.6 million at December 31, 2014. The First National Bank acquisition is more fully described in the Business Acquisitions footnote.  Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Management performs goodwill impairment testing on an annual basis in as of September 30.  The fair value of the reporting unit is determined based on a discounted cash flow model.  

Acquired Intangible Assets

Acquired intangible assets were as follows:

 

 

September 30, 2015

 

 

December 31, 2014

 

(In Thousands of Dollars)

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship intangibles

$

5,970

 

 

$

(3,431

)

 

$

5,970

 

 

$

(2,972

)

Non-compete contracts

 

370

 

 

 

(318

)

 

 

370

 

 

 

(295

)

Trade name

 

190

 

 

 

(59

)

 

 

190

 

 

 

(41

)

Core deposit intangible

 

4,409

 

 

 

(138

)

 

 

0

 

 

 

0

 

Total

$

10,939

 

 

$

(3,946

)

 

$

6,530

 

 

$

(3,308

)

Aggregate amortization expense was $304 thousand and $638 thousand for the three and nine month periods ended September 30, 2015.  Amortization expense was $192 thousand and $575 thousand for the three and nine months ended September 30, 2014.

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

 

2015 (Three months)

$

305

 

2016

 

1,108

 

2017

 

1,022

 

2018

 

938

 

2019

 

862

 

Thereafter

 

2,758

 

TOTAL

$

6,993

 

 

Short-term borrowings:

There were $80 million in short-term Federal Home Loan Bank Advances at September 30, 2015 with a weighted average interest rate of 0.27%.  The Company also had a $350 thousand balance on a business line of credit with another lending institution at September 30, 2015.

34

 


The following table provides a disaggregation of the obligation by the class of collateral pledged for short-term financing obtained through the sales of repurchase agreements:

 

(In Thousands of Dollars)

September 30, 2015

 

Overnight and continuous repurchase agreements

 

 

 

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

$

7,566

 

State and political subdivisions

 

3,107

 

Mortgage-backed securities - residential

 

67,164

 

Collateralized mortgage obligations

 

5,242

 

Total borrowings

$

83,079

 

 

Management believes the risks associated with the agreements are minimal and in the case of collateral decline the company has additional investment securities available to adequately pledge as guarantees for the repurchase agreements.  

 

Item 2.

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

Forward Looking Statements

Discussions in this report that are not statements of historical fact (including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” and “plan”) are forward-looking statements that involve risks and uncertainties. Any forward-looking statement is not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “Commission”), including without limitation, the risk factors disclosed in Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Many of these factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on those forward-looking statements. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting the Company, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in these forward-looking statements:

 

·

general economic conditions in market areas where we conduct business, which could materially impact credit quality trends;

 

·

business conditions in the banking industry;

 

·

the regulatory environment;

 

·

fluctuations in interest rates;

 

·

demand for loans in the market areas where we conduct business;

 

·

rapidly changing technology and evolving banking industry standards;

 

·

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

 

·

new service and product offerings by competitors and price pressures; and other like items.

Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

 

On June 19, 2015, Farmers completed the merger of NBOH, the holding company for the First National Bank of Orrville.  Immediately following the merger, First National Bank was merged into the Bank.  This transaction resulted in the addition of $545 million in assets and 14 branch locations in Wayne, Medina and Stark counties in Ohio.

 

35

 


On October 1, 2015, Farmers completed the acquisition of Tri-State and the merger of Tri-State’s wholly-owned subsidiary, First National Community Bank, which operates 5 banking locations in Columbiana County in Ohio and Western Pennsylvania into the Bank.  At closing, Tri-State had approximately $139 million in assets, which included $54.3 million of demand deposits with an overall cost of deposits of 0.19%.  Under the terms of the agreement, shareholders of Tri-State elected to receive either 1.747 shares of Farmers common stock or $14.20 per share in cash, subject to an overall limitation of 75% of the shares being exchanged for Farmers shares and 25% for cash. Since this transaction was completed in October the financial statements do not reflect any transactions associated with this acquisition at September 30, 2015. Both acquisitions provide the Company the opportunity to expand into new markets and develop efficiencies of scale to drive future profits.  

 

Net income for the three months ended September 30, 2015 was $1.9 million, or $0.07 per diluted share, which compares to $2.3 million, or $0.12 per diluted share, for the three month period ended September 30, 2014. Merger expenses, net of tax, of $1.8 million related to acquisition activities accounted for the decline in net income for the three month period. Adjusted for the after tax expenses related to acquisition activities, net income would have been $3.7 million or $0.15 per diluted share.

Net income for the nine months ended September 30, 2015, reduced by merger activity expenses, was $4.9 million, compared to $6.8 million for the same nine month period in 2014. On a per share basis, net income for the nine months ended September 30, 2015 was $0.23, a decrease of 36.1% compared to the same nine month period in 2014. Excluding the after tax merger related expenses net income would have been $8.4 million or $0.40 per share for the nine month period ended September 30, 2015.

 

Annualized return on average assets and return on average equity were 0.43% and 3.97%, respectively, for the three month period ending September 30, 2015.  Excluding the tax effected expenses related to acquisition activities, the annualized return on average assets and the annualized return on average equity would have been 0.87% and 7.97%, respectively.

 

Annualized return on average assets for the nine month period ended September 30, 2015 was 0.48% compared to 0.80% for the nine month period in 2014. Excluding the tax equated merger expense the return on average assets for the nine month period ended September 30, 2015 would have been 0.83%.  The annualized return on average equity was 4.31% compared to 7.61% for the nine month periods ended September 30, 2015 and 2015, respectively. The return on equity for this year’s nine month period would have been 7.41% excluding tax equated merger costs.

 

Total loans were $1.18 billion at September 30, 2015, compared to $647.0 million at September 30, 2014.  Organic loan growth of 16% supplemented the increase from the NBOH acquisition, which amounted to $430 million.  The organic increase in loans is a direct result of Farmers’ focus on loan growth utilizing a talented lending and credit team, while adhering to a sound underwriting discipline. Most of the increase in loans has occurred in the commercial real estate, commercial and industrial and residential real estate loan portfolios.  Loans now comprise 73.8% of the Bank's average earning assets in 2015, an improvement compared to 59.6% in 2014.  This improvement along with the growth in earning assets organically and through merger activity has resulted in a 70.7% increase in tax equated loan income from the third quarter of 2014 to the same quarter in 2015.

 

Non-performing assets to total assets remain at nominal levels, currently at 0.62%.  Early stage delinquencies also continue to remain at low levels, at $6.9 million, or 0.58% of total loans, at September 30, 2015.  Net charge-offs for the current quarter were $211 thousand, which compares favorably to $1.3 million in the previous quarter and $448 thousand in the same quarter last year.

 

The net interest margin for the three months ended September 30, 2015 was 3.84%, a 26 basis points increase from the quarter ended September 30, 2014.  The increased margin is partially due to the additional accretion as a result of the discounted loan portfolio acquired in the NBOH merger and the higher mix of loans to assets on the balance sheet. Excluding the amortization of premium on time deposits and FHLB advances along with the accretion of the loan portfolio discount, the net interest margin would have been 9 basis points lower or 7.25% for the quarter ended September 30, 2015.

 

In comparing the first nine months of 2015 to the same period in 2014, asset yields increased 3 basis points, while the cost of interest-bearing liabilities decreased 13 basis points which results in the 3.72% annualized year to date net interest margin.

 

Noninterest income increased 20.8% to $4.7 million for the quarter ended September 30, 2015 compared to $3.9 million in 2014.  Deposit account income increased $218 thousand, or 31%, in the current year’s quarter compared to the same quarter in 2014 and gains on the sale of mortgage loans increased $301 thousand, or 264%, in comparing the same two quarters.

 

Farmers has remained committed to managing the level of noninterest expenses.  Total noninterest expenses for the third quarter of 2015 were $15.5 million.  Excluding expenses related to acquisition activities of $2.5 million, noninterest expenses were $13 million.  The noninterest expense, excluding merger costs, measured as a percentage of quarterly average assets decreased from 3.39% in the

36

 


third quarter of 2014 to 3.03% in the third quarter of 2015.  Salaries and employee benefits excluding severance expenses related to the merger as a percent of average assets decreased from 1.85% to 1.68%.  

 

Excluding expenses related to acquisition activities, the efficiency ratio for the quarter ended September 30, 2015 improved to 61.94% compared to 70.17% for the same quarter in 2014.  The main factors leading to the improvement in the efficiency ratio was the increase in net interest income and noninterest income, along with the stabilized level of noninterest expenses relative to average assets as explained in the preceding paragraphs.

 

Results of Operations

The following is a comparison of selected financial ratios and other results at or for the three and nine month periods ended September 30, 2015 and 2014:

 

 

At or for the Three Months

Ended September 30,

 

 

At or for the Nine Months

Ended September 30,

 

(In Thousands, except Per Share Data)

2015

 

 

2014

 

 

2015

 

 

2014

 

Total Assets

$

1,707,797

 

 

$

1,139,739

 

 

$

1,707,797

 

 

$

1,139,739

 

Net Income

$

1,857

 

 

$

2,276

 

 

$

4,880

 

 

$

6,818

 

Basic and Diluted Earnings Per Share

$

0.07

 

 

$

0.12

 

 

$

0.23

 

 

$

0.36

 

Return on Average Assets (Annualized)

 

0.43

%

 

 

0.79

%

 

 

0.48

%

 

 

0.80

%

Return on Average Equity (Annualized)

 

3.97

%

 

 

7.37

%

 

 

4.31

%

 

 

7.61

%

Efficiency Ratio (tax equivalent basis)

 

76.55

%

 

 

70.17

%

 

 

76.27

%

 

 

69.91

%

Equity to Asset Ratio

 

10.90

%

 

 

10.65

%

 

 

10.90

%

 

 

10.65

%

Tangible Common Equity Ratio *

 

8.80

%

 

 

9.88

%

 

 

8.80

%

 

 

9.88

%

Dividends to Net Income

 

41.46

%

 

 

24.56

%

 

 

38.42

%

 

 

24.71

%

Net Loans to Assets

 

68.79

%

 

 

56.12

%

 

 

68.79

%

 

 

56.12

%

Loans to Deposits

 

88.93

%

 

 

70.86

%

 

 

88.93

%

 

 

70.86

%

 

*

The tangible common equity ratio is calculated by dividing total common stockholders’ equity by total assets, after reducing both amounts by intangible assets. The tangible common equity ratio is not required by U.S. GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of the Company’s capital levels. Since there is no authoritative requirement to calculate the tangible common equity ratio, the Company’s tangible common equity ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-U.S. GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S. GAAP. With respect to the calculation of the actual unaudited tangible common equity ratio as of September 30, 2015 and 2014, reconciliations of tangible common equity to U.S. GAAP total common stockholders’ equity and tangible assets to U.S. GAAP total assets are set forth below:

 

 

Sept. 30,

 

 

December 31,

 

 

Sept. 30,

 

(In Thousands of Dollars)

 

2015

 

 

 

2014

 

 

 

2014

 

Reconciliation of Common Stockholders' Equity to Tangible Common Equity

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

$

186,151

 

 

$

123,560

 

 

$

121,401

 

Less Goodwill and Other Intangibles

 

39,265

 

 

 

8,813

 

 

 

9,768

 

Tangible Common Equity

$

146,886

 

 

$

114,747

 

 

$

111,633

 

 

 

Sept. 30,

 

 

December 31,

 

 

Sept. 30,

 

(In Thousands of Dollars)

 

2015

 

 

 

2014

 

 

 

2014

 

Reconciliation of Total Assets to Tangible Assets

 

 

 

 

 

 

 

 

 

 

 

Total Assets

$

1,707,797

 

 

$

1,136,967

 

 

$

1,139,739

 

Less Goodwill and Other Intangibles

 

39,265

 

 

 

8,813

 

 

 

9,768

 

Tangible Assets

$

1,668,532

 

 

$

1,128,154

 

 

$

1,129,971

 

 

37

 


Net Interest Income. The following schedule details the various components of net interest income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where applicable. Security yields are based on amortized cost.

 

 

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

September 30, 2015

 

 

September 30, 2014

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (3) (5) (6)

$

1,151,899

 

 

$

13,530

 

 

 

4.66

%

 

$

631,686

 

 

$

7,925

 

 

 

4.98

%

Taxable securities (4)

 

265,416

 

 

 

1,369

 

 

 

2.05

 

 

 

328,026

 

 

 

1,803

 

 

 

2.18

 

Tax-exempt securities (4) (6)

 

116,581

 

 

 

1,196

 

 

 

4.07

 

 

 

77,701

 

 

 

922

 

 

 

4.71

 

Equity securities (2)

 

7,593

 

 

 

48

 

 

 

2.51

 

 

 

4,282

 

 

 

47

 

 

 

4.35

 

Federal funds sold and other

 

19,615

 

 

 

9

 

 

 

0.18

 

 

 

18,919

 

 

 

8

 

 

 

0.17

 

TOTAL EARNING ASSETS

 

1,561,104

 

 

 

16,152

 

 

 

4.10

 

 

 

1,060,614

 

 

 

10,705

 

 

 

4.00

 

NONEARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

26,690

 

 

 

 

 

 

 

 

 

 

 

21,836

 

 

 

 

 

 

 

 

 

Premises and equipment

 

23,500

 

 

 

 

 

 

 

 

 

 

 

17,389

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(7,452

)

 

 

 

 

 

 

 

 

 

 

(7,292

)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

221

 

 

 

 

 

 

 

 

 

 

 

(748

)

 

 

 

 

 

 

 

 

Other assets (3)

 

95,808

 

 

 

 

 

 

 

 

 

 

 

52,264

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

1,699,871

 

 

 

 

 

 

 

 

 

 

$

1,144,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

257,822

 

 

$

616

 

 

 

0.95

%

 

$

214,578

 

 

$

865

 

 

 

1.60

%

Savings deposits

 

512,288

 

 

 

144

 

 

 

0.11

 

 

 

408,429

 

 

 

113

 

 

 

0.11

 

Demand deposits

 

267,700

 

 

 

149

 

 

 

0.22

 

 

 

126,506

 

 

 

9

 

 

 

0.03

 

Short term borrowings

 

109,795

 

 

 

59

 

 

 

0.21

 

 

 

74,280

 

 

 

11

 

 

 

0.06

 

Long term borrowings

 

51,651

 

 

 

88

 

 

 

0.68

 

 

 

18,852

 

 

 

130

 

 

 

2.74

 

TOTAL INTEREST-BEARING LIABILITIES

 

1,199,256

 

 

 

1,056

 

 

 

0.35

 

 

 

842,645

 

 

 

1,128

 

 

 

0.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST-BEARING LIABILITIES AND

   STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

303,188

 

 

 

 

 

 

 

 

 

 

 

167,543

 

 

 

 

 

 

 

 

 

Other liabilities

 

11,974

 

 

 

 

 

 

 

 

 

 

 

11,310

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

185,453

 

 

 

 

 

 

 

 

 

 

 

122,565

 

 

 

 

 

 

 

 

 

TOTAL LIABILTIES AND STOCKHOLDERS'

   EQUITY

$

1,699,871

 

 

 

 

 

 

 

 

 

 

$

1,144,063

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

 

$

15,096

 

 

 

3.75

%

 

 

 

 

 

$

9,577

 

 

 

3.47

%

Net interest margin

 

 

 

 

 

 

 

 

 

3.84

%

 

 

 

 

 

 

 

 

 

 

3.58

%

 

(1)

Rates are calculated on an annualized basis.

(2)

Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.

(3)

Non-accrual loans and overdraft deposits are included in other assets.

(4)

Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost.

(5)

Interest on loans includes fee income of $834 thousand and $599 thousand for 2015 and 2014, respectively, and is reduced by amortization of $640 thousand and $529 thousand for 2015 and 2014, respectively.

(6)

For 2015, adjustments of $145 thousand and $413 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. For 2014, adjustments of $25 thousand and $317 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. These adjustments are based on a marginal federal income tax rate of 35%, less disallowances.

 

38

 


Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

 

Nine Months Ended

September 30, 2015

 

 

Nine Months Ended

September 30, 2014

 

 

AVERAGE

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

 

AVERAGE

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (3) (5) (6)

$

852,094

 

 

$

30,129

 

 

 

4.73

%

 

$

625,023

 

 

$

23,381

 

 

 

5.00

%

Taxable securities (4)

 

278,538

 

 

 

4,421

 

 

 

2.12

 

 

 

336,783

 

 

 

5,512

 

 

 

2.19

 

Tax-exempt securities (4) (6)

 

93,874

 

 

 

3,149

 

 

 

4.48

 

 

 

81,992

 

 

 

2,891

 

 

 

4.71

 

Equity securities (2) (6)

 

5,564

 

 

 

142

 

 

 

3.41

 

 

 

4,282

 

 

 

142

 

 

 

4.43

 

Federal funds sold and other

 

21,071

 

 

 

20

 

 

 

0.13

 

 

 

13,714

 

 

 

17

 

 

 

0.17

 

TOTAL EARNING ASSETS

 

1,251,141

 

 

 

37,861

 

 

 

4.05

 

 

 

1,061,794

 

 

 

31,943

 

 

 

4.02

 

NONEARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

18,063

 

 

 

 

 

 

 

 

 

 

 

20,404

 

 

 

 

 

 

 

 

 

Premises and equipment

 

19,558

 

 

 

 

 

 

 

 

 

 

 

17,464

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(7,553

)

 

 

 

 

 

 

 

 

 

 

(7,352

)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

1,698

 

 

 

 

 

 

 

 

 

 

 

(2,979

)

 

 

 

 

 

 

 

 

Other assets (3)

 

70,834

 

 

 

 

 

 

 

 

 

 

 

51,221

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

1,353,741

 

 

 

 

 

 

 

 

 

 

$

1,140,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

221,576

 

 

$

2,120

 

 

 

1.28

%

 

$

220,135

 

 

$

2,691

 

 

 

1.63

%

Savings deposits

 

444,161

 

 

 

371

 

 

 

0.11

 

 

 

409,664

 

 

 

352

 

 

 

0.11

 

Demand deposits

 

184,057

 

 

 

184

 

 

 

0.13

 

 

 

127,049

 

 

 

27

 

 

 

0.03

 

Short term borrowings

 

80,721

 

 

 

86

 

 

 

0.14

 

 

 

73,463

 

 

 

35

 

 

 

0.06

 

Long term borrowings

 

39,449

 

 

 

306

 

 

 

1.04

 

 

 

21,664

 

 

 

396

 

 

 

2.44

 

TOTAL INTEREST-BEARING LIABILITIES

 

969,964

 

 

 

3,067

 

 

 

0.42

 

 

 

851,975

 

 

 

3,501

 

 

 

0.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

221,555

 

 

 

 

 

 

 

 

 

 

 

159,493

 

 

 

 

 

 

 

 

 

Other liabilities

 

10,727

 

 

 

 

 

 

 

 

 

 

 

9,250

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

151,495

 

 

 

 

 

 

 

 

 

 

 

119,834

 

 

 

 

 

 

 

 

 

TOTAL LIABILTIES AND STOCKHOLDERS'

   EQUITY

$

1,353,741

 

 

 

 

 

 

 

 

 

 

$

1,140,552

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

 

$

34,794

 

 

 

3.63

%

 

 

 

 

 

$

28,442

 

 

 

3.47

%

Net interest margin

 

 

 

 

 

 

 

 

 

3.72

%

 

 

 

 

 

 

 

 

 

 

3.57

%

 

(1)

Rates are calculated on an annualized basis.

(2)

Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.

(3)

Non-accrual loans and overdraft deposits are included in other assets.

(4)

Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost.

(5)

Interest on loans includes fee income of $2.1 million and $1.8 million for 2015 and 2014 respectively and is reduced by amortization of $1.7 million and $1.6 million for 2015 and 2014 respectively.

(6)

For 2015, adjustments of $426 thousand and $1.1 million, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. For 2014, adjustments of $358 thousand and $991 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. These adjustments are based on a marginal federal income tax rate of 35%, less disallowances.

Net Interest Income.  Tax equated net interest income was $15.1 million for the third quarter of 2015 compared to $9.6 million for the same period in 2014.  The net interest margin to average earning assets on a fully taxable equivalent basis increased 26 basis points to 3.84% for the three months ended September 30, 2015, compared to 3.58% for the same three month period in the prior year.  In comparing the quarters ended September 30, 2015 and 2014, yields on earning assets increased 10 basis points, while the cost of interest bearing liabilities decreased 18 basis points. The increase in net interest margin was mainly a result of time deposits with higher interest rates maturing and then being moved to products with lower interest rates or leaving the bank. Time deposit costs for the three month period ended September 30, 2015 decreased 65 basis points compared to the same period in 2014.  Loan income now comprises a larger share of interest income compared to the third quarter of 2014.

39

 


Tax equated net interest income increased to $34.8 million for the nine month period ended September 30 2015, compared to $28.4 million in the same period in 2014. The annualized net interest margin to average earning assets on a fully taxable equivalent basis was 3.72% for the nine months ended September 30, 2015, compared to 3.57% for the same period in the prior year.  The increase is primarily a result of factors similar to the three months results previously stated.

 

Noninterest Income.  Noninterest income increased 20.1% to $4.7 million for the quarter ended September 30, 2015 compared to $3.9 million in 2014.  Gains on the sale of mortgage loans increased $301 thousand or 264% and deposit account income increased $218 thousand or 30.1% in comparing the same two quarters. The increased fees are mainly the result of additional volume provided by the addition of NBOH this year.  Insurance agency commissions increased $45 thousand or 52.9% in the current year’s quarter compared to the same quarter in 2014.  

Noninterest income for the nine months ended September 30, 2015 was $13.1 million, compared to $11.1 million during the same period in 2014. The increase was the result of many of the same factors affecting the quarterly numbers.  In addition, retirement plan consulting fees increased to $1.7 million compared to $1.4 million during the same nine month period in 2014.  Gains on the sale of mortgage loans increased from $250 thousand for the nine month period ended September 30, 2014 to $694 thousand for the current year nine month period ended September 30, 2015. Other operating income increased $628 thousand for the nine month period ended September 30, 2015 compared to the same period in 2014 and can be attributed mostly to increased debit and credit card fee income along with the additional income from the investment in the FNB Capital Partners that has now been in place for the entire nine month period of 2015.

Noninterest Expense.  Noninterest expense totaled $15.5 million for the three month period ended September 30, 2015, which was $5.7 million more than the $9.8 million during the same quarter in 2014.  The increase is primarily the result of $2.5 million in merger related costs associated with the 2015 acquisitions of NBOH and Tri-State. There also was an additional $495 thousand expense recorded related to the contingency consideration associated with the 2013 acquisition of NAI, Inc. during the quarter ended September 30, 2015. There was an increase of $1.9 million in salaries and employee benefits during the current quarter compared to the same quarter in 2014 as a result of the additional employees from the NBOH acquisition. As of September 30, 2015 and December 31, 2014, there were 327 and 408 Full Time Equivalents, respectively. There was a reduction of 26 Full Time Equivalents during the three month period ended September 30, 2015 that will help reduce noninterest going forward.

Noninterest expenses for the nine months ended September 30, 2015 was $37.4 million, compared to $28.3 million for the same period in 2014, representing an increase of $9.1 million, or 32.0%. The increase is the result of the $4.7 million in merger costs and $3.0 million increase in salaries and employee benefits as mention above.

The Company’s tax equivalent efficiency ratio for the three month period ended September 30, 2015 was 76.6% compared to 70.2% for the same period in 2014. The negative change in the efficiency ratio was the result of the $2.5 million in merger costs. Excluding merger costs the quarterly efficiency ratio would have been 61.9%.

The tax equivalent efficiency ratio for the nine month period ended September 30, 2015 was 76.3% compared to 69.9% for the nine month period ended September 30, 2014.  Excluding the merger costs for the nine month period ended September 30, 2015 the ratio was 66.3%. Management has continued to focus on increasing the levels of noninterest income and reducing the level of noninterest expenses.

Income Taxes. Income tax expense totaled $625 thousand for the quarter ended September 30, 2015 and $688 thousand for the quarter ended September 30, 2014. As discussed in previous paragraphs the increased merger costs negatively impacted net income therefore reducing overall tax expense for the period.  The effective tax rate for the three month period ended September 30, 2015 was 25.2% which compared to the effective tax rate of 23.2% for the same period in 2014.  The increase in the current period’s rate is a result of the $495 thousand contingent cash consideration payment expense not being tax deductible and some merger related expenses not being fully tax deductible.   

Income tax expense was $1.7 million for the first nine months of 2015 and $2.0 million for the first nine months of 2014.  The effective tax rate for the nine month period of 2015 was 25.3%, compared to 23.0% for the same period in 2014.  The effective tax rate increase over the same period in 2014 was due to the non-deductibility of the contingent payment expense of $1.3 million during the nine month period ended September 30, 2015.

Other Comprehensive Income.  For the quarter ended September 30, 2015, the change in net unrealized gains or losses on securities, net of reclassifications, resulted in an unrealized gain, net of tax, of $2.3 million, compared to an unrealized gain of $342 thousand for the same period in 2014. The increase in fair value of securities for the three month period ended September 30, 2015 compared to 2014 is the result of market interest rate fluctuations.

40

 


For the nine months of 2015, the change in net unrealized gains on securities, net of reclassifications, resulted in an unrealized gain, net of tax, of $242 thousand, compared to an unrealized gain of $4.9 million for the same period in 2014. The increase in fair value of securities for the three month period and the modest increase during the nine month period ended September 30, 2015 is the result of the market’s reaction to projected long term interest rates.

Financial Condition

Cash and Cash Equivalents. Cash and cash equivalents increased $6.9 million during the first nine months of 2015. The newly acquired bank entity contributed $37.0 million in cash and cash equivalents to the combined company.  Cash was used to help fund the cash portion of the acquisition and to support the lending activity of the newly combined company. The Company expects these levels to remain steady over the next few months.

Securities. Securities available-for-sale decreased by $10.7 million since December 31, 2014.  With the additional $51.3 million in securities brought by the purchase of NBOH the Company used proceeds from both maturing securities and sales of securities to help fund the purchase of both NBOH and Tri-State, to fund the loan portfolio growth and to purchase additional bank owned life insurance during the first nine months of 2015.

Loans. Gross loans increased $519.2 million since December 31, 2014.  Most of the increase in loans is a result of the $430.5 million in additional loans acquired in the NBOH transaction and $88.7 million in organic loan growth.  The Bank utilized a talented lending and credit team while adhering to a sound underwriting discipline to increase the loan portfolio. Most of the increase in loans has occurred in the commercial real estate, commercial and industrial and residential real estate loan portfolios. On a fully tax equivalent basis, loans contributed $30.1 million of total interest income during the nine month period ended September 30, 2015 compared to $23.4 million for the same period in 2014.

 Allowance for Loan Losses. The following table indicates key asset quality ratios that management evaluates on an ongoing basis. The unpaid principal balance of non-performing loans and non-performing assets was used in the calculation of amounts and ratios on the table below for quarters prior to the current quarter ended September 30, 2015.  For the current quarter, recorded investment amounts were used in the calculations.

 

Asset Quality History

(In Thousands of Dollars)

 

 

9/30/2015

 

 

6/30/2015

 

 

3/31/2015

 

 

12/31/2014

 

 

9/30/2014

 

Nonperforming loans

$

9,620

 

 

$

7,984

 

 

$

7,939

 

 

$

8,481

 

 

$

7,218

 

Nonperforming loans as a % of total loans

 

0.81

%

 

 

0.70

%

 

 

1.18

%

 

 

1.28

%

 

 

1.12

%

Loans delinquent 30-89 days

$

6,974

 

 

$

7,146

 

 

$

4,344

 

 

$

5,426

 

 

$

4,938

 

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

 

0.59

%

 

 

0.63

%

 

 

0.64

%

 

 

0.82

%

 

 

0.76

%

Allowance for loan losses

$

8,294

 

 

$

7,286

 

 

$

7,723

 

 

$

7,632

 

 

$

7,333

 

Allowance for loan losses as a % of loans

 

0.70

%

 

 

0.64

%

 

 

1.15

%

 

 

1.15

%

 

 

1.13

%

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

 

1.08

%

 

 

1.03

%

 

 

1.15

%

 

 

1.15

%

 

 

1.13

%

Allowance for loan losses as a % of nonperforming loans

 

86.22

%

 

 

91.26

%

 

 

97.28

%

 

 

89.99

%

 

 

101.58

%

Annualized net charge-offs to average net loans

   outstanding

 

0.10

%

 

 

0.71

%

 

 

0.22

%

 

 

0.33

%

 

 

0.28

%

Non-performing assets

$

10,672

 

 

$

9,112

 

 

$

8,083

 

 

$

8,629

 

 

$

7,600

 

Non-performing assets as a % of total assets

 

0.62

%

 

 

0.54

%

 

 

0.71

%

 

 

0.76

%

 

 

0.67

%

Net charge-offs for the quarter

$

211

 

 

$

1,292

 

 

$

359

 

 

$

526

 

 

$

448

 

 

For the three months ended September 30, 2015, management recorded a $1.2 million provision for loan losses, compared to providing $425 thousand over the same three month period in the prior year. The larger provision recorded for the three month period ended September 30, 2015 was primarily a result of the loan portfolio’s growth and higher than normal charge-offs due to one owner-occupied commercial real estate loan relationship. The increase in the allowance for loan losses was consistent with the percentage of growth in total loans for the three month period ended September 30, 2015 as compared to the same period in 2014. The ratio of allowance for loan losses to gross loans decreased to .70% compared to 1.15% at December 31, 2014.  The decrease is the result of the additional loan portfolio acquired at fair market value without an allowance for loan losses as displayed in the allowance for loan losses as a percentage of non-acquired loans. When the acquired loans are excluded the ratio is 1.08% and compares similarly with the periods presented in the above table.  Non-performing loans as a percentage of total loans decreased from 1.28% at December 31, 2014 to .81% at September 30, 2015. Even with the reduction in the percentage of non-performing loans to total loans as compared to December 31, 2014 the percentage of the allowance for loan losses to non-performing loans decreased from 90.0% at December 31, 2014 to 86.2% at September 30, 2015.

41

 


Based on the evaluation of the adequacy of the allowance for loan losses, management believes that the allowance for loan losses at September 30, 2015 is adequate and reflects probable incurred losses in the portfolio. The provision for loan losses is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

Deposits. Total deposits increased $414.5 million from $915.7 million at December 31, 2014 to $1.3 billion at September 30, 2015.  The increase in deposits is the result of the $423.7 million in deposits acquired with the NBOH transaction.  The company experienced a small amount of runoff in the deposit portfolio during the first nine months of 2015 as customers seek out other investment options in search of higher returns.  All deposit types have shown increases as a result of the acquisition as non-interest bearing deposits increased $114.4 million during the first nine month period of 2015. The Company’s strategy is to maintain deposit balances while pricing deposit rates to remain competitive within the market. At September 30, 2015, core deposits, which include, savings and money market accounts, time deposits less than $250 thousand, demand deposits and interest bearing demand deposits represented approximately 96.7% of total deposits.

Borrowings. Total borrowings increased $92.2 million, or 105.3%, since December 31, 2014. The increase in borrowings is the result of the Company assuming $52.0 million in Federal Home Loan Bank advances, $13.5 million in securities sold under repurchase agreements from the acquisition and the continued growth in the loan portfolio during the nine month period ended September 30, 2015.

Capital Resources. Total stockholders’ equity increased to $186.2 million, or 10.9% of total assets, at September 30, 2015, an increase of $62.6 million, compared to $123.6 million at December 31, 2014.  The increase is due to the $59.0 million of stock that was issued as part of the purchase price of NBOH.  Shareholders have received $0.03 per share in cash dividends each quarter over the last four quarters. Book value per share increased from $6.71 per share at December 31, 2014 to $7.25 per share at September 30, 2015.  The Company’s tangible book value per share decreased from $6.23 per share at December 31, 2014 to $5.72 per share at September 30, 2015.  The increase in book value was due to the issuance of shares in the NBOH acquisition.  The tangible book value per share decline can be attributed to the creation of goodwill and other intangible assets.

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company. New minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III) and are being phased in beginning on January 1, 2015 through January 1, 2019. At September 30, 2015 the Company is required to maintain 4.5% common equity tier 1 to risk weighted assets. As of September 30, 2015 the Company’s common equity tier 1 to risk weighted assets was 12.24%, total risk-based capital ratio stood at 12.87%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 12.24% and 9.59%, respectively. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of September 30, 2015.

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified two accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for loan losses and other-than-temporary impairment of securities. Additional information regarding these policies is included in the notes to the aforementioned 2014 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 2 (Securities), Note 3 (Loans), and the sections captioned “Investment Securities” and “Loan Portfolio.”

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. U.S. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Company’s trust and NAI subsidiaries to provide quality, cost-effective services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. U.S. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair

42

 


value of the goodwill, which resides on the books of the Trust and NAI, is estimated by reviewing the past and projected operating results for the subsidiaries and comparable industry information.

Liquidity

The Company maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Company’s ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. The Company’s objective in liquidity management is to maintain the ability to meet loan commitments, purchase securities or to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings. Principal sources of liquidity for the Company include assets considered relatively liquid, such as federal funds sold, cash and due from banks, as well as cash flows from maturities and repayments of loans, and securities.

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at major domestic banks. At September 30, 2015, these lines of credit totaled $39.0 million of which the Bank had not borrowed against these lines. In addition, the Company has two revolving lines of credit with correspondent banks totaling $6.5 million. The outstanding balance at September 30, 2015 was $350 thousand. Management feels that its liquidity position is adequate and continues to monitor the position on a monthly basis. As of September 30, 2015, the Bank had outstanding balances with the Federal Home Loan Bank of Cincinnati (“FHLB”) of $96.3 million with additional borrowing capacity of approximately $135.0 million with the FHLB as well as access to the Federal Reserve Discount Window, which provides an additional source of funds. The Bank views its membership in the FHLB as a solid source of liquidity.

The primary investing activities of the Company are originating loans and purchasing securities. During the first nine months of 2015, net cash used by investing activities amounted to $16.1 million, compared to $8.8 million provided in the same period in 2014.  Loan originations were very robust and used $91.7 million during the first nine months of 2015 compared to the $17.9 million used during the same period in 2014. The cash used by lending activities during this period can be attributed to the positive activity in the consumer real estate and commercial loan portfolios. Net cash received from the NBOH acquisition provided $21.3 million dollars.  Proceeds from maturities and repayments of securities available for sale were up to $44.0 million from $35.9 million during the first nine months of 2014.  Proceeds from sales of securities available for sale amounted to $58.2 million provided during the first nine months of 2015 compared to $34.2 million provided during the same period in 2014.  Cash from the security pay-downs and sales was used to help fund a portion of the acquisition costs associated with the NBOH transaction.  The Company also used $6.0 million to purchase additional bank owned life insurance.

The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings. Net cash provided by financing activities amounted to $15.7 million for the period ended September 30, 2015, compared to $16.4 million used in financing activities for the same period in 2014. There were large swings in activity during the nine month period ended September 30, 2015 compared to the same period last year. Short and long term net borrowing changes used $10.8 million in the nine month period ended September 30, 2014 compared to providing a net $26.6 million during the nine month period ended September 30, 2105. Deposits used $9.1 million compared to $2.2 million during the nine month periods ended September 30, 2015 and 2014 respectiviely.

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The Bank’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $246.2 million at September 30, 2015 and $150.0 at December 31, 2014 as the Bank assumed commitments made by NBOH.  Additionally, the Company has committed up to a $3 million subscription in a Small Business Investment Company fund (SBIC).  At September 30, 2015 the Company had invested $2.4 million in this fund.

43

 


Recent Market and Regulatory Developments

In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant provisions of the Dodd-Frank Act.  The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds.  Community banking organizations, such as the Company and the Bank, become subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over the period of 2015 through 2019.

The final rule:

 

·

Permits banking organizations that had less than $15 billion in total consolidated assets as of December 31, 2009 to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock that were issued and included in Tier 1 capital prior to May 19, 2010, subject to a limit of 25% of Tier 1 capital elements, excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments have been applied to Tier 1 capital.

 

·

Establishes new qualifying criteria for regulatory capital, including new limitations on the inclusion of deferred tax assets and mortgage servicing rights.

 

·

Requires a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%.

 

·

Increases the minimum Tier 1 capital to risk-weighted assets ratio requirement from 4% to 6%.

 

·

Retains the minimum total capital to risk-weighted assets ratio requirement of 8%.

 

·

Establishes a minimum leverage ratio requirement of 4%.

 

·

Retains the existing regulatory capital framework for 1-4 family residential mortgage exposures.

 

·

Permits banking organizations that are not subject to the advanced approaches rule, such as the Company and the Bank, to retain, through a one-time election, the existing treatment for most accumulated other comprehensive income, such that unrealized gains and losses on securities available for sale will not affect regulatory capital amounts and ratios.

 

·

Implements a new capital conservation buffer requirement for a banking organization to maintain a common equity capital ratio more than 2.5% above the minimum common equity Tier 1 capital, Tier 1 capital and total risk-based capital ratios in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments. The capital conservation buffer requirement will be phased in beginning on January 1, 2016 at 0.625% and will be fully phased in at 2.50% by January 1, 2019.  A banking organization with a buffer of less than the required amount would be subject to increasingly stringent limitations on such distributions and payments as the buffer approaches zero. The new rule also generally prohibits a banking organization from making such distributions or payments during any quarter if its eligible retained income is negative and its capital conservation buffer ratio was 2.5% or less at the end of the previous quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income.

 

·

Increases capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term commitments and securitization exposures.

 

·

Expands the recognition of collateral and guarantors in determining risk-weighted assets.

 

·

Removes references to credit ratings consistent with the Dodd Frank Act and establishes due diligence requirements for securitization exposures.

The Company’s management is currently evaluating the provisions of the final rule and their expected impact on the Company.

Various legislation affecting financial institutions and the financial industry will likely continue to be introduced in Congress, and such legislation may further change banking statutes and the operating environment of the Company in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries. With the enactment of the Dodd-Frank Act, the nature and extent of future legislative and regulatory changes affecting financial institutions remains very unpredictable at this time.

44

 


Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company.

 

Item  3.

Quantitative and Qualitative Disclosures About Market Risk

The Company’s ability to maximize net income is dependent, in part, on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of the Company are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. Additionally, the Company’s balance sheet is currently liability sensitive and in the low interest rate environment that exists today, the Company’s net interest margin should maintain current levels throughout the near future.

The Company considers the primary market exposure to be interest rate risk. Simulation analysis is used to monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income. The following table shows the effect on net interest income and the net present value of equity in the event of a sudden and sustained 300 basis point increase or 100 basis decrease in market interest rates:

 

Changes In Interest Rate

(basis points)

September 30,

2015

Result

 

 

December 31,

2014

Result

 

 

ALCO

Guidelines

 

Net Interest Income Change

 

 

 

 

 

 

 

 

 

 

 

+300

 

3.3

%

 

 

2.2

%

 

 

15

%

+200

 

2.6

%

 

 

1.9

%

 

 

10

%

+100

 

1.5

%

 

 

1.2

%

 

 

5

%

-100

 

-3.8

%

 

 

-4.0

%

 

 

5

%

Net Present Value Of Equity Change

 

 

 

 

 

 

 

 

 

 

 

+300

 

-0.6

%

 

 

-4.6

%

 

 

20

%

+200

 

1.1

%

 

 

-1.3

%

 

 

15

%

+100

 

1.7

%

 

 

0.8

%

 

 

10

%

-100

 

-7.0

%

 

 

-6.7

%

 

 

10

%

 

The results of the simulation indicate that in an environment where interest rates rise 100, 200 and 300 basis points or fall 100 basis points over a 12 month period, using September 30, 2015 amounts as a base case, and considering the increase in deposit liabilities, and the volatile financial markets. The results of this analysis comply with internal limits established by the Company. A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis. The Company has no market risk sensitive instruments held for trading purposes, nor does it hold derivative financial instruments, and does not plan to purchase these instruments in the near future.

 

Item  4.

Controls and Procedures

Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

In the opinion of management there are no outstanding legal actions that will have a material adverse effect on the Company’s financial condition or results of operations.

 

 

45

 


Item 1A.

Risk Factors  

There have been no material changes to the Company’s risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Purchases of equity securities by the issuer.

On September 28, 2012, the Company announced that its Board of Directors approved a stock repurchase program that authorizes the repurchase of up to 920,000 shares of its outstanding common stock in the open market or in privately negotiated transactions. There were no shares purchased during the nine month period ended September 30, 2015.

During the acquisition of NBOH there were 7,262,955 shares issued as part of the transaction that was completed on June 18, 2015.

 

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

 

 

Item 4.

Mine Safety Disclosures

Not applicable.

 

 

Item 5.

Other Information

Not applicable.

 

 

 

46

 


Item 6.

Exhibits  

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

 

2.1

Agreement and Plan of Merger by and among Tri-State 1st Banc, Inc., Farmers National Banc Corp. and FMNB Merger Subsidiary, LLC, dated as of June 23, 2015 (incorporated by reference from Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 29, 2015).

 

 

3.1

Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on October 3, 2001 (File No. 333-70806)).

 

 

3.2

Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2013).

 

 

3.3

Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011 filed with the Commission on August 9, 2011).

 

 

10.1*

Farmers National Banc Corp. Form of Notice of Grant and Restricted Stock Award Agreement under 2012 Equity Incentive Plan (filed herewith)

 

 

10.2*

Farmers National Banc Corp. Amended and Restated Executive Separation Policy (filed herewith)

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Kevin J. Helmick, President and Chief Executive Officer of the Company (filed herewith).

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Carl D. Culp, Executive Vice President, Chief Financial Officer and Treasurer of the Company (filed herewith).

 

 

32.1

Certification pursuant to 18 U.S.C. Section 1350 of Kevin J. Helmick, President and Chief Executive Officer of the Company (filed herewith).

 

 

32.2

Certification pursuant to 18 U.S.C. Section 1350 of Carl D. Culp, Executive Vice President, Chief Financial Officer and Treasurer of the Company (filed herewith).

 

 

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; and (v) Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text.

 

 

*  Constitutes a management contract or compensatory plan or arrangement.

 

 

47

 


SIGNATURES

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

FARMERS NATIONAL BANC CORP.

Dated: November 9, 2015

 

/s/ Kevin J. Helmick

Kevin J. Helmick
President and Chief Executive Officer

Dated: November 9, 2015

 

/s/ Carl D. Culp

Carl D. Culp
Executive Vice President and Treasurer

 

48