NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for
a fair presentation of the financial condition of the Company as of September 30, 2017 and the results of its operations for the
three and nine month periods ended September 30, 2017 and 2016. The results of operations for the three and nine month periods
ended September 30, 2017 and 2016 are not necessarily indicative of the results which may be expected for the entire year, or any
other interim period. The condensed consolidated balance sheet of the Company as of December 31, 2016 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, 2016 filed as an exhibit to the Company’s
Form 10-K filed in March 2017. The accounting and reporting policies of the Company conform to GAAP and to prevailing practices
within the industry.
|
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. Management continues to evaluate
the impact of the new guidance, but does not expect the adoption of this guidance to have a material impact on the Company’s
revenue recognition practices. However, the Company does expect additional documentation and disclosure. Early adoption would be
permitted, but not before the original public entity effective date.
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 is currently reviewing its processes but adoption by the Company is not expected
to have a material impact on the consolidated financial statements and related disclosures.
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 March 2016, FASB issued ASU 2016-09, Compensation –
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of the simplification initiative
is to identify, evaluate, and improve areas of US GAAP for which cost and complexity can be reduced while maintaining or improving
the usefulness of the information provided to users of financial statements. The areas for simplification involve several aspects
of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either
equity or liabilities, and classification on the statement of cash flows. Amendments related to the timing of when excess tax benefits
are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified
retrospective transition method by means of a cumulative effect adjustment to equity as of the beginning of the period in which
the guidance is adopted. The new guidance was effective for public companies for reporting periods beginning after December 15,
2016. The Company adopted the ASU and there was not a material impact on the Company’s 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 has adopted the ASU early and there was not a material
impact on the Company’s 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 the outstanding stock options under the Company’s stock
option plans. Average shares outstanding exclude unallocated shares 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income available to common shareholders
|
|
$
|
734,242
|
|
|
$
|
757,765
|
|
|
$
|
2,299,716
|
|
|
$
|
2,350,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic average shares outstanding
|
|
|
1,797,080
|
|
|
|
1,778,742
|
|
|
|
1,790,603
|
|
|
|
1,775,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option equivalents
|
|
|
14,706
|
|
|
|
19,741
|
|
|
|
14,542
|
|
|
|
17,103
|
|
Diluted average shares outstanding
|
|
|
1,811,786
|
|
|
|
1,798,483
|
|
|
|
1,805,145
|
|
|
|
1,792,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.41
|
|
|
$
|
0.43
|
|
|
$
|
1.28
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.41
|
|
|
$
|
0.42
|
|
|
$
|
1.27
|
|
|
$
|
1.31
|
|
|
4.
|
STOCK–BASED COMPENSATION
|
In connection with our 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 of directors 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 September 30, 2017 and 2016
is shown below.
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Unearned shares
|
|
|
13,529
|
|
|
|
17,599
|
|
Shares committed for release
|
|
|
1,854
|
|
|
|
1,786
|
|
Allocated shares
|
|
|
60,344
|
|
|
|
61,624
|
|
Total ESOP shares
|
|
|
75,727
|
|
|
|
81,009
|
|
|
|
|
|
|
|
|
|
|
Fair value of unearned shares
|
|
$
|
474,566
|
|
|
$
|
568,368
|
|
On April 24, 2012, our shareholders approved the 2012
Stock Option Plan. On this same date, 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 issuance. 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 nine months ended September 30, 2017.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Instrinsic
|
|
|
|
Options
|
|
|
Price/Share
|
|
|
Life (in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
47,488
|
|
|
$
|
15.65
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,021
|
)
|
|
|
15.65
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(400
|
)
|
|
|
15.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
31,067
|
|
|
$
|
15.65
|
|
|
|
4.50
|
|
|
$
|
472,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2017
|
|
|
29,282
|
|
|
$
|
15.65
|
|
|
|
4.50
|
|
|
$
|
445,086
|
|
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 $30.85 per share
on September 30, 2017.
|
5.
|
LOAN PORTFOLIO COMPOSITION
|
At September 30, 2017 and December
31, 2016, the composition of the Company’s loan portfolio is shown below.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
45,438,266
|
|
|
|
24.7
|
%
|
|
$
|
45,311,103
|
|
|
|
24.6
|
%
|
Commercial
|
|
|
38,642,318
|
|
|
|
21.0
|
|
|
|
41,477,480
|
|
|
|
22.5
|
|
Agricultural
|
|
|
39,957,890
|
|
|
|
21.7
|
|
|
|
38,271,758
|
|
|
|
20.7
|
|
Home equity
|
|
|
10,110,539
|
|
|
|
5.5
|
|
|
|
11,606,002
|
|
|
|
6.3
|
|
Total real estate loans
|
|
|
134,149,013
|
|
|
|
72.9
|
|
|
|
136,666,343
|
|
|
|
74.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
24,702,765
|
|
|
|
13.4
|
|
|
|
21,617,744
|
|
|
|
11.7
|
|
Agricultural loans
|
|
|
12,212,504
|
|
|
|
6.6
|
|
|
|
14,649,622
|
|
|
|
7.9
|
|
Consumer loans
|
|
|
16,141,791
|
|
|
|
8.8
|
|
|
|
14,543,356
|
|
|
|
7.9
|
|
Total loans receivable
|
|
|
187,206,073
|
|
|
|
101.7
|
|
|
|
187,477,065
|
|
|
|
101.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
|
(8,551
|
)
|
|
|
(0.0
|
)
|
|
|
21,667
|
|
|
|
0.0
|
|
Allowance for loan losses
|
|
|
3,083,934
|
|
|
|
1.7
|
|
|
|
3,007,395
|
|
|
|
1.6
|
|
Total loans receivable, net
|
|
$
|
184,130,690
|
|
|
|
100.0
|
%
|
|
$
|
184,448,003
|
|
|
|
100.0
|
%
|
The Company believes that originating or purchasing sound
loans is 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 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 Cass, Morgan, Macoupin, Montgomery, and surrounding counties. 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.
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 30 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 or an attorney’s opinion based on a title search
of the property 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. Generally, one-to-four family loan originations are limited
to the financing of loans secured by properties located within the Company’s market area.
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 net interest income. In the low interest rate environment that has existed over the past five 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. During periods of rising interest rates the risk of delinquencies and defaults on adjustable-rate mortgage loans
increases due to the upward adjustment of interest costs to the borrower, which may result 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 the 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 28% of the applicant’s total monthly income. In addition, total monthly
obligations of the applicant, including mortgage payments, generally should not exceed 38% 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, or an attorney’s title opinion, 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 a 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 flows from the project are 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 80%. 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 flows are 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. 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. In the case of a new car loan, 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 September 30, 2017, September 30, 2016, and December 31, 2016.
|
|
September 30, 2017
|
|
|
|
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Home Equity
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance, July 1, 2017
|
|
$
|
772,492
|
|
|
$
|
1,208,531
|
|
|
$
|
220,860
|
|
|
$
|
151,666
|
|
|
$
|
316,514
|
|
|
$
|
109,865
|
|
|
$
|
172,613
|
|
|
$
|
99,920
|
|
|
$
|
3,052,461
|
|
Provision charged
to expense
|
|
|
(24,925
|
)
|
|
|
(115,121
|
)
|
|
|
3,762
|
|
|
|
(58,828
|
)
|
|
|
109,298
|
|
|
|
40,998
|
|
|
|
74,205
|
|
|
|
611
|
|
|
|
30,000
|
|
Losses charged off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,706
|
)
|
|
|
-
|
|
|
|
(9,268
|
)
|
|
|
-
|
|
|
|
(11,974
|
)
|
Recoveries
|
|
|
5,659
|
|
|
|
5,809
|
|
|
|
-
|
|
|
|
525
|
|
|
|
28
|
|
|
|
-
|
|
|
|
1,426
|
|
|
|
-
|
|
|
|
13,447
|
|
Ending balance,
September
30, 2017
|
|
$
|
753,226
|
|
|
$
|
1,099,219
|
|
|
$
|
224,622
|
|
|
$
|
93,363
|
|
|
$
|
423,134
|
|
|
$
|
150,863
|
|
|
$
|
238,976
|
|
|
$
|
100,531
|
|
|
$
|
3,083,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance,
January 1,
2017
|
|
$
|
832,000
|
|
|
$
|
1,044,553
|
|
|
$
|
191,359
|
|
|
$
|
173,626
|
|
|
$
|
301,478
|
|
|
$
|
167,469
|
|
|
$
|
182,653
|
|
|
$
|
114,257
|
|
|
$
|
3,007,395
|
|
Provision charged
to
expense
|
|
|
(54,914
|
)
|
|
|
39,177
|
|
|
|
33,263
|
|
|
|
(83,838
|
)
|
|
|
124,305
|
|
|
|
(16,606
|
)
|
|
|
62,339
|
|
|
|
(13,726
|
)
|
|
|
90,000
|
|
Losses charged off
|
|
|
(41,782
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(2,706
|
)
|
|
|
-
|
|
|
|
(13,041
|
)
|
|
|
-
|
|
|
|
(57,529
|
)
|
Recoveries
|
|
|
17,922
|
|
|
|
15,489
|
|
|
|
-
|
|
|
|
3,575
|
|
|
|
57
|
|
|
|
-
|
|
|
|
7,025
|
|
|
|
-
|
|
|
|
44,068
|
|
Ending balance,
September 30, 2017
|
|
$
|
753,226
|
|
|
$
|
1,099,219
|
|
|
$
|
224,622
|
|
|
$
|
93,363
|
|
|
$
|
423,134
|
|
|
$
|
150,863
|
|
|
$
|
238,976
|
|
|
$
|
100,531
|
|
|
$
|
3,083,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually evaluated for impairment
|
|
$
|
233,432
|
|
|
$
|
774,201
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
178,993
|
|
|
$
|
3,731
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,190,357
|
|
Ending balance:
collectively
evaluated for impairment
|
|
$
|
519,794
|
|
|
$
|
325,018
|
|
|
$
|
224,622
|
|
|
$
|
93,363
|
|
|
$
|
244,141
|
|
|
$
|
147,132
|
|
|
$
|
238,976
|
|
|
$
|
100,531
|
|
|
$
|
1,893,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
45,438,266
|
|
|
$
|
38,642,318
|
|
|
$
|
39,957,890
|
|
|
$
|
10,110,539
|
|
|
$
|
24,702,765
|
|
|
$
|
12,212,504
|
|
|
$
|
16,141,791
|
|
|
$
|
-
|
|
|
$
|
187,206,073
|
|
Ending
balance: individually evaluated for
impairment
|
|
$
|
696,670
|
|
|
$
|
1,999,362
|
|
|
$
|
-
|
|
|
$
|
57,528
|
|
|
$
|
623,744
|
|
|
$
|
375,951
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,753,255
|
|
Ending balance:
collectively evaluated for impairment
|
|
$
|
44,741,596
|
|
|
$
|
36,642,956
|
|
|
$
|
39,957,890
|
|
|
$
|
10,053,011
|
|
|
$
|
24,079,021
|
|
|
$
|
11,836,553
|
|
|
$
|
16,141,791
|
|
|
$
|
-
|
|
|
$
|
183,452,818
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Home Equity
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, July 1, 2016
|
|
$
|
836,512
|
|
|
$
|
913,730
|
|
|
$
|
205,633
|
|
|
$
|
197,901
|
|
|
$
|
372,287
|
|
|
$
|
162,663
|
|
|
$
|
172,430
|
|
|
$
|
97,409
|
|
|
$
|
2,958,565
|
|
Provision
charged to expense
|
|
|
20,848
|
|
|
|
(25,754
|
)
|
|
|
(17,258
|
)
|
|
|
2,785
|
|
|
|
(1,514
|
)
|
|
|
33,389
|
|
|
|
14,870
|
|
|
|
2,634
|
|
|
|
30,000
|
|
Losses charged off
|
|
|
(7,803
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,602
|
)
|
|
|
-
|
|
|
|
(16,405
|
)
|
Recoveries
|
|
|
5,340
|
|
|
|
5,808
|
|
|
|
-
|
|
|
|
525
|
|
|
|
-
|
|
|
|
-
|
|
|
|
764
|
|
|
|
-
|
|
|
|
12,437
|
|
Ending
balance,
September 30, 2016
|
|
$
|
854,897
|
|
|
$
|
893,784
|
|
|
$
|
188,375
|
|
|
$
|
201,211
|
|
|
$
|
370,773
|
|
|
$
|
196,052
|
|
|
$
|
179,462
|
|
|
$
|
100,043
|
|
|
$
|
2,984,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, January 1, 2016
|
|
$
|
829,604
|
|
|
$
|
917,526
|
|
|
$
|
201,918
|
|
|
$
|
149,253
|
|
|
$
|
386,620
|
|
|
$
|
163,346
|
|
|
$
|
169,381
|
|
|
$
|
101,946
|
|
|
$
|
2,919,594
|
|
Provision charged to expense
|
|
|
45,349
|
|
|
|
(32,550
|
)
|
|
|
(13,543
|
)
|
|
|
50,383
|
|
|
|
(15,963
|
)
|
|
|
32,706
|
|
|
|
25,521
|
|
|
|
(1,903
|
)
|
|
|
90,000
|
|
Losses charged off
|
|
|
(34,682
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,501
|
)
|
|
|
-
|
|
|
|
(55,183
|
)
|
Recoveries
|
|
|
14,626
|
|
|
|
8,808
|
|
|
|
-
|
|
|
|
1,575
|
|
|
|
116
|
|
|
|
-
|
|
|
|
5,061
|
|
|
|
-
|
|
|
|
30,186
|
|
Ending
balance, September
30, 2016
|
|
$
|
854,897
|
|
|
$
|
893,784
|
|
|
$
|
188,375
|
|
|
$
|
201,211
|
|
|
$
|
370,773
|
|
|
$
|
196,052
|
|
|
$
|
179,462
|
|
|
$
|
100,043
|
|
|
$
|
2,984,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
: individually evaluated for impairment
|
|
$
|
257,165
|
|
|
$
|
503,492
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
108,485
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
869,142
|
|
Ending balance:
collectively
evaluated for impairment
|
|
$
|
597,732
|
|
|
$
|
390,292
|
|
|
$
|
188,375
|
|
|
$
|
201,211
|
|
|
$
|
262,288
|
|
|
$
|
196,052
|
|
|
$
|
179,462
|
|
|
$
|
100,043
|
|
|
$
|
2,115,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
46,125,444
|
|
|
$
|
41,504,664
|
|
|
$
|
37,674,941
|
|
|
$
|
11,427,197
|
|
|
$
|
23,256,734
|
|
|
$
|
13,833,991
|
|
|
$
|
14,540,615
|
|
|
$
|
-
|
|
|
$
|
188,363,586
|
|
Ending balance:
individually evaluated for impairment
|
|
$
|
626,578
|
|
|
$
|
1,177,278
|
|
|
$
|
-
|
|
|
$
|
56,409
|
|
|
$
|
248,735
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,109,000
|
|
Ending balance:
collectively evaluated
for impairment
|
|
$
|
45,498,866
|
|
|
$
|
40,327,386
|
|
|
$
|
37,674,941
|
|
|
$
|
11,370,788
|
|
|
$
|
23,007,999
|
|
|
$
|
13,833,991
|
|
|
$
|
14,540,615
|
|
|
$
|
-
|
|
|
$
|
186,254,586
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Home Equity
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Unallocated
|
|
|
Total
|
|
Allowance for Loan Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance, January 1, 2016
|
|
$
|
829,604
|
|
|
$
|
917,526
|
|
|
$
|
201,918
|
|
|
$
|
149,253
|
|
|
$
|
386,620
|
|
|
$
|
163,346
|
|
|
$
|
169,381
|
|
|
$
|
101,946
|
|
|
$
|
2,919,594
|
|
Provision charged to expense
|
|
|
14,683
|
|
|
|
112,411
|
|
|
|
(10,559
|
)
|
|
|
22,273
|
|
|
|
(85,258
|
)
|
|
|
4,123
|
|
|
|
50,016
|
|
|
|
12,311
|
|
|
|
120,000
|
|
Losses charged off
|
|
|
(38,171
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(43,777
|
)
|
|
|
-
|
|
|
|
(81,948
|
)
|
Recoveries
|
|
|
25,884
|
|
|
|
14,616
|
|
|
|
-
|
|
|
|
2,100
|
|
|
|
116
|
|
|
|
-
|
|
|
|
7,033
|
|
|
|
-
|
|
|
|
49,749
|
|
Ending balance, December 31, 2016
|
|
$
|
832,000
|
|
|
$
|
1,044,553
|
|
|
$
|
191,359
|
|
|
$
|
173,626
|
|
|
$
|
301,478
|
|
|
$
|
167,469
|
|
|
$
|
182,653
|
|
|
$
|
114,257
|
|
|
$
|
3,007,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually
evaluated for impairment
|
|
$
|
304,922
|
|
|
$
|
723,481
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
56,409
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,084,812
|
|
Ending balance: collectively evaluated
for impairment
|
|
$
|
527,078
|
|
|
$
|
321,072
|
|
|
$
|
191,359
|
|
|
$
|
173,626
|
|
|
$
|
245,069
|
|
|
$
|
167,469
|
|
|
$
|
182,653
|
|
|
$
|
114,257
|
|
|
$
|
1,922,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
45,311,103
|
|
|
$
|
41,477,480
|
|
|
$
|
38,271,758
|
|
|
$
|
11,606,002
|
|
|
$
|
21,617,744
|
|
|
$
|
14,649,622
|
|
|
$
|
14,543,356
|
|
|
$
|
-
|
|
|
$
|
187,477,065
|
|
Ending balance:
individually
evaluated for impairment
|
|
$
|
713,151
|
|
|
$
|
1,658,323
|
|
|
$
|
-
|
|
|
$
|
54,011
|
|
|
$
|
155,067
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,580,552
|
|
Ending balance:
collectively evaluated for impairment
|
|
$
|
44,597,952
|
|
|
$
|
39,819,157
|
|
|
$
|
38,271,758
|
|
|
$
|
11,551,991
|
|
|
$
|
21,462,677
|
|
|
$
|
14,649,622
|
|
|
$
|
14,543,356
|
|
|
$
|
-
|
|
|
$
|
184,896,513
|
|
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 size and composition 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 department in order to verify risk ratings. 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 above described process 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 September 30, 2017 and December 31, 2016.
|
|
1-4 Family
|
Commercial Real Estate
|
|
|
Agricultural Real Estate
|
|
|
Home Equity
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
42,608,502
|
|
|
$
|
42,327,337
|
|
|
$
|
36,033,628
|
|
|
$
|
39,078,740
|
|
|
$
|
39,721,390
|
|
|
$
|
38,271,758
|
|
|
$
|
9,893,071
|
|
|
$
|
10,790,377
|
|
Special Mention
|
|
|
922,169
|
|
|
|
1,016,025
|
|
|
|
329,014
|
|
|
|
429,877
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,741
|
|
|
|
70,983
|
|
Substandard
|
|
|
1,907,595
|
|
|
|
1,967,741
|
|
|
|
2,279,676
|
|
|
|
1,968,863
|
|
|
|
236,500
|
|
|
|
-
|
|
|
|
161,727
|
|
|
|
744,642
|
|
Total
|
|
$
|
45,438,266
|
|
|
$
|
45,311,103
|
|
|
$
|
38,642,318
|
|
|
$
|
41,477,480
|
|
|
$
|
39,957,890
|
|
|
$
|
38,271,758
|
|
|
$
|
10,110,539
|
|
|
$
|
11,606,002
|
|
|
|
Commercial
|
|
|
Agricultural
|
|
|
Consumer
|
|
|
Total
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
24,058,706
|
|
|
$
|
21,141,466
|
|
|
$
|
11,212,515
|
|
|
$
|
13,845,865
|
|
|
$
|
15,422,443
|
|
|
$
|
14,361,125
|
|
|
$
|
178,950,255
|
|
|
$
|
179,816,668
|
|
Special Mention
|
|
|
14,313
|
|
|
|
100,234
|
|
|
|
186,807
|
|
|
|
803,757
|
|
|
|
28,680
|
|
|
|
10,575
|
|
|
|
1,536,724
|
|
|
|
2,431,451
|
|
Substandard
|
|
|
629,746
|
|
|
|
376,044
|
|
|
|
813,182
|
|
|
|
-
|
|
|
|
690,668
|
|
|
|
171,656
|
|
|
|
6,719,094
|
|
|
|
5,228,946
|
|
Total
|
|
$
|
24,702,765
|
|
|
$
|
21,617,744
|
|
|
$
|
12,212,504
|
|
|
$
|
14,649,622
|
|
|
$
|
16,141,791
|
|
|
$
|
14,543,356
|
|
|
$
|
187,206,073
|
|
|
$
|
187,477,065
|
|
The following tables present the Company’s loan
portfolio aging analysis as of September 30, 2017 and December 31, 2016.
|
|
September 30, 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
|
|
$
|
397,573
|
|
|
$
|
164,948
|
|
|
$
|
189,925
|
|
|
$
|
752,446
|
|
|
$
|
44,685,820
|
|
|
$
|
45,438,266
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
19,195
|
|
|
|
19,195
|
|
|
|
38,623,123
|
|
|
|
38,642,318
|
|
|
|
-
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,957,890
|
|
|
|
39,957,890
|
|
|
|
-
|
|
Home equity
|
|
|
84,518
|
|
|
|
87,090
|
|
|
|
-
|
|
|
|
171,608
|
|
|
|
9,938,931
|
|
|
|
10,110,539
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
6,315
|
|
|
|
5,000
|
|
|
|
11,315
|
|
|
|
24,691,450
|
|
|
|
24,702,765
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,212,504
|
|
|
|
12,212,504
|
|
|
|
-
|
|
Consumer
|
|
|
80,042
|
|
|
|
28,390
|
|
|
|
19,238
|
|
|
|
127,670
|
|
|
|
16,014,121
|
|
|
|
16,141,791
|
|
|
|
-
|
|
Total
|
|
$
|
562,133
|
|
|
$
|
286,743
|
|
|
$
|
233,358
|
|
|
$
|
1,082,234
|
|
|
$
|
186,123,839
|
|
|
$
|
187,206,073
|
|
|
$
|
-
|
|
|
|
December 31, 2016
|
|
|
|
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
|
|
$
|
237,783
|
|
|
$
|
136,340
|
|
|
$
|
544,425
|
|
|
$
|
918,548
|
|
|
$
|
44,392,555
|
|
|
$
|
45,311,103
|
|
|
$
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
16,273
|
|
|
|
-
|
|
|
|
16,273
|
|
|
|
41,461,207
|
|
|
|
41,477,480
|
|
|
|
-
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,271,758
|
|
|
|
38,271,758
|
|
|
|
-
|
|
Home equity
|
|
|
151,482
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,482
|
|
|
|
11,454,520
|
|
|
|
11,606,002
|
|
|
|
-
|
|
Commercial
|
|
|
-
|
|
|
|
41,474
|
|
|
|
13,309
|
|
|
|
54,783
|
|
|
|
21,562,961
|
|
|
|
21,617,744
|
|
|
|
-
|
|
Agricultural
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,649,622
|
|
|
|
14,649,622
|
|
|
|
-
|
|
Consumer
|
|
|
68,077
|
|
|
|
17,757
|
|
|
|
72,150
|
|
|
|
157,984
|
|
|
|
14,385,372
|
|
|
|
14,543,356
|
|
|
|
-
|
|
Total
|
|
$
|
457,342
|
|
|
$
|
211,844
|
|
|
$
|
629,884
|
|
|
$
|
1,299,070
|
|
|
$
|
186,177,995
|
|
|
$
|
187,477,065
|
|
|
$
|
-
|
|
The accrual of interest on loans is generally 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 and nine months ended September 30, 2017 and for the year ended December 31, 2016.
|
|
Three Months Ended September 30, 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
|
|
$
|
213,176
|
|
|
$
|
213,176
|
|
|
$
|
-
|
|
|
$
|
238,138
|
|
|
$
|
3,052
|
|
|
$
|
2,783
|
|
Commercial real estate
|
|
|
531,007
|
|
|
|
531,007
|
|
|
|
-
|
|
|
|
553,564
|
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
57,528
|
|
|
|
57,528
|
|
|
|
-
|
|
|
|
52,363
|
|
|
|
919
|
|
|
|
747
|
|
Commercial
|
|
|
444,751
|
|
|
|
444,751
|
|
|
|
-
|
|
|
|
459,111
|
|
|
|
5,877
|
|
|
|
4,844
|
|
Loans with a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
483,494
|
|
|
|
483,494
|
|
|
|
233,432
|
|
|
|
487,986
|
|
|
|
6,235
|
|
|
|
6,375
|
|
Commercial real estate
|
|
|
1,468,355
|
|
|
|
1,468,355
|
|
|
|
774,201
|
|
|
|
1,522,556
|
|
|
|
13,669
|
|
|
|
19,792
|
|
Commercial
|
|
|
178,993
|
|
|
|
178,993
|
|
|
|
178,993
|
|
|
|
192,546
|
|
|
|
-
|
|
|
|
-
|
|
Agricultural
|
|
|
375,951
|
|
|
|
375,951
|
|
|
|
3,731
|
|
|
|
376,571
|
|
|
|
4,431
|
|
|
|
2,987
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
696,670
|
|
|
|
696,670
|
|
|
|
233,432
|
|
|
|
726,124
|
|
|
|
9,287
|
|
|
|
9,158
|
|
Commercial real estate
|
|
|
1,999,362
|
|
|
|
1,999,362
|
|
|
|
774,201
|
|
|
|
2,076,120
|
|
|
|
13,669
|
|
|
|
19,792
|
|
Home equity
|
|
|
57,528
|
|
|
|
57,528
|
|
|
|
-
|
|
|
|
52,363
|
|
|
|
919
|
|
|
|
747
|
|
Commercial
|
|
|
623,744
|
|
|
|
623,744
|
|
|
|
178,993
|
|
|
|
651,657
|
|
|
|
5,877
|
|
|
|
4,844
|
|
Agricultural
|
|
|
375,951
|
|
|
|
375,951
|
|
|
|
3,731
|
|
|
|
376,571
|
|
|
|
4,431
|
|
|
|
2,987
|
|
Total
|
|
$
|
3,753,255
|
|
|
$
|
3,753,255
|
|
|
$
|
1,190,357
|
|
|
$
|
3,882,835
|
|
|
$
|
34,183
|
|
|
$
|
37,528
|
|
|
|
Nine Months Ended September 30, 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
|
|
$
|
213,176
|
|
|
$
|
213,176
|
|
|
$
|
-
|
|
|
$
|
249,949
|
|
|
$
|
9,842
|
|
|
$
|
9,829
|
|
Commercial real estate
|
|
|
531,007
|
|
|
|
531,007
|
|
|
|
-
|
|
|
|
554,029
|
|
|
|
20,982
|
|
|
|
22,972
|
|
Home equity
|
|
|
57,528
|
|
|
|
57,528
|
|
|
|
-
|
|
|
|
52,379
|
|
|
|
2,703
|
|
|
|
2,419
|
|
Commercial
|
|
|
444,751
|
|
|
|
444,751
|
|
|
|
-
|
|
|
|
487,847
|
|
|
|
18,545
|
|
|
|
15,514
|
|
Loans with a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
483,494
|
|
|
|
483,494
|
|
|
|
233,432
|
|
|
|
494,089
|
|
|
|
18,881
|
|
|
|
16,243
|
|
Commercial real estate
|
|
|
1,468,355
|
|
|
|
1,468,355
|
|
|
|
774,201
|
|
|
|
1,536,774
|
|
|
|
58,510
|
|
|
|
62,584
|
|
Commercial
|
|
|
178,993
|
|
|
|
178,993
|
|
|
|
178,993
|
|
|
|
195,571
|
|
|
|
1,646
|
|
|
|
1,317
|
|
Agricultural
|
|
|
375,951
|
|
|
|
375,951
|
|
|
|
3,731
|
|
|
|
383,775
|
|
|
|
13,641
|
|
|
|
26,240
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
696,670
|
|
|
|
696,670
|
|
|
|
233,432
|
|
|
|
744,038
|
|
|
|
28,723
|
|
|
|
26,072
|
|
Commercial real estate
|
|
|
1,999,362
|
|
|
|
1,999,362
|
|
|
|
774,201
|
|
|
|
2,090,803
|
|
|
|
79,492
|
|
|
|
85,556
|
|
Home equity
|
|
|
57,528
|
|
|
|
57,528
|
|
|
|
-
|
|
|
|
52,379
|
|
|
|
2,703
|
|
|
|
2,419
|
|
Commercial
|
|
|
623,744
|
|
|
|
623,744
|
|
|
|
178,993
|
|
|
|
683,418
|
|
|
|
20,191
|
|
|
|
16,831
|
|
Agricultural
|
|
|
375,951
|
|
|
|
375,951
|
|
|
|
3,731
|
|
|
|
383,775
|
|
|
|
13,641
|
|
|
|
26,240
|
|
Total
|
|
$
|
3,753,255
|
|
|
$
|
3,753,255
|
|
|
$
|
1,190,357
|
|
|
$
|
3,954,413
|
|
|
$
|
144,750
|
|
|
$
|
157,118
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
39,598
|
|
|
$
|
39,598
|
|
|
$
|
-
|
|
|
$
|
41,880
|
|
|
$
|
2,653
|
|
|
$
|
2,888
|
|
Commercial real estate
|
|
|
120,172
|
|
|
|
120,172
|
|
|
|
-
|
|
|
|
272,557
|
|
|
|
13,499
|
|
|
|
14,061
|
|
Commercial
|
|
|
61,483
|
|
|
|
61,483
|
|
|
|
-
|
|
|
|
87,359
|
|
|
|
4,332
|
|
|
|
4,419
|
|
Home equity
|
|
|
54,011
|
|
|
|
54,011
|
|
|
|
-
|
|
|
|
54,067
|
|
|
|
3,670
|
|
|
|
3,871
|
|
Loans with a specific allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
673,553
|
|
|
|
673,553
|
|
|
|
304,922
|
|
|
|
719,834
|
|
|
|
41,323
|
|
|
|
34,208
|
|
Commercial real estate
|
|
|
1,538,151
|
|
|
|
1,538,151
|
|
|
|
723,481
|
|
|
|
1,572,203
|
|
|
|
68,918
|
|
|
|
64,878
|
|
Commercial
|
|
|
93,584
|
|
|
|
93,584
|
|
|
|
56,409
|
|
|
|
165,473
|
|
|
|
7,580
|
|
|
|
7,814
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
713,151
|
|
|
|
713,151
|
|
|
|
304,922
|
|
|
|
761,714
|
|
|
|
43,976
|
|
|
|
37,096
|
|
Commercial real estate
|
|
|
1,658,323
|
|
|
|
1,658,323
|
|
|
|
723,481
|
|
|
|
1,844,760
|
|
|
|
82,417
|
|
|
|
78,939
|
|
Commercial
|
|
|
155,067
|
|
|
|
155,067
|
|
|
|
56,409
|
|
|
|
252,832
|
|
|
|
11,912
|
|
|
|
12,233
|
|
Home equity
|
|
|
54,011
|
|
|
|
54,011
|
|
|
|
-
|
|
|
|
54,067
|
|
|
|
3,670
|
|
|
|
3,871
|
|
Total
|
|
$
|
2,580,552
|
|
|
$
|
2,580,552
|
|
|
$
|
1,084,812
|
|
|
$
|
2,913,373
|
|
|
$
|
141,975
|
|
|
$
|
132,139
|
|
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. These concessions typically result from our loss mitigation activities and could 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 determines 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 September 30, 2017 and December 31, 2016.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
670,248
|
|
|
$
|
836,867
|
|
Commercial real estate
|
|
|
1,302,423
|
|
|
|
1,362,088
|
|
Agricultural real estate
|
|
|
236,500
|
|
|
|
-
|
|
Home equity
|
|
|
4,796
|
|
|
|
6,009
|
|
Commercial loans
|
|
|
392,159
|
|
|
|
245,710
|
|
Agricultural loans
|
|
|
93,914
|
|
|
|
-
|
|
Consumer loans
|
|
|
70,303
|
|
|
|
81,880
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,770,343
|
|
|
$
|
2,532,554
|
|
The following table presents the recorded balance,
at original cost, of TDRs, which were performing according to the terms of the restructuring, as of September 30, 2017 and December
31, 2016.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
636,332
|
|
|
$
|
666,744
|
|
Commercial real estate
|
|
|
1,302,423
|
|
|
|
1,362,088
|
|
Agricultural real estate
|
|
|
236,500
|
|
|
|
-
|
|
Home equity
|
|
|
4,796
|
|
|
|
6,009
|
|
Commercial loans
|
|
|
392,159
|
|
|
|
245,710
|
|
Agricultural loans
|
|
|
93,914
|
|
|
|
-
|
|
Consumer loans
|
|
|
70,303
|
|
|
|
57,540
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,736,427
|
|
|
$
|
2,338,091
|
|
The following tables present loans modified as TDRs
during the three and nine months ended September 30, 2017 and 2016.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2017
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
|
Modifications
|
|
|
Investment
|
|
|
Modifications
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2
|
|
|
$
|
90,333
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
456,158
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
236,500
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
1
|
|
|
|
134,446
|
|
|
|
2
|
|
|
|
178,993
|
|
Agricultural loans
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
93,914
|
|
Consumer loans
|
|
|
1
|
|
|
|
1,604
|
|
|
|
1
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
136,050
|
|
|
|
8
|
|
|
$
|
1,057,502
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2016
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Number of
|
|
|
Recorded
|
|
|
|
Modifications
|
|
|
Investment
|
|
|
Modifications
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
40,626
|
|
Commercial real estate
|
|
|
1
|
|
|
|
719,022
|
|
|
|
1
|
|
|
|
719,022
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
1
|
|
|
|
218,331
|
|
|
|
1
|
|
|
|
218,331
|
|
Agricultural loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
937,353
|
|
|
|
3
|
|
|
$
|
977,979
|
|
2017 Modifications
The Company modified two residential real estate
loans totaling $90,333. The modifications were made to lower the rate on one note and extend the payment schedule on the other
note for three months. The Company modified one commercial real estate loan with a recorded investment of $456,158. 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 two commercial
loans with a recorded investment of $178,993. One modification was made to combine three notes and lower the rate and the other
was made to consolidate two notes, capitalize interest, and extend the term. The Company modified one agricultural loan with a
recorded investment of $93,914. The modification was made to extend the principal payment for nine months. The Company modified
one consumer loan with a recorded investment of $1,604. The modification was made to extend the term and lower the payments. The
modifications did not result in a write-off of the principal balance of any loan nor was there a significant difference between
the pre-modification balance and the post-modification balance.
2016 Modifications
The Company modified one residential real estate
loan with a recorded investment of $40,626. The modification was made to restructure the loan and capitalize delinquent real estate
taxes. The Company modified one commercial real estate loan with a recorded investment of $719,022. The modification was made to
lower the rate, extend the amortization, and capitalize interest and escrow funds as part of a bankruptcy restructuring. The Company
modified one commercial loan with a recorded investment of $218,331. The modification was made to require interest only payments
for four months. The modifications did not result in a write-off of the principal balance of any loan 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 nine month period ended September 30, 2017, we had no defaulted TDRs as none were more than 90 days past due at September
30, 2017. 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 nine month period ended September 30,
2016, three residential real estate loans of $176,483 were considered defaulted TDRs as they were more than 90 days past due at
September 30, 2016.
The following table presents the Company’s
nonaccrual loans at September 30, 2017 and December 31, 2016. This table excludes performing troubled debt restructurings.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential
|
|
$
|
353,531
|
|
|
$
|
590,514
|
|
Commercial real estate
|
|
|
682,665
|
|
|
|
708,922
|
|
Agricultural real estate
|
|
|
-
|
|
|
|
-
|
|
Home equity
|
|
|
40,218
|
|
|
|
49,542
|
|
Commercial loans
|
|
|
140,448
|
|
|
|
16,561
|
|
Agricultural loans
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
118,722
|
|
|
|
164,472
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,335,584
|
|
|
$
|
1,530,011
|
|
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
|
|
September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
11,374,351
|
|
|
$
|
-
|
|
|
$
|
(307,519
|
)
|
|
$
|
11,066,832
|
|
Mortgage-backed securities (government-sponsored enterprises - residential)
|
|
|
56,208,061
|
|
|
|
44,247
|
|
|
|
(355,324
|
)
|
|
|
55,896,984
|
|
Municipal bonds
|
|
|
37,924,484
|
|
|
|
924,596
|
|
|
|
(137,350
|
)
|
|
|
38,711,730
|
|
|
|
$
|
105,506,896
|
|
|
$
|
968,843
|
|
|
$
|
(800,193
|
)
|
|
$
|
105,675,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
13,985,863
|
|
|
$
|
9,641
|
|
|
$
|
(661,964
|
)
|
|
$
|
13,333,540
|
|
Mortgage-backed securities (government-sponsored enterprises - residential)
|
|
|
45,457,262
|
|
|
|
70,512
|
|
|
|
(1,114,597
|
)
|
|
|
44,413,177
|
|
Municipal bonds
|
|
|
42,500,579
|
|
|
|
558,776
|
|
|
|
(644,632
|
)
|
|
|
42,414,723
|
|
|
|
$
|
101,943,704
|
|
|
$
|
638,929
|
|
|
$
|
(2,421,193
|
)
|
|
$
|
100,161,440
|
|
The amortized cost and fair value of available-for-sale
securities at September 30, 2017, 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
|
|
$
|
323,234
|
|
|
$
|
323,369
|
|
More than one year to five years
|
|
|
4,530,741
|
|
|
|
4,622,781
|
|
More than five years to ten years
|
|
|
20,150,121
|
|
|
|
20,452,615
|
|
After ten years
|
|
|
24,294,739
|
|
|
|
24,379,797
|
|
|
|
|
49,298,835
|
|
|
|
49,778,562
|
|
Mortgage-backed securities (government- sponsored
enterprises - residential)
|
|
|
56,208,061
|
|
|
|
55,896,984
|
|
|
|
$
|
105,506,896
|
|
|
$
|
105,675,546
|
|
The carrying value of securities pledged as collateral,
to secure public deposits and for other purposes, was $59,039,000 at September 30, 2017 and $42,463,000 at December 31, 2016.
The book value of securities sold
under agreement to repurchase amounted to $7,196,000 at September 30, 2017 and $7,135,000 at December 31, 2016. At September 30,
2017, we had $2,065,000 of repurchase agreements secured by U.S. government agency bonds and $5,262,000 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 $107,000 and $84,000 and gross losses
of $9,000 and $0 resulting from sales of available-for-sale securities were realized during the three months ended September 30,
2017 and 2016, respectively. Gross gains of $333,000 and $295,000 and gross losses of $9,000 and $3,000 resulting from sales of
available-for-sale securities were realized during the nine months ended September 30, 2017 and 2016, 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 September 30,
2017 and December 31, 2016 were $61,146,000, and $71,583,000, respectively, which were approximately 58% and 71% of the Company’s
available-for-sale investment portfolio.
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 September 30, 2017 and December 31, 2016.
|
|
Less Than Twelve Months
|
|
|
Twelve Months or More
|
|
|
Total
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
(216,312
|
)
|
|
$
|
8,216,077
|
|
|
$
|
(91,207
|
)
|
|
$
|
2,850,755
|
|
|
$
|
(307,519
|
)
|
|
$
|
11,066,832
|
|
Mortgage-backed securities (government sponsored enterprises - residential)
|
|
|
(259,857
|
)
|
|
|
35,222,201
|
|
|
|
(95,467
|
)
|
|
|
6,881,713
|
|
|
|
(355,324
|
)
|
|
|
42,103,914
|
|
Municipal bonds
|
|
|
(81,973
|
)
|
|
|
5,810,654
|
|
|
|
(55,377
|
)
|
|
|
2,164,130
|
|
|
$
|
(137,350
|
)
|
|
$
|
7,974,784
|
|
Total
|
|
$
|
(558,142
|
)
|
|
$
|
49,248,932
|
|
|
$
|
(242,051
|
)
|
|
$
|
11,896,598
|
|
|
$
|
(800,193
|
)
|
|
$
|
61,145,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
$
|
(661,964
|
)
|
|
$
|
12,333,924
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(661,964
|
)
|
|
$
|
12,333,924
|
|
Mortgage-backed securities (government sponsored enterprises - residential)
|
|
|
(1,114,597
|
)
|
|
|
37,144,915
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,114,597
|
)
|
|
|
37,144,915
|
|
Municipal bonds
|
|
|
(644,632
|
)
|
|
|
22,104,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(644,632
|
)
|
|
|
22,104,420
|
|
Total
|
|
$
|
(2,421,193
|
)
|
|
$
|
71,583,259
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,421,193
|
)
|
|
$
|
71,583,259
|
|
The unrealized losses on the Company’s investments
in municipal bonds, U.S. government 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 September 30, 2017 and December 31, 2016.
|
7.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
The components of accumulated
other comprehensive income (loss), included in stockholders’ equity, are as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Net unrealized gains on securities available-for-sale
|
|
$
|
168,650
|
|
|
$
|
(1,782,264
|
)
|
Tax effect
|
|
|
(57,341
|
)
|
|
|
605,970
|
|
Net-of-tax amount
|
|
$
|
111,309
|
|
|
$
|
(1,176,294
|
)
|
|
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 and nine months ended September 30, 2017 and 2016, were as follows:
|
|
Amounts Reclassified
|
|
|
|
|
|
from AOCI
|
|
|
|
|
|
Three Months Ended
|
|
|
Affected Line Item in the
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
Statements of Income
|
Realized gains on available-for-sale securities
|
|
$
|
97,701
|
|
|
$
|
83,712
|
|
|
Net realized gains on sales of available-for-sale securities
|
Tax effect
|
|
|
(33,218
|
)
|
|
|
(28,462
|
)
|
|
Income taxes
|
Total reclassification out of AOCI
|
|
$
|
64,483
|
|
|
$
|
55,250
|
|
|
Net reclassified amount
|
|
|
Amounts Reclassified
|
|
|
|
|
|
from AOCI
|
|
|
|
|
|
Nine Months Ended
|
|
|
Affected Line Item in the
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
Statements of Income
|
Realized gains on available-for-sale securities
|
|
$
|
324,375
|
|
|
$
|
291,810
|
|
|
Net realized gains on sales of available-for-sale securities
|
Tax effect
|
|
|
(110,287
|
)
|
|
|
(99,215
|
)
|
|
Income taxes
|
Total reclassification out of AOCI
|
|
$
|
214,088
|
|
|
$
|
192,595
|
|
|
Net reclassified amount
|
|
9.
|
DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
|
Fair
value is the price that would be received to sell an asset or paid to transfer a liability 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 or
liabilities
|
|
Level 2
|
Observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or liabilities
|
|
Level 3
|
Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the assets or liabilities
|
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 September 30, 2017 and December 31, 2016:
|
|
|
|
|
September 30, 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
|
|
$
|
11,066,832
|
|
|
$
|
-
|
|
|
$
|
11,066,832
|
|
|
$
|
-
|
|
Mortgage-backed securities (Government sponsored enterprises -
residential)
|
|
|
55,896,984
|
|
|
|
-
|
|
|
|
55,896,984
|
|
|
|
-
|
|
Municipal bonds
|
|
|
38,711,730
|
|
|
|
-
|
|
|
|
38,711,730
|
|
|
|
-
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
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
|
|
$
|
13,333,540
|
|
|
$
|
-
|
|
|
$
|
13,333,540
|
|
|
$
|
-
|
|
Mortgage-backed securities (Government sponsored enterprises -
residential)
|
|
|
44,413,177
|
|
|
|
-
|
|
|
|
44,413,177
|
|
|
|
-
|
|
Municipal bonds
|
|
|
42,414,723
|
|
|
|
-
|
|
|
|
42,414,723
|
|
|
|
-
|
|
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 nine month period ended September 30, 2017.
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 or independently sourced market
parameters, 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 September 30, 2017 and December 31, 2016:
|
|
|
|
|
September 30, 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)
|
|
$
|
1,357,769
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,357,769
|
|
Real estate owned
|
|
|
10,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,500
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
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)
|
|
$
|
1,157,329
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,157,329
|
|
Mortgage servicing rights
|
|
|
552,827
|
|
|
|
-
|
|
|
|
-
|
|
|
|
552,827
|
|
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.
Real Estate Owned
–
Real estate owned is carried at the lower of fair value at acquisition date or current estimated
fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of real estate owned is based on
appraisals or evaluations. Real estate owned is classified within Level 3 of the fair value hierarchy.
Appraisals of real estate owned are obtained when the
real estate is acquired 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 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.
Mortgage Servicing
Rights
–
Mortgage servicing rights do not trade in an active, open market with readily
observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs
of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage servicing rights
are classified within Level 3 of the hierarchy.
Mortgage servicing rights are tested for impairment
on at least an annual basis. The Company uses a third-party to measure mortgage servicing rights through the completion
of a proprietary model. Inputs to the model are reviewed by the Company.
Unobservable (Level 3) Inputs
The following table presents quantitative information
about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements (dollars in thousands).
|
|
Fair Value at
9/30/17
|
|
|
Valuation
Technique
|
|
Unobservable Inputs
|
|
Range (Weighted
Average)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned
|
|
$
|
10,500
|
|
|
Market comparable properties
|
|
Comparability adjustments (%)
|
|
|
30%
|
|
Collateral-dependent impaired loans
|
|
|
1,357,769
|
|
|
Market comparable properties
|
|
Marketability discount
|
|
|
25%
– 50% (40%)
|
|
|
|
Fair Value at
12/31/16
|
|
|
Valuation
Technique
|
|
Unobservable Inputs
|
|
Range (Weighted
Average)
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent impaired loans
|
|
|
1,157,329
|
|
|
Market comparable properties
|
|
Marketability discount
|
|
|
20% – 30% (25%)
|
|
Mortgage servicing rights
|
|
|
552,827
|
|
|
Discounted cash flow
|
|
Discount rate PSA standard prepayment model rate
|
|
|
9% –13.5% (10.25%)
104 – 300 (153)
|
|
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 September 30, 2017 and December 31, 2016
|
|
|
|
|
September 30, 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
|
|
$
|
24,638,617
|
|
|
$
|
24,638,617
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest-earning time deposits in banks
|
|
|
998,000
|
|
|
|
998,000
|
|
|
|
-
|
|
|
|
-
|
|
Other investments
|
|
|
53,131
|
|
|
|
-
|
|
|
|
53,131
|
|
|
|
-
|
|
Loans held for sale
|
|
|
286,328
|
|
|
|
-
|
|
|
|
286,328
|
|
|
|
-
|
|
Loans, net of allowance for loan losses
|
|
|
184,130,690
|
|
|
|
-
|
|
|
|
-
|
|
|
|
183,510,171
|
|
Federal Home Loan Bank stock
|
|
|
428,500
|
|
|
|
-
|
|
|
|
428,500
|
|
|
|
-
|
|
Interest receivable
|
|
|
2,527,625
|
|
|
|
-
|
|
|
|
2,527,625
|
|
|
|
-
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
272,619,107
|
|
|
|
-
|
|
|
|
200,500,496
|
|
|
|
72,875,950
|
|
Short-term borrowings
|
|
|
7,196,206
|
|
|
|
-
|
|
|
|
7,196,206
|
|
|
|
-
|
|
Advances from borrowers for taxes and insurance
|
|
|
642,305
|
|
|
|
-
|
|
|
|
642,305
|
|
|
|
-
|
|
Interest payable
|
|
|
90,266
|
|
|
|
-
|
|
|
|
90,266
|
|
|
|
-
|
|
Unrecognized financial instruments (net of contract amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Letters of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Lines of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
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
|
|
$
|
12,909,924
|
|
|
$
|
12,909,924
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest-earning time deposits
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
-
|
|
|
|
-
|
|
Other investments
|
|
|
55,481
|
|
|
|
-
|
|
|
|
55,481
|
|
|
|
-
|
|
Loans held for sale
|
|
|
503,003
|
|
|
|
-
|
|
|
|
503,003
|
|
|
|
-
|
|
Loans, net of allowance for loan losses
|
|
|
184,448,003
|
|
|
|
-
|
|
|
|
-
|
|
|
|
183,941,877
|
|
Federal Home Loan Bank stock
|
|
|
363,800
|
|
|
|
-
|
|
|
|
363,800
|
|
|
|
-
|
|
Interest receivable
|
|
|
1,588,545
|
|
|
|
-
|
|
|
|
1,588,545
|
|
|
|
-
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
258,677,960
|
|
|
|
-
|
|
|
|
178,491,424
|
|
|
|
81,241,011
|
|
Short-term borrowings
|
|
|
7,135,182
|
|
|
|
-
|
|
|
|
7,135,182
|
|
|
|
-
|
|
Advances from borrowers for taxes and insurance
|
|
|
1,102,204
|
|
|
|
-
|
|
|
|
1,102,204
|
|
|
|
-
|
|
Interest payable
|
|
|
106,755
|
|
|
|
-
|
|
|
|
106,755
|
|
|
|
-
|
|
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 -
The fair value of loans is estimated
by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. 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 nine month period ended September 30, 2017 and the year ended December 31, 2016
was as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Balance, beginning of period
|
|
$
|
552,827
|
|
|
$
|
597,713
|
|
Servicing rights capitalized
|
|
|
58,601
|
|
|
|
87,579
|
|
Amortization of servicing rights
|
|
|
(63,755
|
)
|
|
|
(107,239
|
)
|
Write-downs
|
|
|
-
|
|
|
|
(72,580
|
)
|
Change in valuation allowance
|
|
|
-
|
|
|
|
47,354
|
|
Balance, end of period
|
|
$
|
547,673
|
|
|
$
|
552,827
|
|
Activity in the valuation allowance for mortgage servicing
rights for the nine month period ended September 30, 2017 and the year ended December 31, 2016 was as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Balance, beginning of period
|
|
$
|
-
|
|
|
$
|
47,354
|
|
Additions
|
|
|
-
|
|
|
|
38,967
|
|
Reductions due to write-downs
|
|
|
|
|
|
|
(72,580
|
)
|
Reductions due to payoff of loans
|
|
|
-
|
|
|
|
(13,741
|
)
|
Balance, end of period
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of income tax expense at the statutory
rate to the Company’s actual income tax expense for the nine months ended September 30, 2017 and 2016 is shown below.
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Computed at the statutory rate (34%)
|
|
$
|
1,077,162
|
|
|
$
|
1,089,710
|
|
Increase (decrease) resulting from
|
|
|
|
|
|
|
|
|
Tax exempt interest
|
|
|
(327,772
|
)
|
|
|
(333,465
|
)
|
State income taxes, net
|
|
|
158,809
|
|
|
|
142,722
|
|
Increase in cash surrender value
|
|
|
(41,800
|
)
|
|
|
(44,530
|
)
|
Other, net
|
|
|
2,008
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
Actual tax expense
|
|
$
|
868,407
|
|
|
$
|
854,380
|
|
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
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.