Attached files
file | filename |
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EX-32 - EXHIBIT 32 - FARMERS CAPITAL BANK CORP | ex_111808.htm |
EX-31.2 - EXHIBIT 31.2 - FARMERS CAPITAL BANK CORP | ex_111805.htm |
EX-31.1 - EXHIBIT 31.1 - FARMERS CAPITAL BANK CORP | ex_111804.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 March 31, 2018
Farmers Capital Bank Corporation |
(Exact name of registrant as specified in its charter) |
Kentucky |
000-14412 |
61-1017851 |
||
(State or other jurisdiction of incorporation or organization) |
(Commission File Number) |
(IRS Employer Identification No.) |
P.O. Box 309 202 West Main St. Frankfort, KY |
40601 |
|
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code – (502) 227-1668
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report.) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common stock, par value $0.125 per share
7,519,814 shares outstanding at May 1, 2018
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION |
|
Item 1. Condensed Consolidated Financial Statements |
|
Unaudited Condensed Consolidated Balance Sheets |
3 |
Unaudited Condensed Consolidated Statements of Income |
4 |
Unaudited Condensed Consolidated Statements of Comprehensive Income |
5 |
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity |
6 |
Unaudited Condensed Consolidated Statements of Cash Flows |
7 |
Notes to Unaudited Condensed Consolidated Financial Statements |
8 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
32 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
46 |
Item 4. Controls and Procedures |
46 |
PART II - OTHER INFORMATION |
|
Item 1. Legal Proceedings |
47 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
47 |
Item 6. Exhibits |
47 |
SIGNATURES |
50 |
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets
March 31, |
December 31, |
|||||||
(In thousands, except share and per share data) |
2018 |
2017 |
||||||
Assets |
||||||||
Cash and cash equivalents: |
||||||||
Cash and due from banks |
$ | 22,143 | $ | 25,581 | ||||
Interest bearing deposits in other banks |
96,099 | 58,154 | ||||||
Money market mutual funds |
34,979 | 36,673 | ||||||
Total cash and cash equivalents |
153,221 | 120,408 | ||||||
Investment securities: |
||||||||
Available for sale, amortized cost of $411,995 (2018) and $427,831 (2017) |
402,288 | 423,318 | ||||||
Equity investments, amortized cost of $1,560 (2018) and $864 (2017) |
1,575 | 935 | ||||||
Held to maturity, fair value of $3,424 (2018) and $3,478 (2017) |
3,350 | 3,364 | ||||||
Total investment securities |
407,213 | 427,617 | ||||||
Loans, net of unearned income |
1,035,469 | 1,035,263 | ||||||
Allowance for loan losses |
(9,748 | ) | (9,783 | ) | ||||
Loans, net |
1,025,721 | 1,025,480 | ||||||
Premises and equipment, net |
30,909 | 30,928 | ||||||
Company-owned life insurance |
30,731 | 30,817 | ||||||
Other real estate owned |
5,087 | 5,489 | ||||||
Other assets |
33,105 | 33,133 | ||||||
Total assets |
$ | 1,685,987 | $ | 1,673,872 | ||||
Liabilities |
||||||||
Deposits: |
||||||||
Noninterest bearing |
$ | 375,645 | $ | 361,855 | ||||
Interest bearing |
1,018,446 | 1,018,048 | ||||||
Total deposits |
1,394,091 | 1,379,903 | ||||||
Securities sold under agreements to repurchase |
33,343 | 34,252 | ||||||
Federal Home Loan Bank advances |
3,436 | 3,479 | ||||||
Subordinated notes payable to unconsolidated trusts |
33,506 | 33,506 | ||||||
Dividends payable, common stock |
940 | 939 | ||||||
Other liabilities |
26,643 | 28,440 | ||||||
Total liabilities |
1,491,959 | 1,480,519 | ||||||
Shareholders’ Equity |
||||||||
Common stock, par value $.125 per share; 14,608,000 shares authorized; 7,519,445 and 7,517,446 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively |
940 | 940 | ||||||
Capital surplus |
52,278 | 52,201 | ||||||
Retained earnings |
148,535 | 143,778 | ||||||
Accumulated other comprehensive loss |
(7,725 | ) | (3,566 | ) | ||||
Total shareholders’ equity |
194,028 | 193,353 | ||||||
Total liabilities and shareholders’ equity |
$ | 1,685,987 | $ | 1,673,872 |
See accompanying notes to unaudited condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Income
Three Months Ended |
||||||||
March 31, |
||||||||
(In thousands, except per share data) |
2018 |
2017 |
||||||
Interest Income |
||||||||
Interest and fees on loans |
$ | 12,469 | $ | 11,722 | ||||
Interest on investment securities: |
||||||||
Taxable |
2,025 | 1,900 | ||||||
Nontaxable |
475 | 591 | ||||||
Interest on deposits in other banks |
269 | 142 | ||||||
Interest on federal funds sold and money market mutual funds |
106 | 24 | ||||||
Total interest income |
15,344 | 14,379 | ||||||
Interest Expense |
||||||||
Interest on deposits |
586 | 533 | ||||||
Interest on securities sold under agreements to repurchase |
19 | 25 | ||||||
Interest on Federal Home Loan Bank advances |
28 | 160 | ||||||
Interest on subordinated notes payable to unconsolidated trusts |
254 | 198 | ||||||
Total interest expense |
887 | 916 | ||||||
Net interest income |
14,457 | 13,463 | ||||||
Provision for loan losses |
(261 | ) | 580 | |||||
Net interest income after provision for loan losses |
14,718 | 12,883 | ||||||
Noninterest Income |
||||||||
Service charges and fees on deposits |
1,912 | 1,958 | ||||||
Allotment processing fees |
720 | 715 | ||||||
Other service charges, commissions, and fees |
1,372 | 1,372 | ||||||
Trust income |
789 | 704 | ||||||
Net loss on sales of available for sale investment securities |
- | (9 | ) | |||||
Gains on sale of mortgage loans, net |
95 | 154 | ||||||
Income from company-owned life insurance |
293 | 235 | ||||||
Other |
20 | 122 | ||||||
Total noninterest income |
5,201 | 5,251 | ||||||
Noninterest Expense |
||||||||
Salaries and employee benefits |
7,490 | 7,860 | ||||||
Occupancy expenses, net |
1,254 | 1,214 | ||||||
Equipment expenses |
601 | 553 | ||||||
Data processing and communication expenses |
1,083 | 1,293 | ||||||
Bank franchise tax |
500 | 557 | ||||||
Deposit insurance expense |
126 | 137 | ||||||
Other real estate expenses, net |
117 | 74 | ||||||
Other |
1,947 | 1,841 | ||||||
Total noninterest expense |
13,118 | 13,529 | ||||||
Income before income taxes |
6,801 | 4,605 | ||||||
Income tax expense |
1,160 | 1,276 | ||||||
Net income |
$ | 5,641 | $ | 3,329 | ||||
Per Common Share |
||||||||
Net income – basic and diluted |
$ | .75 | $ | .44 | ||||
Cash dividends declared |
.125 | .10 | ||||||
Weighted Average Common Shares Outstanding |
||||||||
Basic and diluted |
7,518 | 7,510 |
See accompanying notes to unaudited condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Comprehensive Income
Three Months Ended |
||||||||
March 31, |
||||||||
(In thousands) |
2018 |
2017 |
||||||
Net Income |
$ | 5,641 | $ | 3,329 | ||||
Other comprehensive (loss) income: |
||||||||
Unrealized holding (loss) gain on available for sale securities arising during the period, net of tax of $(1,093) and $510, respectively |
(4,102 | ) | 948 | |||||
Reclassification adjustment for net realized loss included in net income, net of tax of $- and $(3), respectively |
- | 6 | ||||||
Change in unfunded portion of postretirement benefit obligation, net of tax of $- and $32, respectively |
(1 | ) | 59 | |||||
Other comprehensive (loss) income |
(4,103 | ) | 1,013 | |||||
Comprehensive income |
$ | 1,538 | $ | 4,342 |
See accompanying notes to unaudited condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity
(In thousands, except per share data) |
Accumulated |
|||||||||||||||||||||||
Other |
Total |
|||||||||||||||||||||||
Three months ended |
Common Stock |
Capital |
Retained |
Comprehensive |
Shareholders’ |
|||||||||||||||||||
March 31, 2018 and 2017 |
Shares |
Amount |
Surplus |
Earnings |
(Loss) Income |
Equity |
||||||||||||||||||
Balance at January 1, 2018 |
7,517 | $ | 940 | $ | 52,201 | $ | 143,778 | $ | (3,566 | ) | $ | 193,353 | ||||||||||||
Net income |
- | - | - | 5,641 | - | 5,641 | ||||||||||||||||||
Other comprehensive loss |
- | - | - | - | (4,103 | ) | (4,103 | ) | ||||||||||||||||
Adoption of Accounting Standards Update 2016-01 |
- | - | - | 56 | (56 | ) | - | |||||||||||||||||
Cash dividends declared – common, $.125 per share |
- | - | - | (940 | ) | - | (940 | ) | ||||||||||||||||
Shares issued under director compensation plan |
- | - | 18 | - | - | 18 | ||||||||||||||||||
Shares issued pursuant to employee stock purchase plan |
2 | - | 51 | - | - | 51 | ||||||||||||||||||
Expense related to employee stock purchase plan |
- | - | 8 | - | - | 8 | ||||||||||||||||||
Balance at March 31, 2018 |
7,519 | $ | 940 | $ | 52,278 | $ | 148,535 | $ | (7,725 | ) | $ | 194,028 | ||||||||||||
Balance at January 1, 2017 |
7,509 | $ | 939 | $ | 51,885 | $ | 134,650 | $ | (3,408 | ) | $ | 184,066 | ||||||||||||
Net income |
- | - | - | 3,329 | - | 3,329 | ||||||||||||||||||
Other comprehensive income |
- | - | - | - | 1,013 | 1,013 | ||||||||||||||||||
Cash dividends declared – common, $.10 per share |
- | - | - | (751 | ) | - | (751 | ) | ||||||||||||||||
Shares issued under director compensation plan |
1 | - | 28 | - | - | 28 | ||||||||||||||||||
Shares issued pursuant to employee stock purchase plan |
2 | - | 46 | - | - | 46 | ||||||||||||||||||
Expense related to employee stock purchase plan |
- | - | 9 | - | - | 9 | ||||||||||||||||||
Balance at March 31, 2017 |
7,512 | $ | 939 | $ | 51,968 | $ | 137,228 | $ | (2,395 | ) | $ | 187,740 |
See accompanying notes to unaudited condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Cash Flows
Three months ended March 31, (In thousands) |
2018 |
2017 |
||||||
Cash Flows from Operating Activities |
||||||||
Net income |
$ | 5,641 | $ | 3,329 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
800 | 862 | ||||||
Net premium amortization of investment securities: |
||||||||
Available for sale |
616 | 897 | ||||||
Held to maturity |
14 | 13 | ||||||
Provision for loan losses |
(261 | ) | 580 | |||||
Deferred income tax (benefit) expense |
(10 | ) | 18 | |||||
Noncash employee stock purchase plan expense |
8 | 9 | ||||||
Noncash director fee compensation |
18 | 28 | ||||||
Mortgage loans originated for sale |
(2,557 | ) | (5,324 | ) | ||||
Proceeds from sale of mortgage loans |
2,537 | 6,624 | ||||||
Gain on sale of mortgage loans, net |
(95 | ) | (154 | ) | ||||
Loss on disposal of premises and equipment, net |
- | 37 | ||||||
Net loss (gain) on sale and write downs of other real estate |
76 | (5 | ) | |||||
Net loss on sale of available for sale investment securities |
- | 9 | ||||||
Unrealized loss on equity investment securities |
55 | - | ||||||
Curtailment gain on postretirement benefits plan liability |
- | (351 | ) | |||||
Increase in cash surrender value of company-owned life insurance |
(213 | ) | (216 | ) | ||||
Death benefits in excess of cash surrender value on company-owned life insurance |
(67 | ) | - | |||||
Decrease in accrued interest receivable |
363 | 434 | ||||||
Decrease in other assets |
517 | 1,787 | ||||||
Increase (decrease) in accrued interest payable |
4 | (32 | ) | |||||
Decrease in other liabilities |
(1,802 | ) | (2,603 | ) | ||||
Net cash provided by operating activities |
5,644 | 5,942 | ||||||
Cash Flows from Investing Activities |
||||||||
Proceeds from maturities and calls of available for sale investment securities |
16,715 | 19,474 | ||||||
Purchase of available for sale investment securities |
(1,536 | ) | (31,058 | ) | ||||
Purchase of equity investment securities |
(695 | ) | (3 | ) | ||||
Proceeds from cancelation of cost method investment securities |
239 | 666 | ||||||
Purchase of cost method investment securities |
- | (4,236 | ) | |||||
Loans originated for investment greater than principal collected, net |
(493 | ) | (18,347 | ) | ||||
Purchase of loans held for investment |
(709 | ) | (732 | ) | ||||
Principal collected on purchased loans |
1,317 | 643 | ||||||
Proceeds from death benefits of company-owned life insurance |
366 | - | ||||||
Purchase of premises and equipment |
(729 | ) | (1,145 | ) | ||||
Proceeds from sale of other real estate |
346 | 699 | ||||||
Net cash provided by (used in) investing activities |
14,821 | (34,039 | ) | |||||
Cash Flows from Financing Activities |
||||||||
Net increase in deposits |
14,188 | 18,170 | ||||||
Net decrease in short-term securities sold under agreements to repurchase |
(910 | ) | (2,299 | ) | ||||
Proceeds from long-term securities sold under agreements to repurchase |
1 | 2 | ||||||
Repayments of long-term securities sold under agreements to repurchase |
- | (5,041 | ) | |||||
Repayments of Federal Home Loan Bank advances |
(43 | ) | - | |||||
Dividends paid, common stock |
(939 | ) | (751 | ) | ||||
Shares issued under employee stock purchase plan |
51 | 46 | ||||||
Net cash provided by financing activities |
12,348 | 10,127 | ||||||
Net increase (decrease) in cash and cash equivalents |
32,813 | (17,970 | ) | |||||
Cash and cash equivalents at beginning of year |
120,408 | 113,534 | ||||||
Cash and cash equivalents at end of period |
$ | 153,221 | $ | 95,564 | ||||
Supplemental Disclosures |
||||||||
Cash paid during the period for interest |
$ | 883 | $ | 948 | ||||
Transfers from loans to other real estate |
104 | 187 | ||||||
Sale and financing of other real estate |
84 | 2,172 | ||||||
Cash dividends payable, common |
940 | 751 |
See accompanying notes to unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation and Nature of Operations
The condensed consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a financial holding company, and its wholly owned subsidiaries. The Company has one bank subsidiary, United Bank & Capital Trust Company (“United Bank”), and one nonbank subsidiary, FFKT Insurance Services, Inc. (“FFKT Insurance”).
FFKT Insurance is a captive insurance company that provides property and casualty coverage to the Parent Company and its subsidiaries for risk management purposes or where insurance may not be available or economically feasible. The Company has two subsidiaries organized as Delaware statutory trusts that are not consolidated into its financial statements. These trusts were formed for the purpose of issuing trust preferred securities.
United Bank’s significant subsidiaries include EG Properties, Inc. and Farmers Capital Insurance Corporation (“Farmers Insurance”). EG Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank. Farmers Insurance is an insurance agency in Frankfort, KY.
The Company provides financial services at its 34 locations in 21 communities throughout Central and Northern Kentucky to individual, business, agricultural, governmental, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential mortgage, commercial lending, and consumer installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Other services include, but are not limited to, cash management services, issuing letters of credit, safe deposit box rental, and providing funds transfer services. Other financial instruments, which could potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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. Estimates used in the preparation of the condensed financial statements are based on various factors including the current interest rate environment and the general strength of the local and state economy. Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the condensed financial statements. The allowance for loan losses, carrying value of other real estate owned, actuarial assumptions used to calculate postretirement benefits, and the fair values of financial instruments are estimates that are particularly subject to change.
The consolidated balance sheet as of December 31, 2017 has been derived from the audited financial statements of the Company as of that date. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2017 included in the Company’s annual report on Form 10-K. The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by U.S. GAAP for complete statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such condensed financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany transactions and balances are eliminated in consolidation.
2. Reclassifications
Certain reclassifications have been made to the condensed consolidated financial statements of prior periods to conform to the current period presentation. These reclassifications do not affect net income or total shareholders’ equity as previously reported.
3. Accumulated Other Comprehensive (Loss) Income
The following table presents changes in accumulated other comprehensive (loss) income (“AOCI”) by component, net of tax, for the periods indicated. The table also includes $56 thousand cumulative-effect adjustment from AOCI to retained earnings related to the adoption of Accounting Standards Update (“ASU”) 2016-01 effective January 1, 2018. ASU 2016-01 requires changes in the fair value of the Company’s equity investments to be recognized through net income. Prior to 2018, changes in the fair value of equity securities were recognized through AOCI. Additional information related to the adoption of ASU 2016-01 can be found in Note 4 and Note 7.
Three Months Ended March 31, 2018 |
Three Months Ended March 31, 2017 |
|||||||||||||||||||||||
(In thousands) |
Unrealized Gains (Losses) on Available for Sale Investment Securities |
Postretirement Benefit Obligation |
Total |
Unrealized Gains (Losses) on Available for Sale Investment Securities |
Postretirement Benefit Obligation |
Total |
||||||||||||||||||
Beginning balance |
$ | (3,510 | ) | $ | (56 | ) | $ | (3,566 | ) | $ | (3,363 | ) | $ | (45 | ) | $ | (3,408 | ) | ||||||
Other comprehensive (loss) income before reclassifications |
(4,102 | ) | - | (4,102 | ) | 948 | 10 | 958 | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive income |
- | (1 | ) | (1 | ) | 6 | 49 | 55 | ||||||||||||||||
Net current-period other comprehensive (loss) income |
(4,102 | ) | (1 | ) | (4,103 | ) | 954 | 59 | 1,013 | |||||||||||||||
Adoption of Accounting Standards Update 2016-01 |
(56 | ) | - | (56 | ) | - | - | - | ||||||||||||||||
Ending balance |
$ | (7,668 | ) | $ | (57 | ) | $ | (7,725 | ) | $ | (2,409 | ) | $ | 14 | $ | (2,395 | ) |
The following table presents amounts reclassified out of accumulated other comprehensive income by component for the periods indicated. Line items in the statement of income affected by the reclassification are also presented.
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Statement Where Net Income is Presented |
||||||||
(In thousands) |
Three Months Ended March 31, 2018 |
Three Months Ended March 31, 2017 |
|||||||
Unrealized gains (losses) on available for sale investment securities |
$ | - | $ | (9 | ) |
Net loss on sales of available for sale investment securities |
|||
- | 3 |
Income tax expense |
|||||||
$ | - | $ | (6 | ) |
Net of tax |
||||
Amortization related to postretirement benefits |
|||||||||
Prior service costs |
$ | - | $ | (75 | ) |
Salaries and employee benefits |
|||
Actuarial gains (losses) |
1 | (1 | ) |
Other noninterest expense |
|||||
1 | (76 | ) |
Total before tax |
||||||
- | 27 |
Income tax expense |
|||||||
$ | 1 | $ | (49 | ) |
Net of tax |
||||
Total reclassifications for the period |
$ | 1 | $ | (55 | ) |
Net of tax |
4. Accounting Policy
Loans and Interest Income
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their unpaid principal amount outstanding adjusted for any charge-offs, deferred fees or costs on originated loans, and unamortized premiums and discounts on purchased loans. Interest income on loans is recognized using the interest method based on loan principal amounts outstanding during the period. Interest income also includes amortization and accretion of any premiums or discounts over the expected life of acquired loans at the time of purchase or business acquisition. Loan origination fees, net of certain direct origination costs, are deferred and amortized as yield adjustments over the contractual term of the loans.
The Company disaggregates certain disclosure information related to loans, the related allowance for loan losses, and credit quality measures by either portfolio segment or by loan class. The Company segregates its loan portfolio segments based on similar risk characteristics as follows: real estate loans, commercial loans, and consumer loans. Portfolio segments are further disaggregated into classes for certain required disclosures as follows:
Portfolio Segment |
Class |
Real estate loans |
Real estate mortgage – construction and land development Real estate mortgage – residential Real estate mortgage – farmland and other commercial enterprises |
Commercial loans |
Commercial and industrial Depository institutions Agriculture production and other loans to farmers States and political subdivisions Other |
Consumer loans |
Secured Unsecured |
The Company has a loan policy in place that is amended and approved from time to time as needed to reflect current economic conditions and product offerings in its markets. The policy establishes written procedures concerning areas such as the lending authorities of loan officers, committee review and approval of certain credit requests, underwriting criteria, policy exceptions, appraisal requirements, and loan review. Credit is extended to borrowers based primarily on their ability to repay as demonstrated by income and cash flow analysis.
Loans secured by real estate make up the largest segment of the Company’s loan portfolio. If a borrower fails to repay a loan secured by real estate, the Company may liquidate the collateral in order to satisfy the amount owed. Determining the value of real estate is a key component to the lending process for real estate backed loans. If the fair value of real estate (less estimated cost to sell) securing a collateral dependent loan declines below the outstanding loan amount, the Company will write down the carrying value of the loan and thereby incur a loss. The Company uses independent third party state certified or licensed appraisers in accordance with its loan policy to mitigate risk when underwriting real estate loans. Cash flow analysis of the borrower, loan to value limits as adopted by loan policy, and other customary underwriting standards are also in place which are designed to maximize credit quality and mitigate risks associated with real estate lending.
Commercial loans are made to businesses and are secured mainly by assets such as inventory, accounts receivable, machinery, fixtures and equipment, or other business assets. Commercial lending involves significant risk, as loan repayments are more dependent on the successful operation or management of the business and its cash flows. Consumer lending includes loans to individuals mainly for personal autos, boats, or a variety of other personal uses and may be secured or unsecured. Loan repayment associated with consumer loans is highly dependent upon the borrower’s continuing financial stability, which is heavily influenced by local unemployment rates. The Company mitigates its risk exposure to each of its loan segments by analyzing the borrower’s repayment capacity, imposing restrictions on the amount it will loan compared to estimated collateral values, limiting the payback periods, and following other customary underwriting practices as adopted in its loan policy.
The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. Interest accrued but not received for a loan placed on nonaccrual status is reversed against interest income. Cash payments received on nonaccrual loans generally are applied to principal until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company’s policy for placing a loan on nonaccrual status or subsequently returning a loan to accrual status does not differ based on its portfolio class or segment.
Commercial and real estate loans delinquent in excess of 120 days and consumer loans delinquent in excess of 180 days are charged off, unless the collateral securing the debt is of such value that any loss appears to be unlikely. In all cases, loans are charged off at an earlier date if classified as loss under the Company’s loan grading process or as a result of regulatory examination. The Company’s charge-off policy for impaired loans does not differ from the charge-off policy for loans outside the definition of impaired.
Provision and Allowance for Loan Losses
The provision for loan losses represents charges or credits made to earnings to maintain an allowance for loan losses at a level considered adequate to provide for probable incurred credit losses at the balance sheet date. The allowance for loan losses is a valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company estimates the adequacy of the allowance using a risk-rated methodology which is based on the Company’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral securing loans, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires significant judgment and the use of estimates that may be susceptible to change.
The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current risk factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Actual loan losses could differ significantly from the amounts estimated by management.
The general portion of the Company’s loan portfolio is segregated into portfolio segments having similar risk characteristics identified as follows: real estate loans, commercial loans, and consumer loans. Each of these portfolio segments is assigned a loss percentage based on their respective twelve quarter rolling historical loss rates, adjusted for the qualitative risk factors summarized below.
The qualitative risk factors used in the methodology are consistent with the guidance in the most recent Interagency Policy Statement on the Allowance for Loan Losses issued. Each factor is supported by a detailed analysis and is both measurable and supportable. Some factors include a minimum allocation in instances where loss levels are extremely low and it is determined to be prudent from a safety and soundness perspective. Qualitative risk factors that are used in the methodology include the following for each loan portfolio segment:
● |
Delinquency trends |
● |
Trends in net charge-offs |
● |
Trends in loan volume |
● |
Lending philosophy risk |
● |
Management experience risk |
● |
Concentration of credit risk |
● |
Economic conditions risk |
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The Company accounts for impaired loans in accordance with Accounting Standards Codification (“ASC”) Topic 310, “Receivables.” ASC Topic 310 requires that impaired loans be measured at the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Impaired loans may also be classified as nonaccrual. In many circumstances, however, the Company continues to accrue interest on an impaired loan. Cash receipts on accruing impaired loans are applied to the recorded investment in the loan, including any accrued interest receivable. Cash payments received on nonaccrual impaired loans generally are applied to principal until qualifying for return to accrual status. Loans that are part of a large group of smaller-balance homogeneous loans, such as residential mortgage, consumer, and smaller-balance commercial loans, are collectively evaluated for impairment. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception, or at the fair value of collateral. The Company determines the amount of reserve for troubled debt restructurings that subsequently default in accordance with its accounting policy for the allowance for loan losses.
Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued several amendments to the standard during 2015, 2016, and 2017. The primary principle of ASU No. 2014-09 is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The majority of the Company’s revenues earned are excluded from the scope of the new standard. Revenue streams within the scope of this ASU include services charges and fees on deposits, allotment processing fees, trust income, and certain components of other service charges, commission, and fees. The Company has analyzed each revenue stream under Topic 606 and determined that there were no material changes to existing recognition practices. The Company adopted ASU No. 2014-09 effective January 1, 2018 using a modified retrospective approach and no cumulative-effect adjustment was recorded. Additional disclosures required by the new standard are included in Note 5.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and, in February 2018, issued an amendment for technical corrections and improvements related to this ASU. The amendments in this ASU require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). In addition, this ASU eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. Public business entities are required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company adopted ASU No. 2016-01 effective January 1, 2018, recorded a cumulative-effect adjustment of $56 thousand, and began using the exit price notion rather than entrance price to determine the fair value for disclosure purposes. For equity securities without a readily determinable fair value, the Company elected the practical expedient and recorded them at cost adjusted for impairment (if any), plus or minus changes resulting from observable price changes in orderly transactions. Additional information related to the cumulative-effect adjustment can be found in Note 3 and Note 7. Fair value disclosures can be found in Note 13.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that employers offering benefit plans accounted for under Topic 715 report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The Company retrospectively adopted ASU 2017-07 effective January 1, 2018, which did not have a material impact on its consolidated financial position, results of operations, or cash flows upon adoption. For prior periods, the interest cost, recognized actuarial loss, and recognized curtailment gain have been reclassified from salaries and employee benefits to other noninterest expense.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows entities to reclassify the stranded tax effects caused by the Tax Cuts and Jobs Act (“Tax Act”), which was enacted in December 2017, from accumulated other comprehensive income (“AOCI”) to retained earnings. This ASU is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company early adopted this standard, resulting in the reclassification of $633 thousand from AOCI to retained earnings for the year ended December 31, 2017. There was no impact on total equity.
Recently Issued Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” to improve financial reporting about leasing transactions. This ASU will require organizations that lease assets (“lessees”) to recognize a lease liability and a right-of-use asset on its balance sheet for all leases with terms of more than twelve months. A lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset represents the lessee’s right to use, or control use of, a specified asset for the lease term. The amendments in this ASU simplify the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. This ASU leaves the accounting for the organizations that own the assets leased to the lessee (“lessor”) largely unchanged except for targeted improvements to align it with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
For public companies, ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company has identified a project team and is in the process of reviewing its leases and assessing the impact of ASU No. 2016-02 on its consolidated financial position, results of operations, and cash flows.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires enhanced disclosures, including qualitative and quantitative requirements, which provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
ASU No. 2016-13 is effective for the Company in annual and interim reporting periods beginning after December 15, 2019. Although early adoption is permitted for fiscal years beginning after December 15, 2018, the Company does not plan to early adopt. The Company has been preserving certain historical loan information from its core processing system in anticipation of adopting the standard. The Company has identified a project team to assess the impact of this ASU on its consolidated financial position, results of operations, and cash flows. The project team has developed a timeline for implementing the standard, has begun working with a third party software solution provider, and has identified an independent third party for validation of the impending changes to our credit loss methodologies and processes. The team continues to assess the impact of the standard; however, the Company expects adopting this ASU will result in an increase in its allowance for loan losses. The amount of the increase in the allowance for loan losses upon adoption will be dependent upon the characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that date. A cumulative effect adjustment will be made to retained earnings for the impact of the standard at the beginning of the period the standard is adopted.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
5. Revenue From Contracts With Customers
The Company records revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” ASC Topic 606 requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized when, or as, the Company satisfies a performance obligation. Primarily all of the Company’s revenue from contracts with customers in the scope of ASC Topic 606 is recognized within noninterest income. Net gains or losses on the sale of other real estate owned (“OREO”) are included in net other real estate expenses. The following table presents the Company’s sources of noninterest income for the three months ended March 31, 2018 and 2017. Amounts in the table are within the scope of ASC Topic 606 unless otherwise noted.
Three Months Ended March 31, (In thousands) |
2018 |
2017 |
||||||
Service charges and fees on deposits |
||||||||
Overdraft fees |
$ | 956 | $ | 927 | ||||
Dormant account fees |
593 | 665 | ||||||
Service charges on checking and savings accounts |
314 | 310 | ||||||
Other |
49 | 56 | ||||||
Allotment processing fees |
720 | 715 | ||||||
Other service charges, commissions, and fees |
||||||||
Interchange fees |
827 | 781 | ||||||
Other1 |
545 | 591 | ||||||
Trust income |
789 | 704 | ||||||
Investment securities (losses) gains, net2 |
- | (9 | ) | |||||
Gain on sale of mortgage loans, net2 |
95 | 154 | ||||||
Income from company-owned life insurance2 |
293 | 235 | ||||||
Other |
20 | 122 | ||||||
Total noninterest income |
$ | 5,201 | $ | 5,251 |
1Includes broker, ATM, and other fees totaling $402 thousand and $457 thousand for the three months ended March 31, 2018 and 2017, respectively, which is within the scope of ASC Topic 606.
2Not within the scope of ASC Topic 606.
Net other real estate expenses include a net loss on the sale of OREO of $43 thousand and a net gain of $115 thousand for the three months ended March 31, 2018 and 2017, respectively.
A description of the Company’s revenue-generating activities accounted for under Topic 606 follows.
Service charges and fees on deposits consist primarily of overdraft fees, dormant account fees, and service charges on checking and savings accounts. Overdraft fees are recognized at the time an account is overdrawn. Dormant account fees are recognized when an account is inactive for 365 days. The majority of service charges on checking and savings accounts are for account maintenance services performed and recognized in the same calendar month. Other fees are primarily for transaction-based services completed at the request of the customer and recognized at the time the transaction is executed. These transaction-based services include foreign ATM usage and stop payments services. All service charges and fees on deposits are withdrawn from the customer’s account balance.
Allotment processing fees relate to the Company’s bill payment and electronic funds transfer (“EFT”) services provided under the name of FirstNet. The Company processes payments by individual customers to unaffiliated third party lenders on bi-weekly and monthly schedules. Other EFT services are available to customers upon request. The Company does not provide credit to individuals under the program. Fees are primarily withdrawn from the customer’s account and recognized at the time the transaction is executed.
Other service charges, commissions, and fees include interchange fees earned primarily from debit card holder transactions conducted through the VISA payment network and other networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are received and recognized daily, concurrent with the transaction processing services provided to the cardholder.
Trust income is earned from living trusts and investment management agency accounts, estate planning and estate settlement, custody accounts, individual retirement accounts, and other related services. These fees are primarily earned and accrued over the period of time the Company provides the contracted services and are generally assessed based on tiered scale of the market value of the assets of the accounts. Fees for other services, including the preparation of fiduciary income tax returns, are recognized when the services are rendered. Fees are generally paid out of the assets held in the customer’s account.
6. Net Income Per Common Share
Basic net income per common share is determined by dividing net income by the weighted average total number of common shares issued and outstanding. There were no dilutive instruments at March 31, 2018 and 2017.
Net income per common share computations were as follows for the periods indicated:
Three Months Ended March 31, |
||||||||
(In thousands, except per share data) |
2018 |
2017 |
||||||
Net income, basic and diluted |
$ | 5,641 | $ | 3,329 | ||||
Average common shares issued and outstanding, basic and diluted |
7,518 | 7,510 | ||||||
Net income per common share, basic and diluted |
$ | .75 | $ | .44 |
7. Investment Securities
Equity Securities
Equity securities consist of money market mutual funds classified as cash and cash equivalents on the balance sheet and mutual funds and equity securities in the investment portfolio of the Company’s captive insurance subsidiary. Money market mutual funds were $35.0 million and $36.7 million at March 31, 2018 and December 31, 2017, respectively. The Company held $1.6 million and $935 thousand in mutual funds and equity securities recorded at fair value at March 31, 2018 and December 31, 2017, respectively.
Effective January 1, 2018, the Company adopted ASU 2016-01, which requires the Company to recognize changes in the fair value of its equity securities through net income. Prior to 2018, changes in the fair value of equity securities were recognized through AOCI. At December 31, 2017, unrealized gains, net of tax, of $56 thousand had been recognized in AOCI. At the beginning of 2018, the Company made a cumulative-effect adjustment to reclassify those gains out of AOCI and into retained earnings. During the three months ended March 31, 2018, the Company recognized an unrealized loss of $55 thousand on the equity securities held at March 31, 2018, which was recorded in other noninterest income. There were no sales of equity securities during the three months ended March 31, 2018.
Debt Securities
The Company’s debt securities are classified as available for sale or held to maturity. The following tables summarize the amortized costs and estimated fair value of the Company’s debt securities at March 31, 2018 and December 31, 2017.
March 31, 2018 (In thousands) |
Amortized |
Gross Unrealized |
Gross Unrealized |
Estimated |
||||||||||||
Available For Sale |
||||||||||||||||
Obligations of U.S. government-sponsored entities |
$ | 42,633 | $ | 14 | $ | 691 | $ | 41,956 | ||||||||
Obligations of states and political subdivisions |
109,652 | 281 | 2,365 | 107,568 | ||||||||||||
Mortgage-backed securities – residential |
186,441 | 318 | 5,158 | 181,601 | ||||||||||||
Mortgage-backed securities – commercial |
49,990 | - | 2,116 | 47,874 | ||||||||||||
Asset-backed securities |
15,538 | 8 | 29 | 15,517 | ||||||||||||
Corporate debt securities |
7,741 | 49 | 18 | 7,772 | ||||||||||||
Total securities – available for sale |
$ | 411,995 | $ | 670 | $ | 10,377 | $ | 402,288 | ||||||||
Held To Maturity |
||||||||||||||||
Obligations of states and political subdivisions |
$ | 3,350 | $ | 74 | $ | - | $ | 3,424 |
December 31, 2017 (In thousands) |
Amortized |
Gross Unrealized |
Gross Unrealized |
Estimated |
||||||||||||
Available For Sale |
||||||||||||||||
Obligations of U.S. government-sponsored entities |
$ | 43,601 | $ | 44 | $ | 437 | $ | 43,208 | ||||||||
Obligations of states and political subdivisions |
114,960 | 562 | 1,273 | 114,249 | ||||||||||||
Mortgage-backed securities – residential |
195,605 | 523 | 2,735 | 193,393 | ||||||||||||
Mortgage-backed securities – commercial |
50,518 | 42 | 1,208 | 49,352 | ||||||||||||
Asset-backed securities |
15,569 | 9 | 4 | 15,574 | ||||||||||||
Corporate debt securities |
7,578 | 1 | 37 | 7,542 | ||||||||||||
Total securities – available for sale |
$ | 427,831 | $ | 1,181 | $ | 5,694 | $ | 423,318 | ||||||||
Held To Maturity |
||||||||||||||||
Obligations of states and political subdivisions |
$ | 3,364 | $ | 114 | $ | - | $ | 3,478 |
Debt securities with a carrying value of $208 million and $214 million at March 31, 2018 and December 31, 2017, respectively, were pledged to secure public and trust deposits, repurchase agreements, and for other purposes.
The amortized cost and estimated fair value of the debt securities portfolio at March 31, 2018, by contractual maturity, are detailed below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are stated separately due to the nature of payment and prepayment characteristics of these securities, as principal is not due at a single date.
Available For Sale |
Held To Maturity |
|||||||||||||||
Amortized |
Estimated |
Amortized |
Estimated |
|||||||||||||
March 31, 2018 (In thousands) |
Cost |
Fair Value |
Cost |
Fair Value |
||||||||||||
Due in one year or less |
$ | 28,921 | $ | 28,872 | $ | - | $ | - | ||||||||
Due after one year through five years |
52,222 | 51,572 | - | - | ||||||||||||
Due after five years through ten years |
55,496 | 53,726 | 1,232 | 1,289 | ||||||||||||
Due after ten years |
38,925 | 38,643 | 2,118 | 2,135 | ||||||||||||
Mortgage-backed securities |
236,431 | 229,475 | - | - | ||||||||||||
Total |
$ | 411,995 | $ | 402,288 | $ | 3,350 | $ | 3,424 |
Gross realized gains and losses on the sale of available for sale debt securities are presented in the table below for the periods indicated.
Three Months Ended |
||||||||
March 31, |
||||||||
(In thousands) |
2018 |
2017 |
||||||
Gross realized gains |
$ | - | $ | - | ||||
Gross realized losses |
- | 9 | ||||||
Net realized loss |
$ | - | $ | (9 | ) |
Debt securities with unrealized losses at March 31, 2018 and December 31, 2017 not recognized in income are presented in the tables below. The tables segregate debt securities that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or more. The tables also include the fair value of the related securities.
Less than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
March 31, 2018 (In thousands) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
Obligations of U.S. government-sponsored entities |
$ | 13,336 | $ | 182 | $ | 27,010 | $ | 509 | $ | 40,346 | $ | 691 | ||||||||||||
Obligations of states and political subdivisions |
52,756 | 956 | 33,058 | 1,409 | 85,814 | 2,365 | ||||||||||||||||||
Mortgage-backed securities – residential |
74,591 | 1,642 | 93,924 | 3,516 | 168,515 | 5,158 | ||||||||||||||||||
Mortgage-backed securities – commercial |
14,798 | 378 | 33,076 | 1,738 | 47,874 | 2,116 | ||||||||||||||||||
Asset-backed securities |
11,721 | 29 | - | - | 11,721 | 29 | ||||||||||||||||||
Corporate debt securities |
2,721 | 15 | 498 | 3 | 3,219 | 18 | ||||||||||||||||||
Total |
$ | 169,923 | $ | 3,202 | $ | 187,566 | $ | 7,175 | $ | 357,489 | $ | 10,377 |
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2017 (In thousands) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
Obligations of U.S. government-sponsored entities |
$ | 11,544 | $ | 43 | $ | 25,298 | $ | 394 | $ | 36,842 | $ | 437 | ||||||||||||
Obligations of states and political subdivisions |
40,402 | 413 | 33,965 | 860 | 74,367 | 1,273 | ||||||||||||||||||
Mortgage-backed securities – residential |
77,312 | 481 | 99,986 | 2,254 | 177,298 | 2,735 | ||||||||||||||||||
Mortgage-backed securities – commercial |
7,758 | 62 | 34,139 | 1,146 | 41,897 | 1,208 | ||||||||||||||||||
Asset-backed securities |
1,166 | 4 | - | - | 1,166 | 4 | ||||||||||||||||||
Corporate debt securities |
7,251 | 36 | 200 | 1 | 7,451 | 37 | ||||||||||||||||||
Total |
$ | 145,433 | $ | 1,039 | $ | 193,588 | $ | 4,655 | $ | 339,021 | $ | 5,694 |
Unrealized losses included in the tables above have not been recognized in income since they have been identified as temporary. The Company evaluates debt securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant. Many factors are considered, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was effected by macroeconomic conditions, and (4) whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an OTTI charge exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at a point in time.
The Company attributes the unrealized losses in its debt securities portfolio to changes in market interest rates and volatility. Debt securities with unrealized losses at March 31, 2018 and December 31, 2017 are performing according to their contractual terms, and the Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company does not have the intent to sell these securities nor does it believe it is likely that it will be required to sell these securities prior to their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors.
8. Loans and Allowance for Loan Losses
Major classifications of loans outstanding are summarized as follows:
(In thousands) |
March 31, |
December 31, |
||||||
Real Estate |
||||||||
Real estate mortgage – construction and land development |
$ | 131,376 | $ | 129,181 | ||||
Real estate mortgage – residential |
351,838 | 355,304 | ||||||
Real estate mortgage – farmland and other commercial enterprises |
440,680 | 432,321 | ||||||
Commercial |
||||||||
Commercial and industrial |
68,472 | 63,417 | ||||||
States and political subdivisions |
18,883 | 27,209 | ||||||
Other |
16,663 | 19,916 | ||||||
Consumer |
||||||||
Secured |
3,980 | 4,853 | ||||||
Unsecured |
3,577 | 3,062 | ||||||
Total loans |
1,035,469 | 1,035,263 | ||||||
Less unearned income |
- | - | ||||||
Total loans, net of unearned income |
$ | 1,035,469 | $ | 1,035,263 |
Activity in the allowance for loan losses by portfolio segment was as follows for the periods indicated:
(In thousands) |
Real Estate |
Commercial |
Consumer |
Total |
||||||||||||
Three months ended M arch 31, 2018 |
||||||||||||||||
Balance, beginning of period |
$ | 8,509 | $ | 951 | $ | 323 | $ | 9,783 | ||||||||
Provision for loan losses |
(191 | ) | (47 | ) | (23 | ) | (261 | ) | ||||||||
Recoveries |
341 | 20 | 27 | 388 | ||||||||||||
Loans charged off |
(58 | ) | (88 | ) | (16 | ) | (162 | ) | ||||||||
Balance, end of period |
$ | 8,601 | $ | 836 | $ | 311 | $ | 9,748 |
(In thousands) |
Real Estate |
Commercial |
Consumer |
Total |
||||||||||||
Three months ended M arch 31, 2017 |
||||||||||||||||
Balance, beginning of period |
$ | 8,205 | $ | 854 | $ | 285 | $ | 9,344 | ||||||||
Provision for loan losses |
396 | (7 | ) | 191 | 580 | |||||||||||
Recoveries |
17 | 49 | 11 | 77 | ||||||||||||
Loans charged off |
(434 | ) | (32 | ) | (28 | ) | (494 | ) | ||||||||
Balance, end of period |
$ | 8,184 | $ | 864 | $ | 459 | $ | 9,507 |
The following tables present individually impaired loans by class of loans for the dates indicated.
|
Unpaid Balance |
Recorded With No Allowance |
Recorded With Allowance |
Total Recorded Investment |
Allowance for |
|||||||||||||||
Real Estate |
||||||||||||||||||||
Real estate mortgage – construction and land development |
$ | 3,473 | $ | 1,501 | $ | 1,597 | $ | 3,098 | $ | 325 | ||||||||||
Real estate mortgage – residential |
10,177 | 3,056 | 7,120 | 10,176 | 2,115 | |||||||||||||||
Real estate mortgage – farmland and other commercial enterprises |
8,675 | 2,169 | 6,338 | 8,507 | 307 | |||||||||||||||
Commercial |
||||||||||||||||||||
Commercial and industrial |
391 | - | 391 | 391 | 214 | |||||||||||||||
Consumer |
||||||||||||||||||||
Unsecured |
305 | - | 305 | 305 | 212 | |||||||||||||||
Total |
$ | 23,021 | $ | 6,726 | $ | 15,751 | $ | 22,477 | $ | 3,173 |
|
Unpaid Balance |
Recorded With No Allowance |
Recorded With Allowance |
Total Recorded Investment |
Allowance for |
|||||||||||||||
Real Estate |
||||||||||||||||||||
Real estate mortgage – construction and land development |
$ | 4,076 | $ | 1,746 | $ | 1,955 | $ | 3,701 | $ | 402 | ||||||||||
Real estate mortgage – residential |
10,112 | 3,233 | 6,877 | 10,110 | 1,973 | |||||||||||||||
Real estate mortgage – farmland and other commercial enterprises |
8,737 | 2,203 | 6,367 | 8,570 | 319 | |||||||||||||||
Commercial |
||||||||||||||||||||
Commercial and industrial |
448 | - | 448 | 448 | 270 | |||||||||||||||
Consumer |
||||||||||||||||||||
Unsecured |
312 | - | 312 | 312 | 218 | |||||||||||||||
Total |
$ | 23,685 | $ | 7,182 | $ | 15,959 | $ | 23,141 | $ | 3,182 |
Three Months Ended March 31, |
2018 |
2017 |
||||||||||||||||||||||
(In thousands) |
Average |
Interest Income Recognized |
Cash Basis Interest Recognized |
Average |
Interest Income Recognized |
Cash Basis Interest Recognized |
||||||||||||||||||
Real Estate |
||||||||||||||||||||||||
Real estate mortgage – construction and land development |
$ | 3,616 | $ | 46 | $ | 26 | $ | 6,247 | $ | 76 | $ | 52 | ||||||||||||
Real estate mortgage – residential |
10,343 | 136 | 133 | 9,702 | 118 | 117 | ||||||||||||||||||
Real estate mortgage – farmland and other commercial enterprises |
8,887 | 100 | 96 | 24,089 | 302 | 291 | ||||||||||||||||||
Commercial |
||||||||||||||||||||||||
Commercial and industrial |
393 | 5 | 4 | 499 | 7 | 6 | ||||||||||||||||||
Consumer |
||||||||||||||||||||||||
Unsecured |
320 | 4 | 4 | 335 | 5 | 2 | ||||||||||||||||||
Total |
$ | 23,559 | $ | 291 | $ | 263 | $ | 40,872 | $ | 508 | $ | 468 |
The following tables present the balance of the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2018 and December 31, 2017.
March 31, 2018 (In thousands) |
Real Estate |
Commercial |
Consumer |
Total |
||||||||||||
Allowance for Loan Losses |
||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||
Individually evaluated for impairment |
$ | 2,747 | $ | 214 | $ | 212 | $ | 3,173 | ||||||||
Collectively evaluated for impairment |
5,854 | 622 | 99 | 6,575 | ||||||||||||
Total ending allowance balance |
$ | 8,601 | $ | 836 | $ | 311 | $ | 9,748 | ||||||||
Loans |
||||||||||||||||
Loans individually evaluated for impairment |
$ | 21,781 | $ | 391 | $ | 305 | $ | 22,477 | ||||||||
Loans collectively evaluated for impairment |
902,113 | 103,627 | 7,252 | 1,012,992 | ||||||||||||
Total ending loan balance, net of unearned income |
$ | 923,894 | $ | 104,018 | $ | 7,557 | $ | 1,035,469 |
December 31, 2017 (In thousands) |
Real Estate |
Commercial |
Consumer |
Total |
||||||||||||
Allowance for Loan Losses |
||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||
Individually evaluated for impairment |
$ | 2,694 | $ | 270 | $ | 218 | $ | 3,182 | ||||||||
Collectively evaluated for impairment |
5,815 | 681 | 105 | 6,601 | ||||||||||||
Total ending allowance balance |
$ | 8,509 | $ | 951 | $ | 323 | $ | 9,783 | ||||||||
Loans |
||||||||||||||||
Loans individually evaluated for impairment |
$ | 22,381 | $ | 448 | $ | 312 | $ | 23,141 | ||||||||
Loans collectively evaluated for impairment |
894,425 | 110,094 | 7,603 | 1,012,122 | ||||||||||||
Total ending loan balance, net of unearned income |
$ | 916,806 | $ | 110,542 | $ | 7,915 | $ | 1,035,263 |
The following tables present the recorded investment in nonperforming loans by class of loans as of March 31, 2018 and December 31, 2017.
March 31, 2018 (In thousands) |
Nonaccrual |
Restructured Loans |
Loans Past Due 90 Days or More and Still Accruing |
|||||||||
Real Estate |
||||||||||||
Real estate mortgage – construction and land development |
$ | 150 | $ | 1,597 | $ | - | ||||||
Real estate mortgage – residential |
1,636 | 5,648 | - | |||||||||
Real estate mortgage – farmland and other commercial enterprises |
1,738 | 3,682 | - | |||||||||
Commercial |
||||||||||||
Commercial and industrial |
30 | 369 | - | |||||||||
Consumer |
||||||||||||
Unsecured |
165 | 126 | - | |||||||||
Total |
$ | 3,719 | $ | 11,422 | $ | - |
December 31, 2017 (In thousands) |
Nonaccrual |
Restructured Loans |
Loans Past Due 90 Days or More and Still Accruing |
|||||||||
Real Estate |
||||||||||||
Real estate mortgage – construction and land development |
$ | 151 | $ | 1,955 | $ | - | ||||||
Real estate mortgage – residential |
1,763 | 5,326 | - | |||||||||
Real estate mortgage – farmland and other commercial enterprises |
1,752 | 3,703 | - | |||||||||
Commercial |
||||||||||||
Commercial and industrial |
53 | 370 | - | |||||||||
Consumer |
||||||||||||
Unsecured |
168 | 128 | - | |||||||||
Total |
$ | 3,887 | $ | 11,482 | $ | - |
The Company has allocated $1.7 million and $1.8 million of specific reserves as of March 31, 2018 and December 31, 2017, respectively, to customers whose loan terms have been modified in troubled debt restructurings and that are in compliance with those terms. The Company had no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at March 31, 2018 and December 31, 2017. The Company had no credits during the first three months of 2018 or 2017 that were modified as troubled debt restructurings.
The tables below present an age analysis of past due loans 30 days or more by class of loans as of the dates indicated. Past due loans that are also classified as nonaccrual are included in their respective past due category.
March 31, 2018 (In thousands) |
30-89 Days Past Due |
90 Days or More Past Due |
Total |
Current |
Total Loans |
|||||||||||||||
Real Estate |
||||||||||||||||||||
Real estate mortgage – construction and land development |
$ | - | $ | 87 | $ | 87 | $ | 131,289 | $ | 131,376 | ||||||||||
Real estate mortgage – residential |
2,145 | 250 | 2,395 | 349,443 | 351,838 | |||||||||||||||
Real estate mortgage – farmland and other commercial enterprises |
712 | 989 | 1,701 | 438,979 | 440,680 | |||||||||||||||
Commercial |
||||||||||||||||||||
Commercial and industrial |
47 | - | 47 | 68,425 | 68,472 | |||||||||||||||
States and political subdivisions |
- | - | - | 18,883 | 18,883 | |||||||||||||||
Other |
- | - | - | 16,663 | 16,663 | |||||||||||||||
Consumer |
||||||||||||||||||||
Secured |
- | - | - | 3,980 | 3,980 | |||||||||||||||
Unsecured |
1 | - | 1 | 3,576 | 3,577 | |||||||||||||||
Total |
$ | 2,905 | $ | 1,326 | $ | 4,231 | $ | 1,031,238 | $ | 1,035,469 |
December 31, 2017 (In thousands) |
30-89 Days Past Due |
90 Days or More Past Due |
Total |
Current |
Total Loans |
|||||||||||||||
Real Estate |
||||||||||||||||||||
Real estate mortgage – construction and land development |
$ | 15 | $ | 87 | $ | 102 | $ | 129,079 | $ | 129,181 | ||||||||||
Real estate mortgage – residential |
1,160 | 538 | 1,698 | 353,606 | 355,304 | |||||||||||||||
Real estate mortgage – farmland and other commercial enterprises |
966 | 948 | 1,914 | 430,407 | 432,321 | |||||||||||||||
Commercial |
||||||||||||||||||||
Commercial and industrial |
62 | - | 62 | 63,355 | 63,417 | |||||||||||||||
States and political subdivisions |
- | - | - | 27,209 | 27,209 | |||||||||||||||
Other |
21 | - | 21 | 19,895 | 19,916 | |||||||||||||||
Consumer |
||||||||||||||||||||
Secured |
- | - | - | 4,853 | 4,853 | |||||||||||||||
Unsecured |
9 | - | 9 | 3,053 | 3,062 | |||||||||||||||
Total |
$ | 2,233 | $ | 1,573 | $ | 3,806 | $ | 1,031,457 | $ | 1,035,263 |
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 and conditions. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes large-balance loans and non-homogeneous loans, such as commercial real estate and certain residential real estate loans. Loan rating grades, as described further below, are assigned based on a continuous process. The amount and adequacy of the allowance for loan loss is determined on a quarterly basis. The Company uses the following definitions for its 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 borrower’s repayment ability, weaken the collateral or inadequately protect the Company’s credit position at some future date. These credits pose elevated risk, but their weaknesses do not yet justify a substandard 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. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent of 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 which are analyzed individually as part of the above described process are considered to be pass rated loans and are considered to have a low risk of loss. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows for the dates indicated.
Real Estate |
Commercial |
|||||||||||||||||||||||
March 31, 2018 |
Real Estate Mortgage – Construction and Land Development |
Real Estate Mortgage – Residential |
Real Estate Mortgage – Farmland and Other Commercial Enterprises |
Commercial and Industrial |
States and Political Subdivisions |
Other |
||||||||||||||||||
Credit risk profile by internally assigned rating grades |
||||||||||||||||||||||||
Pass |
$ | 127,443 | $ | 326,807 | $ | 423,824 | $ | 67,586 | $ | 18,883 | $ | 16,647 | ||||||||||||
Special Mention |
681 | 9,355 | 6,174 | 461 | - | 16 | ||||||||||||||||||
Substandard |
3,252 | 15,676 | 10,682 | 425 | - | - | ||||||||||||||||||
Doubtful |
- | - | - | - | - | - | ||||||||||||||||||
Total |
$ | 131,376 | $ | 351,838 | $ | 440,680 | $ | 68,472 | $ | 18,883 | $ | 16,663 |
Real Estate |
Commercial |
|||||||||||||||||||||||
December 31, 2017 |
Real Estate Mortgage –Construction and Land Development |
Real Estate Mortgage –Residential |
Real Estate Mortgage – Farmland and Other Commercial Enterprises |
Commercial and Industrial |
States and Political Subdivisions |
Other |
||||||||||||||||||
Credit risk profile by internally assigned rating grades |
||||||||||||||||||||||||
Pass |
$ | 124,926 | $ | 330,401 | $ | 414,663 | $ | 62,490 | $ | 27,209 | $ | 19,898 | ||||||||||||
Special Mention |
396 | 9,196 | 7,556 | 474 | - | 18 | ||||||||||||||||||
Substandard |
3,859 | 15,707 | 10,102 | 453 | - | - | ||||||||||||||||||
Doubtful |
- | - | - | - | - | - | ||||||||||||||||||
Total |
$ | 129,181 | $ | 355,304 | $ | 432,321 | $ | 63,417 | $ | 27,209 | $ | 19,916 |
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the consumer loans outstanding based on payment activity as of March 31, 2018 and December 31, 2017.
March 31, 2018 |
December 31, 2017 |
|||||||||||||||
Consumer |
Consumer |
|||||||||||||||
(In thousands) |
Secured |
Unsecured |
Secured |
Unsecured |
||||||||||||
Credit risk profile based on payment activity |
||||||||||||||||
Performing |
$ | 3,980 | $ | 3,286 | $ | 4,853 | $ | 2,766 | ||||||||
Nonperforming |
- | 291 | - | 296 | ||||||||||||
Total |
$ | 3,980 | $ | 3,577 | $ | 4,853 | $ | 3,062 |
9. Other Real Estate Owned
Other real estate owned (“OREO”) was as follows for the dates indicated:
(In thousands) |
March 31, 2018 |
December 31, 2017 |
||||||
Construction and land development |
$ | 4,089 | $ | 4,433 | ||||
Residential real estate |
35 | 157 | ||||||
Farmland and other commercial enterprises |
963 | 899 | ||||||
Total |
$ | 5,087 | $ | 5,489 |
OREO activity for the three months ended March 31, 2018 and 2017 was as follows:
Three months ended March 31, (In thousands) |
2018 |
2017 |
||||||
Beginning balance |
$ | 5,489 | $ | 10,673 | ||||
Transfers from loans and other increases |
104 | 193 | ||||||
Proceeds from sales |
(430 | ) | (2,871 | ) | ||||
(Loss) gain on sales, net |
(43 | ) | 115 | |||||
Write downs and other decreases, net |
(33 | ) | (110 | ) | ||||
Ending balance |
$ | 5,087 | $ | 8,000 |
At March 31, 2018, the Company had a total of $136 thousand of loans secured by residential real estate mortgages that were in the process of foreclosure.
10. Securities Sold under Agreements to Repurchase
Securities sold under agreements to repurchase represent transactions where the Company sells certain of its investment securities and agrees to repurchase them at a specific date in the future. Securities sold under agreements to repurchase are accounted for as secured borrowings and reflect the amount of cash received in connection with the transaction.
Securities sold under agreements to repurchase are collateralized by U.S. government agency securities, primarily mortgage-backed securities. The Company may be required to provide additional collateral securing the borrowings in the event of principal pay downs or a decrease in the market value of the pledged securities. The Company mitigates this risk by monitoring the market value and liquidity of the collateral and ensuring that it holds a sufficient level of eligible securities to cover potential increases in collateral requirements.
The following tables represent the remaining maturity of repurchase agreements disaggregated by the class of securities pledged as of the dates indicated.
Remaining Contractual Maturity of the Agreements |
||||||||||||||||||||||||
March 31, 2018 (In thousands) |
Overnight/ |
Less Than 30 Days |
30-89 |
90 Days to One Year |
Over One Year to Three Years |
Total |
||||||||||||||||||
Mortgage-backed securities – residential |
$ | 31,431 | $ | 254 | $ | - | $ | 1,400 | $ | 258 | $ | 33,343 | ||||||||||||
Total |
$ | 31,431 | $ | 254 | $ | - | $ | 1,400 | $ | 258 | $ | 33,343 |
Remaining Contractual Maturity of the Agreements |
||||||||||||||||||||||||
December 31, 2017 (In thousands) |
Overnight/ |
Less Than 30 Days |
30-89 |
90 Days to One Year |
Over One Year to Three Years |
Total |
||||||||||||||||||
Mortgage-backed securities – residential |
$ | 32,341 | $ | 1,200 | $ | - | $ | 454 | $ | 257 | $ | 34,252 | ||||||||||||
Total |
$ | 32,341 | $ | 1,200 | $ | - | $ | 454 | $ | 257 | $ | 34,252 |
11. Postretirement Medical Benefits
The Company provides lifetime medical and dental benefits upon retirement for certain employees meeting the eligibility requirements as of December 31, 1989 (“Plan 1”). Additional participants are not eligible to be included in Plan 1 unless they met the requirements on this date. During 2003, the Company implemented an additional postretirement health insurance program (“Plan 2”). Under Plan 2, any employee meeting the service requirement of 20 years of full time service to the Company and is at least age 55 upon retirement is eligible to continue their health insurance coverage. Under both plans, retirees not yet eligible for Medicare have coverage identical to the coverage offered to active employees. Under both plans, Medicare-eligible retirees are provided with a Medicare Advantage plan. The Company pays 100% of the cost of Plan 1. The Company and the retirees each pay 50% of the cost under Plan 2. Both plans are unfunded. Employees hired on or after January 1, 2016 are not eligible for benefits under Plan 2.
The following disclosures of the net periodic benefit cost components of Plan 1 and Plan 2 were measured at January 1, 2018 and 2017.
Three months ended March 31, (In thousands) |
2018 |
2017 |
||||||
Service cost |
$ | 140 | $ | 146 | ||||
Interest cost |
153 | 167 | ||||||
Curtailment gain recognized |
- | (417 | ) | |||||
Recognized prior service cost |
- | 75 | ||||||
Net periodic benefit cost |
$ | 293 | $ | (29 | ) |
Service costs and recognized prior service costs are recorded as a component of salaries and employee benefits with the remaining portion of net periodic benefit cost recorded in other noninterest expense on the Company’s unaudited condensed consolidated statements of income. In connection with the merger of certain of its subsidiaries in February 2017, the Company recognized a curtailment gain of $417 thousand and prior service costs of $66 thousand, for a net gain of $351 thousand at the time of curtailment. This gain is a result of revaluing its postretirement medical benefits plan liability due to a reduction in workforce during the first quarter of 2017.
The Company expects benefit payments of $459 thousand for 2018, of which $96 thousand have been made during the first three months of 2018.
12. Regulatory Matters
The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements will initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and its subsidiary bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The regulatory ratios of the consolidated Company and its subsidiary bank were as follows for the dates indicated:
March 31, 2018 |
December 31, 2017 |
|||||||||||||||||||||||||||||||
Common Equity Tier 1 Risk-based Capital1 |
Tier 1 |
Total |
Tier 1 |
Common Equity Tier 1 Risk-based Capital1 |
Tier 1 |
Total |
Tier 1 |
|||||||||||||||||||||||||
Consolidated |
17.07 | % | 19.82 | % | 20.65 | % | 13.99 | % | 16.56 | % | 19.30 | % | 20.12 | % | 13.75 | % | ||||||||||||||||
United Bank |
14.63 | 14.63 | 15.47 | 10.47 | 14.05 | 14.05 | 14.88 | 10.13 | ||||||||||||||||||||||||
Regulatory minimum |
4.50 | 6.00 | 8.00 | 4.00 | 4.50 | 6.00 | 8.00 | 4.00 | ||||||||||||||||||||||||
Well-capitalized status |
6.50 | 8.00 | 10.00 | 5.00 | 6.50 | 8.00 | 10.00 | 5.00 |
1Common Equity Tier 1 Risked-based, Tier 1 Risk-based, and Total Risk-based Capital ratios are computed by dividing a bank’s Common Equity Tier 1, Tier 1 or Total Capital, as defined by regulation, by a risk-weighted sum of the bank’s assets, with the risk weighting determined by general standards established by regulation.
2Tier 1 Leverage ratio is computed by dividing a bank’s Tier 1 Capital by its total quarterly average assets, as defined by regulation.
13. Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements. ASC Topic 825, “Financial Instruments,” allows entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any of its financial assets or liabilities.
ASC Topic 820 defines fair value as the price that would be received to sell 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 at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This Topic describes three levels of inputs that may be used to measure fair value:
Level 1: |
Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access at 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 for substantially the full term of the assets or liabilities. |
Level 3: |
Significant unobservable inputs that reflect a reporting entity’s own assumptions supported by little or no market activity about the assumptions that market participants would use in pricing the asset or liability. |
Following is a description of the valuation method used for financial instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale debt securities, equity securities, and money market mutual funds classified as cash equivalents that meet the requirement. The carrying value of the $35.0 million and $36.7 million in money market mutual funds at March 31, 2018 and December 31, 2017, respectively, is equivalent to its fair value and based on Level 1 inputs.
Available for sale debt securities and equity securities
Valued primarily by independent third party pricing services under the market valuation approach that include, but are not limited to, the following inputs:
● |
Mutual funds and equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities and are considered Level 1 inputs. |
● |
Government-sponsored agency debt securities, obligations of states and political subdivisions, mortgage-backed securities, corporate bonds, and other similar investment securities are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources and are considered Level 2 inputs. |
Fair value disclosure for available for sale debt securities and equity securities classified as investments on the balance sheet as of March 31, 2018 and December 31, 2017 are as follows:
Fair Value Measurements Using | ||||||||||||||||
(In thousands)
March 31, 2018 |
Fair Value |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||
Available For Sale Securities |
||||||||||||||||
Obligations of U.S. government-sponsored entities |
$ | 41,956 | $ | - | $ | 41,956 | $ | - | ||||||||
Obligations of states and political subdivisions |
107,568 | - | 107,568 | - | ||||||||||||
Mortgage-backed securities – residential |
181,601 | - | 181,601 | - | ||||||||||||
Mortgage-backed securities – commercial |
47,874 | - | 47,874 | - | ||||||||||||
Asset-backed securities |
15,517 | - | 15,517 | - | ||||||||||||
Corporate debt securities |
7,772 | - | 7,772 | - | ||||||||||||
Total available for sale securities |
$ | 402,288 | $ | - | $ | 402,288 | $ | - | ||||||||
Equity Securities | ||||||||||||||||
Mutual funds and equity securities | $ | 1,575 | $ | 1,575 | $ | - | $ | - | ||||||||
December 31, 2017 | ||||||||||||||||
Available For Sale Securities | ||||||||||||||||
Obligations of U.S. government-sponsored entities |
$ | 43,208 | $ | - | $ | 43,208 | $ | - | ||||||||
Obligations of states and political subdivisions |
114,249 | - | 114,249 | - | ||||||||||||
Mortgage-backed securities – residential |
193,393 | - | 193,393 | - | ||||||||||||
Mortgage-backed securities – commercial |
49,352 | - | 49,352 | - | ||||||||||||
Asset-backed securities |
15,574 | - | 15,574 | - | ||||||||||||
Corporate debt securities |
7,542 | - | 7,542 | - | ||||||||||||
Total available for sale securities |
$ | 423,318 | $ | - | $ | 423,318 | $ | - | ||||||||
Equity Securities |
||||||||||||||||
Mutual funds and equity securities |
$ | 935 | $ | 935 | $ | - | $ | - |
The Company is required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis in periods following their initial recognition. The Company’s disclosure about assets and liabilities measured at fair value on a nonrecurring basis consists of collateral-dependent impaired loans and OREO.
Adjustments to the fair value of collateral-dependent loans are recorded by either direct loan charge-offs through the allowance for loan losses or an adjustment to the specific reserve through an increase or decrease to the provision for loan losses. The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is measured based on recent appraisals of the underlying collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraisers take absorption rates into consideration and adjustments are routinely made in the appraisal process to identify differences between the comparable sales and income data available. Such adjustments consist mainly of estimated costs to sell that are not included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for which a newer appraisal is available. These adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.
OREO includes properties acquired by the Company through, or in lieu of, actual loan foreclosures and is carried at fair value less estimated costs to sell. Fair value of OREO at acquisition is generally based on third party appraisals of the property that includes comparable sales data and is considered as Level 3 inputs. The carrying value of each OREO property is updated at least annually and more frequently when market conditions significantly impact the value of the property. If the carrying amount of the OREO exceeds fair value less estimated costs to sell, an impairment loss is recorded through noninterest expense.
The following table represents the carrying amount of assets measured at fair value on a nonrecurring basis and still held by the Company as of the dates indicated. The amounts in the table only represent assets whose carrying amount has been adjusted during the period in a manner as described above; therefore, these amounts will differ from the total amounts outstanding. With the exception of those calculated using the collateral valuation method, collateral-dependent impaired loan amounts in the tables below exclude restructured loans that are measured based on present value techniques, which are outside the scope of the fair value reporting framework.
Fair Value Measurements Using |
||||||||||||||||
(In thousands) |
Fair Value |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||
March 31, 2018 |
||||||||||||||||
Collateral-dependent Impaired Loans |
||||||||||||||||
Real estate mortgage – construction and land development |
$ | 1,271 | $ | - | $ | - | $ | 1,271 | ||||||||
Real estate mortgage – residential |
4,176 | - | - | 4,176 | ||||||||||||
Total |
$ | 5,447 | $ | - | $ | - | $ | 5,447 | ||||||||
OREO |
||||||||||||||||
Construction and land development |
$ | 125 | $ | - | $ | - | $ | 125 | ||||||||
Residential real estate |
35 | - | - | 35 | ||||||||||||
Total |
$ | 160 | $ | - | $ | - | $ | 160 |
Fair Value Measurements Using |
||||||||||||||||
(In thousands) |
Fair Value |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||
December 31, 2017 |
||||||||||||||||
Collateral-dependent Impaired Loans |
||||||||||||||||
Real estate mortgage – construction and land development |
$ | 1,553 | $ | - | $ | - | $ | 1,553 | ||||||||
Real estate mortgage – residential |
4,687 | - | - | 4,687 | ||||||||||||
Real estate mortgage – farmland and other commercial enterprises |
2,645 | - | - | 2,645 | ||||||||||||
Total |
$ | 8,885 | $ | - | $ | - | $ | 8,885 | ||||||||
OREO |
||||||||||||||||
Construction and land development |
$ | 3,468 | $ | - | $ | - | $ | 3,468 | ||||||||
Residential real estate |
157 | - | - | 157 | ||||||||||||
Farmland and other commercial enterprises |
821 | - | - | 821 | ||||||||||||
Total |
$ | 4,446 | $ | - | $ | - | $ | 4,446 |
The following table represents fair value adjustments recorded in earnings for the periods indicated on assets measured at fair value on a nonrecurring basis.
(In thousands) |
||||||||
Three months ended March 31, |
2018 |
2017 |
||||||
Net decrease in fair value: |
||||||||
Collateral-dependent impaired loans |
$ | 115 | $ | 65 | ||||
OREO |
33 | 110 | ||||||
Total |
$ | 148 | $ | 175 |
The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level 3 measurements. As described above, the fair value of real estate securing collateral-dependent impaired loans and OREO are based on current third party appraisals. It is sometimes necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO. These discounts relate primarily to marketing and other holding costs that are not included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. Discounts may also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table below for 2018 and 2017.
(In thousands) |
Fair Value |
Valuation Technique |
Unobservable Inputs |
Range |
Weighted Average |
||||||||||
M arch 31, 2018 |
|||||||||||||||
Collateral-dependent impaired loans |
$ | 5,447 |
Discounted appraisals |
Marketability discount |
0% | - | 73.6 | % | 1.3 | % | |||||
OREO |
$ | 160 |
Discounted appraisals |
Marketability discount |
0% | - | 35.9 | % | 10.8 | % | |||||
December 31, 2017 |
|||||||||||||||
Collateral-dependent impaired loans |
$ | 8,885 |
Discounted appraisals |
Marketability discount |
0% | - | 22.8 | % | 3.1 | % | |||||
OREO |
$ | 4,446 |
Discounted appraisals |
Marketability discount |
0% | - | 71.7 | % | 4.0 | % |
Fair Value of Financial Instruments
The table that follows represents the estimated fair values of the Company’s financial instruments made in accordance with the requirements of ASC Topic 825, “Financial Instruments.” ASC Topic 825 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet for which it is practicable to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and present value or other valuation techniques. These derived fair values are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company.
The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2018 and December 31, 2017. Information for available for sale investment securities is presented within this footnote in greater detail above. In accordance with the prospective adoption of ASU 2016-01, the fair values as of March 31, 2018 were measured using an exit price notion.
Fair Value Measurements Using |
||||||||||||||||||||
(In thousands) |
Carrying |
Fair |
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
|||||||||||||||
March 31, 2018 |
||||||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 153,221 | $ | 153,221 | $ | 153,221 | $ | - | $ | - | ||||||||||
Held to maturity investment securities |
3,350 | 3,424 | - | 3,424 | - | |||||||||||||||
Loans, net |
1,025,721 | 1,007,469 | - | - | 1,007,469 | |||||||||||||||
Accrued interest receivable |
4,572 | 4,572 | - | 4,572 | - | |||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank Stock |
12,996 | 12,996 | - | - | 12,996 | |||||||||||||||
Liabilities |
||||||||||||||||||||
Deposits |
1,394,091 | 1,393,901 | 1,181,392 | - | 212,509 | |||||||||||||||
Securities sold under agreements to repurchase |
33,343 | 33,349 | - | 33,349 | - | |||||||||||||||
Federal Home Loan Bank advances |
3,436 | 3,488 | - | 3,488 | - | |||||||||||||||
Subordinated notes payable to unconsolidated trusts |
33,506 | 23,918 | - | - | 23,918 | |||||||||||||||
Accrued interest payable |
265 | 265 | - | 265 | - | |||||||||||||||
December 31, 2017 |
||||||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 120,408 | $ | 120,408 | $ | 120,408 | $ | - | $ | - | ||||||||||
Held to maturity investment securities |
3,364 | 3,478 | - | 3,478 | - | |||||||||||||||
Loans, net |
1,025,480 | 1,012,959 | - | - | 1,012,959 | |||||||||||||||
Accrued interest receivable |
4,935 | 4,935 | - | 4,935 | - | |||||||||||||||
Federal Home Loan Bank and Federal Reserve Bank Stock |
13,235 | 13,235 | - | - | 13,235 | |||||||||||||||
Liabilities |
||||||||||||||||||||
Deposits |
1,379,903 | 1,380,122 | 1,157,045 | - | 223,077 | |||||||||||||||
Securities sold under agreements to repurchase |
34,252 | 34,257 | - | 34,257 | - | |||||||||||||||
Federal Home Loan Bank advances |
3,479 | 3,546 | - | 3,546 | - | |||||||||||||||
Subordinated notes payable to unconsolidated trusts |
33,506 | 22,709 | - | - | 22,709 | |||||||||||||||
Accrued interest payable |
261 | 261 | - | 261 | - |
14. Subsequent Event
On April 19, 2018, the Company and Wesbanco, Inc. (“WesBanco”), a multi-state bank holding company with $10.2 billion in assets at March 31, 2018, entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) providing for the merger of the Company with and into WesBanco (the “Merger”) subject to the terms and conditions set forth in the Merger Agreement. As a result of the Merger, the separate corporate existence of the Company will cease and WesBanco will continue as the surviving corporation in the Merger. The Merger Agreement also provides that, immediately following the completion of the Merger, the Company’s subsidiary bank, United Bank, will merge with and into Wesbanco Bank, Inc., a West Virginia banking corporation and a wholly-owned subsidiary of WesBanco (the “Bank Merger”), with Wesbanco Bank, Inc. continuing as the surviving bank in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of both WesBanco and the Company.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, the Company’s shareholders will have the right to receive (i) 1.053 shares of WesBanco common stock and (ii) $5.00 in cash, without interest, for each share of the Company’s common stock. As of the date of the announcement, the transaction was valued at approximately $378.2 million. The Merger Agreement contains certain termination rights for both WesBanco and the Company and further provides that, upon termination of the Merger Agreement under certain circumstances, the Company may be obligated to pay WesBanco a termination fee of $12,000,000.
Consummation of the Merger is subject to a number of customary conditions, including, but not limited to, the approval of the Merger Agreement by the shareholders of the Company and the receipt of all required regulatory approvals. The transaction is expected to close in the third or fourth quarter of 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements with the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Statements in this report that are not statements of historical fact are forward-looking statements. In general, forward-looking statements relate to a discussion of future financial results or projections, future economic performance, future operational plans and objectives, and statements regarding the underlying assumptions of such statements. Although management of Farmers Capital Bank Corporation (the “Company” or “Parent Company”) believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.
Various risks and uncertainties may cause actual results to differ materially from those indicated by the Company’s forward-looking statements. In addition to the risks described under Part 1, Item 1A “Risk Factors” in the Company’s most recent annual report on Form 10-K, factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate) and lower interest margins; competition for the Company’s customers from other providers of financial services; deposit outflows or reduced demand for financial services and loan products; government legislation, regulation, and changes in monetary and fiscal policies (which changes from time to time and over which the Company has no control); changes in interest rates; changes in prepayment speeds of loans or investment securities; inflation; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company’s customers; changes in the level of non-performing assets and charge-offs; changes in the number of common shares outstanding; the capability of the Company to successfully enter into a definitive agreement for, close, and realize the benefits of anticipated transactions; unexpected claims or litigation against the Company; expected insurance or other recoveries; technological or operational difficulties; the impact of new accounting pronouncements and changes in policies and practices that may be adopted by regulatory agencies; acts of war or terrorism; the ability of the Parent Company to receive dividends from its subsidiaries; the impact of larger or similar financial institutions encountering difficulties, which may adversely affect the banking industry or the Company; the Company or its subsidiary bank’s ability to maintain required capital levels and adequate funding sources and liquidity; and other risks or uncertainties detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.
The Company’s forward-looking statements are based on information available at the time such statements are made. The Company expressly disclaims any intent or obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events, or other changes.
RESULTS OF OPERATIONS
Net income was $5.6 million, or $.75 per common share, and $3.3 million, or $.44 per common share, for the quarters ended March 31, 2018 and 2017, respectively. This represents an increase of $2.3 million, or 69.5%, and $.31, or 70.5%, on a per common share basis. The first quarter of 2017 includes pre-tax expenses of $472 thousand ($307 thousand after tax), or $.04 per common share, related to the Company’s consolidation of its four bank subsidiaries and data processing subsidiary into one bank, which was completed in February 2017.
Selected income statement amounts and related data are summarized in the table below.
(In thousands except per share data) |
||||||||||||
Three Months Ended March 31, |
2018 |
2017 |
Increase |
|||||||||
Interest income |
$ | 15,344 | $ | 14,379 | $ | 965 | ||||||
Interest expense |
887 | 916 | (29 | ) | ||||||||
Net interest income |
14,457 | 13,463 | 994 | |||||||||
Provision for loan losses |
(261 | ) | 580 | (841 | ) | |||||||
Net interest income after provision for loan losses |
14,718 | 12,883 | 1,835 | |||||||||
Noninterest income |
5,201 | 5,251 | (50 | ) | ||||||||
Noninterest expenses |
13,118 | 13,529 | (411 | ) | ||||||||
Income before income taxes |
6,801 | 4,605 | 2,196 | |||||||||
Income tax expense |
1,160 | 1,276 | (116 | ) | ||||||||
Net income |
$ | 5,641 | $ | 3,329 | $ | 2,312 | ||||||
Basic and diluted net income per common share |
$ | .75 | $ | .44 | $ | .31 | ||||||
Cash dividends declared per common share |
.125 | .10 | .025 | |||||||||
Weighted average common shares outstanding – basic and diluted |
7,518 | 7,510 | 8 | |||||||||
Return on average assets |
1.37 | % | .81 | % |
56 bp |
|||||||
Return on average equity |
11.86 | % | 7.27 | % |
459 bp |
|||||||
bp – basis points. |
The increase in net income in the comparison is attributed primarily to higher net interest income of $994 thousand, or 7.4%, and a lower provision for loan losses of $841 thousand. Noninterest expenses declined $411 thousand, or 3.0%, which was partially offset by a decrease in noninterest income of $50 thousand, or 1.0%. Further information related to the more significant components making up the changes in net income follows.
Net Interest Income
The overall interest rate environment at March 31, 2018 (as measured by the Treasury yield curve) increased during the quarter, but remained at very low levels when compared with historical trends. During the quarter, the shape of the yield curve flattened as a result of yields on short-term maturities increasing more than yields on longer-term maturities. Yields for the two and three-year maturity periods were up 38 and 41 basis points, respectively, while yields on the ten and thirty-year maturities increased 33 and 23 basis points, respectively.
The Federal Reserve Board increased the short-term federal funds target interest rate 25 basis points during March 2018 to a range between 1.50% and 1.75% and has indicated that it will continue to assess realized and expected economic conditions relative to its objectives of maximum employment and two percent inflation when determining the timing and size of future adjustments to the target rate. At March 31, 2018, the national and Kentucky unemployment rates were 4.1% and 4.0%, respectively. The national inflation rate at March 31, 2018 was 2.4% based on the Consumer Price Index published by the Bureau of Labor Statistics, up from 2.1% at year-end 2017.
Net interest income increased $994 thousand, or 7.4%, for the first quarter of 2018 compared to the first quarter of 2017. The increase was driven by overall loan growth and higher average rates earned on loans and investment securities, partially offset by declines in investment securities balances. Net interest margin increased 16 basis points in the comparison, reflecting the Company’s efforts to improve net interest income and net interest margin through loan growth combined with continued refinement of the Company’s investment securities portfolio.
Interest income on loans was up $747 thousand, or 6.4%, driven by a higher average loan balance outstanding of $61.5 million, or 6.3%, in the comparison. Interest income on loans in the current quarter includes the collection of $74 thousand in prepayment fees, which aided the average rate earned on loans by three basis points.
Interest income on investment securities is up $9 thousand, or 0.4%, for the comparison. An increase in the average rate earned on investment securities was mostly offset by lower volume. The average rate earned was up 14 basis points compared to the year-ago quarter. Average investment securities decreased $54.9 million, or 11.1%, mainly as the result of loan demand. As loan demand increases, the Company uses proceeds from maturities, calls, and sales of investment securities to fund higher-earning loans.
Interest expense on deposits was up $53 thousand, or 9.9%, compared to the first quarter of 2017. The average rate paid on deposits increased two basis points due to a higher average rate on interest bearing demand deposits of 15 basis points which correlates to the increase in market rates and local market competition. Rates on time deposits decreased 8 basis points. Average total deposits were down $8.9 million driven by a decline in average time deposits of $45.8 million, partially offset by higher volume of interest bearing demand deposits of $32.1 million. The Company has continued to aggressively reprice higher-rate maturing time deposits downward with lower rate offerings or to allow them to mature without renewal.
Interest expense on borrowed funds was down $82 thousand, or 21.4%, in the comparison primarily due to a lower average balance of FHLB advances. The Company had FHLB advances of $10.0 million and $5.0 million mature during September and February 2017, respectively. The average rate paid on subordinated notes payable to the Company’s unconsolidated trusts, which is tied to the 3-month LIBOR, increased 67 basis points. The 3-month LIBOR was 2.31% as of the end of the quarter, up from 1.15% at March 31, 2017.
The average rate earned from interest income on loans and average interest rate paid on deposits continue to be near historical lows as a result of the low interest rate environment, competitive pressures, and the Company’s ongoing strategy of being more selective in pricing its loans and deposits. The goal of this strategy is to improve credit quality, net interest income, overall profitability, and capital position.
The Company has improved its mix of earning assets and interest bearing liabilities mainly through growth in the loan portfolio over the past year combined with a significant decrease in lower-yielding investment securities and a decline in higher-rate borrowings. On an average basis, loans represented 65.7% of earning assets for the first quarter of 2018, an increase of 325 basis points compared to 62.5% for the first quarter of 2017. Loans typically involve an increase in credit risk and higher yields when compared to investment securities.
For the current quarter, net interest margin on a taxable equivalent basis was 3.76%, an increase of 16 basis points compared with 3.60% a year earlier. Net interest spread increased 16 basis points to 3.66%, up from 3.50% in the year-ago quarter. Net interest margin and spread for the current quarter were negatively impacted four basis points by lower tax-equivalent adjustments related to tax-exempt loans and investment securities due to a reduction in Federal income tax rates that went to effect at the beginning of 2018. Net interest margin and spread for the current quarter were positively impacted two basis points from the collection of $74 thousand in prepayment fees during the quarter.
The Company expects its net interest margin to stay relatively flat or trend slightly upward in the near term according to internal modeling using expectations about future market interest rates, loan volume, the maturity structure of the Company’s earning assets and liabilities, and other factors. Future results could be significantly different than current expectations.
The following tables present an analysis of net interest income for periods indicated.
Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential
Three Months Ended March 31, |
2018 |
2017 |
||||||||||||||||||||||
(In thousands) |
Average Balance |
Interest |
Average Rate |
Average Balance |
Interest |
Average Rate |
||||||||||||||||||
Earning Assets |
||||||||||||||||||||||||
Investment securities1 |
||||||||||||||||||||||||
Taxable |
$ | 342,307 | $ | 2,025 | 2.40 | % | $ | 369,635 | $ | 1,900 | 2.08 | % | ||||||||||||
Nontaxable2 |
95,647 | 598 | 2.54 | 123,174 | 887 | 2.92 | ||||||||||||||||||
Interest bearing deposits in banks, federal funds sold, and money market mutual funds |
102,484 | 375 | 1.48 | 92,593 | 166 | .73 | ||||||||||||||||||
Loans2,3,4 |
1,036,527 | 12,518 | 4.90 | 974,987 | 11,796 | 4.91 | ||||||||||||||||||
Total earning assets |
1,576,965 | $ | 15,516 | 3.99 | % | 1,560,389 | $ | 14,749 | 3.83 | % | ||||||||||||||
Allowance for loan losses |
(9,815 | ) | (9,448 | ) | ||||||||||||||||||||
Total earning assets, net of allowance for loan losses |
1,567,150 | 1,550,941 | ||||||||||||||||||||||
Nonearning Assets |
||||||||||||||||||||||||
Cash and due from banks |
22,299 | 25,462 | ||||||||||||||||||||||
Premises and equipment, net |
30,806 | 31,852 | ||||||||||||||||||||||
Other assets |
48,452 | 58,660 | ||||||||||||||||||||||
Total assets |
$ | 1,668,707 | $ | 1,666,915 | ||||||||||||||||||||
Interest Bearing Liabilities |
||||||||||||||||||||||||
Deposits |
||||||||||||||||||||||||
Interest bearing demand |
$ | 381,339 | $ | 248 | .26 | % | $ | 349,212 | $ | 91 | .11 | % | ||||||||||||
Savings |
426,007 | 115 | .11 | 421,230 | 124 | .12 | ||||||||||||||||||
Time |
218,799 | 223 | .41 | 264,585 | 318 | .49 | ||||||||||||||||||
Federal funds purchased |
- | - | - | 39 | - | - | ||||||||||||||||||
Short-term securities sold under agreements to repurchase |
34,215 | 18 | .21 | 33,723 | 23 | .28 | ||||||||||||||||||
Long-term securities sold under agreements to repurchase |
512 | 1 | .79 | 1,287 | 2 | .63 | ||||||||||||||||||
Federal Home Loan Bank advances |
3,450 | 28 | 3.29 | 16,000 | 160 | 4.06 | ||||||||||||||||||
Subordinated notes payable to unconsolidated trusts |
33,506 | 254 | 3.07 | 33,506 | 198 | 2.40 | ||||||||||||||||||
Total interest bearing liabilities |
1,097,828 | $ | 887 | .33 | % | 1,119,582 | $ | 916 | .33 | % | ||||||||||||||
Noninterest Bearing Liabilities |
||||||||||||||||||||||||
Demand deposits |
350,183 | 337,016 | ||||||||||||||||||||||
Other liabilities |
27,732 | 24,541 | ||||||||||||||||||||||
Total liabilities |
1,475,743 | 1,481,139 | ||||||||||||||||||||||
Shareholders’ equity |
192,964 | 185,776 | ||||||||||||||||||||||
Total liabilities and shareholders’ equity |
$ | 1,668,707 | $ | 1,666,915 | ||||||||||||||||||||
Net interest income |
14,629 | 13,833 | ||||||||||||||||||||||
TE basis adjustment |
(172 | ) | (370 | ) | ||||||||||||||||||||
Net interest income |
$ | 14,457 | $ | 13,463 | ||||||||||||||||||||
Net interest spread |
3.66 | % | 3.50 | % | ||||||||||||||||||||
Impact of noninterest bearing sources of funds |
.10 | .10 | ||||||||||||||||||||||
Net interest margin |
3.76 | % | 3.60 | % |
1Average yields on securities available for sale have been calculated based on amortized cost.
2Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 21% for 2018 and 35% for 2017.
3Loan balances include principal balances on nonaccrual loans.
4Loan fees included in interest income amounted to $298 thousand and $326 thousand in 2018 and 2017, respectively.
Analysis of Changes in Net Interest Income (tax equivalent basis)
(In thousands) |
Variance |
Variance Attributed to |
||||||||||
Three Months Ended March 31, |
2018/20171 |
Volume |
Rate |
|||||||||
Interest Income |
||||||||||||
Taxable investment securities |
$ | 125 | $ | (727 | ) | $ | 852 | |||||
Nontaxable investment securities2 |
(289 | ) | (183 | ) | (106 | ) | ||||||
Interest bearing deposits in banks, federal funds sold, and money market mutual funds |
209 | 20 | 189 | |||||||||
Loans2 |
722 | 888 | (166 | ) | ||||||||
Total interest income |
767 | (2 | ) | 769 | ||||||||
Interest Expense |
||||||||||||
Interest bearing demand deposits |
157 | 10 | 147 | |||||||||
Savings deposits |
(9 | ) | 9 | (18 | ) | |||||||
Time deposits |
(95 | ) | (49 | ) | (46 | ) | ||||||
Federal funds purchased |
- | - | - | |||||||||
Short-term securities sold under agreements to repurchase |
(5 | ) | 2 | (7 | ) | |||||||
Long-term securities sold under agreements to repurchase |
(1 | ) | (4 | ) | 3 | |||||||
Federal Home Loan Bank advances |
(132 | ) | (106 | ) | (26 | ) | ||||||
Subordinated notes payable to unconsolidated trusts |
56 | - | 56 | |||||||||
Total interest expense |
(29 | ) | (138 | ) | 109 | |||||||
Net interest income |
$ | 796 | $ | 136 | $ | 660 | ||||||
Percentage change |
100.0 | % | 17.1 | % | 82.9 | % |
1The changes that are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and volume variances as a basis for allocation.
2Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 21% for 2018 and 35% for 2017.
Provision for Loan Losses
The provision for loan losses represents charges or credits to earnings that are necessary to maintain an allowance for loan losses at an adequate level to cover credit losses specifically identified in the loan portfolio, as well as management’s best estimate of incurred probable loan losses in the remainder of the portfolio at the balance sheet date. The credit quality of the Company’s loan portfolio continued recent trends of improvement during the current quarter, as certain credit quality metrics further improved upon recent quarterly bests.
The Company recorded a credit to the provision for loan losses in the amount of $261 thousand for the current quarter and a provision of $580 thousand for the year-ago quarter. The allowance for loan losses as a percentage of outstanding loans was 0.94% at March 31, 2018 compared to 0.94% and 0.96% at year-end 2017 and March 31, 2017, respectively. The credit to the provision for the current quarter was driven by net recoveries of $226 thousand and improvement in the overall credit quality of the loan portfolio. Net recoveries in the current quarter include $219 thousand from a real estate development project. The Company recorded a total of $2.4 million in principal charge-offs primarily between 2010 and 2012 related to this project. Recoveries in the current quarter bring the total recoveries related to this project to $2.1 million and the Company anticipates it could receive an additional $332 thousand in recoveries related to this credit. The timing and amount of these possible recoveries are subject to change and are dependent on the price and volume of lots sold by the developer; however, the Company expects to receive the recoveries in the second quarter of 2018. The provision in the first quarter of 2017 was driven by net charge-offs of $417 thousand primarily due to a $405 thousand charge-off on one larger-balance credit.
Overall credit quality metrics of the loan portfolio have continued to improve. Nonperforming loans, impaired loans, loans graded as substandard or below, and watch list loans have each declined when compared with a year earlier even though total loans outstanding have increased $45.6 million, or 4.6%, over that period of time. For further information about improvements in the Company’s overall credit quality, please refer to the discussion under the captions “Allowance for Loan Losses” and “Nonperforming Loans” that follows.
Noninterest Income
The components of noninterest income are as follows for the periods indicated:
Three Months Ended March 31, (In thousands) |
2018 |
2017 |
Increase |
% |
||||||||||||
Service charges and fees on deposits |
$ | 1,912 | $ | 1,958 | $ | (46 | ) | (2.3 | )% | |||||||
Allotment processing fees |
720 | 715 | 5 | 0.7 | ||||||||||||
Other service charges, commissions, and fees |
1,372 | 1,372 | - | - | ||||||||||||
Trust income |
789 | 704 | 85 | 12.1 | ||||||||||||
Net loss on sale of available for sale investment securities |
- | (9 | ) | 9 | (100.0 | ) | ||||||||||
Gain on sale of mortgage loans, net |
95 | 154 | (59 | ) | (38.3 | ) | ||||||||||
Income from company-owned life insurance |
293 | 235 | 58 | 24.7 | ||||||||||||
Other |
20 | 122 | (102 | ) | (83.6 | ) | ||||||||||
Total noninterest income |
$ | 5,201 | $ | 5,251 | $ | (50 | ) | (1.0 | )% |
The more significant items impacting noninterest income in the comparison are included below.
Service charges and fees on deposits were down due to lower dormant account fees of $73 thousand, or 10.9%, partially offset by higher overdraft fees of $29 thousand, or 3.2%. Dormant fees were down primarily due to a decline in certain savings account balances. The increase in overdraft fees was driven by higher volume and customer activity.
Allotment processing fees include $54 thousand related to an extra processing period during the current quarter due to the timing of scheduled transactions, which more than offset the overall reduction in processing volume. Volume declines in the comparison were primarily due to a customer that was acquired by a company that has the ability to do its own payment processing at the end of the first quarter of 2017. Allotment processing fees continued to be affected by lower processing volume stemming from the U.S. Department of Defense policy that became effective January 1, 2015, restricting the types of purchases active service members are able to make using the military allotment system for payment. The rate of decline in allotment processing fees began to subside during 2017, as existing contracts for the types of purchases affected by the new policy have steadily decreased and the Company continues its efforts to diversify its customer base and expand its payment processing options.
The increase in trust income was driven by a revision of fee schedules and an increase in the market value of accounts. The Company standardized the fee schedules for its trust services following the consolidation of its subsidiaries in 2017. The new fee schedule became effective for new customer accounts during the second quarter of 2017 and effective for existing accounts as of January 1, 2018, resulting in higher overall fee rates. Tax preparation fees related to annual fiduciary returns were up $22 thousand.
Net gains on the sale of mortgage loans were down in the comparisons mainly due to lower sales volume, partially offset by an increase in fees earned per loan sold beginning in 2018. Sales of mortgage loans decreased $4.0 million, or 62.3%, compared to the first quarter of 2017. The decrease in sales activity is mainly the result of the Company retaining a limited amount of certain mortgage loans that meet specific criteria in order to grow its loan portfolio. The increase in income from company-owned life insurance in the comparison is primarily due to a tax-free death benefit received in excess of the cash surrender value during the quarter of $67 thousand.
Other noninterest income during the current quarter includes a net unrealized loss on equity securities of $55 thousand related to the adoption of Accounting Standards Update (“ASU”) 2016-01 at the beginning of 2018 which requires equity investments to be measured at fair value with changes in the fair value recognized through net income. Prior to 2018, changes in the fair value of equity securities were recognized through accumulated other comprehensive income.
Noninterest Expense
The components of noninterest expense are as follows for the periods indicated:
Three Months Ended March 31, (In thousands) |
2018 |
2017 |
Increase |
% |
||||||||||||
Salaries and employee benefits |
$ | 7,490 | $ | 7,860 | $ | (370 | ) | (4.7 | )% | |||||||
Occupancy expenses, net |
1,254 | 1,214 | 40 | 3.3 | ||||||||||||
Equipment expenses |
601 | 553 | 48 | 8.7 | ||||||||||||
Data processing and communication expenses |
1,083 | 1,293 | (210 | ) | (16.2 | ) | ||||||||||
Bank franchise tax |
500 | 557 | (57 | ) | (10.2 | ) | ||||||||||
Deposit insurance expenses |
126 | 137 | (11 | ) | (8.0 | ) | ||||||||||
Other real estate expenses, net |
117 | 74 | 43 | 58.1 | ||||||||||||
Other |
1,947 | 1,841 | 106 | 5.8 | ||||||||||||
Total noninterest expense |
$ | 13,118 | $ | 13,529 | $ | (411 | ) | (3.0 | )% |
Noninterest expense for the first quarter of the prior year includes $472 thousand related to the consolidation of the Company’s subsidiaries that was completed during the first quarter of 2017. The more significant items impacting noninterest expense in the comparison are included below.
The decrease in salaries and employee benefits was led by a decline in salaries and related payroll taxes of $302 thousand, or 4.8%, which reflects a reduction in workforce related to the subsidiary consolidation plan completed during the first quarter of 2017. The Company had 424 full time equivalent employees at March 31, 2018, down from 443 a year ago. Salaries and employee benefits for the first quarter of 2017 include severance pay expense of $301 thousand. There were no similar expenses during the first quarter of 2018. Benefit expenses were up $131 thousand, or 12.9%, primarily due to higher claims activity of the Company’s self-funded health insurance plan of $111 thousand, or 10.1%. Accruals related to the Company’s incentive payment plans increased $100 thousand, or 46.8% in the comparison.
In connection with the merger of certain of its subsidiaries in February 2017, the Company revalued its postretirement medical benefits plan liability due to the reduction in workforce. This resulted in a curtailment gain of $417 thousand, which is recorded in other noninterest expense, and prior service costs of $66 thousand, which is recorded in salaries and employee benefits, for a net gain of $351 thousand at the time of curtailment during the first quarter of 2017.
The decline in data processing and communication expenses was primarily due to $127 thousand related to the consolidation of subsidiaries in the first quarter of 2017. The reduction in deposit insurance expense in the comparison is primarily due to a refinement of the accrual in the current quarter. Other noninterest expenses also includes a reduction in supplies expense of $95 thousand, or 52.6%, due to $21 thousand in the year-ago quarter related to the consolidation and the timing of the replenishment of operational supplies and a decline in legal expenses of $47 thousand or 55.3%.
Income Taxes
Income tax expense was $1.2 million for the current quarter, a decrease of $116 thousand, or 9.1%, compared to $1.3 million for the first quarter of 2017. The effective income tax rates were 17.1% and 27.7% for the current and year-ago quarters, respectively. Tax expense and the effective tax rate declined as a result of the decrease in the top Federal income tax rate from 35% to 21% that went into effect in 2018.
FINANCIAL CONDITION
Total assets were $1.7 billion at March 31, 2018, an increase of $12.1 million, or 0.7%, from year-end 2017, led by an increase in cash and cash equivalents of $32.8 million, partially offset by a decline in investment securities of $20.4 million. Liabilities were up $11.4 million, or 0.8%, and equity increased $675 thousand, or 0.3%, in the comparison. Selected balance sheet amounts and related data are presented in the table below and discussion that follows.
(Dollars in thousands, except per share data) |
March 31, |
December 31, |
Increase |
% |
||||||||||||
Cash and cash equivalents |
$ | 153,221 | $ | 120,408 | $ | 32,813 | 27.3 | % | ||||||||
Investment securities |
407,213 | 427,617 | (20,404 | ) | (4.8 | ) | ||||||||||
Loans, net of allowance of $9,748 and $9,783 |
1,025,721 | 1,025,480 | 241 | 0.0 | ||||||||||||
Other real estate owned |
5,087 | 5,489 | (402 | ) | (7.3 | ) | ||||||||||
Other assets |
94,745 | 94,878 | (133 | ) | (0.1 | ) | ||||||||||
Total assets |
$ | 1,685,987 | $ | 1,673,872 | $ | 12,115 | 0.7 | % | ||||||||
Deposits |
$ | 1,394,091 | $ | 1,379,903 | $ | 14,188 | 1.0 | % | ||||||||
Securities sold under agreements to repurchase |
33,343 | 34,252 | (909 | ) | (2.7 | ) | ||||||||||
Other borrowings |
36,942 | 36,985 | (43 | ) | (0.1 | ) | ||||||||||
Other liabilities |
27,583 | 29,379 | (1,796 | ) | (6.1 | ) | ||||||||||
Total liabilities |
1,491,959 | 1,480,519 | 11,440 | 0.8 | ||||||||||||
Common stock |
940 | 940 | - | - | ||||||||||||
Capital surplus |
52,278 | 52,201 | 77 | 0.1 | ||||||||||||
Retained earnings |
148,535 | 143,778 | 4,757 | 3.3 | ||||||||||||
Accumulated other comprehensive loss |
(7,725 | ) | (3,566 | ) | (4,159 | ) | 116.6 | |||||||||
Total shareholders’ equity |
194,028 | 193,353 | 675 | 0.3 | ||||||||||||
Total liabilities and shareholders’ equity |
$ | 1,685,987 | $ | 1,673,872 | $ | 12,115 | 0.7 | % | ||||||||
End of period tangible book value per common share1 |
$ | 25.80 | $ | 25.72 | $ | .08 | 0.3 | % | ||||||||
End of period per common share closing price |
39.95 | 38.50 | 1.45 | 3.8 |
1Represents total common equity less intangible assets divided by the number of common shares outstanding at the end of the period.
Cash and cash equivalents increased as the result of net proceeds from sales, maturities, and calls of investment securities and an increase in deposits. Deposits were up primarily from higher noninterest bearing demand deposits and savings deposits. Noninterest bearing demand deposits includes $12.3 million received at the end of the quarter related to a single business customer. These funds were temporary and transferred out of the account following quarter-end.
Shareholders’ equity was up primarily due to net income of $5.6 million, partially offset by other comprehensive loss of $4.1 million and dividends declared on common stock of $940 thousand. Other comprehensive loss was driven by an increase in the after-tax unrealized loss of $4.1 million related to the available for sale investment securities portfolio.
Temporary Investments
Temporary investments consist of interest bearing deposits in other banks, federal funds sold, and money market mutual funds. The Company uses these funds in the management of liquidity and interest rate sensitivity, as a short-term holding prior to subsequent movement into other investments with higher yields, or for other purposes. At March 31, 2018, temporary investments were $131 million, an increase of $36.3 million, or 38.2%, from year-end 2017.
Investment Securities
The investment securities portfolio is comprised primarily of residential mortgage-backed securities, tax-exempt securities of states and political subdivisions, and debt securities issued by U.S. government-sponsored agencies. Substantially all of the Company’s investment securities are designated as available for sale debt securities. Proceeds received from maturing or called investment securities not needed to fund higher-earning loans are either reinvested in similar investments or used to manage liquidity, such as for deposit outflows or other payment obligations. Total investment securities had a carrying amount of $407 million at March 31, 2018, a decrease of $20.4 million, or 4.8%, compared to $428 million at year-end 2017.
The decline in investment securities was driven by net maturities, calls, and sales totaling $14.5 million, lower pre-tax market values related to the available for sale portfolio of $5.2 million, and net premium amortization of $630 thousand. The decrease in the market value of the available for sale portfolio correlates with an overall increase in market interest rates during the quarter. As market interest rates rise, the value of fixed rate investments generally declines.
Loans
Loans were $1.0 billion at March 31, 2018, relatively unchanged compared to year-end 2017 despite early payoffs of several larger-balance loans totaling $11.8 million in the aggregate. The loan portfolio has grown in nine of the last twelve quarter and is at the highest level since the second quarter of 2012.
From time to time the Company may purchase a limited amount of loans originated by otherwise nonaffiliated third parties. The Company performs its own risk assessment and makes the credit decision on each loan prior to purchase. The Company purchased smaller balance commercial loans totaling $709 thousand and $732 thousand in the aggregate during the first quarter of 2018 and 2017, respectively. The average amount of the purchased loans was $118 thousand for 2018 and $122 thousand for 2017.
The composition of the loan portfolio is summarized in the table below.
March 31, 2018 |
December 31, 2017 |
|||||||||||||||
(Dollars in thousands) |
Amount |
% |
Amount |
% |
||||||||||||
Real estate mortgage – construction and land development |
$ | 131,376 | 12.7 | % | $ | 129,181 | 12.5 | % | ||||||||
Real estate mortgage – residential |
351,838 | 34.0 | 355,304 | 34.3 | ||||||||||||
Real estate mortgage – farmland and other commercial enterprises |
440,680 | 42.6 | 432,321 | 41.8 | ||||||||||||
Commercial, financial, and agriculture |
104,018 | 10.0 | 110,542 | 10.7 | ||||||||||||
Installment |
7,557 | .7 | 7,915 | .7 | ||||||||||||
Total |
$ | 1,035,469 | 100.0 | % | $ | 1,035,263 | 100.0 | % |
On an average basis, loans represented 65.7% of earning assets for the first three months of 2018, an increase of 244 basis points compared to 63.3% for the full year of 2017. The increase in the level of loans as a percentage of earning assets reflects the overall growth in the loan portfolio over the past year combined with a decrease in investment securities. The increase in loans in recent periods has been funded primarily by cash flows from the investment portfolio. Loans typically involve an increase in credit risk and higher yields when compared to investment securities and temporary investment alternatives.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level management believes is adequate to cover probable losses in the loan portfolio. The determination of the appropriate level of allowance for loan losses requires significant judgment in order to reflect credit losses specifically identified in the Company’s loan portfolio as well as management's best estimate of probable incurred credit losses in the loan portfolio at the balance sheet date. The allowance for loan losses is a valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses and the related provision for loan losses generally fluctuate as the relative level of nonperforming and impaired loans vary. However, other factors impact the amount of the allowance such as the Company’s historical loss experience, the financial condition of its borrowers, general economic conditions, and other qualitative risk factors as described in greater detail in the Company’s most recent annual report on Form 10-K.
The allowance for loan losses was $9.7 million, or 0.94% of outstanding loans, at March 31, 2018, a decline of $35 thousand compared to $9.8 million, or 0.94% of loans outstanding, at year-end 2017. The allowance as a percentage of loans outstanding was unchanged from the prior year-end as the result of net recoveries of $226 thousand, which nearly offsets the credit to the provision for loan losses of $261 thousand for the quarter and a relatively unchanged loan balance. As a percentage of nonperforming loans, the allowance for loan losses was 64.4% at March 31, 2018 compared to 63.7% at year-end 2017. The relatively low amount of the allowance for loan losses as a percentage of nonperforming loans is due mainly to the makeup of nonperforming loans as discussed further below.
Nonperforming loans include $11.4 million of accruing restructured loans, which represents 75.4% of total nonperforming loans at March 31, 2018. At year-end 2017, this amount was $11.5 million, or 74.7%. The allowance attributed to credits that are restructured with lower interest rates generally represents the difference in the present value of future cash flows calculated at the loan’s original effective interest rate and the new lower rate resulting from the restructuring. This typically results in a reserve for loan losses that is less severe than for other loans that are collateral dependent. The allowance specifically allocated to impaired loans, which includes restructured loans, was $3.2 million, or 14.1%, and $3.2 million, or 13.8% of such loans, at March 31, 2018 and year-end 2017, respectively. As a percentage of nonaccrual loans and loans past due 90 days or more and still accruing, the allowance for loan losses was 262% and 252% for the current quarter-end and year-end 2017, respectively.
The overall improvement in the credit quality of the loan portfolio experienced during 2017 continued during the first three months of 2018. Certain credit quality measures are summarized in the table that follows for the periods indicated. Several of these measures are at or near the best level in the last three years.
(In thousands) |
March 31, 2018 |
December 31, 2017 |
March 31, 2017 |
Three-year |
Three-year |
|||||||||||||||
Nonperforming loans |
$ | 15,141 | $ | 15,369 | $ | 27,736 | $ | 34,193 | $ | 15,141 | ||||||||||
Nonaccrual loans |
3,719 | 3,887 | 5,182 | 9,921 | 3,719 | |||||||||||||||
Loans past due 30-89 days and still accruing |
2,598 | 2,099 | 1,453 | 2,719 | 588 | |||||||||||||||
Loans graded substandard or below |
30,035 | 30,121 | 35,855 | 48,985 | 30,035 | |||||||||||||||
Impaired loans |
22,477 | 23,141 | 39,732 | 43,395 | 22,477 | |||||||||||||||
Loans, net of unearned income |
1,035,469 | 1,035,263 | 989,833 | 1,035,469 | 933,305 |
1Based on quarter-end balances over the previous three years.
Nonperforming Loans
Nonperforming loans consist of nonaccrual loans, accruing restructured loans, and loans 90 days or more past due and still accruing interest. The accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection.
Restructured loans occur when a lender, because of economic or legal reasons related to a borrower’s financial difficulty, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically include a reduction of the stated interest rate or an extension of the maturity date, among other possible concessions. The Company gives careful consideration to identifying which of its challenged credits merit a restructuring of terms that it believes will result in maximum loan repayments and mitigation of possible losses. Cash flow projections are carefully scrutinized prior to restructuring any credits; past due credits are typically not granted concessions.
Nonperforming loans were $15.1 million at March 31, 2018, a decrease of $228 thousand or, 1.5%, compared to $15.4 million at year-end 2017. Nonaccrual loans and accruing restructured loans decreased $168 thousand, or 4.3%, and $60 thousand, or 0.5%, respectively. Loan payments include $348 thousand related to nonaccrual loans during the first three months of 2018.
Accruing restructured loans make up $11.4 million, or 75.4%, of the Company’s nonperforming loans at March 31, 2018 compared with $3.7 million, or 24.6%, related to nonaccrual loans. Additionally, two larger balance credits account for $10.3 million, or 89.8%, of total restructured loans. Nonaccrual loans have decreased to the lowest level since the second quarter of 2007 and are down $60.0 million, or 94.2%, from their peak of $63.7 million in the second quarter of 2011.
Nonperforming loans, presented by class, were as follows for the periods indicated:
Nonperforming Loans
(In thousands) |
March 31, |
December 31, |
||||||
Nonaccrual Loans |
||||||||
Real Estate |
||||||||
Real estate mortgage – construction and land development |
$ | 150 | $ | 151 | ||||
Real estate mortgage – residential |
1,636 | 1,763 | ||||||
Real estate mortgage – farmland and other commercial enterprises |
1,738 | 1,752 | ||||||
Commercial |
||||||||
Commercial and industrial |
30 | 53 | ||||||
Consumer |
||||||||
Unsecured |
165 | 168 | ||||||
Total nonaccrual loans |
$ | 3,719 | $ | 3,887 | ||||
Restructured Loans |
||||||||
Real Estate |
||||||||
Real estate mortgage – construction and land development |
$ | 1,597 | $ | 1,955 | ||||
Real estate mortgage – residential |
5,648 | 5,326 | ||||||
Real estate mortgage – farmland and other commercial enterprises |
3,682 | 3,703 | ||||||
Commercial |
||||||||
Commercial and industrial |
369 | 370 | ||||||
Consumer |
||||||||
Unsecured |
126 | 128 | ||||||
Total restructured loans |
$ | 11,422 | $ | 11,482 | ||||
Past Due 90 Days or More and Still Accruing |
$ | - | $ | - | ||||
Total nonperforming loans |
$ | 15,141 | $ | 15,369 | ||||
Ratio of total nonperforming loans to total loans |
1.5 | % | 1.5 | % |
The most significant components of nonperforming loans include nonaccrual and restructured loans. Activity during 2018 related to these two components was as follows:
(In thousands) |
Nonaccrual |
Restructured |
||||||
Balance at December 31, 2017 |
$ | 3,887 | $ | 11,482 | ||||
Additions |
291 | - | ||||||
Principal paydowns |
(348 | ) | (60 | ) | ||||
Charge-offs |
(111 | ) | - | |||||
Balance at March 31, 2018 |
$ | 3,719 | $ | 11,422 |
The Company’s comprehensive risk-grading and loan review program includes a review of loans to assess risk and assign a grade to those loans, a review of delinquencies, and an assessment of loans for needed charge-offs or placement on nonaccrual status. The Company had loans in the amount of $31.9 million and $32.7 million at March 31, 2018 and year-end 2017, respectively, which were performing but considered potential problem loans and are not included in the nonperforming loan totals in the table above. These loans, however, are considered in establishing an appropriate allowance for loan losses. Potential problem loans include a variety of borrowers and are secured primarily by various types of real estate including commercial, construction properties, and residential real estate developments. At March 31, 2018, the five largest potential problem credits were $7.8 million in the aggregate compared to $9.3 million at year-end 2017.
Potential problem loans are identified on the Company’s watch list and consist of loans that require close monitoring by management. Credits may be considered as a potential problem loan for reasons that are temporary or correctable, such as for a deficiency in loan documentation or absence of current financial statements of the borrower. Potential problem loans may also include credits where adverse circumstances are identified that may affect the borrower’s ability to comply with the contractual terms of the loan. Other factors which might indicate the existence of a potential problem loan include the delinquency of a scheduled loan payment, deterioration in a borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment in which the borrower operates. Certain loans on the Company’s watch list are also considered impaired and specific allowances related to these loans are established in accordance with the appropriate accounting guidance.
Other Real Estate
OREO includes real estate properties acquired by the Company through, or in lieu of, actual foreclosure. At March 31, 2018, OREO was $5.1 million, a decrease of $402 thousand, or 7.3%, compared to $5.5 million at year-end 2017. The decrease was driven by sales activity, including the sale of two related real estate development properties that sold for $223 thousand with a related loss of $4 thousand. OREO has declined $47.5 million or 90.3% from its peak of $52.6 million, which occurred at year-end 2012. A summary of OREO activity for 2018 follows.
(In thousands) |
Amount |
|||
Balance at December 31, 2017 |
$ | 5,489 | ||
Transfers from loans and other increases |
104 | |||
Proceeds from sales |
(430 | ) | ||
Loss on sales, net |
(43 | ) | ||
Write-downs |
(33 | ) | ||
Balance at March 31, 2018 |
$ | 5,087 |
Deposits
A summary of the Company’s deposits are as follows for the periods indicated:
End of Period |
Average |
|||||||||||||||||||||||
(In thousands) |
March 31, |
December 31, |
Increase |
Three Months |
Twelve Months |
Increase |
||||||||||||||||||
Noninterest Bearing |
$ | 375,645 | $ | 361,855 | $ | 13,790 | $ | 350,183 | $ | 347,355 | $ | 2,828 | ||||||||||||
Interest Bearing |
||||||||||||||||||||||||
Demand |
381,253 | 379,027 | 2,226 | 381,339 | 356,023 | 25,316 | ||||||||||||||||||
Savings |
424,494 | 416,163 | 8,331 | 426,007 | 418,507 | 7,500 | ||||||||||||||||||
Time |
212,699 | 222,858 | (10,159 | ) | 218,799 | 245,215 | (26,416 | ) | ||||||||||||||||
Total interest bearing |
1,018,446 | 1,018,048 | 398 | 1,026,145 | 1,019,745 | 6,400 | ||||||||||||||||||
Total Deposits |
$ | 1,394,091 | $ | 1,379,903 | $ | 14,188 | $ | 1,376,328 | $ | 1,367,100 | $ | 9,228 |
The increase in total end of period deposits was driven by higher noninterest bearing demand, savings, and interest bearing demand deposits of $13.8 million, or 3.8%, $8.3 million, or 2.0%, and $2.2 million, or 0.6%, respectively. Noninterest bearing demand deposits includes $12.3 million received at the end of the quarter related to a single business customer. These funds were temporary and transferred out of the account following quarter-end. Time deposits decreased $10.2 million, or 4.6%. The decrease in time deposits is a result of the Company’s overall high liquidity position and a strategy to minimize overall funding costs, mainly by allowing higher-rate certificates of deposit to roll off or reprice at lower interest rates. Many of those balances have been moved into noninterest bearing demand or lower-rate interest bearing demand or savings accounts by the customer. The Company has not sought out or accepted brokered deposits in the past nor does it have plans to do so in the future.
Borrowed Funds
Total borrowed funds were $70.3 million at March 31, 2018, down $952 thousand, or 1.3%, from year-end 2017. The decrease in borrowed funds was driven by securities sold under agreements to repurchase, which were $33.3 million at quarter-end, down $909 thousand, or 2.7%, from year-end 2017. Securities sold under agreements to repurchase represent funds that have been swept out of the deposit accounts into repurchase agreements to facilitate the needs of certain qualifying customers, primarily commercial. Such transactions are accounted for as secured borrowings.
LIQUIDITY
The primary source of funds for the Parent Company is the receipt of dividends from its subsidiary bank, United Bank & Capital Trust Company (“United Bank” or the “Bank”), balances of cash and cash equivalents maintained, and borrowings from nonaffiliated sources. Primary uses of cash include the payment of dividends to its shareholders, paying interest expense on borrowings, and payments to fund general operating expenses.
Payments of dividends to the Parent Company by the Bank are subject to certain regulatory restrictions as set forth in national and state banking laws and regulations. A depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it is already undercapitalized. Capital ratios at the Bank exceed regulatory established “well-capitalized” status at March 31, 2018 under the prompt corrective action regulatory framework. The federal banking agencies may prevent the payment of a dividend if they determine that the payment would be an unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
The Parent Company had cash and cash equivalents of $60.3 million and $61.6 million at March 31, 2018 and year-end 2017, respectively. Significant cash transactions include $939 thousand and $242 thousand for the payment of dividends on common stock and interest on subordinated notes payable, respectively.
The Company's objective as it relates to liquidity is to ensure that the Bank has funds available to meet deposit withdrawals and credit demands without unduly penalizing profitability. In order to maintain a proper level of liquidity, the Bank has several sources of funds available on a daily basis. For assets, those sources of funds include liquid assets that are readily marketable or that can be pledged, or which mature in the near future. These assets primarily include cash and due from banks, federal funds sold, investment securities, and cash flow generated by the repayment of principal and interest on loans and investment securities. For liabilities, sources of funds primarily include the Bank’s core deposits, FHLB and other borrowings, and federal funds purchased and securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and investment securities are generally a predictable source of funds, deposit outflows and mortgage prepayments are influenced significantly by general interest rates, economic conditions, and competition in our local markets.
As of March 31, 2018, the Company had $419 million of additional borrowing capacity under various FHLB, federal funds, and other borrowing agreements. However, there is no guarantee that these sources of funds will continue to be available to the Company, or that current borrowings can be refinanced upon maturity, although the Company is not aware of any events or uncertainties that are likely to cause a decrease in the Company’s liquidity from these sources. The Company’s borrowing capacity was $406 million at year-end 2017.
For the longer term, the liquidity position is managed by balancing the maturity structure of the balance sheet. This process allows for an orderly flow of funds over an extended period of time. The Company’s Asset and Liability Management Committee meets regularly and monitors the composition of the balance sheet to ensure comprehensive management of interest rate risk and liquidity.
Liquid assets consist of cash and cash equivalents, available for sale debt securities, and equity investment securities. At March 31, 2018, consolidated liquid assets were $557 million, up $12.4 million, or 2.3%, compared to $545 million at year-end 2017. The Company’s liquidity position remains elevated mainly as a result of the Company’s overall net funding position. The overall funding position of the Company changes as loan demand, deposit levels, and other sources and uses of funds fluctuate.
Net cash provided by operating activities was $5.6 million and $5.9 million for the first three months of 2018 and 2017, respectively. This represents a decrease of $298 thousand, or 5.0%. Net cash provided by investing activities was $14.8 million for the first three months of 2018 compared to net cash used in investing activities of $34.0 million for the first quarter of 2017. The change was primarily driven by investment securities activity and loan activity. The Company had net cash proceeds of $14.5 million related to investment securities for 2018, up $26.1 million compared with the year-ago period. Net cash inflows represent proceeds from the sale, maturity, and call of investment securities in excess of purchases. For loans, the Company had cash inflows representing overall net principal collections of $115 thousand for 2018 compared to net principal advances of $18.4 million a year earlier.
Net cash provided by financing activities was $12.3 million and $10.1 million for the first three months of 2018 and 2017, respectively. This represents an increase of $2.2 million, or 21.9%, driven primarily by long and short-term securities sold under agreements to repurchase activity. For 2018, the Company had net proceeds from long-term securities sold under agreements to repurchase of $1 thousand, compared to net repayments of $5.0 million in 2017. Short-term securities sold under agreements to repurchase declined $910 thousand during the first three months of 2018, down $1.4 million compared to a decrease of $2.3 million in the year-ago period. Deposits were up $14.2 million during 2018 compared to an $18.2 million increase for the first three months of 2017.
Commitments to extend credit are entered into with customers in the ordinary course of providing traditional banking services and are considered in addressing the Company’s liquidity management. The Company does not expect these commitments to significantly affect the liquidity position in future periods. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options, or similar instruments.
CAPITAL RESOURCES
Shareholders’ equity was $194 million at March 31, 2018, an increase of $675 thousand, or 0.3%, compared to $193 million at year-end 2017. The increase in shareholders’ equity was driven by net income of $5.6 million, partially offset by higher accumulated other comprehensive loss of $4.2 million, and dividends declared on common stock of $940 thousand. The increase in accumulated other comprehensive loss is primarily due to a $4.1 million after-tax decline in the market value of the available for sale investment securities portfolio, which correlates with an overall increase in market interest rates during the quarter. As market interest rates rise, the value of fixed rate investments generally declines.
At March 31, 2018, the Company’s tangible common equity ratio was 11.51%, a decrease of 4 basis points compared to 11.55% at year-end 2017. The tangible common equity ratio represents tangible common equity as a percentage of tangible assets, which excludes intangible assets.
In July 2013, U.S. banking regulators adopted final rules related to standards on bank capital adequacy and liquidity (commonly referred to as “Basel III”). The rules were effective for the Company beginning on January 1, 2015, subject to a phase-in period for certain provisions extending through January 1, 2019. The rules include a new common equity Tier 1 capital ratio, an increase to the minimum Tier 1 capital ratio, an increase to risk-weightings of certain assets, implementation of a new capital conservation buffer in excess of the required minimum (which began being phased in during 2016), and changes to how regulatory capital is defined. At March 31, 2018, the Company and the Bank met the minimum capital ratios and a fully phased-in capital conservation buffer under the rules.
Consistent with the objective of operating a sound financial organization, the Company’s goal is to maintain capital ratios well above the regulatory minimum requirements. The capital ratios of the Company and its subsidiary bank are presented in the following table for the dates indicated.
March 31, 2018 |
December 31, 2017 |
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Common Equity Tier 1 Risk- based Capital1 |
Tier 1 based |
Total based |
Tier 1 |
Common Equity Tier 1 Risk- based Capital1 |
Tier 1 based |
Total based |
Tier 1 |
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Consolidated |
17.07 | % | 19.82 | % | 20.65 | % | 13.99 | % | 16.56 | % | 19.30 | % | 20.12 | % | 13.75 | % | ||||||||||||||||
United Bank & Capital Trust Company |
14.63 | 14.63 | 15.47 | 10.47 | 14.05 | 14.05 | 14.88 | 10.13 | ||||||||||||||||||||||||
Regulatory minimum |
4.50 | 6.00 | 8.00 | 4.00 | 4.50 | 6.00 | 8.00 | 4.00 | ||||||||||||||||||||||||
Well-capitalized status |
6.50 | 8.00 | 10.00 | 5.00 | 6.50 | 8.00 | 10.00 | 5.00 |
1Common Equity Tier 1 Risked-based, Tier 1 Risk-based, and Total Risk-based Capital ratios are computed by dividing a bank’s Common Equity Tier 1, Tier 1 or Total Capital, as defined by regulation, by a risk-weighted sum of the bank’s assets, with the risk weighting determined by general standards established by regulation.
2Tier 1 Leverage ratio is computed by dividing a bank’s Tier 1 Capital by its total quarterly average assets, as defined by regulation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company uses a simulation model as a tool to monitor and evaluate interest rate risk exposure. The model is designed to measure the sensitivity of net interest income and net income to changing interest rates over future time periods. Forecasting net interest income and its sensitivity to changes in interest rates requires the Company to make assumptions about the volume and characteristics of many attributes, including assumptions relating to the replacement of maturing earning assets and liabilities. Other assumptions include, but are not limited to, projected prepayments, projected new volume, and the predicted relationship between changes in market interest rates and changes in customer account balances. These effects are combined with the Company’s estimate of the most likely rate environment to produce a forecast of net interest income and net income. The forecasted results are then adjusted for the effect of a gradual increase and decrease in market interest rates on the Company’s net interest income and net income. Because assumptions are inherently uncertain, the model cannot precisely estimate net interest income and net income or the effect of interest rate changes on net interest income and net income. Actual results could differ significantly from simulated results.
At March 31, 2018, the model indicated that if rates were to gradually increase by 150 basis points during the remainder of the calendar year, then net interest income and net income would decrease 0.16% and 0.37%, respectively, for the year ending December 31, 2018 when compared to the forecasted results for the most likely rate environment. The model indicated that if rates were to gradually decrease by 150 basis points over the same period, then net interest income and net income would decrease 0.02% and 0.06%, respectively.
In the current low interest rate environment, it is not practical or possible to reduce certain deposit rates by the same magnitude as rates on earning assets. The average rate paid on the Company’s deposits is presently below 1.5%. This situation magnifies the model’s predicted results when modeling a decrease in interest rates, as earning assets with higher yields have more of an opportunity to reprice at lower rates than lower-rate deposits.
Item 4. Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report, and have concluded that the Company’s disclosure controls and procedures were adequate and effective to ensure that all material information required to be disclosed in this report has been made known to them in a timely fashion.
The Company’s Chief Executive Officer and Chief Financial Officer have also concluded that there were no significant changes during the quarter ended March 31, 2018 in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 2018, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. It is the opinion of management, after discussion with legal counsel, that the disposition or ultimate resolution of such claims and legal actions will not have a material effect upon the consolidated financial statements of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During 2014, the Company changed the form of payment to its directors for board meeting and quarterly fees from 100% cash to 50% in cash and 50% in Company common stock. The shares are issued as part of a plan adopted by the Board of Directors. Each director has elected to participate by entering into an agreement with the Company to accept common stock in lieu of cash for 50% of the director’s board meeting and quarterly fees. As the shares are only issued to directors as part of a plan approved by the Board, the shares are exempt from the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”), as a sale not involving any public offering under Section 4(2) of the 1933 Act. Attendance for committee meetings continues to be paid completely in cash. As employee directors are not paid director’s fees, only non-employee directors receive stock under this plan.
In the three months ended March 31, 2018, the Company issued a total of 447 shares of common stock to its non-employee directors under this plan as compensation for $18 thousand of director fees. The cash retained by the Company by issuing common stock in lieu of paying cash is used for general corporate purposes. There are no brokers involved in the issuance of stock to directors and no commissions or other broker fees are paid.
At various times, the Company’s Board of Directors has authorized the purchase of shares of the Company’s outstanding common stock. No stated expiration dates have been established under any of the previous authorizations. There were no shares of common stock repurchased by the Company during the quarter ended March 31, 2018. There are 84,971 shares that may still be purchased under the various authorizations, although no shares have been purchased since 2008.
Item 6. Exhibits
List of Exhibits
2.1 |
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3.1 |
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3.2 |
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3.3 |
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3.4 |
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4.1* |
Junior Subordinated Indenture, dated as of July 21, 2005, between Farmers Capital Bank Corporation and Wilmington Trust Company, as Trustee, relating to unsecured junior subordinated deferrable interest notes that mature in 2035. |
4.2* |
Amended and Restated Trust Agreement, dated as of July 21, 2005, among Farmers Capital Bank Corporation, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein). |
4.3* |
Guarantee Agreement, dated as of July 21, 2005, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. |
4.4* |
Junior Subordinated Indenture, dated as of July 26, 2005, between Farmers Capital Bank Corporation and Wilmington Trust Company, as Trustee, relating to unsecured junior subordinated deferrable interest notes that mature in 2035. |
4.5* |
Amended and Restated Trust Agreement, dated as of July 26, 2005, among Farmers Capital Bank Corporation, as Depositor, Wilmington Trust Company, as Property and Delaware Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein). |
4.6* |
Guarantee Agreement, dated as of July 26, 2005, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. |
4.7* |
Indenture, dated as of August 14, 2007 between Farmers Capital Bank Corporation, as Issuer, and Wilmington Trust Company, as Trustee, relating to fixed/floating rate junior subordinated debt due 2037. |
4.8* |
Amended and Restated Declaration of Trust, dated as of August 14, 2007, by Farmers Capital Bank Corporation, as Sponsor, Wilmington Trust Company, as Delaware and Institutional Trustee, the Administrative Trustees (as named therein), and the Holders (as defined therein). |
4.9* |
Guarantee Agreement, dated as of August 14, 2007, between Farmers Capital Bank Corporation, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee. |
10.1 |
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10.2 |
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10.3 |
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10.4 |
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10.5 |
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10.6 |
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10.7 |
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10.8 |
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31.1** |
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2** |
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32** |
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101** |
Interactive Data Files |
* Exhibit not included pursuant to Item 601(b)(4)(iii) and (v) of Regulation S-K. The Company will provide a copy of such exhibit to the Securities and Exchange Commission upon request.
** Filed with this Quarterly Report on Form 10-Q.
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.
Date: |
May 7, 2018 |
/s/ Lloyd C. Hillard, Jr. |
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Lloyd C. Hillard, Jr. |
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President and CEO |
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(Principal Executive Officer) |
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Date: |
May 7, 2018 |
/s/ Mark A. Hampton |
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Mark A. Hampton |
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Executive Vice President, CFO, and Secretary |
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(Principal Financial and Accounting Officer) |
50