The accompanying interim condensed consolidated financial
statements include the accounts of Jacksonville Bancorp, Inc. and its wholly-owned subsidiary, Jacksonville Savings Bank (the “Bank”)
and its wholly-owned subsidiary, Financial Resources Group, Inc. collectively (the “Company”). All significant intercompany
accounts and transactions have been eliminated.
In the opinion of management, the preceding unaudited
consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary 1) for a fair
presentation and 2) to make the financial statements not misleading as to the financial condition of the Company as of March 31,
2018, and the results of its operations for the three month periods ended March 31, 2018 and 2017. The results of operations for
the three month periods are not necessarily indicative of the results which may be expected for the entire year. The condensed
consolidated balance sheet of the Company as of December 31, 2017 has been derived from the audited consolidated balance sheet
of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial
statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) have been
condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements of the Company for the year ended December 31, 2017 filed as an exhibit to the Company’s Annual Report on Form
10-K filed in March 2018. The accounting and reporting policies of the Company conform to GAAP and to prevailing practices within
the industry.
Certain amounts included in the 2017 consolidated statements
have been reclassified to conform to the 2018 presentation.
Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenues as they are earned based
on contractual terms, as transactions occur, or as services are provided and collectibility is reasonable assured. The Company’s
principal source of revenue is interest income from loans and investment and mortgage-backed securities. The Company also earns
noninterest income from various banking and financial services offered primarily through the Bank and its subsidiary.
Interest Income
– The largest source of revenue
for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas written
in contracts, such as loan agreements or investment securities contracts.
Noninterest Income
– The Company earns noninterest
income through a variety of financial and transaction services provided to consumer and corporate clients such as investment brokerage
and trust, deposit account, debit card, and mortgage banking. Revenue is recorded for noninterest income based on the contractual
terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.
|
2.
|
NEW ACCOUNTING PRONOUNCEMENTS
|
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers (Topic 606). The update provides a five-step revenue recognition model for all revenue arising from contracts
with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts
are included in the scope of other standards). The guidance requires an entity to recognize the revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods and services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers
(Topic 606) – Deferral of the Effective Date, which provides a one-year deferral of ASU 2014-09. For public entities, the
guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting
period, and must be applied either retrospectively or using the modified retrospective approach. The Company adopted ASU 2014-09
on January 1, 2018, and did not identify any material changes in the timing of revenue recognition when considering the amended
accounting guidance. See Note 1 for additional disclosures related to revenue recognition.
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU
2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with more
decision-useful information. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company adopted ASU 2016-01 on January 1, 2018 and there was not a significant impact on
the Company’s consolidated financial statements, with the exception of the loan fair value calculation in Note 9.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected
credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable
and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform
their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs
to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment
to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for
credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies,
this update will be effective for interim and annual periods beginning after December 15, 2019. The Company has been receiving
training and gathering historical data in order to determine the impact the adoption of ASU 2016-13 will have on the consolidated
financial statements.
In January 2017, FASB amended FASB ASC Topic 350, Simplifying
the Test for Goodwill. The amendments in the update simplify the measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. Instead, under this amendment, an entity should perform its annual, or interim, goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of
goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and
annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company has goodwill from a prior business combination and performs
an annual impairment test or more frequently if changes or circumstances occur that would more likely than not reduce the fair
value of the reporting unit below its carrying value. The Company’s most recent annual impairment assessment determined that
the Company’s goodwill was not impaired. Although the Company cannot anticipate future goodwill impairment assessments, based
on the most recent assessment it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate
a material impact from these amendments to the Company’s financial position and results of operations. The current accounting
policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.
In March 2017, FASB issued ASU 2017-08, Receivables –
Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20). The ASU amends
the amortization period for certain callable debt securities held at a premium. The amendments require the premium to be amortized
to the earliest call date. The ASU’s amendments are effective for public business entities for interim and annual periods
beginning after December 15, 2018. Early adoption is permitted. The Company adopted the ASU early and there was not a material
impact on the Company’s consolidated financial statements.
In February 2018, FASB issued ASU 2018-02, Income Statement
– Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income (AOCI). Because the Tax Change & Jobs Act was signed on December 22, 2017, the accounting for the change in tax rates
and effect on deferred tax assets and liabilities must be reflected in the 2017 financial statements as an adjustment to income
tax expense, even though a portion of the tax effects were initially recognized directly in other comprehensive income. This adjustment
would leave a stranded balance in AOCI that would not reflect the appropriate tax rate. Under this ASU, entities are allowed, but
not required, to reclassify from AOCI to retained earnings the stranded tax effects resulting from the new federal corporate income
tax rate. The ASU is effective for all entities for annual reporting periods beginning after December 15, 2018. Early adoption
would be permitted for interim or annual financial statements that have not been issued or made available for issuance. Early adoption
will allow entities to align the timing of the stranded tax reclassification in their 2017 financial statements. The Company adopted
the ASU retrospectively and the impact was reflected in the Company’s 2017 consolidated financial statements.
Earnings Per Share -
Basic
earnings per share is determined by dividing net income for the period by the weighted average number of common shares. Diluted
earnings per share considers the potential effects of the exercise of outstanding stock options under the Company’s stock
option plans. Average shares outstanding exclude unallocated shared held by the Jacksonville Savings Bank employee stock ownership
plan (ESOP).
The following reflects earnings
per share calculations for basic and diluted methods:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
688,246
|
|
|
$
|
759,566
|
|
|
|
|
|
|
|
|
|
|
Basic average shares outstanding
|
|
|
1,799,897
|
|
|
|
1,784,584
|
|
|
|
|
|
|
|
|
|
|
Diluted potential common shares:
|
|
|
|
|
|
|
|
|
Stock option equivalents
|
|
|
15,248
|
|
|
|
20,938
|
|
Diluted average shares outstanding
|
|
|
1,815,145
|
|
|
|
1,805,522
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.38
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.38
|
|
|
$
|
0.42
|
|
|
4.
|
STOCK BASED COMPENSATION
|
In connection with the 2010 second-step conversion and
related stock offering, the ESOP purchased an additional 41,614 shares for the exclusive benefit of eligible employees. The ESOP
borrowed funds from the Company in an amount sufficient to purchase the 41,614 shares (approximately 4% of the common stock issued
in the offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made
by the Bank and dividends received by the ESOP. Contributions will be applied to repay interest on the loan first, and the remainder
will be applied to principal. The loan is expected to be repaid over a period of up to 20 years. Shares purchased with the loan
proceeds are held in a suspense account for allocation among participants as the loan is repaid. Shares released from the suspense
account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants.
Participants will vest on a pro-rata basis and reach 100% vesting in the accrued benefits under the ESOP after six years. Vesting
is accelerated upon retirement, death, or disability of the participant or a change in control of the Bank. Forfeitures will be
reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service,
or termination of the ESOP. Discretionary contributions are determined by the board annually.
The Company is accounting for its ESOP in accordance with
ASC Topic 718, “
Employers Accounting for Employee Stock Ownership Plans
.” Accordingly, the debt of the ESOP
is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance
sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares
are committed to be released from the collateral, the Company reports compensation expense equal to the average market price of
the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends, if any,
on unallocated shares are recorded as a reduction of debt and accrued interest.
A summary of ESOP shares at March 31, 2018 and 2017 is
shown below.
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Unearned shares
|
|
|
14,147
|
|
|
|
16,619
|
|
Shares committed for release
|
|
|
618
|
|
|
|
618
|
|
Allocated shares
|
|
|
60,538
|
|
|
|
63,778
|
|
Total ESOP shares
|
|
|
75,303
|
|
|
|
81,015
|
|
|
|
|
|
|
|
|
|
|
Fair value of unearned shares
|
|
$
|
472,510
|
|
|
$
|
520,175
|
|
On April 24, 2012, the compensation committee of the
board of directors approved the awards of 104,035 options to purchase Company common stock. The stock options vest over a five-year
period and expire ten years after the date of the grant. Apart from the vesting schedule, there are no performance-based conditions
or any other material conditions applicable to the options issued.
The following table summarizes stock option activity
for the three months ended March 31, 2018.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Instrinsic
|
|
|
|
Options
|
|
|
Price/Share
|
|
|
Life (in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
31,067
|
|
|
$
|
15.65
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,596
|
)
|
|
|
15.65
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2018
|
|
|
29,471
|
|
|
$
|
15.65
|
|
|
|
4.00
|
|
|
$
|
523,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2018
|
|
|
27,686
|
|
|
$
|
15.65
|
|
|
|
4.00
|
|
|
$
|
491,427
|
|
Intrinsic value for stock options is defined as the
difference between the current market value and the exercise price. The value is based upon a closing price of $33.40 per share
on March 31, 2018.
|
5.
|
LOAN PORTFOLIO COMPOSITION
|
At March 31, 2018 and December
31, 2017, the composition of the Company’s loan portfolio is shown below.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
46,695,828
|
|
|
|
25.1
|
%
|
|
$
|
45,844,543
|
|
|
|
24.6
|
%
|
Commercial
|
|
|
36,092,381
|
|
|
|
19.4
|
|
|
|
37,260,090
|
|
|
|
20.0
|
|
Agricultural
|
|
|
40,611,733
|
|
|
|
21.8
|
|
|
|
40,129,028
|
|
|
|
21.5
|
|
Home equity
|
|
|
9,670,718
|
|
|
|
5.2
|
|
|
|
10,117,647
|
|
|
|
5.4
|
|
Total real estate loans
|
|
|
133,070,660
|
|
|
|
71.5
|
|
|
|
133,351,308
|
|
|
|
71.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
27,857,933
|
|
|
|
15.0
|
|
|
|
26,934,790
|
|
|
|
14.4
|
|
Agricultural loans
|
|
|
12,551,929
|
|
|
|
6.8
|
|
|
|
13,400,651
|
|
|
|
7.2
|
|
Consumer loans
|
|
|
15,340,380
|
|
|
|
8.2
|
|
|
|
15,760,797
|
|
|
|
8.4
|
|
Total loans receivable
|
|
|
188,820,902
|
|
|
|
101.5
|
|
|
|
189,447,546
|
|
|
|
101.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
|
12,513
|
|
|
|
0.0
|
|
|
|
10,486
|
|
|
|
0.0
|
|
Allowance for loan losses
|
|
|
2,737,933
|
|
|
|
1.5
|
|
|
|
2,879,510
|
|
|
|
1.5
|
|
Total loans receivable, net
|
|
$
|
186,070,456
|
|
|
|
100.0
|
%
|
|
$
|
186,557,550
|
|
|
|
100.0
|
%
|
The Company believes that sound loans are a necessary
and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors
and to the communities it serves, authorized personnel are expected to make sound, profitable loans that resources permit and that
opportunity affords. The Company maintains lending policies and procedures in place designed to focus lending efforts on the types,
locations, and duration of loans most appropriate for the business model and markets. The Company’s principal lending activities
include the origination of one-to four-family residential mortgage loans, multi-family loans, commercial real estate loans, agricultural
loans, home equity lines of credits, commercial business loans, and consumer loans. The primary lending market includes the Illinois
counties of Morgan, Macoupin and Montgomery. Generally, loans are collateralized by assets, primarily real estate, of the borrowers
and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale
of selected assets of the borrowers.
Loan originations are derived from a number of sources
such as real estate broker referrals, existing customers, builders, attorneys and walk-in customers. Upon receipt of a loan application,
a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing.
In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent
appraiser approved by the Company. A loan application file is first reviewed by a loan officer who checks applications for accuracy
and completeness, and verifies the information provided. The financial resources of the borrower and the borrower’s credit
history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval.
All residential real estate loans are then verified by our loan risk management department prior to closing. The board of directors
has established individual lending authorities for each loan officer by loan type. Loans over an individual officer’s lending
limit must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending
officer and all lending officers, which meets three times a week, and has lending authority up to $750,000 depending on the type
of loan. Loans to borrowers with an aggregate principal balance over this limit, up to $1.0 million, must be approved by the directors’
loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer
and at least two outside directors, plus all lending officers as non-voting members. The board of directors approves all loans
to borrowers with an aggregate principal balance over $1.0 million. The board of directors ratifies all loans that are originated.
Once the loan is approved, the applicant is informed and a closing date is scheduled. Loan commitments are typically funded within
45 days.
If the loan is approved, the borrower must provide proof
of fire and casualty insurance on the property serving as collateral which insurance must be maintained during the full term of
the loan; flood insurance is required in certain instances. Title insurance is generally required on loans secured by real property.
One- to four-family Mortgage Loans -
Historically,
the Bank’s primary lending origination activity has been one- to four-family, owner-occupied, residential mortgage loans
secured by property located in the Company’s market area. The Company generates loans through marketing efforts, existing
customers and referrals, real estate brokers, builders and local businesses.
Fixed rate one- to four-family residential mortgage loans
are generally conforming loans, underwritten according to secondary market guidelines. The Company generally originates both fixed
and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits established by the Federal Housing Finance
Agency.
The Company originates for resale to Freddie Mac and
the Federal Home Loan Bank fixed-rate one- to four-family residential mortgage loans with terms of 15 years or more. The fixed-rate
mortgage loans amortize monthly with principal and interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.
The Company offers fixed-rate one- to four-family residential mortgage loans with terms of up to 30 years without prepayment penalty.
The Company currently offers adjustable-rate mortgage
loans for terms ranging up to 30 years. They generally offer adjustable-rate mortgage loans that adjust between one and five years
on the anniversary date of origination. Interest rate adjustments are up to two hundred basis points per year, with a cap of up
to six hundred basis points on interest rate increases over the life of the loan. In a rising interest rate environment, such rate
limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect
on the net interest income. In the low interest rate environment that has existed over the past several years, the adjustable-rate
portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio. In addition, during
this period borrowers have shown a preference for fixed-rate loans. The Company has used different interest indices for adjustable-rate
mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year,
three-years or five-years. The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an
ongoing basis and is affected significantly by the level of market interest rates, customer preference, interest rate risk position
and competitors’ loan products.
Adjustable-rate mortgage loans make the loan portfolio
more interest rate sensitive and provide an alternative for those borrowers who meet the underwriting criteria, but are unable
to qualify for a fixed-rate mortgage. However, as the interest income earned on adjustable-rate mortgage loans varies with prevailing
interest rates, such loans do not offer predictable cash flows in the same manner as long-term, fixed-rate loans. Adjustable-rate
mortgage loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest
rates increase. It is possible that during periods of rising interest rates that the risk of delinquencies and defaults on adjustable-rate
mortgage loans may increase due to the upward adjustment of interest costs to the borrower, resulting in increased loan losses.
Residential first mortgage loans customarily include
due-on-sale clauses, which gives the Company the right to declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the underlying real property serving as collateral for the loan. Due-on-sale
clauses are a means of imposing assumption fees and increasing the interest rate on mortgage portfolio during periods of rising
interest rates.
When underwriting residential real estate loans, the
Company reviews and verifies each loan applicant’s income and credit history. Management believes that stability of income
and past credit history are integral parts in the underwriting process. Generally, the applicant’s total monthly mortgage
payment, including all escrow amounts, is limited to 30% of the applicant’s total monthly income. In addition, total monthly
obligations of the applicant, including mortgage payments, generally should not exceed 43% of total monthly income. Written appraisals
are generally required on real estate property offered to secure an applicant’s loan. For one- to four-family real estate
loans with loan to value ratios of over 80%, private mortgage insurance is generally required. Fire and casualty insurance is also
required on all properties securing real estate loans. Title insurance may be required, as circumstances warrant.
The Company does not offer an “interest
only” mortgage loan product on one- to four-family residential properties (where the borrower pays interest for an initial
period, after which the loan converts to a fully amortizing loan). They also do not offer loans that provide for negative amortization
of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting
in an increased principal balance during the life of the loan. The Company does not offer a “subprime loan” program
(loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous
charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high
debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).
Commercial Real Estate Loans -
The Company originates
and purchases commercial real estate loans. Commercial real estate loans are secured primarily by improved properties such as multi-family
residential, retail facilities and office buildings, restaurants and other non-residential buildings. The maximum loan-to-value
ratio for commercial real estate loans originated is generally 80%. Commercial real estate loans are generally written up to terms
of five years with adjustable interest rates. The rates are generally tied to the prime rate and generally have a specified floor.
Many of the fixed-rate commercial real estate loans are not fully amortizing and therefore require a “balloon” payment
at maturity. The Company purchases from time to time commercial real estate loan participations primarily from outside the Company’s
market area. All participation loans are approved following an internal review to ensure that the loan satisfies the underwriting
standards.
Underwriting standards for commercial real estate loans
include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing
obligations and payments on the proposed loan. The income approach is primarily utilized to determine whether income generated
from the applicant’s business or real estate offered as collateral is adequate to repay the loan. There is an emphasis on
the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum
ratio of 120%). In underwriting a loan, the value of the real estate offered as collateral in relation to the proposed loan amount
is considered. Generally, the loan amount cannot be greater than 80% of the value of the real estate. Written appraisals are usually
obtained from either licensed or certified appraisers on all commercial real estate loans in excess of $250,000. Creditworthiness
of the applicant is assessed by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining
other public records regarding the applicant.
Loans secured by commercial real estate generally involve
a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased
credit risk is a result of several factors, including the effects of general economic conditions on income producing properties
and the successful operation or management of the properties securing the loans. Furthermore, the repayment of loans secured by
commercial real estate is typically dependent upon the successful operation of the related business and real estate property. If
the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
Agricultural Real Estate Loans -
The Company originates
and purchases agricultural real estate loans. The maximum loan-to-value ratio for agricultural real estate loans we originate is
generally 75%. Our agricultural real estate loans are generally written up to terms of five years with adjustable interest rates.
The rates are generally tied to the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years,
or five-years and generally have a specified floor. Many of our fixed-rate agricultural real estate loans are not fully amortizing
and therefore require a “balloon” payment at maturity. We purchase from time to time agricultural real estate loan
participations primarily from other local institutions within our market area. All participation loans are approved following a
review to ensure that the loan satisfies our underwriting standards.
Underwriting standards for agricultural real estate include
a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations
and payments on the proposed loan. The income approach is primarily utilized to determine whether income generated from the applicant’s
farm operation or real estate offered as collateral is adequate to repay the loan. We emphasize the ratio of the property’s
projected cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%). In underwriting
a loan, we consider the value of the real estate offered as collateral in relation to the proposed loan amount. Generally, the
loan amount cannot be greater than 80% of the value of the real estate. We usually obtain written appraisals from either licensed
or certified appraisers on all agricultural real estate loans in excess of $250,000. We assess the creditworthiness of the applicant
by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records
regarding the applicant.
Loans secured by agricultural real estate generally involve
a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased
credit risk is a result of several factors, including the effects of general economic and market conditions on farm operations
and the successful operation or management of the properties securing the loans. The repayment of loans secured by agricultural
estate is typically dependent upon the successful operation of the farm and real estate property. If the cash flow is reduced,
the borrower’s ability to repay the loan may be impaired.
Home Equity Loans –
The Company originates
home equity loans and lines of credit, which are generally secured by the borrower’s principal residence. The maximum amount
of a home equity loan or line of credit is generally 95% of the appraised value of a borrower’s real estate collateral less
the amount of any existing mortgages or related liabilities. Home equity loans and lines of credit are approved with both fixed
and adjustable interest rates which we determine based upon market conditions. Such loans may be fully amortized over the life
of the loan or have a balloon feature. Generally, the maximum term for home equity loans is 10 years.
Underwriting standards for home equity loans include
a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations
and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable secondary income. We also consider the length of employment
with the borrower’s present employer as well as the amount of time the borrower has lived in the local area. Creditworthiness
of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount.
Home equity loans entail greater risks than one- to four-family
residential mortgage loans, which are secured by first lien mortgages. In such cases, collateral repossessed after a default may
not provide an adequate source of repayment of the outstanding loan balance because of damage or depreciation in the value of the
property or loss of equity to the first lien position. Further, home equity loan payments are dependent on the borrower’s
continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws,
may limit the amount which can be recovered on such loans in the event of a default.
Commercial Business Loans -
The Company originates
commercial business loans to borrowers located in the Company’s market area which are secured by collateral other than real
estate or which can be unsecured. Commercial business loan participations are also purchased from other lenders, which may be made
to borrowers outside the Company’s market area. Commercial business loans are generally secured by equipment and inventory
and generally are offered with adjustable rates tied to the prime rate or the average yield on U.S. Treasury securities, adjusted
to a constant maturity of either one-year, three-years or five-years and various terms of maturity generally from three years to
five years. Unsecured business loans are originated on a limited basis in those instances where the applicant’s financial
strength and creditworthiness has been established. Commercial business loans generally bear higher interest rates than residential
loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation
of the borrower’s business. Personal guarantees are generally obtained from the borrower or a third party as a condition
to originating its business loans.
Underwriting standards for commercial business loans
include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal
cash flows generated in the applicant’s business. The financial strength of each applicant is assessed through the review
of financial statements and tax returns provided by the applicant. The creditworthiness of an applicant is derived from a review
of credit reports as well as a search of public records. Business loans are periodically reviewed following origination. Financial
statements are requested at least annually and reviewed for substantial deviations or changes that might affect repayment of the
loan. Loan officers also visit the premises of borrowers to observe the business premises, facilities, and personnel and to inspect
the pledged collateral. Underwriting standards for business loans are different for each type of loan depending on the financial
strength of the applicant and the value of collateral offered as security.
Agricultural Business Loans -
The Company originates
agricultural business loans to borrowers located in our market area which are secured by collateral other than real estate or which
can be unsecured. Agricultural business loans are generally secured by equipment and blanket security agreements on all farm assets.
These loans are generally offered with fixed rates with terms up to five years. Agricultural business loans generally bear lower
interest rates than residential loans due to competitive market pressures. The repayment of agricultural business loans is generally
dependent on the successful operation of the farm operation. Personal guarantees are generally obtained from the borrower as a
condition to originating agricultural business loans.
Underwriting standards for agricultural business loans
include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal
cash flows generated in the applicant’s business. The financial strength of each applicant is assessed through the review
of financial statements, pro-forma cash flow statements, and tax returns provided by the applicant. The creditworthiness of an
applicant is derived from a review of credit reports as well as a search of public records. Financial statements are requested
at least annually and reviewed for substantial deviations or changes that might affect repayment of the loan. Loan officers may
also visit the premises of borrowers to observe the operation, facilities, equipment, and personnel and to inspect the pledged
collateral. Underwriting standards for agricultural business loans are different for each type of loan depending on the financial
strength of the applicant and the value of collateral offered as security.
The repayment of agricultural business loans generally
is dependent on the successful operation of a farm and can be adversely affected by fluctuations in crop prices, increase in interest
rates, and changes in weather conditions. These developments may result in smaller harvests and less income for farmers which may
adversely affect such borrower’s ability to repay a loan, and potentially result in an increase in the level of problem loans
and loan losses in our agricultural portfolio. While not required, the majority of our agricultural business loans are covered
by crop insurance, which provides protection against loss due to lower crop yields as a result of unfavorable weather conditions.
Consumer Loans –
The Company originates
consumer loans, including automobile loans, loans secured by deposit accounts, unsecured loans and mobile home loans. Consumer
loans are generally offered on a fixed-rate basis. Automobile loans are generally offered with maturities of up to 60 months for
new automobiles. Loans secured by used automobiles will have maximum terms which vary depending upon the age of the automobile.
Automobile loans are generally originated with a loan-to-value ratio below the greater of 80% of the purchase price or 100% of
NADA loan value. The loan-to-value ratio may be greater or less depending on the borrower’s credit history, debt to income
ratio, home ownership and other banking relationships with us.
Underwriting standards for consumer loans include a determination
of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments
on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly
income from primary employment, and additionally from any verifiable secondary income. We also consider the length of employment
with the borrower’s present employer as well as the amount of time the borrower has lived in the local area. Creditworthiness
of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount.
Consumer loans entail greater risks than one- to four-family
residential mortgage loans, particularly consumer loans secured by rapidly depreciating assets such as automobiles or loans that
are unsecured. In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding
loan balance because of damage, loss or depreciation. Further, consumer loan payments are dependent on the borrower’s continuing
financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Such events would increase our risk of loss on unsecured loans. Finally, the application of various Federal and state laws, including
Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.
The following tables present the balance in the allowance
for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of and for the periods
ended March 31, 2018, March 31, 2017, and December 31, 2017.
|
|
March 31, 2018
|
|
|
|
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Home Equity
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, December 31, 2017
|
|
$
|
677,107
|
|
|
$
|
846,045
|
|
|
$
|
225,478
|
|
|
$
|
95,902
|
|
|
$
|
397,572
|
|
|
$
|
288,922
|
|
|
$
|
239,936
|
|
|
$
|
108,548
|
|
|
$
|
2,879,510
|
|
Provision (credit) charged to expense
|
|
|
(110,505
|
)
|
|
|
42,717
|
|
|
|
4,778
|
|
|
|
(29,500
|
)
|
|
|
4,261
|
|
|
|
(40,191
|
)
|
|
|
(35,059
|
)
|
|
|
3,499
|
|
|
|
(160,000
|
)
|
Losses charged off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recoveries
|
|
|
9,454
|
|
|
|
5,808
|
|
|
|
-
|
|
|
|
525
|
|
|
|
32
|
|
|
|
-
|
|
|
|
2,604
|
|
|
|
-
|
|
|
|
18,423
|
|
Ending balance, March 31, 2018
|
|
$
|
576,056
|
|
|
$
|
894,570
|
|
|
$
|
230,256
|
|
|
$
|
66,927
|
|
|
$
|
401,865
|
|
|
$
|
248,731
|
|
|
$
|
207,481
|
|
|
$
|
112,047
|
|
|
$
|
2,737,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individually evaluated for impairment
|
|
$
|
224,993
|
|
|
$
|
451,367
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
129,416
|
|
|
$
|
113,131
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
918,907
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collectively evaluated for impairment
|
|
$
|
351,063
|
|
|
$
|
443,203
|
|
|
$
|
230,256
|
|
|
$
|
66,927
|
|
|
$
|
272,449
|
|
|
$
|
135,600
|
|
|
$
|
207,481
|
|
|
$
|
112,047
|
|
|
$
|
1,819,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
46,695,828
|
|
|
$
|
36,092,381
|
|
|
$
|
40,611,733
|
|
|
$
|
9,670,718
|
|
|
$
|
27,857,933
|
|
|
$
|
12,551,929
|
|
|
$
|
15,340,380
|
|
|
$
|
-
|
|
|
$
|
188,820,902
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individually evaluated for impairment
|
|
$
|
1,154,224
|
|
|
$
|
1,806,302
|
|
|
$
|
-
|
|
|
$
|
46,629
|
|
|
$
|
1,241,386
|
|
|
$
|
269,534
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,518,075
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collectively evaluated for impairment
|
|
$
|
45,541,604
|
|
|
$
|
34,286,079
|
|
|
$
|
40,611,733
|
|
|
$
|
9,624,089
|
|
|
$
|
26,616,547
|
|
|
$
|
12,282,395
|
|
|
$
|
15,340,380
|
|
|
$
|
-
|
|
|
$
|
184,302,827
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Home Equity
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, December 31, 2016
|
|
$
|
832,000
|
|
|
$
|
1,044,553
|
|
|
$
|
191,359
|
|
|
$
|
173,626
|
|
|
$
|
301,478
|
|
|
$
|
167,469
|
|
|
$
|
182,653
|
|
|
$
|
114,257
|
|
|
$
|
3,007,395
|
|
Provision charged to expense
|
|
|
(49,055
|
)
|
|
|
167,304
|
|
|
|
26,801
|
|
|
|
(17,364
|
)
|
|
|
(26,604
|
)
|
|
|
(33,605
|
)
|
|
|
(12,992
|
)
|
|
|
(24,485
|
)
|
|
|
30,000
|
|
Losses charged off
|
|
|
(18,367
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,367
|
)
|
Recoveries
|
|
|
6,550
|
|
|
|
3,872
|
|
|
|
-
|
|
|
|
2,525
|
|
|
|
29
|
|
|
|
-
|
|
|
|
3,404
|
|
|
|
-
|
|
|
|
16,380
|
|
Ending balance, March 31, 2017
|
|
$
|
771,128
|
|
|
$
|
1,215,729
|
|
|
$
|
218,160
|
|
|
$
|
158,787
|
|
|
$
|
274,903
|
|
|
$
|
133,864
|
|
|
$
|
173,065
|
|
|
$
|
89,772
|
|
|
$
|
3,035,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individually evaluated for impairment
|
|
$
|
251,976
|
|
|
$
|
894,407
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
62,059
|
|
|
$
|
10,796
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,219,238
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collectively evaluated for impairment
|
|
$
|
519,152
|
|
|
$
|
321,322
|
|
|
$
|
218,160
|
|
|
$
|
158,787
|
|
|
$
|
212,844
|
|
|
$
|
123,068
|
|
|
$
|
173,065
|
|
|
$
|
89,772
|
|
|
$
|
1,816,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
45,367,530
|
|
|
$
|
38,872,870
|
|
|
$
|
38,665,494
|
|
|
$
|
11,032,862
|
|
|
$
|
21,302,516
|
|
|
$
|
11,171,580
|
|
|
$
|
15,190,490
|
|
|
$
|
-
|
|
|
$
|
181,603,342
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individually evaluated for impairment
|
|
$
|
728,294
|
|
|
$
|
2,765,091
|
|
|
$
|
-
|
|
|
$
|
52,541
|
|
|
$
|
518,326
|
|
|
$
|
379,307
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,443,559
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collectively evaluated for impairment
|
|
$
|
44,639,236
|
|
|
$
|
36,107,779
|
|
|
$
|
38,665,494
|
|
|
$
|
10,980,321
|
|
|
$
|
20,784,190
|
|
|
$
|
10,792,273
|
|
|
$
|
15,190,490
|
|
|
$
|
-
|
|
|
$
|
177,159,783
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Home Equity
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, December 31, 2016
|
|
$
|
832,000
|
|
|
$
|
1,044,553
|
|
|
$
|
191,359
|
|
|
$
|
173,626
|
|
|
$
|
301,478
|
|
|
$
|
167,469
|
|
|
$
|
182,653
|
|
|
$
|
114,257
|
|
|
$
|
3,007,395
|
|
Provision (credit) charged to expense
|
|
|
(127,286
|
)
|
|
|
95,961
|
|
|
|
34,119
|
|
|
|
(81,824
|
)
|
|
|
(305,586
|
)
|
|
|
121,453
|
|
|
|
88,872
|
|
|
|
(5,709
|
)
|
|
|
(180,000
|
)
|
Losses charged off
|
|
|
(51,695
|
)
|
|
|
(315,766
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,706
|
)
|
|
|
-
|
|
|
|
(39,692
|
)
|
|
|
-
|
|
|
|
(409,859
|
)
|
Recoveries
|
|
|
24,088
|
|
|
|
21,297
|
|
|
|
-
|
|
|
|
4,100
|
|
|
|
404,386
|
|
|
|
-
|
|
|
|
8,103
|
|
|
|
-
|
|
|
|
461,974
|
|
Ending balance, December 31, 2017
|
|
$
|
677,107
|
|
|
$
|
846,045
|
|
|
$
|
225,478
|
|
|
$
|
95,902
|
|
|
$
|
397,572
|
|
|
$
|
288,922
|
|
|
$
|
239,936
|
|
|
$
|
108,548
|
|
|
$
|
2,879,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individually evaluated for impairment
|
|
$
|
176,635
|
|
|
$
|
472,393
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
132,901
|
|
|
$
|
144,438
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
926,367
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collectively evaluated for impairment
|
|
$
|
500,472
|
|
|
$
|
373,652
|
|
|
$
|
225,478
|
|
|
$
|
95,902
|
|
|
$
|
264,671
|
|
|
$
|
144,484
|
|
|
$
|
239,936
|
|
|
$
|
108,548
|
|
|
$
|
1,953,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
45,844,543
|
|
|
$
|
37,260,090
|
|
|
$
|
40,129,028
|
|
|
$
|
10,117,647
|
|
|
$
|
26,934,790
|
|
|
$
|
13,400,651
|
|
|
$
|
15,760,797
|
|
|
$
|
-
|
|
|
$
|
189,447,546
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
individually evaluated for impairment
|
|
$
|
663,366
|
|
|
$
|
1,434,722
|
|
|
$
|
-
|
|
|
$
|
43,683
|
|
|
$
|
553,950
|
|
|
$
|
375,951
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,071,672
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
collectively evaluated for impairment
|
|
$
|
45,181,177
|
|
|
$
|
35,825,368
|
|
|
$
|
40,129,028
|
|
|
$
|
10,073,964
|
|
|
$
|
26,380,840
|
|
|
$
|
13,024,700
|
|
|
$
|
15,760,797
|
|
|
$
|
-
|
|
|
$
|
186,375,874
|
|
Management’s opinion as to the ultimate collectability
of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged
as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.
The allowance for loan losses is maintained at a level
that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance
sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan
balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular
basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay,
estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components.
The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan.
A loan is considered impaired when, based on current
information and events, it is probable that the scheduled payments of principal or interest will not be able to be collected when
due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior
payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral
dependent.
Groups of loans with similar risk characteristics are
collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions
and other relevant factors that affect repayment of the loans. Accordingly, individual consumer and residential loans are not separately
identified for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties
of the borrower.
The general component covers non-classified loans and
is based on historical charge-off experience and expected loss given the internal risk rating process. The loan portfolio is stratified
into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for other qualitative
factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.
There have been no changes to the Company’s accounting
policies or methodology from the prior periods.
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 analyzes
loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination. In addition,
lending relationships over $750,000, new commercial and commercial real estate loans, and watch list credits are reviewed annually
by our external loan review firm in order to verify risk ratings. All watch list credits are reviewed by management and reported
to the Board monthly. The Company uses the following definitions for risk ratings:
Special Mention
– Loans classified as special
mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future
date.
Substandard
– Loans classified as substandard
are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans
so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by
the distinct possibility that the 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 foregoing are considered to be Pass rated loans.
The following tables present the credit risk profile
of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2018 and December 31, 2017.
|
|
1-4 Family
|
|
|
Commercial Real Estate
|
|
|
Agricultural Real Estate
|
|
|
Home Equity
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
44,082,787
|
|
|
$
|
43,254,380
|
|
|
$
|
33,956,183
|
|
|
$
|
35,239,108
|
|
|
$
|
40,375,233
|
|
|
$
|
39,892,528
|
|
|
$
|
9,465,581
|
|
|
$
|
9,893,063
|
|
Special Mention
|
|
|
259,479
|
|
|
|
809,345
|
|
|
|
57,637
|
|
|
|
310,770
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,149
|
|
|
|
75,347
|
|
Substandard
|
|
|
2,353,562
|
|
|
|
1,780,818
|
|
|
|
2,078,561
|
|
|
|
1,710,212
|
|
|
|
236,500
|
|
|
|
236,500
|
|
|
|
155,988
|
|
|
|
149,237
|
|
Total
|
|
$
|
46,695,828
|
|
|
$
|
45,844,543
|
|
|
$
|
36,092,381
|
|
|
$
|
37,260,090
|
|
|
$
|
40,611,733
|
|
|
$
|
40,129,028
|
|
|
$
|
9,670,718
|
|
|
$
|
10,117,647
|
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Total
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
26,609,443
|
|
|
$
|
26,367,452
|
|
|
$
|
11,843,253
|
|
|
$
|
12,507,114
|
|
|
$
|
14,568,695
|
|
|
$
|
15,043,520
|
|
|
$
|
180,901,175
|
|
|
$
|
182,197,165
|
|
Special Mention
|
|
|
3,187
|
|
|
|
8,819
|
|
|
|
43,500
|
|
|
|
139,306
|
|
|
|
11,343
|
|
|
|
17,092
|
|
|
|
424,295
|
|
|
|
1,360,679
|
|
Substandard
|
|
|
1,245,303
|
|
|
|
558,519
|
|
|
|
665,176
|
|
|
|
754,231
|
|
|
|
760,342
|
|
|
|
700,185
|
|
|
|
7,495,432
|
|
|
|
5,889,702
|
|
Total
|
|
$
|
27,857,933
|
|
|
$
|
26,934,790
|
|
|
$
|
12,551,929
|
|
|
$
|
13,400,651
|
|
|
$
|
15,340,380
|
|
|
$
|
15,760,797
|
|
|
$
|
188,820,902
|
|
|
$
|
189,447,546
|
|
The following tables present the Company’s loan
portfolio aging analysis as of March 31, 2018 and December 31, 2017.
|
|
March 31, 2018
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Greater than 90
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total Loans >90
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Days Past Due
|
|
|
Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
Days & Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
545,313
|
|
|
$
|
34,336
|
|
|
$
|
147,753
|
|
|
$
|
727,402
|
|
|
$
|
45,968,426
|
|
|
$
|
46,695,828
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
158,662
|
|
|
|
158,662
|
|
|
|
35,933,719
|
|
|
|
36,092,381
|
|
|
|
-
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,611,733
|
|
|
|
40,611,733
|
|
|
|
-
|
|
Home equity
|
|
|
52,062
|
|
|
|
24,193
|
|
|
|
-
|
|
|
|
76,255
|
|
|
|
9,594,463
|
|
|
|
9,670,718
|
|
|
|
-
|
|
Commercial
|
|
|
4,793
|
|
|
|
-
|
|
|
|
3,918
|
|
|
|
8,711
|
|
|
|
27,849,222
|
|
|
|
27,857,933
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,551,929
|
|
|
|
12,551,929
|
|
|
|
-
|
|
Consumer
|
|
|
114,636
|
|
|
|
23,820
|
|
|
|
94,378
|
|
|
|
232,834
|
|
|
|
15,107,546
|
|
|
|
15,340,380
|
|
|
|
-
|
|
Total
|
|
$
|
716,804
|
|
|
$
|
82,349
|
|
|
$
|
404,711
|
|
|
$
|
1,203,864
|
|
|
$
|
187,617,038
|
|
|
$
|
188,820,902
|
|
|
$
|
-
|
|
|
|
December 31, 2017
|
|
|
|
30-59 Days
|
|
|
60-89 Days
|
|
|
Greater than 90
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total Loans >90
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Days Past Due
|
|
|
Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
Days & Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
243,627
|
|
|
$
|
169,154
|
|
|
$
|
157,550
|
|
|
$
|
570,331
|
|
|
$
|
45,274,212
|
|
|
$
|
45,844,543
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
139,467
|
|
|
|
19,195
|
|
|
|
158,662
|
|
|
|
37,101,428
|
|
|
|
37,260,090
|
|
|
|
-
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,129,028
|
|
|
|
40,129,028
|
|
|
|
-
|
|
Home equity
|
|
|
20,082
|
|
|
|
75,247
|
|
|
|
-
|
|
|
|
95,329
|
|
|
|
10,022,318
|
|
|
|
10,117,647
|
|
|
|
-
|
|
Commercial
|
|
|
5,485
|
|
|
|
-
|
|
|
|
4,317
|
|
|
|
9,802
|
|
|
|
26,924,988
|
|
|
|
26,934,790
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,400,651
|
|
|
|
13,400,651
|
|
|
|
-
|
|
Consumer
|
|
|
74,459
|
|
|
|
105,845
|
|
|
|
11,307
|
|
|
|
191,611
|
|
|
|
15,569,186
|
|
|
|
15,760,797
|
|
|
|
-
|
|
Total
|
|
$
|
343,653
|
|
|
$
|
489,713
|
|
|
$
|
192,369
|
|
|
$
|
1,025,735
|
|
|
$
|
188,421,811
|
|
|
$
|
189,447,546
|
|
|
$
|
-
|
|
The accrual of interest on loans is discontinued at the
time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual
terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal and
interest is considered doubtful.
All interest accrued but not collected for loans that are
placed on non-accrual or charged-off are reversed against interest income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all principal
and interest amounts contractually due are brought current and future payments are reasonably assured.
The Company actively seeks to reduce its investment in
impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of
the underlying collateral, or restructuring.
The Company will restructure loans when the borrower demonstrates
the inability to comply with the terms of the loan, but can demonstrate the ability to meet acceptable restructured terms. Restructurings
generally include one or more of the following restructuring options; reduction in the interest rate on the loan, payment extensions,
forgiveness of principal, forbearance, or other actions intended to maximize collection. Restructured loans in compliance with
modified terms are classified as impaired.
The following tables present impaired loans at or for
the three months ended March 31, 2018 and 2017 and for the year ended December 31, 2017.
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Impairment in
|
|
|
Interest
|
|
|
Income
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
|
Impaired
|
|
|
Income
|
|
|
Recognized
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Allowance
|
|
|
Loans
|
|
|
Recognized
|
|
|
Cash Basis
|
|
Loans without a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
212,908
|
|
|
$
|
212,908
|
|
|
$
|
-
|
|
|
$
|
217,436
|
|
|
$
|
2,834
|
|
|
$
|
2,886
|
|
Commercial real estate
|
|
|
838,443
|
|
|
|
838,443
|
|
|
|
-
|
|
|
|
835,880
|
|
|
|
12,795
|
|
|
|
11,067
|
|
Commercial
|
|
|
1,111,970
|
|
|
|
1,111,970
|
|
|
|
-
|
|
|
|
1,094,363
|
|
|
|
12,940
|
|
|
|
4,828
|
|
Home equity
|
|
|
46,629
|
|
|
|
46,629
|
|
|
|
-
|
|
|
|
47,404
|
|
|
|
844
|
|
|
|
796
|
|
Loans with a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
941,316
|
|
|
|
941,316
|
|
|
|
224,993
|
|
|
|
951,131
|
|
|
|
12,372
|
|
|
|
12,023
|
|
Commercial real estate
|
|
|
967,859
|
|
|
|
967,859
|
|
|
|
451,367
|
|
|
|
1,040,249
|
|
|
|
14,765
|
|
|
|
14,984
|
|
Commercial
|
|
|
129,416
|
|
|
|
129,416
|
|
|
|
129,416
|
|
|
|
145,514
|
|
|
|
2,274
|
|
|
|
3,125
|
|
Agricultural
|
|
|
269,534
|
|
|
|
269,534
|
|
|
|
113,131
|
|
|
|
279,762
|
|
|
|
3,159
|
|
|
|
7,549
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
1,154,224
|
|
|
|
1,154,224
|
|
|
|
224,993
|
|
|
|
1,168,567
|
|
|
|
15,206
|
|
|
|
14,909
|
|
Commercial real estate
|
|
|
1,806,302
|
|
|
|
1,806,302
|
|
|
|
451,367
|
|
|
|
1,876,129
|
|
|
|
27,560
|
|
|
|
26,051
|
|
Commercial
|
|
|
1,241,386
|
|
|
|
1,241,386
|
|
|
|
129,416
|
|
|
|
1,239,877
|
|
|
|
15,214
|
|
|
|
7,953
|
|
Agricultural
|
|
|
269,534
|
|
|
|
269,534
|
|
|
|
113,131
|
|
|
|
279,762
|
|
|
|
3,159
|
|
|
|
7,549
|
|
Home equity
|
|
|
46,629
|
|
|
|
46,629
|
|
|
|
-
|
|
|
|
47,404
|
|
|
|
844
|
|
|
|
796
|
|
Total
|
|
$
|
4,518,075
|
|
|
$
|
4,518,075
|
|
|
$
|
918,907
|
|
|
$
|
4,611,739
|
|
|
$
|
61,983
|
|
|
$
|
57,258
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Impairment in
|
|
|
Interest
|
|
|
Income
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
|
Impaired
|
|
|
Income
|
|
|
Recognized
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Allowance
|
|
|
Loans
|
|
|
Recognized
|
|
|
Cash Basis
|
|
Loans without a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
231,961
|
|
|
$
|
231,961
|
|
|
$
|
-
|
|
|
$
|
265,795
|
|
|
$
|
3,563
|
|
|
$
|
3,713
|
|
Commercial real estate
|
|
|
1,053,432
|
|
|
|
1,053,432
|
|
|
|
-
|
|
|
|
1,053,606
|
|
|
|
14,552
|
|
|
|
19,933
|
|
Commercial
|
|
|
411,682
|
|
|
|
411,682
|
|
|
|
-
|
|
|
|
535,531
|
|
|
|
6,732
|
|
|
|
5,924
|
|
Home equity
|
|
|
52,541
|
|
|
|
52,541
|
|
|
|
-
|
|
|
|
53,321
|
|
|
|
893
|
|
|
|
790
|
|
Loans with a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
496,333
|
|
|
|
496,333
|
|
|
|
251,976
|
|
|
|
499,324
|
|
|
|
6,350
|
|
|
|
5,076
|
|
Commercial real estate
|
|
|
1,711,659
|
|
|
|
1,711,659
|
|
|
|
894,407
|
|
|
|
1,740,514
|
|
|
|
22,022
|
|
|
|
20,011
|
|
Commercial
|
|
|
106,644
|
|
|
|
106,644
|
|
|
|
62,059
|
|
|
|
112,152
|
|
|
|
975
|
|
|
|
391
|
|
Agricultural
|
|
|
379,307
|
|
|
|
379,307
|
|
|
|
10,796
|
|
|
|
395,658
|
|
|
|
4,800
|
|
|
|
18,313
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
728,294
|
|
|
|
728,294
|
|
|
|
251,976
|
|
|
|
765,119
|
|
|
|
9,913
|
|
|
|
8,789
|
|
Commercial real estate
|
|
|
2,765,091
|
|
|
|
2,765,091
|
|
|
|
894,407
|
|
|
|
2,794,120
|
|
|
|
36,574
|
|
|
|
39,944
|
|
Commercial
|
|
|
518,326
|
|
|
|
518,326
|
|
|
|
62,059
|
|
|
|
647,683
|
|
|
|
7,707
|
|
|
|
6,315
|
|
Agricultural
|
|
|
379,307
|
|
|
|
379,307
|
|
|
|
10,796
|
|
|
|
395,658
|
|
|
|
4,800
|
|
|
|
18,313
|
|
Home equity
|
|
|
52,541
|
|
|
|
52,541
|
|
|
|
-
|
|
|
|
53,321
|
|
|
|
893
|
|
|
|
790
|
|
Total
|
|
$
|
4,443,559
|
|
|
$
|
4,443,559
|
|
|
$
|
1,219,238
|
|
|
$
|
4,655,901
|
|
|
$
|
59,887
|
|
|
$
|
74,151
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Impairment in
|
|
|
Interest
|
|
|
Income
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
|
Impaired
|
|
|
Income
|
|
|
Recognized
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Allowance
|
|
|
Loans
|
|
|
Recognized
|
|
|
Cash Basis
|
|
Loans without a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
223,997
|
|
|
$
|
223,997
|
|
|
$
|
-
|
|
|
$
|
244,463
|
|
|
$
|
12,789
|
|
|
$
|
12,771
|
|
Commercial real estate
|
|
|
444,500
|
|
|
|
444,500
|
|
|
|
-
|
|
|
|
951,010
|
|
|
|
41,732
|
|
|
|
40,184
|
|
Commercial
|
|
|
421,049
|
|
|
|
421,049
|
|
|
|
-
|
|
|
|
473,657
|
|
|
|
24,123
|
|
|
|
23,768
|
|
Home equity
|
|
|
43,683
|
|
|
|
43,683
|
|
|
|
-
|
|
|
|
52,350
|
|
|
|
3,617
|
|
|
|
3,393
|
|
Loans with a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
439,369
|
|
|
|
439,369
|
|
|
|
176,635
|
|
|
|
434,203
|
|
|
|
21,596
|
|
|
|
20,823
|
|
Commercial real estate
|
|
|
990,222
|
|
|
|
990,222
|
|
|
|
472,393
|
|
|
|
1,071,991
|
|
|
|
61,601
|
|
|
|
63,773
|
|
Commercial
|
|
|
132,901
|
|
|
|
132,901
|
|
|
|
132,901
|
|
|
|
145,858
|
|
|
|
2,608
|
|
|
|
1,545
|
|
Agricultural
|
|
|
375,951
|
|
|
|
375,951
|
|
|
|
144,438
|
|
|
|
381,803
|
|
|
|
18,053
|
|
|
|
26,240
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
663,366
|
|
|
|
663,366
|
|
|
|
176,635
|
|
|
|
678,666
|
|
|
|
34,385
|
|
|
|
33,594
|
|
Commercial real estate
|
|
|
1,434,722
|
|
|
|
1,434,722
|
|
|
|
472,393
|
|
|
|
2,023,001
|
|
|
|
103,333
|
|
|
|
103,957
|
|
Commercial
|
|
|
553,950
|
|
|
|
553,950
|
|
|
|
132,901
|
|
|
|
619,515
|
|
|
|
26,731
|
|
|
|
25,313
|
|
Agricultural
|
|
|
375,951
|
|
|
|
375,951
|
|
|
|
144,438
|
|
|
|
381,803
|
|
|
|
18,053
|
|
|
|
26,240
|
|
Home equity
|
|
|
43,683
|
|
|
|
43,683
|
|
|
|
-
|
|
|
|
52,350
|
|
|
|
3,617
|
|
|
|
3,393
|
|
Total
|
|
$
|
3,071,672
|
|
|
$
|
3,071,672
|
|
|
$
|
926,367
|
|
|
$
|
3,755,335
|
|
|
$
|
186,119
|
|
|
$
|
192,497
|
|
Included in certain loan categories in the impaired
loans are troubled debt restructurings (TDRs), where economic concessions have been granted to borrowers who have experienced financial
difficulties, that were classified as impaired. These concessions typically include reductions in the interest rate, payment extensions,
forgiveness of principal, forbearance or other actions. TDRs are considered impaired at the time of restructuring and typically
are returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period of
time, usually at least six months.
When loans are modified into a TDR, the Company evaluates
any possible impairment similar to other impaired loans based on the present value of expected cash flows, discounted at the contractual
interest rate of the original loan agreement, or based upon on the current fair value of the collateral, less selling costs for
collateral dependent loans. If the Company determined that the value of the modified loan is less than the recorded investment
in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized
through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all
TDRs, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.
The following table presents the recorded balance, at
original cost, of TDRs, as of March 31, 2018 and December 31, 2017.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
661,579
|
|
|
$
|
677,031
|
|
Commercial real estate
|
|
|
947,651
|
|
|
|
965,926
|
|
Agricultural real estate
|
|
|
236,500
|
|
|
|
236,500
|
|
Home equity
|
|
|
-
|
|
|
|
4,417
|
|
Commercial loans
|
|
|
337,748
|
|
|
|
343,414
|
|
Agricultural loans
|
|
|
94,000
|
|
|
|
93,914
|
|
Consumer loans
|
|
|
77,351
|
|
|
|
80,011
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,354,829
|
|
|
$
|
2,401,213
|
|
The following table presents the recorded balance, at
original cost, of TDRs, which were performing according to the terms of the restructuring, as of March 31, 2018 and December 31,
2017.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
625,816
|
|
|
$
|
677,031
|
|
Commercial real estate
|
|
|
808,184
|
|
|
|
826,459
|
|
Agricultural real estate
|
|
|
236,500
|
|
|
|
236,500
|
|
Home equity
|
|
|
-
|
|
|
|
4,417
|
|
Commercial loans
|
|
|
337,748
|
|
|
|
343,414
|
|
Agricultural loans
|
|
|
94,000
|
|
|
|
93,914
|
|
Consumer loans
|
|
|
61,173
|
|
|
|
65,006
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,163,421
|
|
|
$
|
2,246,741
|
|
The following table presents loans modified as TDRs
during the three months ended March 31, 2018 and 2017.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
|
Modifications
|
|
|
Investment
|
|
|
Modifications
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
459,987
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
236,500
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
53,194
|
|
Agricultural loans
|
|
|
1
|
|
|
|
94,000
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1
|
|
|
$
|
94,000
|
|
|
|
3
|
|
|
$
|
749,681
|
|
First Quarter, 2018 Modifications
The Company modified one agricultural loan with a recorded
investment of $94,000. The modification was made to renew the loan and defer the principal payment to maturity. The modification
did not result in a write-off of the principal balance nor was there a significant difference between the pre-modification balance
and the post-modification balance.
First Quarter, 2017 Modifications
The Company modified one commercial real estate loan
with a recorded investment of $459,987. The modification was made to lower the rate and extend the amortization. The Company modified
one agricultural real estate loan with a recorded investment of $236,500. The modification was made to consolidate notes and extend
the amortization. The Company modified one commercial loan with a recorded investment of $53,194. The modification was made to
combine three notes and lower the rate. The modifications did not result in a write-off of the principal balance nor was there
a significant difference between the pre-modification balance and the post-modification balance.
TDRs with Defaults
Management considers the level of defaults within the
various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During
the three month period ended March 31, 2018, one commercial real estate loan of $139,467 was considered a TDR defaulted as it was
more than 90 days past due at March 31, 2018. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual
or charged-off, and is within twelve months of restructuring.
During the three month period ended March 31, 2017,
one residential real estate loan of $67,025 and one consumer loan of $4,245 that were considered TDRs defaulted as they were more
than 90 days past due at March 31, 2017.
The following table presents the Company’s nonaccrual
loans at March 31, 2018 and December 31, 2017. This table excludes performing TDRs.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
435,820
|
|
|
$
|
366,992
|
|
Commercial real estate
|
|
|
790,269
|
|
|
|
1,057,663
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
93,253
|
|
|
|
86,239
|
|
Commercial loans
|
|
|
133,333
|
|
|
|
137,471
|
|
Agricultural loans
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
184,648
|
|
|
|
104,360
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,637,323
|
|
|
$
|
1,752,725
|
|
The amortized cost and approximate fair value of securities,
all of which are classified as available-for-sale, are as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
11,320,387
|
|
|
$
|
-
|
|
|
$
|
(701,514
|
)
|
|
$
|
10,618,873
|
|
Mortgage-backed securities (government- sponsored enterprises - residential)
|
|
|
58,154,675
|
|
|
|
-
|
|
|
|
(1,771,559
|
)
|
|
|
56,383,116
|
|
Municipal bonds
|
|
|
42,423,929
|
|
|
|
255,895
|
|
|
|
(689,850
|
)
|
|
|
41,989,974
|
|
|
|
$
|
111,898,991
|
|
|
$
|
255,895
|
|
|
$
|
(3,162,923
|
)
|
|
$
|
108,991,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
11,360,796
|
|
|
$
|
-
|
|
|
$
|
(489,616
|
)
|
|
$
|
10,871,180
|
|
Mortgage-backed securities (government- sponsored enterprises - residential)
|
|
|
56,048,355
|
|
|
|
1,499
|
|
|
|
(818,657
|
)
|
|
|
55,231,197
|
|
Municipal bonds
|
|
|
44,951,679
|
|
|
|
618,470
|
|
|
|
(277,220
|
)
|
|
|
45,292,929
|
|
|
|
$
|
112,360,830
|
|
|
$
|
619,969
|
|
|
$
|
(1,585,493
|
)
|
|
$
|
111,395,306
|
|
The amortized cost and fair value of available-for-sale securities at March 31, 2018, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
Within one year
|
|
$
|
346,687
|
|
|
$
|
346,260
|
|
More than one to five years
|
|
|
4,805,045
|
|
|
|
4,818,452
|
|
More than five to ten years
|
|
|
19,657,634
|
|
|
|
19,308,274
|
|
After ten years
|
|
|
28,934,950
|
|
|
|
28,135,861
|
|
|
|
|
53,744,316
|
|
|
|
52,608,847
|
|
Mortgage-backed securities (government- sponsored enterprises - residential)
|
|
|
58,154,675
|
|
|
|
56,383,116
|
|
|
|
$
|
111,898,991
|
|
|
$
|
108,991,963
|
|
The carrying value of securities pledged as collateral,
to secure public deposits and for other purposes, was $56,728,000 at March 31, 2018 and $57,341,000 at December 31, 2017.
The book value of securities sold
under agreement to repurchase amounted to $3,664,000 at March 31, 2018 and $5,212,000 at December 31, 2017. At March 31, 2018,
we had $1,990,000 of repurchase agreements secured by U.S. government agency bonds and $1,674,000 of repurchase agreements secured
by mortgage backed securities. All of our repurchase agreements mature overnight. The right of offset for a repurchase agreement
resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase
agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event
the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors
collateral levels to ensure adequate levels are maintained.
Gross gains of $51,000 and $129,000
and gross losses of $18,000 and $0 resulting from sales of available-for-sale securities were realized during the three months
ended March 31, 2018 and 2017, respectively.
Certain investments in debt securities
are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at
March 31, 2018 and December 31, 2017 were $95,152,000, and $82,720,000, respectively, which was approximately 87% and 74%, respectively,
of the Company’s available-for-sale investment portfolio at each date.
Management believes the declines in
fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the
cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary
impairment is identified.
The following table shows the gross unrealized losses
and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss
position, at March 31, 2018 and December 31, 2017.
|
|
Less Than Twelve Months
|
|
|
Twelve Months or More
|
|
|
Total
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
March 31, 2018
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
(46,195
|
)
|
|
$
|
974,666
|
|
|
$
|
(655,319
|
)
|
|
$
|
9,644,208
|
|
|
$
|
(701,514
|
)
|
|
$
|
10,618,874
|
|
Mortgage-backed securities (government sponsored enterprises - residential)
|
|
|
(718,942
|
)
|
|
|
30,218,221
|
|
|
|
(1,052,617
|
)
|
|
|
26,164,896
|
|
|
|
(1,771,559
|
)
|
|
|
56,383,117
|
|
Municipal bonds
|
|
|
(208,906
|
)
|
|
|
5,044,653
|
|
|
|
(480,944
|
)
|
|
|
23,105,108
|
|
|
|
(689,850
|
)
|
|
|
28,149,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(974,043
|
)
|
|
$
|
36,237,540
|
|
|
$
|
(2,188,880
|
)
|
|
$
|
58,914,212
|
|
|
$
|
(3,162,923
|
)
|
|
$
|
95,151,752
|
|
|
|
Less Than Twelve Months
|
|
|
Twelve Months or More
|
|
|
Total
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
December 31, 2017
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
(23,513
|
)
|
|
$
|
997,972
|
|
|
$
|
(466,103
|
)
|
|
$
|
9,873,208
|
|
|
$
|
(489,616
|
)
|
|
$
|
10,871,180
|
|
Mortgage-backed securities (government sponsored enterprises - residential)
|
|
|
(240,968
|
)
|
|
|
26,489,556
|
|
|
|
(577,689
|
)
|
|
|
27,776,303
|
|
|
|
(818,657
|
)
|
|
|
54,265,859
|
|
Municipal bonds
|
|
|
(138,840
|
)
|
|
|
12,341,123
|
|
|
|
(138,380
|
)
|
|
|
5,241,641
|
|
|
|
(277,220
|
)
|
|
|
17,582,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(403,321
|
)
|
|
$
|
39,828,651
|
|
|
$
|
(1,182,172
|
)
|
|
$
|
42,891,152
|
|
|
$
|
(1,585,493
|
)
|
|
$
|
82,719,803
|
|
The unrealized losses on the Company’s investments
in municipal bonds, U.S. government and agencies, and mortgage-backed securities were caused by interest rate increases. The contractual
terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the
investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be
required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider
these investments to be other-than-temporarily impaired at March 31, 2018 and December 31, 2017.
|
7.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
The components of accumulated other
comprehensive income (loss), included in stockholders’ equity, are as follows:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Net unrealized loss on securities available-for-sale
|
|
$
|
(2,907,028
|
)
|
|
$
|
(965,524
|
)
|
Tax effect
|
|
|
610,476
|
|
|
|
206,784
|
|
Net-of-tax amount
|
|
$
|
(2,296,552
|
)
|
|
$
|
(758,740
|
)
|
|
8.
|
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
BY COMPONENT
|
Amounts reclassified from AOCI and the affected line items
in the statements of income during the three months ended March 31, 2018 and 2017, were as follows:
|
|
Amounts Reclassified
|
|
|
|
|
|
from AOCI
|
|
|
|
|
|
|
|
|
|
|
|
Affected Line Item in the
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
Statements of Income
|
Realized gains on securities available-for-sale securities
|
|
$
|
32,780
|
|
|
$
|
128,617
|
|
|
Net realized gains on sales of available-for-sale securities
|
|
|
|
32,780
|
|
|
|
128,617
|
|
|
|
Tax effect
|
|
|
(6,884
|
)
|
|
|
(43,730
|
)
|
|
Income taxes
|
Total reclassification out of AOCI
|
|
$
|
25,896
|
|
|
$
|
84,887
|
|
|
Net reclassified amount
|
|
9.
|
DISCLOSURES ABOUT FAIR VALUE OF ASSETS
|
Fair
value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement
date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is
a hierarchy of three levels of inputs that may be used to measure fair value:
|
Level 1
|
Quoted prices in active markets for identical assets.
|
|
Level 2
|
Observable inputs other than Level 1 prices, such as quoted
prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets.
|
|
Level 3
|
Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets.
|
Recurring Measurements
The following table presents the fair value measurements
of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and
the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2018 and December 31, 2017:
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
U.S. Government and agencies
|
|
$
|
10,618,873
|
|
|
$
|
-
|
|
|
$
|
10,618,873
|
|
|
$
|
-
|
|
Mortgage-backed securities (Government sponsored enterprises - residential)
|
|
|
56,383,116
|
|
|
|
-
|
|
|
|
56,383,116
|
|
|
|
-
|
|
Municipal bonds
|
|
|
41,989,974
|
|
|
|
-
|
|
|
|
41,989,974
|
|
|
|
-
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
U.S. Government and agencies
|
|
$
|
10,871,180
|
|
|
$
|
-
|
|
|
$
|
10,871,180
|
|
|
$
|
-
|
|
Mortgage-backed securities (Government sponsored enterprises - residential)
|
|
|
55,231,197
|
|
|
|
-
|
|
|
|
55,231,197
|
|
|
|
-
|
|
Municipal bonds
|
|
|
45,292,929
|
|
|
|
-
|
|
|
|
45,292,929
|
|
|
|
-
|
|
Following is a description of the
valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying
condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
There have been no significant changes in the valuation techniques during the three months ended March 31, 2018.
Available-for-Sale Securities - Where quoted market
prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market
prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent
asset pricing services and pricing models, the inputs of which are market-based on independently sourced market perspectives, including,
but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows.
Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not
available, securities are classified within Level 3 of the hierarchy.
Nonrecurring Measurements
The following table presents the fair value measurement
of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value
measurements fall at March 31, 2018 and December 31, 2017:
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
(collateral
dependent)
|
|
$
|
1,094,952
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,094,952
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
$
|
1,049,668
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,049,668
|
|
Following is a description of the valuation methodologies
and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated
balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified
within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Impaired Loans (Collateral Dependent)
- The estimated
fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to
sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the
starting point for determining fair value and then considers other factors and events in the environment that may affect the fair
value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent
and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list
of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability
and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.
Unobservable (Level 3) Inputs
The following table presents quantitative information
about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
|
|
Fair Value at
3/31/18
|
|
|
Valuation
Technique
|
|
Unobservable Inputs
|
|
Range (Weighted
Average)
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
|
1,094,952
|
|
|
Market comparable properties
|
|
Marketability discount
|
|
20% – 30% (25%)
|
|
|
Fair Value at
12/31/17
|
|
|
Valuation
Technique
|
|
Unobservable Inputs
|
|
Range (Weighted
Average)
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
|
1,049,668
|
|
|
Market comparable properties
|
|
Marketability discount
|
|
20% – 30% (25%)
|
Fair Value of Financial Instruments
The following table presents estimated fair values of
the Company’s other financial instruments and the level within the fair value hierarchy in which the fair value measurements
fall at March 31, 2018 and December 31, 2017:
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,003,615
|
|
|
$
|
7,003,615
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest-earning time deposits in banks
|
|
|
998,000
|
|
|
|
998,000
|
|
|
|
-
|
|
|
|
-
|
|
Other investments
|
|
|
51,864
|
|
|
|
-
|
|
|
|
51,864
|
|
|
|
-
|
|
Loans held for sale
|
|
|
275,115
|
|
|
|
-
|
|
|
|
275,115
|
|
|
|
-
|
|
Loans, net of allowance for loan losses
|
|
|
186,070,456
|
|
|
|
-
|
|
|
|
-
|
|
|
|
184,967,405
|
|
Federal Home Loan Bank stock
|
|
|
428,500
|
|
|
|
-
|
|
|
|
428,500
|
|
|
|
-
|
|
Interest receivable
|
|
|
2,029,454
|
|
|
|
-
|
|
|
|
2,029,454
|
|
|
|
-
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
261,518,469
|
|
|
|
-
|
|
|
|
192,415,562
|
|
|
|
69,878,446
|
|
Other borrowings
|
|
|
3,663,976
|
|
|
|
-
|
|
|
|
3,663,976
|
|
|
|
-
|
|
Advances from borrowers for taxes and insurance
|
|
|
1,828,407
|
|
|
|
-
|
|
|
|
1,828,407
|
|
|
|
-
|
|
Interest payable
|
|
|
91,774
|
|
|
|
-
|
|
|
|
91,774
|
|
|
|
-
|
|
Unrecognized financial instruments (net of contract amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Letters of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,889,628
|
|
|
$
|
5,889,628
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest-earning time deposits
|
|
|
998,000
|
|
|
|
998,000
|
|
|
|
-
|
|
|
|
-
|
|
Other investments
|
|
|
52,502
|
|
|
|
-
|
|
|
|
52,502
|
|
|
|
-
|
|
Loans held for sale
|
|
|
178,833
|
|
|
|
-
|
|
|
|
178,833
|
|
|
|
-
|
|
Loans, net of allowance for loan losses
|
|
|
186,557,550
|
|
|
|
-
|
|
|
|
-
|
|
|
|
185,755,924
|
|
Federal Home Loan Bank stock
|
|
|
490,500
|
|
|
|
-
|
|
|
|
490,500
|
|
|
|
-
|
|
Interest receivable
|
|
|
1,997,798
|
|
|
|
-
|
|
|
|
1,997,798
|
|
|
|
-
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
252,700,432
|
|
|
|
-
|
|
|
|
181,052,653
|
|
|
|
72,392,640
|
|
Short-term borrowings
|
|
|
16,112,154
|
|
|
|
-
|
|
|
|
16,112,154
|
|
|
|
-
|
|
Advances from borrowers for taxes and insurance
|
|
|
1,153,926
|
|
|
|
-
|
|
|
|
1,153,926
|
|
|
|
-
|
|
Interest payable
|
|
|
106,068
|
|
|
|
-
|
|
|
|
106,068
|
|
|
|
-
|
|
Unrecognized financial instruments (net of contract amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Letters of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The following methods were used to estimate the fair value
of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair
value.
Cash and Cash Equivalents, Interest-Earning Time Deposits
in Banks, Interest Receivable, Federal Home Loan Bank Stock, and Other Investments
- The carrying amount approximates fair
value.
Loans Held for Sale
- For homogeneous categories
of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics.
Loans –
For March 31, 2018, the fair value
of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not
comparable with the fair values disclosed for December 31, 2017, which were based on an entrance price basis. For that date, fair
values of variable rate loans that reprice frequently and with no significant change in credit risk were based on carrying values.
The fair values of other loans as of that date were estimated using discounted cash flow analyses which used interest rates then
being offered for loans with similar terms to borrowers of similar credit quality. Loans with similar characteristics were aggregated
for purposes of the calculations.
Deposits
- Deposits include demand deposits, savings
accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity
time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar
remaining maturities.
Short-term Borrowings, Interest Payable, and Advances
from Borrowers for Taxes and Insurance -
The carrying amount approximates fair value.
Commitments to Originate Loans, Letters of Credit,
and Lines of Credit
- The fair value of commitments to originate loans is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed
rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on
the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
|
10.
|
MORTGAGE SERVICING RIGHTS
|
Activity in the balance of mortgage servicing rights, measured
using the amortization method, for the three month period ended March 31, 2018 and the year ended December 31, 2017 was as follows:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Balance, beginning of period
|
|
$
|
547,092
|
|
|
$
|
552,827
|
|
Servicing rights capitalized
|
|
|
15,878
|
|
|
|
78,824
|
|
Amortization of servicing rights
|
|
|
(19,760
|
)
|
|
|
(84,559
|
)
|
Balance, end of period
|
|
$
|
543,210
|
|
|
$
|
547,092
|
|
A reconciliation of income tax expense at the statutory
rate to the Company’s actual income tax expense for the three months ended March 31, 2018 and 2017 is shown below.
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Computed at the statutory rate
|
|
$
|
176,894
|
|
|
$
|
352,143
|
|
Increase (decrease) resulting from
|
|
|
|
|
|
|
|
|
Tax exempt interest
|
|
|
(70,899
|
)
|
|
|
(109,662
|
)
|
State income taxes, net
|
|
|
55,959
|
|
|
|
47,224
|
|
Increase in cash surrender value
|
|
|
(7,973
|
)
|
|
|
(13,837
|
)
|
Other, net
|
|
|
125
|
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
154,106
|
|
|
$
|
276,148
|
|
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
Occasionally, the Company is a defendant
in legal actions arising from normal business activities. Management, after consultation with legal counsel, believes that the
resolution of these actions will not have any material adverse effect on the Company's consolidated financial statements.
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its customers in the way of commitments to extend credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Substantially
all of the Company's loans are to borrowers located in Cass, Morgan, Macoupin, Montgomery, and surrounding counties in Illinois.
JACKSONVILLE BANCORP, INC.
Item 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition
and results of operations is intended to assist in understanding the financial condition and results of the Company. The information
contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying
notes thereto.
Forward Looking Statements
This Form 10-Q contains certain “forward-looking statements”
which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,”
“planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but
are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various
factors that could cause actual results to differ materially from these estimates and most other statements that are not historical
in nature. These factors include, but are not limited to, changes in general economic conditions, changes in interest rates, legislative
and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal
Reserve board, the quality and composition of the loan and investment portfolios, demand for loan products, deposit flows, competition,
and the potential delay of the merger with CNB Bank Shares, Inc.
Critical Accounting
Policies and Use of Significant Estimates
In the ordinary course of business, we have made a number of estimates
and assumptions relating to the reporting of results of operations and financial condition in preparing our financial statements
in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly
from those estimates under different assumptions and conditions. Management believes the following discussion addresses our most
critical accounting policies and significant estimates, which are those that are most important to the portrayal of our financial
condition and results of operations and require management’s most difficult, subjective and complex judgements, often as
a result of the need to make estimates about the effect of matters that are inherently uncertain.
Allowance for Loan Losses
- The Company believes the allowance
for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation
of the consolidated financial statements. The allowance for loan losses is a material estimate that is particularly susceptible
to significant changes in the near term and is established through a provision for loan losses. The allowance is based upon past
loan experience and other factors which, in management’s judgement, deserve current recognition in estimating loan losses.
The evaluation includes a review of all loans on which full collectibility may not be reasonably assured. Other factors considered
by management include the size and composition of the loan portfolio, concentrations of loans to specific borrowers or industries,
existing economic conditions and historical losses on each portfolio category. In connection with the determination of the allowance
for loan losses, management obtains independent appraisals for significant properties, which collateralize loans. Management uses
the available information to make such determinations. If circumstances differ substantially from the assumptions used in making
determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected.
While we believe we have established our existing allowance for loan losses in conformity with accounting principles generally
accepted in the United States of America, there can be no assurance that regulators, in reviewing the Company’s loan portfolio,
will not request an increase in the allowance for loan losses. Because future events affecting borrowers and collateral cannot
be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates.
Other Real Estate Owned
- Other real estate owned acquired
through loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.
The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing
fair value when the asset is acquired, the actual fair value of the other real estate owned could differ from the original estimate.
If it is determined that fair value declines subsequent to foreclosure, the asset is written down through a charge to non-interest
expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses
on the disposition of other real estate owned are netted and posted to non-interest expense.
Deferred Income Tax Assets/Liabilities
– Our net deferred
income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable
income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred
tax assets are reviewed to determine that they are realizable based upon the historical level of our taxable income, estimates
of our future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax
asset is based on our future profitability. If we were to experience net operating losses for tax purposes in a future period,
the realization of our deferred tax assets would be evaluated for a potential valuation reserve.
Impairment of Goodwill -
Goodwill, an intangible asset with
an indefinite life, was recorded on our balance sheet in prior periods as a result of acquisition activity. Goodwill is evaluated
for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment
test is performed more frequently.
Mortgage Servicing Rights -
Mortgage servicing rights are
very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal
balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest
rates decline and decrease when mortgage interest rates rise.
Fair Value Measurements
– The fair value of a financial
instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. The Company estimates the fair value of financial instruments using a variety of valuation
methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair
value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities
with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the
Company estimates fair value. Other factors such as model assumptions and market dislocations can affect estimates of fair value.
The above listing is not intended to be a comprehensive list of
all our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting
principles generally accepted in the United States of America, with no need for management’s judgement in their application.
There are also areas in which management’s judgement in selecting any available alternative would not produce a materially
different result.
Recent
Developments
On January 18, 2018, the Company announced
the signing of a merger agreement under which CNB Bank Shares, Inc. will acquire the Company in an all-cash transaction for total
consideration valued at approximately $61.6 million. Subject to the satisfaction or waiver of the closing conditions contained
in the merger agreement, including the approval of the merger agreement by the Company’s stockholders and the receipt of
required regulatory approvals, CNB Bank Shares and the Company expect that the merger will be completed during the second quarter
of 2018. However, it is possible that factors outside the control of both companies could result in the merger being completed
at a different time or not at all.
Financial Condition
March 31, 2018 Compared to December 31, 2017
Total assets at March 31, 2018 were $323.5 million, a decrease of
$1.5 million, or 0.5%, from $325.0 million at December 31, 2017. The decrease in total assets was primarily due to a decrease of
$3.6 million in investment securities. The decrease was partially offset by increases of $1.2 million in mortgage-backed securities
and $1.1 million in cash and cash equivalents.
Cash and cash equivalents increased $1.1 million, or 18.9%, to $7.0
million at March 31, 2018, from $5.9 million at December 31, 2017. Mortgage-backed securities increased $1.2 million, or 2.1%,
to $56.4 million at March 31, 2018, from $55.2 million at December 31, 2017. The increase in mortgage-backed securities reflected
the investment of cash from the sales of investment securities. The sales of investment securities resulted in a decrease of $3.6
million during the first quarter of 2018.
Net loans receivable (excluding loans held for sale) decreased $487,000,
or 0.3%, to $186.1 million at March 31, 2018 from $186.6 million at December 31, 2017. The decrease in loans was primarily due
to a decrease of $1.2 million in commercial real estate loans, reflecting the payoff of two loans after the sale of the securing
properties.
At March 31, 2018 and December 31, 2017, goodwill totaled $2.7 million.
At these dates, our goodwill was not impaired.
Total deposits increased $8.8 million, or 3.5%, to $261.5 million
at March 31, 2018 from $252.7 million at December 31, 2017. The increase was primarily due to an increase of $11.2 million in transaction
accounts, partially offset by a decrease of $2.4 million in time deposits. Other borrowings, which consisted of $3.7 million in
overnight repurchase agreements at March 31, 2018, decreased $12.4 million, or 77.3%, from December 31, 2017. The decrease reflected
the payoff of $10.9 million in FHLB advances during the first quarter of 2018. The repurchase agreements are a cash management
service provided to our commercial deposit customers.
Total stockholders’ equity decreased $1.0 million, or 2.0%,
to $47.8 million at March 31, 2018, compared to $48.8 million at December 31, 2017. The decrease in stockholders’ equity
was the result of a $1.5 million increase in accumulated other comprehensive loss and $180,000 in cash dividends, partially offset
by net income of $688,000 during the first quarter of 2018. Accumulated other comprehensive loss increased primarily due to an
increase in unrealized losses, net of tax, on available-for-sale securities reflecting changes in market prices for securities
in our portfolio due to an increase in market interest rates during the first quarter of 2018. Accumulated other comprehensive
loss does not include changes in the fair value of other financial instruments included in the condensed consolidated balance sheet.
Results of Operations
Comparison of Operating Results for the Three Months Ended
March 31, 2018 and 2017
General:
Net income for the three months ended March
31, 2018 was $688,000, or $0.38 per common share, basic and diluted, compared to net income of $760,000, or $0.43 per common share
basic, and $0.42 per common share diluted, for the three months ended March 31, 2017. Net income decreased $71,000 during the first
quarter of 2018, as compared to the prior year quarter, due to an increase of $504,000 in noninterest expense, reflecting professional
fees related to the pending merger with CNB Bank Shares, Inc. Partially offsetting the increase in noninterest expense were increases
of $81,000 in net interest income and $40,000 in noninterest income and decreases of $190,000 in provision for loan losses and
$122,000 in income taxes.
Interest Income:
Total interest income for the three
months ended March 31, 2018 increased $152,000, or 5.4%, to $3.0 million during the first quarter of 2018, compared to the same
period in 2017. The increase in interest income reflected increases of $52,000 in interest income on loans, $17,000 in interest
income on investment securities, and $87,000 in interest income on mortgage-backed securities.
Interest income on loans increased $52,000 to $2.2 million during
the first quarter of 2018. The increase in interest income on loans was due to an increase in the average balance of loans. The
average balance of loans increased $6.6 million to $190.3 million during the first quarter of 2018, from $183.7 million during
the first quarter of 2017. The increase in the average balance of the loan portfolio reflected increases in the average balance
of commercial business and agricultural business loans. The average yield of the loan portfolio decreased six basis points to 4.66%
during the first quarter of 2018, compared to 4.72% during the first quarter of 2017. The decrease in the average yield reflected
the low interest rate environment and the competitive lending environment.
Interest income on investment securities increased $17,000 to $402,000
during the first quarter of 2018 compared to $385,000 during the first quarter of 2017. The increase resulted primarily from an
increase in the average yield of investment securities. The average yield increased 10 basis points to 2.94% during the first quarter
of 2018 from 2.84% during the first quarter of 2017. The majority of our investment portfolio (excluding mortgage-backed securities)
consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield. The average balance
of investment securities equaled $54.7 million during the first quarter of 2018, compared to $54.4 million during the first quarter
of 2017.
Interest income on mortgage-backed securities increased $87,000
to $324,000 during the first quarter of 2018, compared to the first quarter of 2017. The increase in interest income reflected
increases in both the average yield and average balance of mortgage-backed securities. The average yield of mortgage-backed securities
increased 39 basis points to 2.28% during the first quarter of 2018 from 1.89% during the first quarter of 2017. The average balance
of mortgage-backed securities increased $6.6 million to $56.7 million during the first quarter of 2018, compared to $50.1 million
during the first quarter of 2017. The increase in the average balance of mortgage-backed securities reflected the investment of
funds from loan payments and sales of investment securities, as loan demand remained weak and acceptable higher-yielding investment
securities were not available.
Interest income on other interest-earning assets, consisting of
interest-earning demand and time deposit accounts and federal funds sold, decreased $4,000 to $8,000 during the first quarter of
2018, compared to the first quarter of 2017. The average balance of other interest-earning assets decreased $3.9 million to $4.0
million during the quarter ended March 31, 2018 compared to $7.9 million for the quarter ended March 31, 2017. The average yield
on other interest-earning assets increased 22 basis points to 0.79% during the first quarter of 2018 from 0.57% during the first
quarter of 2017. The increase in the average yield reflected an increase in short-term market rates.
Interest Expense
:
Total interest expense increased
$71,000, or 27.8%, to $327,000 for the three months ended March 31, 2018 compared to $256,000 for the three months ended March
31, 2017. The higher interest expense reflected increases in the cost of deposits of $39,000 and other borrowings of $32,000.
Interest expense on deposits increased $39,000 to $290,000 during
the first quarter of 2018 compared to $251,000 during the first quarter of 2017. The increase in interest expense on deposits was
primarily due to an increase in the average rate paid on deposits. The average rate on deposits increased seven basis points to
0.52% during the first quarter of 2018 from 0.45% during the first quarter of 2017. The increase in the average rate was partially
offset by a decrease of $1.8 million in the average balance of deposits to $221.5 million during the first quarter of 2018 from
$223.3 million during the first quarter of 2017. The decrease reflected a $6.1 million decrease in the average balance of time
deposit accounts, partially offset by a $4.3 million increase in the average balance of transaction accounts.
Interest paid on borrowed funds, which consisted of overnight repurchase
agreements and FHLB advances, increased $32,000 to $37,000 during the first quarter of 2018. The average balance of borrowed funds
increased $6.3 million to $10.2 million during the first quarter of 2018, compared to $3.9 million during the first quarter of
2017. The average rate paid on borrowed funds increased 90 basis points to 1.45% during the first quarter of 2018, compared to
0.55% during the first quarter of 2017, which reflected the increase in short-term rates.
Net Interest Income:
As a result of the changes in
interest income and interest expense noted above, net interest income increased by $81,000, or 3.2%, to $2.6 million for the three
months ended March 31, 2018 compared to the same time period in 2017. Our net interest margin remained stable at 3.44% during the
first quarters of 2018 and 2017. Our interest rate spread decreased 3 basis points to 3.30% during the first quarter of 2018 from
3.33% during the first quarter of 2017. Our ratio of interest earning assets to interest bearing liabilities increased to 1.32x
for the three months ended March 31, 2018 from 1.30x for the three months ended March 31, 2017.
Provision for Loan Losses:
The provision for loan
losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have
been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles
generally accepted in the United States of America. The following table shows the activity in the allowance for loan losses for
the three months ended March 31, 2018 and 2017.
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,879,510
|
|
|
$
|
3,007,395
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
-
|
|
|
|
18,367
|
|
Total
|
|
|
-
|
|
|
|
18,367
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
9,454
|
|
|
|
6,550
|
|
Commercial real estate
|
|
|
5,808
|
|
|
|
3,872
|
|
Home equity
|
|
|
525
|
|
|
|
2,525
|
|
Commercial
|
|
|
32
|
|
|
|
29
|
|
Consumer
|
|
|
2,604
|
|
|
|
3,404
|
|
Total
|
|
|
18,423
|
|
|
|
16,380
|
|
Net loan charge-offs (recoveries)
|
|
|
(18,423
|
)
|
|
|
1,987
|
|
Provisions (credit) charged to expense
|
|
|
(160,000
|
)
|
|
|
30,000
|
|
Balance at end of period
|
|
$
|
2,737,933
|
|
|
$
|
3,035,408
|
|
The allowance for loan losses decreased $142,000 during the first
quarter to $2.7 million as of March 31, 2018. The decrease was the result of a credit in the provision for loan losses, reflecting
net recoveries, decreased loan volume, and lower loan loss history. We recorded a credit of $160,000 during the first quarter of
2018, compared to a provision of $30,000 during the first quarter of 2017. We recognized a net recovery of $18,000 during the first
quarter of 2018, compared to net charge-offs of $2,000 during the first quarter of 2017. Loans delinquent 30 days or more increased
$178,000 to $1.2 million, or 0.64% of total loans, as of March 31, 2018, from $1.0 million, or 0.54% of total loans, as of December
31, 2017. Loans delinquent 30 days or more totaled $1.8 million, or 0.99% of total loans at March 31, 2017.
Provisions for loan losses have been made to bring the allowance
for loan losses to a level deemed adequate following management’s evaluation of the repayment capacity and collateral protection
afforded by each problem credit, as well as management’s periodic review of the collectability of the remainder of the portfolio.
This review also considered the local economy and the level of bankruptcies and foreclosures in our market area. The following
table sets forth information regarding nonperforming assets at the dates indicated.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
435,820
|
|
|
$
|
366,992
|
|
Commercial real estate
|
|
|
790,269
|
|
|
|
1,057,663
|
|
Home equity
|
|
|
93,253
|
|
|
|
86,239
|
|
Commercial business
|
|
|
133,333
|
|
|
|
137,471
|
|
Consumer
|
|
|
184,648
|
|
|
|
104,360
|
|
Total
|
|
$
|
1,637,323
|
|
|
$
|
1,752,725
|
|
|
|
|
|
|
|
|
|
|
Accruing loans delinquent more than 90 days:
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets:
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
10,500
|
|
|
|
10,500
|
|
Consumer
|
|
|
-
|
|
|
|
10,000
|
|
Total
|
|
$
|
10,500
|
|
|
$
|
20,500
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
1,647,823
|
|
|
$
|
1,773,225
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans as a percentage of total loans
|
|
|
0.87
|
%
|
|
|
0.93
|
%
|
Total nonperforming assets as a percentage of total assets
|
|
|
0.51
|
%
|
|
|
0.55
|
%
|
Nonperforming assets decreased $125,000 to $1.6 million, or 0.51%
of total assets, as of March 31, 2018, compared to $1.8 million, or 0.55% of total assets, as of December 31, 2017. The decrease
in nonperforming assets was primarily due to a decrease in nonperforming loans, reflecting the payoff of a $252,000 nonperforming
commercial real estate loan after the sale of the securing property.
The following table shows the aggregate principal amount of potential
problem credits on the Company’s watch list at March 31, 2018 and December 31, 2017. All nonaccrual loans are automatically
placed on the watch list. The $1.6 million increase in substandard credits reflected advances of $1.1 million on a commercial borrower’s
line of credit and the downgrade from special mention of $511,000 in commercial real estate loans to a single borrower.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Special Mention credits
|
|
$
|
424,295
|
|
|
$
|
1,360,679
|
|
Substandard credits
|
|
|
7,495,432
|
|
|
|
5,889,702
|
|
Total watch list credits
|
|
$
|
7,919,727
|
|
|
$
|
7,250,381
|
|
Noninterest Income:
Noninterest income increased $40,000,
or 3.6%, during the first quarter of 2018. The increase in noninterest income was primarily due to an increase of $114,000 in other
noninterest income, partially offset by a decrease of $96,000 in gains on the sale of available-for-sale securities. Other noninterest
income benefitted from the gain of $84,000 on a bank-owned life insurance policy claim and a $37,000 profit sharing distribution
related to credit life insurance sales during the first quarter of 2018. The decrease in gains on the sales of securities reflected
a lower volume of sales. Securities totaling $4.4 million were sold during the first quarter of 2018 compared to $9.0 million during
the same period of 2017.
Noninterest Expense:
Total noninterest expense increased
$504,000, or 19.5%, to $3.1 million for the first quarter of 2018 compared to the same period of 2017. The increase in noninterest
expense consisted primarily of increases of $347,000 in professional fees, $62,000 in compensation and benefits expense, and $61,000
in other noninterest expense. The increases in professional fees and other noninterest expense reflected higher legal and consulting
expenses related to the recently announced merger agreement. The increase in compensation and benefits expense reflected normal
cost increases.
Income Taxes:
The provision for income taxes decreased
$122,000 to $154,000 during the first quarter of 2018 compared to the same period of 2017. The decrease in the income tax provision
reflected a decrease in taxable income during the comparative periods, as well as the lower federal income tax rate effective January
1, 2018. The effective tax rate was 18.3% and 26.7% during the three months ended March 31, 2018 and 2017, respectively.
Liquidity and Capital Resources
The Company’s most liquid assets are cash and cash equivalents.
The levels of these assets are dependent on the Company’s operating, financing, and investing activities. Cash and cash equivalents
totaled $7.0 million and $5.9 million at March 31, 2018 and December 31, 2017, respectively. The Company’s primary sources
of funds include principal and interest repayments on loans (both scheduled payments and prepayments), maturities of investment
securities and principal repayments from mortgage-backed securities (both scheduled payments and prepayments). During the three
months ended March 31, 2018, the most significant sources of funds have been deposit growth and sales of investment securities
and loans. These funds have been used primarily for the reduction of other borrowings and the purchases of investment and mortgage-backed
securities.
While scheduled loan repayments and proceeds from maturing investment
securities and principal repayments on mortgage-backed securities are relatively predictable, deposit flows and prepayments are
more influenced by interest rates, general economic conditions, and competition. The Company attempts to price its deposits to
meet asset-liability objectives and stay competitive with local market conditions.
Liquidity management is both a short- and long-term responsibility.
The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii)
projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-earning
deposits, and (v) liquidity of its asset/liability management program. Excess liquidity is generally invested in interest-earning
overnight deposits and other short-term U.S. agency obligations. If the Company requires funds beyond its ability to generate them
internally, it has the ability to borrow funds from the FHLB. The Company may borrow from the FHLB under a blanket agreement which
assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral
to secure the amounts borrowed. This borrowing arrangement is limited to a maximum of 30% of the Company’s total assets or
twenty times the balance of FHLB stock held by the Company. At March 31, 2018, the Company had no outstanding FHLB advances and
approximately $77.7 million available to be accessed under the above-mentioned borrowing arrangement.
The Company maintains minimum levels of liquid assets as established
by the Board of Directors. The Company’s liquidity ratios at March 31, 2018 and December 31, 2017 were 36.5% and 36.6%, respectively.
This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.
The Company must also maintain adequate levels of liquidity to ensure
the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to
meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed
above. The following table summarizes these commitments at March 31, 2018 and December 31, 2017.
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Commitments to fund loans
|
|
$
|
44,810,462
|
|
|
$
|
45,995,992
|
|
Standby letters of credit
|
|
|
80,250
|
|
|
|
80,250
|
|
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average
assets (as defined). In addition, the Bank is subject to the new capital conservation buffer which began phasing in during the
first quarter of 2016 at 0.625% of risk-weighted assets. For 2018, the conservation buffer is 1.875% of risk-weighted assets. The
capital conservation buffer will continue to increase 0.625% each year until fully phased in at 2.50% of risk-weighted assets beginning
in the first quarter of 2019. Management believes that at March 31, 2018, the Bank met all its capital adequacy requirements.
Under Illinois law, Illinois-chartered savings banks are required
to maintain a minimum core capital to total assets ratio of 3%. The Illinois Commissioner of Savings and Residential Finance (the
“Commissioner”) is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner
determines that the savings bank’s financial condition or history, management or earnings prospects are not adequate. If
a savings bank’s core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere
to a specific written plan established by the Commissioner to correct the savings bank’s capital deficiency, as well as a
number of other restrictions on the savings bank’s operations, including a prohibition on the declaration of dividends by
the savings bank’s board of directors. At March 31, 2018, the Bank’s core capital ratio was 13.13% of total average
assets, which substantially exceeded the required amount.
The Bank is also required to maintain regulatory capital requirements
imposed by the Federal Deposit Insurance Corporation. At March 31, 2018, minimum requirements and the Bank's actual ratios are
as follows:
|
|
March 31, 2018
|
|
|
Minimum
|
|
|
Minimum Required
|
|
|
|
Actual
|
|
|
Required
|
|
|
With Capital Buffer
|
|
Tier 1 Capital to Average Assets
|
|
|
13.13
|
%
|
|
|
4.00
|
%
|
|
|
4.000
|
%
|
Common Equity Tier 1
|
|
|
19.39
|
%
|
|
|
4.50
|
%
|
|
|
6.375
|
%
|
Tier 1 Capital to Risk-Weighted Assets
|
|
|
19.39
|
%
|
|
|
6.00
|
%
|
|
|
7.875
|
%
|
Total Capital to Risk-Weighted Assets
|
|
|
20.64
|
%
|
|
|
8.00
|
%
|
|
|
9.875
|
%
|
Effect of Inflation and Changing Prices
The condensed consolidated financial statements and related financial
data presented herein have been prepared in accordance with GAAP which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
The following table sets forth the average balances and interest
rates (costs) on the Company’s assets and liabilities during the periods presented.
Consolidated Average Balance Sheet and Interest
Rates
|
|
(Dollars in thousands)
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earnings assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
190,319
|
|
|
$
|
2,219
|
|
|
|
4.66
|
%
|
|
$
|
183,738
|
|
|
$
|
2,167
|
|
|
|
4.72
|
%
|
Investment securities
|
|
|
54,727
|
|
|
|
402
|
|
|
|
2.94
|
%
|
|
|
54,438
|
|
|
|
386
|
|
|
|
2.84
|
%
|
Mortgage-backed securities
|
|
|
56,676
|
|
|
|
324
|
|
|
|
2.28
|
%
|
|
|
50,053
|
|
|
|
236
|
|
|
|
1.89
|
%
|
Other
|
|
|
3,960
|
|
|
|
8
|
|
|
|
0.79
|
%
|
|
|
7,919
|
|
|
|
12
|
|
|
|
0.57
|
%
|
Total interest-earning assets
|
|
|
305,682
|
|
|
|
2,953
|
|
|
|
3.86
|
%
|
|
|
296,148
|
|
|
|
2,801
|
|
|
|
3.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earnings assets
|
|
|
19,197
|
|
|
|
|
|
|
|
|
|
|
|
19,555
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
324,879
|
|
|
|
|
|
|
|
|
|
|
$
|
315,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking
|
|
$
|
62,277
|
|
|
$
|
108
|
|
|
|
0.69
|
%
|
|
$
|
56,489
|
|
|
$
|
51
|
|
|
|
0.36
|
%
|
Savings accounts
|
|
|
47,552
|
|
|
|
20
|
|
|
|
0.17
|
%
|
|
|
45,685
|
|
|
|
23
|
|
|
|
0.20
|
%
|
Certificates of deposit
|
|
|
70,613
|
|
|
|
135
|
|
|
|
0.76
|
%
|
|
|
76,693
|
|
|
|
148
|
|
|
|
0.77
|
%
|
Money market savings
|
|
|
33,418
|
|
|
|
24
|
|
|
|
0.28
|
%
|
|
|
36,227
|
|
|
|
26
|
|
|
|
0.28
|
%
|
Money market deposits
|
|
|
7,590
|
|
|
|
3
|
|
|
|
0.18
|
%
|
|
|
8,181
|
|
|
|
3
|
|
|
|
0.16
|
%
|
Total interest-bearing deposits
|
|
|
221,450
|
|
|
|
290
|
|
|
|
0.52
|
%
|
|
|
223,275
|
|
|
|
251
|
|
|
|
0.45
|
%
|
Federal Home Loan Bank advances
|
|
|
5,671
|
|
|
|
21
|
|
|
|
1.46
|
%
|
|
|
5
|
|
|
|
-
|
|
|
|
0.72
|
%
|
Short-term borrowings
|
|
|
4,522
|
|
|
|
16
|
|
|
|
1.44
|
%
|
|
|
3,903
|
|
|
|
5
|
|
|
|
0.55
|
%
|
Total borrowings
|
|
|
10,193
|
|
|
|
37
|
|
|
|
1.45
|
%
|
|
|
3,908
|
|
|
|
5
|
|
|
|
0.55
|
%
|
Total interest-bearing liabilities
|
|
|
231,643
|
|
|
|
327
|
|
|
|
0.56
|
%
|
|
|
227,183
|
|
|
|
256
|
|
|
|
0.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
45,089
|
|
|
|
|
|
|
|
|
|
|
|
41,854
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
48,147
|
|
|
|
|
|
|
|
|
|
|
|
46,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities/stockholders' equity
|
|
$
|
324,879
|
|
|
|
|
|
|
|
|
|
|
$
|
315,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
2,626
|
|
|
|
|
|
|
|
|
|
|
$
|
2,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (average yield earned minus average rate paid)
|
|
|
|
|
|
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (net interest income divided by average interest-earning assets)
|
|
|
|
|
|
|
|
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
|
|
|
3.44
|
%
|
The following table sets forth the changes in rate and changes in
volume of the Company’s interest earning assets and liabilities.
Analysis of Volume and Rate Changes
|
|
(In thousands)
|
|
Three Months Ended March 31,
|
|
|
|
2018 Compared to 2017
|
|
|
|
Increase (Decrease) Due to
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earnings assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(25
|
)
|
|
$
|
77
|
|
|
$
|
52
|
|
Investment securities
|
|
|
15
|
|
|
|
2
|
|
|
|
17
|
|
Mortgage-backed securities
|
|
|
53
|
|
|
|
34
|
|
|
|
87
|
|
Other
|
|
|
3
|
|
|
|
(7
|
)
|
|
|
(4
|
)
|
Total net change in income on interest-earning assets
|
|
|
46
|
|
|
|
106
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking
|
|
|
51
|
|
|
|
6
|
|
|
|
57
|
|
Savings accounts
|
|
|
(4
|
)
|
|
|
1
|
|
|
|
(3
|
)
|
Certificates of deposit
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
(13
|
)
|
Money market savings
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Money market deposits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total interest-bearing deposits
|
|
|
46
|
|
|
|
(7
|
)
|
|
|
39
|
|
Federal Home Loan Bank advances
|
|
|
-
|
|
|
|
21
|
|
|
|
21
|
|
Short-term borrowings
|
|
|
10
|
|
|
|
1
|
|
|
|
11
|
|
Total borrowings
|
|
|
10
|
|
|
|
22
|
|
|
|
32
|
|
Total net change in expense on interest-bearing liabilities
|
|
|
56
|
|
|
|
15
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
(10
|
)
|
|
$
|
91
|
|
|
$
|
81
|
|
JACKSONVILLE BANCORP, INC.