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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly period ended
Commission file number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No) |
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(Address of principal executive offices) |
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(Zip Code) |
(
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act.
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Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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Large accelerated filer |
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☐ |
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☒ |
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Non-accelerated filer |
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☐ |
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Small reporting company |
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Emerging growth company |
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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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at April 30, 2022 |
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Common Stock, No Par Value |
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Page Number |
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PART I - FINANCIAL INFORMATION |
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Item 1 |
Financial Statements (Unaudited) |
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Included in Part I of this report: |
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Farmers National Banc Corp. and Subsidiaries |
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2 |
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3 |
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4 |
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5 |
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6 |
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7 |
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Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
31 |
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Item 3 |
39 |
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Item 4 |
39 |
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40 |
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Item 1 |
40 |
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Item 1A |
40 |
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Item 2 |
40 |
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Item 3 |
40 |
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Item 4 |
40 |
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Item 5 |
40 |
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Item 6 |
41 |
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43 |
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10-Q Certifications |
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Section 906 Certifications |
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1
CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
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(In Thousands of Dollars) |
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(Unaudited) |
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March 31, 2022 |
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December 31, 2021 |
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ASSETS |
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Cash and due from banks |
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$ |
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$ |
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Federal funds sold and other |
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TOTAL CASH AND CASH EQUIVALENTS |
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Securities available for sale |
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Other investments |
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Loans held for sale |
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Loans |
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Less allowance for credit losses |
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NET LOANS |
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Premises and equipment, net |
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Goodwill |
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Other intangibles, net |
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Bank owned life insurance |
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Other assets |
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TOTAL ASSETS |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Deposits: |
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Noninterest-bearing |
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$ |
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$ |
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Interest-bearing |
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Brokered time deposits |
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TOTAL DEPOSITS |
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Long-term borrowings |
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Other liabilities |
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TOTAL LIABILITIES |
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Commitments and contingent liabilities |
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Stockholders' Equity: |
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Common Stock - Authorized |
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Retained earnings |
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Accumulated other comprehensive income |
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( |
) |
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Treasury stock, at cost; |
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( |
) |
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( |
) |
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TOTAL STOCKHOLDERS' EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
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$ |
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$ |
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See accompanying notes
2
CONSOLIDATED STATEMENTS OF INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
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(In Thousands except Per Share Data) |
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For the Three Months Ended |
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(Unaudited) |
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March 31, 2022 |
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March 31, 2021 |
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INTEREST AND DIVIDEND INCOME |
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Loans, including fees |
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$ |
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$ |
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Taxable securities |
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Tax exempt securities |
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Dividends |
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Federal funds sold and other interest income |
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TOTAL INTEREST AND DIVIDEND INCOME |
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INTEREST EXPENSE |
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Deposits |
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Short-term borrowings |
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Long-term borrowings |
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TOTAL INTEREST EXPENSE |
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NET INTEREST INCOME |
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(Credit) provision for credit losses |
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( |
) |
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Provision for unfunded loans |
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NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES |
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NONINTEREST INCOME |
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Service charges on deposit accounts |
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Bank owned life insurance income, including death benefit |
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Trust fees |
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Insurance agency commissions |
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Security (losses) gains, including fair value changes for equity securities |
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( |
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Retirement plan consulting fees |
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Investment commissions |
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Net gains on sale of loans |
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Other mortgage banking income (loss), net |
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( |
) |
|
Debit card and EFT fees |
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Legal settlement |
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Other operating income |
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TOTAL NONINTEREST INCOME |
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NONINTEREST EXPENSES |
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Salaries and employee benefits |
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Occupancy and equipment |
|
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State and local taxes |
|
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Professional fees |
|
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Merger related costs |
|
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Advertising |
|
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FDIC insurance |
|
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Intangible amortization |
|
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Core processing charges |
|
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Charitable donation |
|
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Other operating expenses |
|
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TOTAL NONINTEREST EXPENSES |
|
|
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|
INCOME BEFORE INCOME TAXES |
|
|
|
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|
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INCOME TAXES |
|
|
|
|
|
|
|
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|
NET INCOME |
|
$ |
|
|
|
$ |
|
|
|
EARNINGS PER SHARE - basic |
|
$ |
|
|
|
$ |
|
|
|
EARNINGS PER SHARE - fully diluted |
|
$ |
|
|
|
$ |
|
|
See accompanying notes
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
|
|
|
(In Thousands of Dollars) |
|
|||||
|
|
|
For the Three Months Ended |
|
|||||
|
(Unaudited) |
|
March 31, 2022 |
|
|
March 31, 2021 |
|
||
|
NET INCOME |
|
$ |
|
|
|
$ |
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
Net unrealized holding losses on available for sale securities |
|
|
( |
) |
|
|
( |
) |
|
Reclassification adjustment for (gains) realized in income |
|
|
|
|
|
|
( |
) |
|
Net unrealized holding losses |
|
|
( |
) |
|
|
( |
) |
|
Income tax effect |
|
|
|
|
|
|
|
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|
Unrealized holding losses, net of reclassification and tax |
|
|
( |
) |
|
|
( |
) |
|
Change in funded status of post-retirement plan, net of tax |
|
|
( |
) |
|
|
|
|
|
Other comprehensive loss, net of tax |
|
|
( |
) |
|
|
( |
) |
|
TOTAL COMPREHENSIVE INCOME (LOSS) |
|
$ |
( |
) |
|
$ |
|
|
See accompanying notes
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
(Table Dollar Amounts in Thousands except Per Share Data)
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
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|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
||||
|
(Unaudited) |
Stock |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|||||
|
Balance December 31, 2021 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Restricted share issuance |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Long Term Incentive Plan |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Share forfeitures for taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Dividends paid at $ |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Balance March 31, 2022 |
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
||||
|
(Unaudited) |
Stock |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|||||
|
Balance December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Long Term Incentive Plan |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share forfeitures for taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Cumulative impact of ASU 2016-13 adoption (CECL) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Dividends paid at $ |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Treasury share purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance March 31, 2021 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
|
|
|
(In Thousands of Dollars) |
|
|||||
|
|
|
Three Months Ended |
|
|||||
|
(Unaudited) |
|
March 31, 2022 |
|
|
March 31, 2021 |
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
( |
) |
|
|
|
|
|
Provision for unfunded loans |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
Net amortization of securities |
|
|
|
|
|
|
|
|
|
Available for sale security gain |
|
|
|
|
|
|
( |
) |
|
Realized (gains) losses on equity securities |
|
|
|
|
|
|
( |
) |
|
Loss on premises and equipment sales and disposals, net |
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
Earnings on bank owned life insurance |
|
|
( |
) |
|
|
( |
) |
|
Origination of loans held for sale |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from loans held for sale |
|
|
|
|
|
|
|
|
|
Net gains on sale of loans |
|
|
( |
) |
|
|
( |
) |
|
Net change in other assets and liabilities |
|
|
( |
) |
|
|
( |
) |
|
NET CASH FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Proceeds from maturities and repayments of securities available for sale |
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities available for sale |
|
|
|
|
|
|
|
|
|
Purchases of securities available for sale |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from sales of equity securities |
|
|
|
|
|
|
|
|
|
Purchase of equity securities |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from maturities and repayments of SBIC funds |
|
|
|
|
|
|
|
|
|
Purchases of SBIC funds |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from redemption of regulatory stock |
|
|
|
|
|
|
|
|
|
Purchase of regulatory stock |
|
|
( |
) |
|
|
( |
) |
|
Loan originations and payments, net |
|
|
|
|
|
|
|
|
|
Proceeds from land and building sales |
|
|
|
|
|
|
|
|
|
Additions to premises and equipment |
|
|
( |
) |
|
|
( |
) |
|
NET CASH FROM INVESTING ACTIVITIES |
|
|
( |
) |
|
|
( |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net change in deposits |
|
|
|
|
|
|
|
|
|
Net change in short-term borrowings |
|
|
|
|
|
|
|
|
|
Repayment of long-term borrowings |
|
|
|
|
|
|
( |
) |
|
Cash dividends paid |
|
|
( |
) |
|
|
( |
) |
|
Repurchase of common shares |
|
|
|
|
|
|
( |
) |
|
NET CASH FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
|
|
|
|
|
|
|
Beginning cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
Supplemental noncash disclosures: |
|
|
|
|
|
|
|
|
|
Transfer of loans to other real estate |
|
$ |
|
|
|
$ |
|
|
|
Security purchases not settled |
|
$ |
|
|
|
$ |
|
|
|
Issuance of stock awards |
|
$ |
|
|
|
$ |
|
|
See accompanying notes
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation:
Farmers National Banc Corp. (“Company”) is a Financial Holding Company registered under the Bank Holding Company Act of 1956, as amended. The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”). The consolidated financial statements also include the accounts of the Bank’s subsidiaries; Farmers National Insurance, LLC (“Insurance”) and Farmers of Canfield Investment Co. (“Investments”). The Company provides trust and retirement consulting services through its subsidiary, Farmers Trust Company (“Trust”), and insurance services through the Bank’s subsidiary, Insurance. Farmers National Captive, Inc. (“Captive”) is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and its subsidiaries. The Captive pools resources with eleven similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves and to provide insurance where not currently available or economically feasible in today’s insurance market place. The consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, along with the Trust and Captive. All significant intercompany balances and transactions have been eliminated in the consolidation.
Basis of Presentation:
The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2021 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”). The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year. Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.
Estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segments:
The Company provides a broad range of financial services to individuals and companies in northeastern Ohio and western Pennsylvania. Operations are managed and financial performance is primarily aggregated and reported in
Equity:
There are
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists of unrealized gains and losses on securities available for sale and changes in the funded status of the post-retirement plan, which are recognized as components of stockholders’ equity, net of tax effect.
7
Updates to Significant Accounting Policies:
New Accounting Standard:
On March 31, 2022, FASB issued ASU 2022-2, which eliminates the troubled debt restructuring (“TDR”), accounting model for creditors that have adopted Topic 326, Financial Instruments – Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications now will be accounted for under the general loan modification guidance in Subtopic 310-20. In addition, on a prospective basis, entities will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty. Public business entities within the scope of the Topic 326 vintage disclosure requirements also will be required to prospectively disclose current-period gross write-off information by vintage, or year of origination. For entities that have adopted Topic 326, ASU 2022-02 takes effect in reporting periods beginning after December 15, 2022. Early adoption is permitted. The Company has not elected to early adopt this ASU at this time. The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
Business Combinations:
On
On
In accordance with ASC 805, the Company expensed approximately $
8
The following table summarizes the consideration paid for Cortland and the amounts of the assets acquired and liabilities assumed on the closing date of the acquisition.
|
(In Thousands of Dollars) |
|
|
|
|
Consideration |
|
|
|
|
Cash |
$ |
|
|
|
Stock |
|
|
|
|
Fair value of total consideration transferred |
$ |
|
|
|
Fair value of assets acquired |
|
|
|
|
Cash and cash equivalents |
$ |
|
|
|
Securities available for sale |
|
|
|
|
Other investments |
|
|
|
|
Loans |
|
|
|
|
Premises and equipment |
|
|
|
|
Bank owned life insurance |
|
|
|
|
Core deposit intangible |
|
|
|
|
Current and deferred taxes |
|
|
|
|
Other assets |
|
|
|
|
Total assets acquired |
|
|
|
|
Fair value of liabilities assumed |
|
|
|
|
Deposits |
|
|
|
|
Short-term borrowings |
|
|
|
|
Long-term borrowings |
|
|
|
|
Accrued interest payable and other liabilities |
|
|
|
|
Total liabilities |
|
|
|
|
Net assets acquired |
$ |
|
|
|
Goodwill created |
|
|
|
|
Total net assets acquired |
$ |
|
|
Securities:
The following table summarizes the amortized cost and fair value of the available for sale investment securities portfolio at March 31, 2022 and December 31, 2021 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|||
|
(In Thousands of Dollars) |
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government sponsored entities |
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Mortgage-backed securities - residential |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Collateralized mortgage obligations - residential |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Small Business Administration |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Totals |
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
9
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
||
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|||
|
(In Thousands of Dollars) |
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
||||
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government sponsored entities |
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Mortgage-backed securities - residential |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Collateralized mortgage obligations - residential |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Small Business Administration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
There were
The amortized cost and fair value of the debt securities portfolio are shown in the table below by expected maturity. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
|
|
|
March 31, 2022 |
|
|||||
|
(In Thousands of Dollars) |
|
Amortized Cost |
|
|
Fair Value |
|
||
|
Maturity |
|
|
|
|
|
|
|
|
|
Within one year |
|
$ |
|
|
|
$ |
|
|
|
One to five years |
|
|
|
|
|
|
|
|
|
Five to ten years |
|
|
|
|
|
|
|
|
|
Beyond ten years |
|
|
|
|
|
|
|
|
|
Mortgage-backed, collateralized mortgage obligations and Small Business Administration securities |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|||||||||||||||
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||
|
(In Thousands of Dollars) |
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
||||||
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government sponsored entities |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
State and political subdivisions |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Corporate bonds |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Mortgage-backed securities - residential |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Collateralized mortgage obligations - residential |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Small Business Administration |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Total temporarily impaired |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
10
|
|
|
Less than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|||||||||||||||
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
||||||
|
(In Thousands of Dollars) |
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
||||||
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government sponsored entities |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
State and political subdivisions |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Corporate bonds |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Mortgage-backed securities - residential |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Collateralized mortgage obligations - residential |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Total temporarily impaired |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
Allowance for Credit Losses
The Company adopted ASU 2016-13 prior to 2021, which made improvements to the accounting for credit losses on securities available for sale. During the evaluation process, management considers the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.
If the Company determines that a credit loss exists, the credit portion of the allowance will be measured using a discounted cash flow analysis using the effective interest rate as of the security’s purchase date. As of March 31, 2022, the Company’s security portfolio consisted of
Loans:
Loan balances were as follows:
|
(In Thousands of Dollars) |
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
|
|
|
$ |
|
|
|
Non-owner occupied |
|
|
|
|
|
|
|
|
|
Farmland |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
1-4 family residential |
|
|
|
|
|
|
|
|
|
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
Indirect |
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total originated loans |
|
$ |
|
|
|
$ |
|
|
|
Net Deferred loan (fees) costs |
|
|
|
|
|
|
|
|
|
Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
|
Net loans |
|
$ |
|
|
|
$ |
|
|
11
Allowance for credit loss activity
The following tables present the activity in the allowance for credit losses by portfolio segment for the three month period ended March 31, 2022 and 2021:
Three Months Ended March 31, 2022
|
(In Thousands of Dollars) |
|
Commercial Real Estate |
|
|
Commercial |
|
|
Residential Real Estate |
|
|
Consumer |
|
|
Total |
|
|||||
|
Allowance for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Provision for credit losses |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Loans charged off |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Three Months Ended March 31, 2021
|
(In Thousands of Dollars) |
|
Commercial Real Estate |
|
|
Commercial |
|
|
Residential Real Estate |
|
|
Consumer |
|
|
Total |
|
|||||
|
Allowance for credit losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Impact of CECL adoption |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table presents the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of March 31, 2022 and December 31, 2021:
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
(In Thousands of Dollars) |
|
Nonaccrual |
|
|
Loans Past Due 90 Days or More Still Accruing |
|
|
Nonaccrual |
|
|
Loans Past Due 90 Days or More Still Accruing |
|
||||
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
12
The following tables present the aging of the recorded investment in past due loans as of March 31, 2022 and December 31, 2021 by class of loans. Note that loans on a modification to defer payments under the CARES Act are included in loans not past due for the period ending December 31, 2021. There were
|
(In Thousands of Dollars) |
|
30-59 Days Past Due |
|
|
60-89 Days Past Due |
|
|
90 Days or More Past Due and Nonaccrual |
|
|
Total Past Due |
|
|
Loans Not Past Due |
|
|
Total |
|
||||||
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(In Thousands of Dollars) |
|
30-59 Days Past Due |
|
|
60-89 Days Past Due |
|
|
90 Days or More Past Due and Nonaccrual |
|
|
Total Past Due |
|
|
Loans Not Past Due |
|
|
Total |
|
||||||
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Troubled Debt Restructurings
Total troubled debt restructurings were $
13
During the three month periods ended March 31, 2022 and 2021, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a deferral of principal, interest and/or escrow; or a legal concession. During the three month period ended March 31, 2022, the terms of such loans included a reduction of the stated interest rate of the loan of
The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ended March 31, 2022 and 2021:
|
|
|
|
|
|
|
Pre- Modification |
|
|
Post- Modification |
|
||
|
Three Months Ended March 31, 2022 |
|
Number of |
|
|
Outstanding Recorded |
|
|
Outstanding Recorded |
|
|||
|
(In Thousands of Dollars) |
|
Loans |
|
|
Investment |
|
|
Investment |
|
|||
|
1-4 family residential |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Pre- Modification |
|
|
Post- Modification |
|
||
|
Three Months Ended March 31, 2021 |
|
Number of |
|
|
Outstanding Recorded |
|
|
Outstanding Recorded |
|
|||
|
(In Thousands of Dollars) |
|
Loans |
|
|
Investment |
|
|
Investment |
|
|||
|
Commercial |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
There were
There was
There was
The Company offered
14
Farmers is also a preferred U.S. Small Business Administration (“SBA”) lender and dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the Paycheck Protection Program (“PPP”) under the CARES Act, so they could obtain SBA approval and receive funding as quickly as possible. During the period of the PPP program, the Company facilitated PPP assistance to
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships. For relationships over $
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
As of March 31, 2022 and December 31, 2021, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
|
(In Thousands of Dollars) |
|
Pass |
|
|
Special Mention |
|
|
Sub standard |
|
|
Total |
|
||||
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
15
|
(In Thousands of Dollars) |
|
Pass |
|
|
Special Mention |
|
|
Sub standard |
|
|
Total |
|
||||
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Non-owner occupied |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential, consumer indirect and direct loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. In the 1-4 family residential real estate portfolio at March 31, 2022, other real estate owned and foreclosure properties were $
The following tables present the recorded investment in residential, consumer indirect and direct auto loans based on payment activity as of March 31, 2022 and December 31, 2021. Nonperforming loans are loans past due 90 days or more and still accruing interest and nonaccrual loans.
|
|
|
Residential Real Estate |
|
|
Consumer |
|
||||||||||||||
|
(In Thousands of Dollars) |
|
1-4 Family Residential |
|
|
Home Equity Lines of Credit |
|
|
Indirect |
|
|
Direct |
|
|
Other |
|
|||||
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Nonperforming |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
Residential Real Estate |
|
|
Consumer |
|
||||||||||||||
|
(In Thousands of Dollars) |
|
1-4 Family Residential |
|
|
Home Equity Lines of Credit |
|
|
Indirect |
|
|
Direct |
|
|
Other |
|
|||||
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Nonperforming |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
16
The following table presents total loans by risk categories and year of origination.
|
|
|
Term Loans Amortized Cost Basis by Origination Year |
|
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|
|
As of March 31, 2022 |
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
Prior |
|
|
Revolving Loans |
|
|
Total |
|
||||||||
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Special mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Special mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Special mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total agricultural loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Special mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential real estate loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Special mention |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total home equity lines of credit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Rating |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Substandard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer loans |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
17
Purchased Loans
As a result of the Cortland Merger, the Company acquired $
Under ASU Topic 326, when loans are purchased with evidence of more than significant deterioration of credit, they are accounted for as purchase credit deteriorated (“PCD”). PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. During 2021, the Company acquired PCD loans with a fair value of $
|
|
|
Loan Balance |
|
|
ACL Balance |
|
||
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
Owner Occupied |
|
$ |
|
|
|
$ |
|
|
|
Non-owner Occupied |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
1-4 family residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
Revenue from Contracts with Customers:
All material revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. The following table presents the Company’s noninterest income by revenue stream and reportable segment, net of eliminations, for the three months ended March 31, 2022 and 2021.
|
(In Thousands of Dollars) |
|
Trust Segment |
|
|
Bank Segment |
|
|
Totals |
|
|||
|
For Three Months Ended March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Debit card and EFT fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance agency commissions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plan consulting fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commissions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (outside the scope of ASC 606) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(In Thousands of Dollars) |
|
Trust Segment |
|
|
Bank Segment |
|
|
Totals |
|
|||
|
For Three Months Ended March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Debit card and EFT fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance agency commissions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plan consulting fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commissions |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (outside the scope of ASC 606) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
18
A description of the Company’s revenue streams under ASC 606 follows:
Service charges on deposit accounts – The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Management reviewed the deposit account agreements, and determined that the agreements can be terminated at any time by either the Bank or the account holder. Transaction fees, such as balance transfers, wires and overdraft charges are settled the day the performance obligation is satisfied. The Bank’s monthly service charges and maintenance fees are for services provided to the customer on a monthly basis and are considered a series of services that have the same pattern of transfer each month. The review of service charges assessed on deposit accounts included the amount of variable consideration that is a part of the monthly charges. It was found that the waiver of service charges due to insufficient funds and dormant account fees is immaterial and would not require a change in the accounting treatment for these fees under the new revenue standards.
Debit Card Interchange Fees – Customers and the Bank have an account agreement and maintain deposit balances with the Bank. Customers use a bank issued debit card to purchase goods and services, and the Bank earns interchange fees on those transactions, typically a percentage of the sale amount of the transaction. The Bank records the amount due when it receives the settlement from the payment network. Payments from the payment network are received and recorded into income on a daily basis. There are
Trust fees – Services provided to Trust customers are a series of distinct services that have the same pattern of transfer each month. Fees for trust accounts are billed and drafted from trust accounts monthly. The Company records these fees on the income statement on a monthly basis. Fees are assessed based on the total investable assets of the customer’s trust account. A signed contract between the Company and the customer is maintained for all customer trust accounts with payment terms identified. It is probable that the fees will be collectible as funds being managed are accessible by the asset manager. Past history of trust fee income recorded by the Company indicates that it is highly unlikely that a significant reversal could occur. There are
Insurance Agency Commissions – Insurance agency commissions are received from insurance carriers for the agency’s share of commissions from customer premium payments. These commissions are recorded into income when checks are received from the insurance carriers, and there is
Insurance also receives incentive checks from the insurance carriers for achieving specified levels of production with particular carriers. These amounts are recorded into income when a check is received, and there are no contingent amounts associated with these payments that may be clawed back by the carrier in the future. Similar to the monthly commissions explained in the preceding paragraph, there may be a short time-lag in recording incentive revenue on a cash basis as opposed to estimating the amount of incentive revenue expected to be earned, this does not materially impact the recognition of Insurance revenue. If there were any amounts that would need to be refunded for one specific Insurance customer, management believes the reversal would not be significant.
Other potential situations surrounding the recognition of Insurance revenue include the estimating potential refunds due to the likely cancellation of a percentage of customers cancelling their policies and recording revenue at the time of policy renewals. Management concluded that since Insurance agency commissions represent only
Retirement Plan Consulting Fees – Revenue is recognized based on the level of work performed for the client. Any payments that are received for work to be performed in the future are recorded in a deferred revenue account, and recorded into income when the fees are earned. Retirement plan consulting fees represent only
Investment Commissions – Investment commissions are earned through the sales of non-deposit investment products to customers of the Company. The sales are conducted through a third-party broker-dealer. When the commissions are received and recorded into income on the Bank’s income statement, there is
19
Other – Income items included in “Other” are Bank owned life insurance income, security gains, net gains on the sale of loans and other operating income. There is also a one-time legal settlement of $
Fair Value:
Fair value is the exchange price that would be received for an asset, or paid to transfer a liability (exit price), in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment Securities: The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis. The Company’s service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities and values securities using exit pricing requirements. They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing methods. The fair values for investment securities, which consist of equity securities that are recorded at fair market value to comply with exit pricing, are determined by quoted market prices in active markets, if available (Level 1). The equity securities change in fair market value is recorded in the income statements. For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates. Inputs used are derived principally from observable market data (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort. For the period ended March 31, 2022 and for the year ended December 31, 2021, the fair value of Level 3 investment securities was immaterial.
Derivative Instruments: The fair values of derivative instruments are based on valuation models using observable market data as of the measurement date (Level 2).
Collateral Dependent Loans: Fair value estimates of collateral dependent loans that are individually reviewed are based on the fair value of the collateral, less estimated costs to sell. Non-collateral dependent loans are valued based on discounted cash flows. Loans carried at fair value generally receive specific allocations of the allowance for credit losses in the current period and allowance for loan losses in prior periods. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. These loans are evaluated on a quarterly basis and adjusted accordingly.
Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
20
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value.
Assets measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2022 Using: |
|
|||||||||
|
(In Thousands of Dollars) |
|
Carrying Value |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government sponsored entities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments measured at net asset value |
|
|
|
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|||
|
Total investment securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2021 Using: |
|
|||||||||
|
(In Thousands of Dollars) |
|
Carrying Value |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and U.S. government sponsored entities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities-residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business Administration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments measured at net asset value |
|
|
|
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|||
|
Total investment securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
There were
21
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
Investment Securities Available-for-sale (Level 3) |
|
|||||
|
|
|
Three Months ended March 31, |
|
|||||
|
(In Thousands of Dollars) |
|
2022 |
|
|
2021 |
|
||
|
Beginning Balance |
|
$ |
|
|
|
$ |
|
|
|
Transfers from level 2 |
|
|
|
|
|
|
|
|
|
Repayments, calls and maturities |
|
|
( |
) |
|
|
|
|
|
Ending Balance |
|
$ |
|
|
|
$ |
|
|
Assets measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2022 Using: |
|
|||||||||
|
(In Thousands of Dollars) |
|
Carrying Value |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1–4 family residential |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Consumer indirect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2021 Using: |
|
|||||||||
|
(In Thousands of Dollars) |
|
Carrying Value |
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
||||
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually Evaluated loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
1–4 family residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent loans were individually evaluated under ASC 326 for the periods ending March 31, 2022 and December 31, 2021. Collateral dependent loans had a principal balance of $
Collateral dependent commercial real estate loans, both owner-occupied and non-owner occupied are valued by independent external appraisals. These external appraisals are prepared using the sales comparison approach and income approach valuation techniques. Management makes subsequent unobservable adjustments to the collateral dependent loan appraisals. Collateral dependent loans other than commercial real estate and other real estate owned are not considered material.
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods ended March 31, 2022 and December 31, 2021:
|
March 31, 2022 |
Fair value |
|
|
Valuation Technique(s) |
|
Unobservable Input(s) |
|
Range (Weighted Average) |
|
|
Individually evaluated loans |
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
Adjustment for differences between comparable sales |
|
(0.12%) |
|
Consumer indirect |
|
|
|
|
|
|
Adjustment for differences between comparable sales |
|
0.00% |
22
|
December 31, 2021 |
Fair value |
|
|
Valuation Technique(s) |
|
Unobservable Input(s) |
|
Range (Weighted Average) |
|
|
Individually evaluated loans |
|
|
|
|
|
|
|
|
|
|
Commercial |
$ |
|
|
|
|
|
Adjustment for differences between comparable sales |
|
(12.43%) |
|
Residential |
|
|
|
|
|
|
Adjustment for differences between comparable sales |
|
(0.12%) |
The carrying amounts and estimated fair values of financial instruments not previously disclosed at March 31, 2022 and December 31, 2021 are as follows:
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2022 Using: |
|
|||||||||||||
|
(In Thousands of Dollars) |
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|||||
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Regulatory stock |
|
|
|
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
||||
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2021 Using: |
|
|||||||||||||
|
(In Thousands of Dollars) |
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|||||
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Regulatory stock |
|
|
|
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
||||
|
Loans held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The methods and assumptions used to estimate fair value, not previously described, are described as follows:
Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Regulatory Stock: It is not practical to determine the fair value of regulatory stock due to restrictions placed on its transferability.
Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: The Company uses a third party firm that uses cash flow analysis and current market interest rates along with adjustments for credit, liquidity and option risk to conform to the ASU 2016-01 exit price requirement. Loans in the tables above consist of impaired credits held for investment. Fair value for collateral dependent loans is based upon appraised values adjusted for trends observed in the market, less estimated cost to sell. The cash flow method is used for estimating fair value for noncollateral dependent loans. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation is a component of the allowance for credit losses. The Company considers these fair values Level 3.
Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
23
Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings, and money market accounts – are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair value for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within
Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Off-balance Sheet Instruments: The fair value of commitments is not considered material.
Goodwill and Intangible Assets:
Goodwill associated with the Company’s acquisition of Cortland in November 2021 and other past acquisitions totaled $
Acquired Intangible Assets
Acquired intangible assets were as follows:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
(In Thousands of Dollars) |
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
||||
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship intangibles |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Non-compete contracts |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Trade name |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Core deposit intangible |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Total |
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
Aggregate amortization expense was $
Estimated amortization expense for each of the next five periods and thereafter:
|
2022 (9 months) |
$ |
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
$ |
|
|
|
|
|
|
|
24
Leases:
The Company has operating leases for branch office locations, vehicles and certain office equipment such as printers, copiers and faxes. The leases have remaining lease terms of up to
The right of use asset and lease liability were $
Lease payments made for the three month period ended March 31, 2022, were $
Maturities of lease liabilities are as follows as of March 31, 2022:
|
2022 (9 months) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total Payments |
|
|
|
|
|
Less: Imputed Interest |
|
|
( |
) |
|
Total |
|
$ |
|
|
Derivative Financial Instruments:
Interest Rate Swaps
The Company maintains an interest rate protection program for commercial loan customers. Under this program, the Company provides a variable rate loan while creating a fixed rate loan for the customer by the customer entering into an interest rate swap with terms that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. The Company had interest rate swaps associated with commercial loans with a notional value of $
There were
Mortgage Banking Derivatives
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market are considered derivatives. These mortgage banking derivatives are not designated in hedge relationships. The Company had approximately $
The net gains and losses on derivative instruments not designated as hedging instruments are included in mortgage banking income. For the quarter ended March 31, 2022, losses of $
25
Earnings Per Share:
The computation of basic and diluted earnings per share is shown in the following table:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
Basic EPS |
|
|
|
|
|
|
|
|
Net income (In thousands) |
$ |
|
|
|
$ |
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
Basic earnings per share |
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
Net income (In thousands) |
$ |
|
|
|
$ |
|
|
|
Weighted average shares outstanding for basic earnings per share |
|
|
|
|
|
|
|
|
Dilutive effect of restricted stock awards |
|
|
|
|
|
|
|
|
Weighted average shares for diluted earnings per share |
|
|
|
|
|
|
|
|
Diluted earnings per share |
$ |
|
|
|
$ |
|
|
There were
Stock Based Compensation:
During 2017, the Company, with the approval of shareholders, created the 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan permits the award of up to
In April of 2022, the Company, with the approval of shareholders, approved the 2022 Equity Incentive Plan (the “2022 Plan”). The 2022 Plan permits the award of up to
The restricted stock awards were granted with a fair value price equal to the market price of the Company’s common stock at the date of the grant. Expense recognized was $
The following is the activity under the Plans during the three month period ended March 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Awarded Service Units |
|
|
Weighted Average Grant Date Fair Value |
|
|
Maximum Awarded Performance Units |
|
|
Weighted Average Grant Date Fair Value |
|
||||
|
Beginning balance - non-vested shares |
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Ending balance - non-vested shares |
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
26
The following is the activity under the Plans during the three month period ended March 31, 2021.
|
|
Maximum Awarded Service Units |
|
|
Weighted Average Grant Date Fair Value |
|
|
Maximum Awarded Performance Units |
|
|
Weighted Average Grant Date Fair Value |
|
||||
|
Beginning balance - non-vested shares |
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Forfeited |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance - non-vested shares |
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
The
Other Comprehensive Income (Loss):
The following tables represent the details of other comprehensive income for the three month periods ended March 31, 2022 and 2021.
|
|
Three Months Ended March 31, 2022 |
|
|||||||||
|
(In Thousands of Dollars) |
Pre-tax |
|
|
Tax |
|
|
After-Tax |
|
|||
|
Unrealized holding losses on available-for-sale securities during the period |
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Reclassification adjustment for gains included in net income (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on available-for-sale securities |
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Change in funded status of post-retirement health plan |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net other comprehensive loss |
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021 |
|
|||||||||
|
(In Thousands of Dollars) |
Pre-tax |
|
|
Tax |
|
|
After-Tax |
|
|||
|
Unrealized holding losses on available-for-sale securities during the period |
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
Reclassification adjustment for gains included in net income (1) |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Net other comprehensive loss |
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
(1) |
|
Regulatory Capital Matters:
Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action by regulators that, if undertaken, could have a direct material effect on the financial statements. Management believes that as of March 31, 2022, the Company and the Bank meet all capital adequacy requirements to which they are subject.
The FDIC and other federal banking regulators revised the risk-based capital requirements applicable to financial holding companies and insured depository institutions, including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”).
The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. The leverage ratio is calculated by dividing tier 1 capital by adjusted average total assets.
Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of
27
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.
Actual and required capital amounts and ratios, which do not include the capital conservation buffer, are presented below at March 31, 2022 and December 31, 2021:
|
|
Actual |
|
|
Requirement For Capital Adequacy Purposes: |
|
|
To be Well Capitalized Under Prompt Corrective Action Provisions: |
|
||||||||||||
|
|
Amount |
|
Ratio |
|
|
Amount |
|
Ratio |
|
|
Amount |
|
Ratio |
|
||||||
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
$ |
|
|
|
|
% |
|
$ |
|
|
|
|
% |
|
N/A |
|
N/A |
|
||
|
Bank |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Total risk based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
N/A |
|
N/A |
|
||
|
Bank |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Tier 1 risk based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
N/A |
|
N/A |
|
||
|
Bank |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Tier 1 leverage ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
N/A |
|
N/A |
|
||
|
Bank |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity tier 1 capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
$ |
|
|
|
|
% |
|
$ |
|
|
|
|
% |
|
N/A |
|
N/A |
|
||
|
Bank |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
$ |
|
|
|
|
% |
|
Total risk based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
N/A |
|
N/A |
|
||
|
Bank |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Tier 1 risk based capital ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
N/A |
|
N/A |
|
||
|
Bank |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
Tier 1 leverage ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
N/A |
|
N/A |
|
||
|
Bank |
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
Segment Information:
The reportable segments are determined by the products and services offered, primarily distinguished between banking and trust. These segments are also distinguished by the level of information provided to the chief operating decision makers in the Company, who use such information to review performance of various components of the business, which are then aggregated. Loans, investments, and deposits provide the revenues in the banking operation. All operations are domestic.
|
(In Thousands of Dollars) |
|
Trust Segment |
|
|
Bank Segment |
|
|
Eliminations and Others |
|
|
Consolidated Totals |
|
||||
|
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
28
|
(In Thousands of Dollars) |
|
Trust Segment |
|
|
Bank Segment |
|
|
Eliminations and Others |
|
|
Consolidated Totals |
|
||||
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(In Thousands of Dollars) |
|
Trust Segment |
|
|
Bank Segment |
|
|
Eliminations and Others |
|
|
Consolidated Totals |
|
||||
|
For Three Months Ended March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Provision for credit losses and unfunded loans |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Service fees, security gains and other noninterest income |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and depreciation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Income taxes |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
(In Thousands of Dollars) |
|
Trust Segment |
|
|
Bank Segment |
|
|
Eliminations and Others |
|
|
Consolidated Totals |
|
||||
|
For Three Months Ended March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Provision for credit losses and unfunded loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees, security gains and other noninterest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Amortization and depreciation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Bank segment includes Farmers National Insurance and Farmers of Canfield Investment Co.
Short-term borrowings:
The Bank had
The Bank has access to lines of credit amounting to $
Farmers has two unsecured revolving lines of credit for $
Long-term borrowings:
There were
The Bank’s long-term and short-term FHLB advances are secured by a blanket pledge of residential mortgage, commercial real estate, and multi-family loans totaling $
29
In November 2021, the Company completed the issuance of $
On
On
In 2015, the Company completed its acquisition of National Bancshares Corporation (“NBOH”), which included the assumption of Floating Rate Junior Subordinated Debt Securities due
In all three instances, the Company may redeem the junior subordinated debentures at any quarter-end, in whole, or in part, at par. This type of subordinated debenture qualifies as Tier 1 capital for regulatory purposes in determining and evaluating the Company’s capital adequacy.
A summary of all junior subordinated debentures issued by the Company to affiliates and subordinated debentures follows. For the junior subordinated debentures, these amounts represent the par value of the obligations owed to these affiliates, including the Company’s equity interest in the trusts along with any unamortized fair value marks. For the subordinated debentures, these amounts represent the par value less the remaining deferred offering expense associated with the issuance of the debentures.
|
|
|
March 31, 2022 |
|
December 31, 2021 |
|
|
|
Amount |
|
Amount |
|
TSEO Statutory Trust I |
|
$ |
|
$ |
|
Maple Leaf Financial Statutory Trust II |
|
|
|
|
|
Cortland Statutory Trust I |
|
|
|
|
|
Total junior subordinated debentures owed to unconsolidated subsidiary trusts |
|
$ |
|
$ |
|
|
|
|
|
|
|
Subordinated debentures |
|
$ |
|
$ |
30
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Cautionary Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact, but rather statements based on the Company’s current expectations, beliefs and assumptions regarding the future of Farmers’ business, future plans and strategies, projections, anticipated events and trends, its intended results and future performance, the economy and other future conditions. Forward-looking statements are preceded by terms such as “will,” “would,” “should,” “could,” “may,” “expect,” “estimate,” “believe,” “anticipate,” “intend,” “plan,” “project,” or variations of these words, or similar expressions. Forward-looking statements are not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Numerous uncertainties, risks, and changes could cause or contribute to Farmers’ actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements.
Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “Commission”), including without limitation, the risk factors disclosed in Item 1A, “Risk Factors,” in the Company’s 2021 Form 10-K, as updated in Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q.
Many of these factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on those forward-looking statements. The following, which is not intended to be an all-encompassing list, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in any forward-looking statement:
|
|
• |
general economic conditions in markets where the Company conducts business, which could materially impact credit quality trends; |
|
|
• |
effects of the COVID-19 pandemic on the local, national, and international economy, our organization and employees, and our customers and suppliers and their business operations, financial condition, and including our customers’ ability to repay loans; |
|
|
• |
disruptions in the mortgage and lending markets and significant or unexpected fluctuations in interest rates related to COVID-19 and governmental responses, including financial stimulus packages; |
|
|
• |
general business conditions in the banking industry; |
|
|
• |
the regulatory environment; |
|
|
• |
general fluctuations in interest rates; |
|
|
• |
demand for loans in the market areas where the Company conducts business; |
|
|
• |
rapidly changing technology and evolving banking industry standards; |
|
|
• |
competitive factors, including increased competition with regional and national financial institutions; |
|
|
• |
new service and product offerings by competitors and price pressures; |
|
|
• |
and the regulatory landscape, capital markets, and the response to and management of the COVID-19 pandemic, including the provision of additional economic stimulus from the federal government. |
Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in the presentation are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.
31
Overview
The Company’s results of operations for the quarter ended March 31, 2022 are discussed below. However, the Company’s past results of operations may not reflect its future operating trends. In March 2020, the COVID-19 pandemic began to affect the U.S. economy and has created additional uncertainty for the Company’s business. Regulatory actions in response to the COVID-19 pandemic have varied across jurisdictions and have included some limited closures of nonessential businesses, affecting customers of the Company. The duration, extent and the effect of the government’s response to the economy is unknown.
The Company’s net income for the three months ended March 31, 2022, was $15.8 million, or $0.47 per diluted share, which compares to $14.6 million, or $0.51 per diluted share, for the three months ended March 31, 2021. Net income improved as a result of the earnings stream from the Cortland acquisition, while the lower per share results reflect only partial cost savings from the merger integration, with full realization expected for the remainder of 2022. Annualized return on average assets and annualized return on average equity were 1.52% and 13.89%, respectively, for the three month period ended March 31, 2022, compared to 1.87% and 16.81% for the same three month period in 2021.
On March 23, 2022, Farmers entered into an agreement and plan of merger with Emclaire Financial Corp. (NASDAQ: EMCF), a Pennsylvania corporation (“Emclaire”), the parent company of The Farmers National Bank of Emlenton (“Emlenton”). The transaction is subject to receipt of Emclaire shareholder approval and customary regulatory approvals and is expected to close during the second half of 2022. The transaction will mark the Company’s expansion into Pennsylvania including the attractive Pittsburgh market. Emclaire operates 19 branches in ten counties throughout western Pennsylvania. As of March 31, 2022, Emclaire had total assets of $1.1 billion, gross loans of $794.9 million, deposits of $936.0 million and equity of $86.7 million.
Total loans were $2.30 billion at March 31, 2022 compared to $2.33 billion at December 31, 2021. Gross loans declined $26.1 million for the quarter but excluding the run off in PPP balances during the quarter the decline was $12.4 million. At March 31, 2022, the Company has $23.2 million of PPP loans and $672 thousand in net deferred fees associated with these loans still to be recognized into income. Average loans now comprise 58.8% of the Bank's first quarter average earning assets at March 31, 2022, compared to 69.2% for the same period in 2021.
Non-performing assets to total assets remain at a low level, currently at 0.33%. Early stage delinquencies, which are loans 30 - 89 days delinquent, also continue to remain at low levels, at $7.3 million, or 0.32% of total loans, at March 31, 2022. Net charge-offs for the current quarter were $1.4 million, compared to $84 thousand in the same quarter in 2021 and net charge-offs as a percentage of average net loans outstanding is only 0.25% for the quarter ended March 31, 2022, compared to 0.02% in the same quarter in 2021.
Due to a decline in loan balances, a decrease in a specific reserve on one loan, and a continued decline in historical loss ratios, the Company recorded a negative provision for credit losses of $930 thousand for the quarter ended March 31, 2022, compared to the $425 thousand of loan loss provision recorded in the first quarter of 2021. This was offset somewhat by an increase in the provision for unfunded loans which totaled $527 thousand. As an overall percentage of loans, the allowance for credit losses decreased to 1.17% for the current quarter compared to 1.22% for the quarter ended March 31, 2021.
The net interest margin for the three months ended March 31, 2022, was 3.27%, a 27 basis point decrease from the quarter ended March 31, 2021. In comparing the first quarter of 2022 to the same period in 2021, asset yields decreased 41 basis points, while the cost of interest-bearing liabilities decreased 18 basis points. Most of the decrease in the asset yields was the result of employing excess liquidity into lower yielding investment securities in the absence of loan growth and a decrease in PPP income compared to the same quarter a year ago.
32
Results of Operations The following is a comparison of selected financial ratios and other results at or for the three month period ended March 31, 2022 and 2021:
|
|
|
At or for the Three Months Ended March 31, |
|
|||||
|
(In Thousands, except Per Share Data) |
|
2022 |
|
|
2021 |
|
||
|
Total assets |
|
$ |
4,205,855 |
|
|
$ |
3,324,524 |
|
|
Net income |
|
$ |
15,844 |
|
|
$ |
14,556 |
|
|
Diluted earnings per share |
|
$ |
0.47 |
|
|
$ |
0.51 |
|
|
Return on average assets (annualized) |
|
|
1.52 |
% |
|
|
1.87 |
% |
|
Return on average equity (annualized) |
|
|
13.89 |
% |
|
|
16.81 |
% |
|
Efficiency ratio (tax equivalent basis) (1) |
|
|
61.36 |
% |
|
|
48.24 |
% |
|
Equity to asset ratio |
|
|
9.37 |
% |
|
|
10.45 |
% |
|
Dividends to net income |
|
|
34.18 |
% |
|
|
21.35 |
% |
|
Net loans to assets |
|
|
54.16 |
% |
|
|
60.53 |
% |
|
Loans to deposits |
|
|
62.40 |
% |
|
|
71.92 |
% |
|
(1) |
The ratio is calculated by dividing noninterest expenses by the sum of net interest income and noninterest income. The Company strives for a lower efficiency ratio. This efficiency ratio measure is not required by any regulatory agency but provides meaningful information to management and investors since a lower ratio indicates the Company is using their assets more effectively to generate profits. |
Net Interest Income. The following schedule details the various components of net interest income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where applicable. Security yields are based on amortized cost.
33
Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||||||||||||||||||
|
|
March 31, 2022 |
|
|
March 31, 2021 |
|
||||||||||||||||||
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
||
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
|
BALANCE |
|
|
INTEREST |
|
|
RATE (1) |
|
||||||
|
EARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (3) (4) |
$ |
2,312,712 |
|
|
$ |
25,646 |
|
|
|
4.44 |
% |
|
$ |
2,054,925 |
|
|
$ |
23,900 |
|
|
|
4.72 |
% |
|
Taxable securities (2) |
|
1,007,963 |
|
|
|
4,587 |
|
|
|
1.82 |
|
|
|
329,903 |
|
|
|
1,719 |
|
|
|
2.11 |
|
|
Tax-exempt securities (2) (4) |
|
461,793 |
|
|
|
3,726 |
|
|
|
3.23 |
|
|
|
282,044 |
|
|
|
2,613 |
|
|
|
3.76 |
|
|
Other investments |
|
31,122 |
|
|
|
130 |
|
|
|
1.67 |
|
|
|
14,840 |
|
|
|
121 |
|
|
|
3.31 |
|
|
Federal funds sold and other |
|
117,916 |
|
|
|
48 |
|
|
|
0.16 |
|
|
|
287,323 |
|
|
|
71 |
|
|
|
0.11 |
|
|
TOTAL EARNING ASSETS |
|
3,931,506 |
|
|
|
34,137 |
|
|
|
3.47 |
|
|
|
2,969,035 |
|
|
|
28,424 |
|
|
|
3.88 |
|
|
NONEARNING ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
28,772 |
|
|
|
|
|
|
|
|
|
|
|
20,275 |
|
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
37,573 |
|
|
|
|
|
|
|
|
|
|
|
25,578 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
(29,008 |
) |
|
|
|
|
|
|
|
|
|
|
(25,336 |
) |
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities |
|
(17,673 |
) |
|
|
|
|
|
|
|
|
|
|
24,498 |
|
|
|
|
|
|
|
|
|
|
Other assets |
|
227,448 |
|
|
|
|
|
|
|
|
|
|
|
141,645 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
$ |
4,178,618 |
|
|
|
|
|
|
|
|
|
|
$ |
3,155,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST-BEARING LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
$ |
378,675 |
|
|
$ |
643 |
|
|
|
0.68 |
% |
|
$ |
440,452 |
|
|
$ |
1,255 |
|
|
|
1.16 |
% |
|
Brokered time deposits |
|
15,555 |
|
|
|
15 |
|
|
|
0.39 |
|
|
|
32,000 |
|
|
|
46 |
|
|
|
0.58 |
|
|
Savings deposits |
|
843,371 |
|
|
|
167 |
|
|
|
0.08 |
|
|
|
495,832 |
|
|
|
193 |
|
|
|
0.16 |
|
|
Demand deposits |
|
1,412,291 |
|
|
|
419 |
|
|
|
0.12 |
|
|
|
1,083,597 |
|
|
|
732 |
|
|
|
0.27 |
|
|
Short term borrowings |
|
2,222 |
|
|
|
1 |
|
|
|
0.18 |
|
|
|
2,808 |
|
|
|
4 |
|
|
|
0.58 |
|
|
Long term borrowings |
|
87,798 |
|
|
|
792 |
|
|
|
3.61 |
|
|
|
76,007 |
|
|
|
293 |
|
|
|
1.56 |
|
|
TOTAL INTEREST-BEARING LIABILITIES |
|
2,739,912 |
|
|
|
2,037 |
|
|
|
0.30 |
|
|
|
2,130,696 |
|
|
|
2,523 |
|
|
|
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
956,499 |
|
|
|
|
|
|
|
|
|
|
|
650,588 |
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
26,001 |
|
|
|
|
|
|
|
|
|
|
|
23,221 |
|
|
|
|
|
|
|
|
|
|
Stockholders' equity |
|
456,206 |
|
|
|
|
|
|
|
|
|
|
|
351,190 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
$ |
4,178,618 |
|
|
|
|
|
|
|
|
|
|
$ |
3,155,695 |
|
|
|
|
|
|
|
|
|
|
Net interest income and interest rate spread |
|
|
|
|
$ |
32,100 |
|
|
|
3.17 |
% |
|
|
|
|
|
$ |
25,901 |
|
|
|
3.40 |
% |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
3.27 |
% |
|
|
|
|
|
|
|
|
|
|
3.54 |
% |
|
(1) |
Rates are calculated on an annualized basis. |
|
(2) |
Includes unamortized discounts and premiums. Average balance and yield are computed using the average historical amortized cost. |
|
(3) |
Interest on loans includes fee income of $1.5 million and $2.8 million for 2022 and 2021, respectively, and is reduced by amortization of $662 thousand and $687 thousand for 2022 and 2021, respectively. |
|
(4) |
For 2022, adjustments of $84 thousand and $774 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. For 2021, adjustments of $95 thousand and $539 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities. These adjustments are based on a marginal federal income tax rate of 21%, less disallowances. |
34
Net Interest Income. Net interest income for the three month period ended March 31, 2022, was $31.2 million compared to $25.3 million for the same period in 2021. The increase in net interest income was driven by an increase in interest earning assets, including the acquisition of Cortland Bancorp (“Cortland”), offset by a decline in the net interest margin. The net interest margin decreased 27 basis points to 3.27% for the three months ended March 31, 2022, compared to 3.54% for the same three month period in the prior year. In comparing the quarters ended March 31, 2022 and 2021, yields on earning assets decreased 41 basis points, while the cost of interest bearing liabilities decreased 18 basis points. Most of the decrease in the asset yields was the result of employing excess liquidity into lower yielding investment securities in the absence of loan growth, the acquisition of Cortland and a decrease in PPP income compared to the same quarter a year ago.
Noninterest Income. Noninterest income increased to $17.7 million for the first quarter of 2022 compared to $10.1 million for the quarter ended March 31, 2021. The first quarter of 2022 increased over the same period in 2021 primarily due to $8.4 million in legal settlement income offset by a decline in net security gains of $499 thousand, or 102.3%, and a decline in net gains on the sale of loans of $1.8 million, or 61.1%. The net gain on sale of loans has declined because of lower origination volumes due to increasing rates along with tighter gain on sale margins. Other categories of noninterest income that increased year over year include service charges on deposit accounts of $337 thousand, or 41.7%, bank owned life insurance of $125 thousand, or 44.0%, trust fees of $283 thousand, or 12.7%, investment commissions of $190 thousand, or 37.7% and debit card and EFT fees of $245 thousand, or 20.9%. Much of the increases in these categories was due to the acquisition of Cortland.
Noninterest Expense. Total noninterest expense for the quarter ended March 31, 2022 was $30.5 million compared to $17.3 million in the first quarter of 2021. The increase in expense year over year was due to the Company making a charitable contribution of $6.0 million to the Farmers Charitable Foundation, $2.1 million in legal expense associated with the legal settlement and $1.9 million in merger expense incurred in the first quarter of 2022. The increase in the other categories of noninterest expense, year over year, was due to the Cortland acquisition which closed on November 1, 2021. The system conversion for Cortland also didn’t take place until late February so the Company did not have a full quarter of cost savings in place for the first quarter of 2022. The efficiency ratio for the quarter ended March 31, 2022 was 61.4% compared to 47.8% for the same quarter in 2021.
Income Taxes. Income tax expense totaled $3.0 million for the quarter ended March 31, 2022, and $3.1 million for the quarter ended March 31, 2021. The effective tax rate for the three month period ended March 31, 2022 and 2021 was 15.9% and 17.6%, respectively.
Financial Condition
Cash and Cash Equivalents. Cash and cash equivalents increased $24.8 million during the first three months of 2022 from $112.8 million to $137.6 million.
Securities. Securities available-for-sale increased by $35.9 million since December 31, 2021 as the Company continued purchasing securities in the first quarter of 2022 in order to utilize excess cash on hand. Offsetting these purchases, the gross unrealized gain of $11.7 million on available for sale securities at December 31, 2021 declined to a gross unrealized loss of $100.7 million at March 31, 2022 due to the rise in U.S. treasury rates during the first quarter.
Loans. Gross loans (excluding loans held for sale) were $2.30 billion at March 31, 2022, compared to $2.33 billion at December 31, 2021. Gross loans declined $26.1 million for the quarter but excluding the run off in PPP balances during the quarter the decline was $12.4 million. At March 31, 2022, the Company has $23.2 million of PPP loans before deferred fees still to be forgiven, and $672 thousand in net deferred fees associated with these loans still to be recognized into income.
Allowance for Loan Losses. The following table indicates key asset quality ratios that management evaluates on an ongoing basis. The recorded investment balances were used in the calculations.
35
Asset Quality History
(In Thousands of Dollars)
|
|
3/31/2022 |
|
|
12/31/2021 |
|
|
9/30/2021 |
|
|
6/30/2021 |
|
|
3/31/2021 |
|
|||||
|
Nonperforming loans |
$ |
14,046 |
|
|
$ |
16,195 |
|
|
$ |
14,744 |
|
|
$ |
13,873 |
|
|
$ |
11,640 |
|
|
Nonperforming loans as a % of total loans |
|
0.61 |
% |
|
|
0.69 |
% |
|
|
0.78 |
% |
|
|
0.71 |
% |
|
|
0.57 |
% |
|
Loans delinquent 30-89 days |
$ |
7,304 |
|
|
$ |
8,891 |
|
|
$ |
6,944 |
|
|
$ |
7,606 |
|
|
$ |
7,183 |
|
|
Loans delinquent 30-89 days as a % of total loans |
|
0.32 |
% |
|
|
0.38 |
% |
|
|
0.37 |
% |
|
|
0.39 |
% |
|
|
0.35 |
% |
|
Allowance for credit losses |
$ |
27,015 |
|
|
$ |
29,386 |
|
|
$ |
23,136 |
|
|
$ |
24,806 |
|
|
$ |
24,935 |
|
|
Allowance for credit losses as a % of loans |
|
1.17 |
% |
|
|
1.26 |
% |
|
|
1.22 |
% |
|
|
1.27 |
% |
|
|
1.22 |
% |
|
Allowance for credit losses as a % of nonperforming loans |
|
192.33 |
% |
|
|
181.45 |
% |
|
|
156.92 |
% |
|
|
178.81 |
% |
|
|
214.22 |
% |
|
Annualized net charge-offs to average net loans outstanding |
|
0.25 |
% |
|
|
0.06 |
% |
|
|
0.06 |
% |
|
|
0.04 |
% |
|
|
0.02 |
% |
|
Non-performing assets |
$ |
14,046 |
|
|
$ |
16,195 |
|
|
$ |
14,744 |
|
|
$ |
13,903 |
|
|
$ |
11,670 |
|
|
Non-performing assets as a % of total assets |
|
0.33 |
% |
|
|
0.39 |
% |
|
|
0.44 |
% |
|
|
0.43 |
% |
|
|
0.35 |
% |
|
Net charge-offs for the quarter |
$ |
1,441 |
|
|
$ |
313 |
|
|
$ |
286 |
|
|
$ |
179 |
|
|
$ |
84 |
|
Due to a decline in loan balances, a decrease in a specific reserve on one loan, and a continued decline in historical loss ratios, the Company recorded a negative provision for credit losses of $930 thousand for the quarter ended March 31, 2022, compared to the $425 thousand of loan loss provision recorded in the first quarter of 2021. The Company estimates the ACL based on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL. Estimating the amount of the ACL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change. The allowance for credit losses as a percentage of the total loan portfolio was 1.17% at March 31, 2022 and 1.22% at March 31, 2021. Early stage delinquencies, which are loans 30 - 89 days delinquent, as a percentage of total loans decreased from 0.35% at March 31, 2021, to 0.32% at March 31, 2022, and non-performing loans as a percentage of total loans increased from 0.57% at March 31, 2021, to 0.61% at March 31, 2022. The allowance for credit losses to non-performing loans decreased from 214.22% at March 31, 2021, to 192.33% at March 31, 2022.
Based on the evaluation of the adequacy of the allowance for credit losses, management believes that the allowance for credit losses at March 31, 2022, is adequate. The provision for credit losses is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.
Deposits. Total deposits increased $146.6 million from December 31, 2021, to March 31, 2022, for a balance of $3.69 billion. The increase of $146.6 million since December 31, 2021 is due to seasonality in public fund balances and continued growth in business and consumer deposits. In addition, the Company added $40.0 million in brokered deposits during the quarter.
Borrowings. Total borrowing balances increased from $87.8 million at December 31, 2021 to $87.9 million at March 31, 2022.
Capital Resources. Total stockholders’ equity decreased $78.5 million, or 16.6%, during the three month period ended March 31, 2022. The decrease in stockholders’ equity was primarily due to an $88.8 million decline in accumulated other comprehensive income and dividends paid to shareholders offset by net income for the quarter. The rapid increase in U.S. treasury rates has had a negative effect on the value of the Company’s available for sale securities, and in turn, the dollar amount that flows through accumulated other comprehensive income. Shareholders received $0.16 per share in cash dividends in the first quarter of 2022. Book value per share decreased from $13.94 per share at December 31, 2021 to $11.58 per share at March 31, 2022.
36
The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company. At March 31, 2022 the Company is required to maintain 4.5% common equity tier 1 to risk weighted assets excluding the conservation buffer to be adequately capitalized. The Company’s common equity tier 1 to risk weighted assets was 13.31%, total risk-based capital ratio stood at 17.59%, and the Tier 1 risk-based capital ratio and Tier 1 leverage ratio were at 13.95% and 9.56%, respectively, at March 31, 2022. The Company opted not to phase in, over 3 years, the effects of the initial CECL entry to equity for the implementation of ACS 326, recorded on January 1, 2021. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of March 31, 2022.
Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to adopt a simple leverage ratio to measure capital adequacy. The community bank leverage ratio framework removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that opts into the framework.
Critical Accounting Policies
The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s 2021 Form 10-K. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified three accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for credit losses, for both the investment and loan portfolios and if there is any impairment of goodwill or other intangible. Additional information regarding these policies is included in the notes to the aforementioned 2021 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combinations), Note 4 (Loans), and the sections captioned “Loan Portfolio.”
Securities classified as AFS are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.
The Company evaluates securities AFS in unrealized loss positions on a quarterly basis to determine whether the decline in fair value below the amortized costs basis (impairment) is due to credit-related factors or noncredit-related factors. In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Any impairment that is not credit-related is recognized in other comprehensive income, net of related deferred income taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet based on the amount by which the amortized cost basis exceeds the fair value, with a corresponding charge to net income. Both the ACL and the charge to net income may be reversed if conditions change. However, if the Company intends to sell an impaired AFS security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in net income with a corresponding adjustment to the security’s amortized cost basis rather than through the establishment of an ACL. The Company has recorded no ACL related to the investment portfolio as of March 31, 2022.
The ACL represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date. The Company estimates the ACL based on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL. Estimating the amount of the ACL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change.
Liquidity
The Company maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Company’s ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. The Company’s objective in liquidity management is to maintain the ability to meet loan commitments, purchase securities or to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings. Principal sources of liquidity for the Company include assets considered relatively liquid, such as federal funds sold, cash-due from banks, as well as cash flows from maturities and repayments of loans, and securities.
37
Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, access to funds in the wholesale arena, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at major domestic banks. At March 31, 2022, this line of credit totaled $35 million of which the Bank had not borrowed against. In addition, the Company has two revolving lines of credit with correspondent banks totaling $6.5 million. There was no balance on these lines at March 31, 2022 and December 31, 2021. Management feels that its liquidity position is adequate and continues to monitor the position on a monthly basis. As of March 31, 2022, the Bank had no outstanding balances with the Federal Home Loan Bank but had additional borrowing capacity of approximately $679.8 million, as well as access to the Federal Reserve Discount Window, which provides an additional source of funds with the posting of collateral. The Bank views its membership in the FHLB as a solid source of liquidity.
Off-Balance Sheet Arrangements
In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The Bank’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $627.9 million at March 31, 2022, and $606.8 million at December 31, 2021. Additionally, the Company committed up to $17.2 million in subscriptions in Small Business Investment Company investment funds. At March 31, 2022, the Company has invested $15.3 million in these funds.
Recent Market and Regulatory Developments
Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system.
Also, such statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company.
38
|
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
The Company’s ability to maximize net income is dependent, in part, on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of the Company are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company.
The Company considers the primary market exposure to be interest rate risk. Simulation analysis is used to monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income. The following table shows the effect on net interest income and the net present value of equity in the event of a sudden and sustained 300 basis point increase or 100 basis point decrease in market interest rates:
|
Changes In Interest Rate (basis points) |
|
March 31, 2022 Result |
|
|
December 31, 2021 Result |
|
|
ALCO Guidelines |
|
|||
|
Net Interest Income Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
+300 |
|
|
3.2 |
% |
|
|
4.5 |
% |
|
|
-10.0 |
% |
|
+200 |
|
|
2.3 |
% |
|
|
3.2 |
% |
|
|
-7.5 |
% |
|
+100 |
|
|
1.0 |
% |
|
|
1.5 |
% |
|
|
-5.0 |
% |
|
-100 |
|
|
-3.0 |
% |
|
|
-4.1 |
% |
|
|
-5.0 |
% |
|
Net Present Value Of Equity Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
+300 |
|
|
2.7 |
% |
|
|
6.2 |
% |
|
|
-10.0 |
% |
|
+200 |
|
|
3.5 |
% |
|
|
7.6 |
% |
|
|
-7.5 |
% |
|
+100 |
|
|
2.9 |
% |
|
|
6.1 |
% |
|
|
-5.0 |
% |
|
-100 |
|
|
-8.8 |
% |
|
|
-12.4 |
% |
|
|
-10.0 |
% |
It should be noted that the change in the net present value of equity and net interest income had exceeded policy when the simulation model assumed a sudden decrease in rates of 100 basis points (1%). This was primarily due to the positive impact on the fair value of assets not being as great as the negative impact on the fair value of certain liabilities. Specifically, because core deposits typically bear relatively low interest rates, their fair value would be negatively impacted as the rates could not be adjusted by the full extent of the sudden decrease in rates. Management will continue to monitor any policy exceptions and may consider changes to the asset/liability position in the future. The results of the simulations indicate that interest rate change results fall within internal limits established by the Company at March 31, 2022. A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis. It is management’s opinion that hedging instruments currently available are not a cost effective means of controlling interest rate risk for the Company. Accordingly, the Company does not currently use financial derivatives, such as interest rate options, swaps, caps, floors or other similar instruments, but does utilize swaps to accommodate large commercial borrowers that desire longer term fixed rates.
|
Item 4. |
Controls and Procedures |
Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
39
PART II - OTHER INFORMATION
|
Item 1. |
Legal Proceedings |
The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, although the Company establishes accruals where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure with respect to adverse claims in legal matters could change in the event of the discovery of additional facts in such matters or upon determinations by judges, juries, administrative agencies or other finders of fact that are inconsistent with the Company’s evaluation of claims. It is possible that the ultimate resolution of matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not known.
|
Item 1A. |
Risk Factors |
For a discussion of risk factors related to the Company, refer to Part 1, Item 1A, “Risk Factors,” contained in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2021.
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases of equity securities by the issuer.
In 2019, the Company announced that its Board of Directors authorized the purchase of up to 1,500,000 shares of its common stock in the open market or in privately negotiated transactions, from time to time and subject to market and other conditions. At March 31, 2022, the Company had 546,182 shares remaining to be repurchased under this program. There were no treasury stock shares repurchased under the program during the three month period ended March 31, 2022.
|
Item 3. |
Defaults Upon Senior Securities |
Not applicable.
|
Item 4. |
Mine Safety Disclosures |
Not applicable.
|
Item 5. |
Other Information |
Not applicable.
40
|
Item 6. |
Exhibits |
The following exhibits are filed or incorporated by reference as part of this report:
|
2.1* |
|
|
|
|
|
2.2* |
|
|
|
|
|
2.3* |
|
|
|
|
|
3.1* |
|
|
|
|
|
3.2* |
|
|
|
|
|
3.3* |
|
|
|
|
|
3.4* |
|
|
|
|
|
10.1** |
|
|
|
|
|
10.2** |
|
|
|
|
|
10.3** |
|
|
|
|
|
10.4** |
|
|
|
|
|
10.5** |
|
|
|
|
|
31.1** |
|
|
|
|
|
31.2** |
|
|
|
|
|
32.1** |
|
|
|
|
|
32.2** |
|
|
|
|
|
101 |
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in iXBRL (Inline Extensible Business Reporting Language), filed herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements. |
|
|
|
|
104 |
The cover page from the Company’s Quarterly report on Form 10-Q for the quarter ended March 31, 2022, has been formatted in Inline XBRL. |
41
|
* |
Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments have been omitted. The registrant hereby agrees to furnish a copy of any omitted schedule or similar attachment to the SEC upon request. |
|
** |
Constitutes a management contract or compensatory plan or arrangement. |
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FARMERS NATIONAL BANC CORP.
Dated: May 5, 2022
|
/s/ Kevin J. Helmick |
|
Kevin J. Helmick President and Chief Executive Officer |
Dated: May 5, 2022
|
/s/ A. Troy Adair |
|
A. Troy Adair Executive Vice President, Chief Financial Officer and Secretary |
43