Mayville Financial Corporation€¦ · on the average MFC stock price of $24.38 for the year. The...

Mayville Financial

Corporation

Mayville, Michigan

Years Ended December 31, 2018 and 2017

2018 Annual Report

MAYVILLE FINANCIAL CORPORATION

Table of Contents

Page

Board of Directors, Officers, and Employees 1

Letter from the President/Chief Executive Officer 2

Financial Highlights - Five Years 3

Independent Auditors’ Report 5

Consolidated Financial Statements for the Years EndedDecember 31, 2018 and 2017

Consolidated Balance Sheets 6

Consolidated Statements of Income 7

Consolidated Statements of Comprehensive Income 8

Consolidated Statements of Stockholders’ Equity 9

Consolidated Statements of Cash Flows 10

Notes to Consolidated Financial Statements 11

MAYVILLE FINANCIAL CORPORATION (MFC) & MAYVILLE STATE BANK (MSB)

Board of Directors (Year elected to Board; Occupation) Brad Sullivan, Chairman – 2000 ................................................... CFO, General Housing Corp. Dan Babcock, Vice Chairman – 2003 ........................................ CEO, Marlette Regional Hospital James Abbey – 2014 ................................................... Partner, Abbey, Abbey & Thomas PLLC Shelly Brooks – 2005 ........................................................ President/CEO, Mayville State Bank Gary Haas, Secretary – 1981 ................................................. Retired CEO, Mayville State Bank David Osentoski – 2007................................................................... Owner, Osentoski Realty Glen Higgins (Honorary) – 1982 ........................................... Retired, Super Food Services, Inc. Robert Steele (Honorary) – 1990 .................................................... Partner, Steele Dairy Farm Lee Tomlinson (Honorary) – 1978 ........................................ President, Ducker-Tomlinson, Inc. James Welke (Honorary) – 1986 ........................................ Owner, Welke Tax and Bookkeeping Dale Wingert (Honorary) – 1976 ............................................................. CEO, Wingert’s, Inc. Officers and Employees (MSB unless otherwise noted) Shelly Brooks ............................................... President/CEO, MSB; President & Treasurer, MFC Lisa Stephens ................................................ Senior Vice President, MSB; Vice President MFC Scott Wegrzyn ........................................... Vice President; Bank Secrecy Officer; Loan Officer Betty Moorhouse .................... Assistant Vice President; Branch Manager, Millington; Loan Officer Ben Heminger ............................................................. Assistant Vice President; Loan Officer Rex Vroman .......................................................... Assistant Vice President; Security Officer Bethany Wingert ................................................................................................. Cashier Dana Zatkovic ............................................................................................. Asst. Cashier Cammie Asmus ................................................................................ Operations Supervisor Anna Blackwell ............................................................ Sr. Financial Services Representative Ashley Brown ...................................................................................................... Teller Sarena Conley .................................................................................................... Teller Patricia DeSenzio ....................................................................... Commercial Loan Officer Nicole Dziuba ........................................................... Asst. Branch Manager, Millington Office Dawn Frenzel ....................................................................................... Drive-in Manager Maria Frye ......................................................................................................... Teller Dawson Hilts ....................................................................................................... Teller Ashleigh Jackson ................................... Loan Review Officer/Financial Services Representative Michelle Kiss .................................................................................................. Custodian Chris Larabell ..................................................................... Information Technology Officer Kathleen Leach .............................................................................................. Custodian Amy Louks..........................................................................Loan Officer/Collection Officer April Pelch .................................................................... Officer-in-Charge, Millington Office Joy Perkins ................................................................................. Bookkeeping Operations Kimberly Smith ............................................................................ Bookkeeping Operations Hannah Sonnerberg ..............................................................................................Teller Leah Sunday.....................................................................................Loan Processing/BSA Tina TerBush.................................................................. Financial Services Representative Diane Travis .................................................................................................. Custodian Jessica Trisch.. ................................................................ Financial Services Representative Kathy Wilson ....................................................................................................... Clerk Kyndra Windsor ................................................................................................... Teller

1

Dear Shareholders:

With the completion of the construction of the new main office at 37 E. Ohmer Rd., both thesupermarket branch and main office on Fulton St. were able to be consolidated into one full servicelocation. The new facility has brought the Bank into the future with new technology and increasedefficiencies in many areas. The new location offers an expanded presence on a major highway in ourarea that will assist in the goals to grow the Bank. Along with the implementation of new businessdevelopment programs and top notch products and services, prospects for additional growthopportunities are promising.

The Board of Directors and management of Mayville Financial Corporation are pleased to submit this134th annual report for the year ended December 31, 2018.

Shelly M. BrooksPresidentMAYVILLE FINANCIAL CORPORATION

For the Board of Directors,

Net income for 2018 increased to $685,298, resulting in a net income per share of $1.44. A 6.24% netgrowth in loans as well as reduced taxes due to the implementation of tax reform in 2018 helpedcontribute to increased earnings in 2018. This net income equates to a return on average assets of0.76% and a return on average equity of 6.99%. This performance helped retain the Bank’s 5-Star ratingfrom Bauer Financial, Inc., for the quarter ending December 31, 2018; the 87th consecutive quarter theBank has earned this superior rating.

Shareholders received a total of $0.85 per share in cash dividends during 2018, a return of 3.49% basedon the average MFC stock price of $24.38 for the year. The Bank maintained strong capital levels,keeping the Bank in a well-capitalized position.

While the Bank experienced some success in rebuilding the loan portfolio, growth in this segment of theBank continues to be a top priority. The Bank will continue to focus on growing the portfolio, with agoal of expanding into other lending areas outside of the concentration in residential real estatemortgages. Credit quality, with low delinquency and charge off rates, remains very strong and hasbeen the basis for a solid return for our shareholders. In a competitive rising rate environment, theBank has been able to successfully manage the interest margin, therefore aiding in the increase in netincome for the year.

Mayville State Bank remains a strong, independent and locally-owned community bank. Our mission ofproviding for the financial needs of our customers while providing a good rate of return to theshareholders has remained a key factor in the Bank’s success for the last 134 years. We thank you, ourshareholders, for your continued interest in and support of Mayville Financial Corporation and itssubsidiary, Mayville State Bank.

2

Mayville Financial CorporationFinancial Highlights - Five Years

$89,550 $91,067 $91,060 $90,797 $89,182

$-

$25,000

$50,000

$75,000

$100,000

2014 2015 2016 2017 2018

Assets"In thousands"

$9,292 $9,529 $9,522 $9,752 $9,851

$-

$2,000

$4,000

$6,000

$8,000

$10,000

2014 2015 2016 2017 2018

Equity"In thousands"

$39,803 $37,617 $36,012 $34,253 $36,392

$-

$10,000

$20,000

$30,000

$40,000

$50,000

2014 2015 2016 2017 2018

Net Loans "In thousands"

$79,931 $81,113 $81,211 $80,823 $78,679

$- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000

2014 2015 2016 2017 2018

Deposits "In thousands"

$31,192

$35,797 $35,458 $34,592 $31,284

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2014 2015 2016 2017 2018

Investment Securities "In thousands"

$467

$587 $649

$577

$685

$-

$200

$400

$600

$800

2014 2015 2016 2017 2018

Net Income"In thousands"

3

Mayville Financial Corporation

Financial Highlights - Five Years

$19.44

$19.94 $19.92

$20.40 $20.67

$18.50

$19.00

$19.50

$20.00

$20.50

$21.00

2014 2015 2016 2017 2018

Book Value Per Share

$296,351 $334,590

$382,389 $358,490 $403,281

$-

$100,000

$200,000

$300,000

$400,000

$500,000

2014 2015 2016 2017 2018

Dividends Paid

0.52%0.65%

0.71% 0.63% 0.76%

0.00%

0.25%

0.50%

0.75%

1.00%

2014 2015 2016 2017 2018

Return on Average Assets

5.09%

6.24%

6.81%

5.99%

6.99%

4.00%

5.00%

6.00%

7.00%

2014 2015 2016 2017 2018

Return on Average Stockholders' Equity

10.38% 10.46% 10.46%

10.74%

11.05%

9.50%

10.00%

10.50%

11.00%

11.50%

2014 2015 2016 2017 2018

Equity to Assets

4

CPAs & Consultants Wealth Advisors Corporate Investigators

Rehmann is an independent member of Nexia International.

Rehmann Robson

5800 Gratiot Rd. Suite 201 Saginaw, MI 48638 Ph: 989.799.9580 Fx: 989.799.0227 rehmann.com

Stockholders and Board of DirectorsMayville Financial CorporationMayville, Michigan

Management's Responsibility for the Consolidated Financial Statements

Independent Auditors' Responsibility

Opinion

INDEPENDENT AUDITORS' REPORT

April 19, 2019

We have audited the accompanying consolidated financial statements of Mayville FinancialCorporation (the “Corporation”), which comprise the consolidated balance sheets as of December 31,2018 and 2017, and the related consolidated statements of income, comprehensive income,stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidatedfinancial statements.

Management is responsible for the preparation and fair presentation of these consolidated financialstatements in accordance with accounting principles generally accepted in the United States ofAmerica; this includes the design, implementation, and maintenance of internal control relevant to thepreparation and fair presentation of consolidated financial statements that are free from materialmisstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these consolidated financial statements based on ouraudits. We conducted our audits in accordance with auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe consolidated financial statements. The procedures selected depend on auditor judgment, includingthe assessment of the risks of material misstatement of the consolidated financial statements, whetherdue to fraud or error. In making those risk assessments, the auditor considers internal control relevantto the Corporation’s preparation and fair presentation of the consolidated financial statements in orderto design audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Corporation’s internal control. Accordingly, weexpress no such opinion. An audit also includes evaluating the appropriateness of accounting policiesused and the reasonableness of significant accounting estimates made by management, as well asevaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Mayville Financial Corporation as of December 31,2018 and 2017, and the consolidated results of their operations and their cash flows for the years thenended in accordance with accounting principles generally accepted in the United States of America.

5


2018 2017

Cash and due from banks 3,251,235$ 2,637,778$ Federal funds sold 2,669,000 4,415,000

Cash and cash equivalents 5,920,235 7,052,778

Certificates of deposit held at other financial institutions 8,626,000 10,594,000

Debt securitiesAvailable-for-sale 29,594,850 32,999,823Held-to-maturity 1,688,950 1,591,926

Federal Home Loan Bank stock, at cost 323,100 323,100

Net loans 36,391,794 34,252,775Accrued interest receivable 296,531 313,042Premises and equipment, net 3,061,292 525,125Bank owned life insurance 2,970,654 2,887,239Other assets 308,753 257,615

Total assets 89,182,159$ 90,797,423$

DepositsInterest-bearing

13,232,407$ 15,423,717$ Savings accounts 26,626,413 25,988,366Other time deposits 23,562,110 25,924,886Time deposits over $250,000 315,916 314,026

Total interest-bearing 63,736,846 67,650,995

Noninterest-bearing 14,941,948 13,171,953

Total deposits 78,678,794 80,822,948

Accrued interest payable 19,178 20,287Accrued expenses and other liabilities 633,445 202,683

Total liabilities 79,331,417 81,045,918

Commitments and contingencies (Notes 6, 10, 11, and 12)

Stockholders' equityCommon stock, no par value: 1,250,000 shares authorized,

473,360 shares issued and outstanding (477,986 in 2017) 4,133,923 4,228,941 Retained earnings 6,014,435 5,732,418 Accumulated other comprehensive loss (297,616) (209,854)

Total stockholders' equity 9,850,742 9,751,505

Total liabilities and stockholders' equity 89,182,159$ 90,797,423$

December 31

ASSETS

LIABILITIES AND STOCKHOLDERS' EQUITY

NOW and money market accounts

Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements.

6


2018 2017Interest and dividend income

Loans (including fees) 1,957,811$ 1,922,773$ Investment securities

Available-for-sale 560,246 535,610 Held-to-maturity 33,839 29,099

Federal funds sold and other 54,210 41,156Other interest and dividend income 212,762 158,925

Total interest and dividend income 2,818,868 2,687,563

Interest expense on deposits 215,953 234,077

Net interest income 2,602,915 2,453,486

Noninterest income Service charges on deposit accounts 304,901 314,100Other 390,103 352,972

Total noninterest income 695,004 667,072

Noninterest expenses Compensation 1,146,610 1,091,841Profit sharing and other employee benefits 250,183 275,359Occupancy and equipment 194,076 186,689FDIC assessments 19,032 28,500ATM processing fees 130,058 124,754 Professional fees 90,761 91,043 Directors fees 69,330 70,730 Data processing fees 179,572 143,483 Impairment on asset held for sale 102,221 - Other 340,778 346,590

Total noninterest expenses 2,522,621 2,358,989

Income before federal income taxes 775,298 761,569

Federal income taxes 90,000 185,000

Net income 685,298$ 576,569$

Net income per basic share of common stock 1.44$ 1.21$

Year Ended December 31

Consolidated Statements of Income


7


2018 2017Available-for-sale debt securities

Unrealized holding (losses) gains arising duringthe year (111,995)$ 16,857$

Reclassification adjustment for net realized lossesincluded in net income 1,166 -

Comprehensive (loss) income before incometax benefit (expense) (110,829) 16,857

Income tax benefit (expense) related to other comprehensive (loss) income 23,067 (5,730)

Other comprehensive (loss) income (87,762) 11,127

Net income 685,298 576,569

Comprehensive income 597,536$ 587,696$


Consolidated Statements of Comprehensive Income


8


Accumulated

Other

Retained Comprehensive

Shares Amount Earnings Loss Total

Balances, January 1, 2017 477,986 4,228,941$ 5,479,805$ (186,447)$ 9,522,299$

Comprehensive income - - 576,569 11,127 587,696

Cash dividends paid

($0.75 per share) - - (358,490) - (358,490)

Reclassification resulting from

enactment of federal tax legislation - - 34,534 (34,534) -

Balances, December 31, 2017 477,986 4,228,941 5,732,418 (209,854) 9,751,505

Comprehensive income - - 685,298 (87,762) 597,536

Redemption of stock (4,626) (95,018) - - (95,018)

Cash dividends paid

($0.85 per share) - - (403,281) - (403,281)

Balances, December 31, 2018 473,360 4,133,923$ 6,014,435$ (297,616)$ 9,850,742$

Common Stock

Consolidated Statements of Stockholders' Equity


9


2018 2017Cash flows from operating activities

Net income 685,298$ 576,569$ Adjustments to reconcile net income to net cash provided

by operating activitiesProvision for foreclosed asset losses - 8,100 Depreciation 66,233 56,923 Impairment of asset held for sale 102,221 - Increase in cash surrender value of

bank owned life insurance (83,415) (83,940) Net amortization of investment securities premiums 235,399 295,040 Gain on sale of foreclosed assets (17,668) (3,803) Loss on sale of premises and equipment 852 - Loss on sale of investment securities 1,166 - Deferred income tax (benefit) expense (6,000) 98,000 Changes in operating assets and liabilities which

provided (used) cashAccrued interest receivable 16,511 (10,437) Other assets (21,538) 95,739 Accrued interest payable (1,109) (1,163) Accrued expenses and other liabilities 53,089 (108,432)

Net cash provided by operating activities 1,031,039 922,596

Cash flows from investing activities Net change in certificates of deposit held at

1,968,000 (3,220,000) Activity in held-to-maturity securities

Purchases (1,255,699) (1,078,191) Maturities, prepayments and calls 1,158,675 146,538

Activity in available-for-sale securitiesPurchases (3,974,434) (5,123,851) Maturities, sales, prepayments and calls 7,032,013 6,643,619

Loan principal (originations) collections, net (2,139,019) 1,683,384 Proceeds from sales of foreclosed assets 93,968 18,803 Purchases of premises and equipment (2,406,903) (74,321) Proceeds from sales of premises and equipment 2,270 -

Net cash provided by (used in) investing activities 478,871 (1,004,019)

Cash flows from financing activitiesAcceptances and withdrawals of deposits, net (2,144,154) (388,335) Common stock repurchased (95,018) - Cash dividends paid (403,281) (358,490)

Net cash used in financing activities (2,642,453) (746,825)

Net decrease in cash and cash equivalents (1,132,543) (828,248)

Cash and cash equivalents, beginning of year 7,052,778 7,881,026

Cash and cash equivalents, end of year 5,920,235$ 7,052,778$


other financial institutions

Consolidated Statements of Cash Flows


10


1.

Consolidation and Nature of Business

Concentration Risks

Use of Estimates

Summary of Significant Accounting Policies

Notes to Consolidated Financial Statements

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the accounts of Mayville FinancialCorporation, a registered bank holding company (the “Corporation”), and its wholly owned subsidiary,Mayville State Bank (the “Bank”), and the Bank’s subsidiary Mayville Financial Services. All significantintercompany accounts and transactions have been eliminated in consolidation.

The Corporation is independently owned and operates a community bank engaged in the business of retail andcommercial banking services through its three branches located in Tuscola County in Michigan. Activecompetition, principally from other commercial banks, savings banks and credit unions, exists in all theBank’s primary markets. The Bank’s results of operations can be significantly affected by changes in interestrates or changes in the automotive and agricultural industries which comprise a significant portion of thelocal economic environment.

The Bank’s primary deposit products are interest and noninterest-bearing checking accounts, savingsaccounts, and time deposits, and its primary lending products are real estate mortgages, commercial, andconsumer loans. The Bank does not have significant concentrations with respect to any one industry,customer, or depositor.

The Bank is a state chartered bank and a member of the Federal Deposit Insurance Corporation (“FDIC”) BankInsurance Fund. The Bank is subject to the regulations and supervision of the FDIC and state regulators andundergoes periodic examinations by these regulatory authorities. The Corporation is further subject toregulations and supervision of the Federal Reserve Board governing bank holding companies.

The preparation of consolidated financial statements in conformity with accounting principles generallyaccepted in the United States of America (“GAAP”) requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet andthe reported amounts of income and expenses during the year. Actual results could differ from thoseestimates. Significant estimates include but are not limited to the determination of the allowance for loanlosses, the associated valuation of impaired loans, and the valuation of other assets held for sale.

Accounting policies used in preparation of the accompanying consolidated financial statements are inconformity with accounting principles generally accepted in the United States of America. The principleswhich materially affect the determination of the consolidated financial position and results of operations ofthe Corporation and its subsidiary are summarized below.

11



Cash and Cash Equivalents

Certificates of Deposit Held at Other Financial Institutions

Fair Value Measurements

Level 1:

Level 2:

Level 3:

Investment Securities

A description of each category in the fair value hierarchy is as follows:

Certificates of deposit held at other financial institutions mature within five years and are carried at cost.

Fair value refers to the price that would be received to sell an asset or paid to transfer a liability (an exitprice) in an orderly transaction between market participants in the market in which the reporting entitytransacts such sales or transfers based on the assumptions market participants would use when pricing anasset or liability. Assumptions are developed based on prioritizing information within a fair valuehierarchy that gives the highest priority to quoted prices in active markets (Level 1) and the lowestpriority to unobservable data, such as the reporting entity's own data (Level 3).

For the purposes of the consolidated statements of cash flows, cash and cash equivalents include cash andbalances due from banks and federal funds sold. Generally, federal funds are sold for a one-day period.The Bank maintains deposit accounts in various financial institutions which generally exceed the FDICinsured limits or are not insured. Management does not believe the Corporation is exposed to anysignificant interest, credit or other financial risk as a result of these deposits.

For a further discussion of Fair Value Measurements, refer to Note 2 to the consolidated financialstatements.

Debt securities that management has the ability and positive intent to hold to maturity are classified asheld-to-maturity and are recorded at amortized cost. Debt securities not classified as held-to-maturityare classified as available-for-sale and are recorded at fair value, with unrealized gains and losses, net ofthe effect of deferred income taxes, recorded in other comprehensive income. Purchase premiums anddiscounts are recognized in interest income using the interest method over the terms of the investmentsecurities. Realized gains or losses on the sale of available-for-sale debt securities are recorded ininvestment income on the trade date and are determined using the specific identification method.

Valuation is based upon quoted prices for identical instruments traded in activemarkets.

Valuation is based upon quoted prices for similar instruments in active markets, quotedprices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in themarket.

Valuation is generated from model-based techniques that use at least one significantassumption not observable in the market. These unobservable assumptions reflect theestimates of assumptions that market participants would use in pricing the asset orliability.

12



Federal Home Loan Bank Stock

Loans

Investment securities are reviewed at each reporting period for possible other-than-temporaryimpairment (“OTTI”). In determining whether an other-than-temporary impairment exists for debtsecurities, management must assert that: (a) it does not have the intent to sell the security; and (b) it ismore likely than not it will not have to sell the security before recovery of its cost basis. If theseconditions are not met, the Corporation must recognize an other-than-temporary impairment chargethrough earnings for the difference between the debt security’s amortized cost basis and its fair value.For these debt securities, the Corporation separates the total impairment into the credit loss componentand the amount of the loss related to other factors.

The Bank is a member of the Federal Home Loan Bank System and is required to invest in capital stock ofthe Federal Home Loan Bank of Indianapolis (“FHLB”). The amount of the required investment is basedupon the available balance of the Bank’s outstanding home mortgage loans or advances from the FHLBand is carried at cost plus the value assigned to stock dividends.

Loans that management has the positive intent and ability to hold for the foreseeable future or untilmaturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted forcharge-offs, and the allowance for loan losses. Interest income is accrued on the unpaid principalbalance. Management estimates that direct costs incurred in originating loans approximate the originationfees generated on these loans. Therefore, net deferred loan origination fees on loans classified as held-to-maturity are not included on the accompanying consolidated balance sheets.

In order to determine the amount of the credit loss for a debt security, the Corporation calculates therecovery value by performing a discounted cash flow analysis based on the current cash flows and futurecash flows management expects to recover. The amount of the total other-than-temporary impairmentrelated to the credit risk is recognized in earnings and is included in noninterest income. The amount ofthe total other-than-temporary impairment related to other risk factors is recognized as a component ofother comprehensive income. For debt securities that have recognized an other-than-temporaryimpairment through earnings, if through subsequent evaluation there is a significant increase in the cashflow expected, the difference between the amortized cost basis and the cash flows expected to becollected is accreted as interest income.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 dayspast due unless the credit is well-secured and in process of collection. Consumer loans are typicallycharged off no later than 180 days past due. Past due status is based on contractual terms of the loan. Inall cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal andinterest is considered doubtful.

All interest accrued in the current year but not collected for loans that are placed on non-accrual or arecharged off, is reversed against interest income while interest accrued but not collected in prior years isreversed against the allowance for loan losses. 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 statuswhen all principal and interest amounts contractually due are brought current and future payments arereasonably assured. For impaired loans not classified as nonaccrual, interest income is recognized daily asit is earned according to the terms of the loan agreement.

13



Allowance for Loan Losses

Nonperforming loans of the loan portfolio are comprised of those loans accounted for on a nonaccrualbasis, accruing loans contractually past due 90 days or more as to interest or principal payments, andloans modified under troubled debt restructurings (nonperforming originated loans).

The allowance for loan losses (“allowance”) is an estimate of loan losses inherent in the Bank’s loanportfolio. The allowance is established through a provision for loan losses which is charged to expense.Additions to the allowance are expected to maintain the appropriateness of the total allowance after loanlosses. Loan losses are charged off against the allowance when the Bank determines the loan balance tobe uncollectible. Cash received on previously charged-off amounts is recorded as a recovery to theallowance.

The allowance consists of general reserves, specific reserves related to impaired loans, and anunallocated component. For loans that are classified as impaired, a specific reserve is established whenthe discounted cash flows or collateral value of the impaired loan is lower than the carrying value of thatloan. The general component covers nonimpaired loans and is based on historical losses adjusted forcurrent factors. The historical loss experience is determined by portfolio segment and is based on theactual loss history experienced by the Bank over the most recent 5 years. This actual loss experience isadjusted for economic factors based on the risks present for each portfolio segment. These economicfactors include consideration of the following: levels of and trends in delinquencies and impaired loans;levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of anychanges in risk selection and underwriting standards; other changes in lending policies, procedures, andpractices; experience, ability, and depth of lending management and other relevant staff; national andlocal economic trends and conditions; industry conditions; and effects of changes in creditconcentrations. These factors are inherently subjective and are driven by the repayment risk associatedwith each portfolio segment. The unallocated component of the allowance reflects the margin ofimprecision inherent in the underlying assumptions used in the methodologies for estimating specific andgeneral losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Bankwill be unable to collect the scheduled payments of principal or interest when due according to thecontractual terms of the loan agreement. Factors considered by management in determining impairmentinclude payment status, collateral value, and the probability of collecting scheduled principal and interestpayments when due. Loans that experience insignificant payment delays and payment shortfalls generallyare not classified as impaired. Management determines the significance of payment delays and paymentshortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loanand the borrower, including the length of the delay, the reasons for the delay, the borrower’s priorpayment 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 loans by either the present value ofexpected future cash flows discounted at the loan’s effective interest rate, or the fair value of thecollateral, less costs to sell, if the loan is collateral dependent. A loan is collateral dependent if itsrepayment is expected to be provided solely by the underlying collateral.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.Accordingly, the Bank does not separately identify individual consumer and residential loans forimpairment disclosures, unless such loans are the subject of a restructuring agreement or in nonaccrualstatus.

14



Pass:

Special Mention (or Watch):

Substandard:

Doubtful:

Loss:

The Bank evaluates the credit quality of loans in the consumer loan portfolio, including residential realestate loans, based primarily on the aging status of the loan and payment activity. Accordingly,nonaccrual loans and loans past due as to principal or interest 90 days or more are considered in anonperforming status for purposes of credit quality evaluation.

Under certain circumstances, the Bank will provide borrowers relief through loan restructurings. A loanrestructuring constitutes a troubled debt restructuring (“TDR”) if for economic or legal reasons related tothe borrower's financial difficulties the Bank grants a concession to the borrower that it would nototherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowersare not able to perform according to the original contractual terms. Loans that are reported as TDRs areconsidered impaired and measured for impairment as described above.

The Bank assigns a risk rating to all loans except pools of homogeneous loans and periodically performsdetailed internal reviews of all such loans over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by the Bank’sregulators. During the internal reviews, management monitors and analyzes the financial condition ofborrowers and guarantors, trends in the industries in which the borrowers operate and the fair values ofcollateral securing the loans. These credit quality indicators are used to assign a risk rating to eachindividual loan. The risk ratings can be grouped into five major categories, defined as follows:

A pass loan is a credit with no existing or known potential weaknesses deserving ofmanagement's close attention.

Special mention loans (or watch) have a potential weakness that deserves management'sclose attention. If left uncorrected, this potential weakness may result in deteriorationof the repayment prospects for the loan or of the Bank’s credit position at some futuredate. Special mention (watch) loans are not adversely classified and do not expose theBank to sufficient risk to warrant adverse classification.

Loans classified as substandard are not adequately protected by the current net worthand paying capacity of the borrower or of the collateral pledged, if any. Loans classifiedas substandard have a well-defined weakness or weaknesses that jeopardize therepayment of the debt. Well defined weaknesses include a borrower's lack ofmarketability, inadequate cash flow or collateral support, failure to completeconstruction on time, or the failure to fulfill economic expectations. They arecharacterized by the distinct possibility that the Bank will sustain some loss if thedeficiencies are not corrected.

Loans classified as doubtful have all the weaknesses inherent in those classified assubstandard, with the added characteristic that the weaknesses make collection orrepayment in full, on the basis of currently existing facts, conditions, and values, highlyquestionable and improbable.

Loans classified as loss are considered uncollectible and are charged off immediately.

15



Commercial and Industrial:

Commercial Real Estate:

Real Estate Construction:

Residential Real Estate:

Consumer and Other:

Commercial and industrial loans generally possess a lower inherent risk of loss than realestate portfolio segments because these loans are generally underwritten to existingcash flows of operating businesses. Debt coverage is provided by business cash flows andeconomic trends influenced by unemployment rates and other key economic indicatorsare closely correlated to the credit quality of these loans.

Commercial real estate loans generally possess a higher inherent risk of loss than otherreal estate portfolio segments. Adverse economic developments or an overbuilt marketimpact commercial real estate projects and may result in troubled loans. Trends invacancy rates of commercial properties impact the credit quality of these loans. Highvacancy rates reduce operating revenues and the ability for the properties to producesufficient cash flow to service debt obligations.

The majority of the Bank’s consumer and residential loan portfolio is comprised of secured loans that areevaluated at origination on a centralized basis against standardized underwriting criteria. The ongoingmeasurement of credit quality of the consumer and residential loan portfolios is largely done on anexception basis. If payments are made on schedule, as agreed, then no further monitoring is performed.However, if delinquency occurs, the delinquent loans are turned over to the Bank’s collection departmentfor resolution, which generally occurs fairly rapidly and often through repossession and foreclosure. Creditquality for the entire consumer and residential loan portfolio is measured by the periodic delinquencyrate, nonaccrual amounts and actual losses incurred.

The Bank maintains a separate general valuation allowance for each portfolio segment. These portfoliosegments include commercial and industrial, commercial real estate, real estate construction, residentialreal estate, and consumer and other with risk characteristics described as follows:

Real estate construction loans generally possess a higher inherent risk of loss than otherreal estate portfolio segments. A major risk arises from the necessity to completeprojects within a specified cost and time line. Trends in the construction industrysignificantly impact the credit quality of these loans, as demand drives constructionactivity. In addition, trends in real estate values significantly impact the credit qualityof these loans, as property values determine the economic viability of constructionprojects.

The degree of risk in residential mortgage lending depends primarily on the loan amountin relation to collateral value, the interest rate and the borrower's ability to repay in anorderly fashion. Economic trends determined by unemployment rates and other keyeconomic indicators are closely correlated to the credit quality of these loans. Weakeconomic trends indicate that the borrowers' capacity to repay their obligations may bedeteriorating.

The consumer and other loan portfolio is comprised of a large number of small loans,including automobile, personal loans, credit cards, etc. Most loans are made directly forconsumer purchases. Economic trends determined by unemployment rates and other keyeconomic indicators are closely correlated to the credit quality of these loans. Weakeconomic trends indicate the borrowers' capacity to repay their obligations may bedeteriorating.

16



Foreclosed Assets

Off-Balance Sheet Credit Related Financial Instruments

Premises and Equipment

Asset Held for Sale

Asset held for sale is stated at the lower of net book value or fair value less costs to sell and is included inother assets on the accompanying statements of financial condition.

Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation whichis computed principally by the straight-line method based upon the estimated useful lives of the relatedassets, which range from 3 to 40 years. Major improvements are capitalized and appropriately amortizedbased upon the useful lives of the related assets or the expected terms of the leases, if shorter, using thestraight-line method. Maintenance, repairs and minor alterations are charged to current operations asexpenditures occur. Management annually reviews these assets to determine whether carrying valueshave been impaired.

Although management believes the allowance to be appropriate, ultimate losses may vary from itsestimates. At least quarterly, the Board of Directors reviews the appropriateness of the allowance,including consideration of the relevant risks in the portfolio, current economic conditions and otherfactors. If the Board of Directors and management determine that changes are warranted based on thosereviews, the allowance is adjusted. In addition, the Bank’s primary regulators review the appropriatenessof the allowance. The regulatory agencies may require changes to the allowance based on their judgmentabout information available at the time of their examination.

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fairvalue, less costs to sell, on the date of transfer, establishing a new cost basis. Physical possession ofresidential real estate property collateralizing a consumer mortgage loan occurs when legal title isobtained upon completion of foreclosure or when the borrower conveys all interest in the property tosatisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.Subsequent to foreclosure, valuations are periodically performed by management and the assets arecarried at the lower of the carrying amount or fair value less costs to sell. Revenue and expenses fromoperations and changes in the valuation allowance are included in other noninterest expenses on theconsolidated statements of income. Other real estate owned amounted to $76,300 at December 31, 2017,and is included in other assets on the accompanying consolidated balance sheets. There was no other realestate owned at December 31, 2018.

In the ordinary course of business, the Bank has entered into commitments to extend credit, includingcommitments under credit arrangements. Such financial instruments are considered to be guarantees;however, as the amount of the liability related to such guarantees on the commitment date is consideredinsignificant, the commitments are generally recorded only when they are funded.

17



Bank Owned Life Insurance

Income Taxes

Advertising Costs

Net Income Per Share

Subsequent Events

New Accounting Pronouncement

In preparing these consolidated financial statements, the Corporation has evaluated, for potential recognitionor disclosure, significant events or transactions that occurred during the period subsequent to December 31,2018, the most recent consolidated balance sheet presented herein, through April 19, 2019, the date theseconsolidated financial statements were available to be issued. No significant such events or transactions wereidentified.

See Note 8 for a discussion of the impact of federal tax legislation (Tax Cuts and Jobs Act), which wasenacted on December 22, 2017.

Net income per basic share of common stock represents income available to common stockholders divided bythe weighted-average number of common shares outstanding during the year, which was 476,490 and 477,986and in 2018 and 2017, respectively.

The Corporation holds life insurance policies purchased on the lives of key members of management. Inthe event of death of one of these individuals, the Corporation, as beneficiary of the policies, wouldreceive a specified cash payment equal to the face value of the policy. Such policies are recorded at theircash surrender value, or the amount that can be currently realized as of the balance sheet date. Thechange in cash surrender value is an adjustment of premiums paid in determining the net expense orincome recognized under the contracts for the year and is included in other noninterest income.

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.Under this method, the net deferred income tax asset or liability is determined based on the federalincome tax effects of the temporary differences between the book and tax bases of the various balancesheet assets and liabilities and gives current recognition to changes in federal income tax rates and laws.Valuation allowances are established, where necessary, to reduce deferred tax assets to the amountexpected more likely than not to be realized. Income tax expense is the tax payable or refundable for theyear plus or minus the change during the year in deferred tax assets and liabilities.

The cost of advertising and promotions are expensed as incurred. The Corporation incurred $35,486 and$29,832 in advertising costs in 2018 and 2017, respectively.

ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses onFinancial Instruments , was issued in 2016 with the intention of improving financial reporting by requiringtimelier recording of credit losses on loans and certain other financial instruments held by financialinstitutions.

18



2.

Debt Securities

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and todetermine fair value disclosures. Marketable securities available-for-sale are recorded at fair value on arecurring basis. Additionally, from time to time, the Corporation may be required to record at fair value otherassets on a nonrecurring basis such as investment securities held-to-maturity, impaired loans, foreclosedassets, and certain other assets. These nonrecurring fair value adjustments typically involve the applicationof lower of cost or market accounting or write downs of individual assets.

FAIR VALUE MEASUREMENTS

The ASU requires that the measurement of all expected credit losses for financial assets that are measured atamortized cost at the reporting date be based on historical experience, current conditions, and reasonableand supportable forecasts. Financial institutions will also use forward-looking information to develop theircredit loss estimates.

The ASU requires enhanced disclosures to assist investors and other financial statement users betterunderstand significant estimates and judgments used in estimating credit losses, as well as the credit qualityand underwriting standards of an institution’s portfolio.

In addition, the ASU amends existing guidance on accounting for credit losses on available-for-sale debtsecurities, purchased financial assets with credit deterioration, and also applies to certain off-balance sheetcredit exposures.

ASU No. 2018-19, Codification Improvements to Topic 326, Financial Statements - Credit losses was issued in2018, which makes the standard effective for fiscal years beginning after December 15, 2021 for non-publicbusiness entities. Management is currently evaluating the provisions of ASU 2016-13 to determine thepotential impact on the Corporation's consolidated financial statements.

Following is a description of the valuation methodologies and key inputs used to measure financial assetsrecorded at fair value. The description includes an indication of the level of the fair value hierarchy in whichthe assets are classified.

Debt securities classified as available-for-sale are recorded at fair value on a recurring basis. Fair valuemeasurement is based upon quoted prices, if available. If quoted prices are not available, fair values aremeasured using independent pricing models or other model-based valuation techniques such as thepresent value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions andother factors such as credit loss and liquidity assumptions. Level 1 securities include those traded on anactive exchange, such as the New York Stock Exchange, that are traded by dealers or brokers in activeover-the-counter markets and money market funds. Level 1 securities include U.S. Treasury notes. Level 2fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fairvalues are measured using independent pricing models or other model based valuation techniques such asthe present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptionsand other factors such as credit loss and liquidity assumptions. Level 2 securities include states andmunicipal securities and mortgage-backed securities, and securities issued by government-sponsoredentities and municipal bonds in active markets. Securities classified as Level 3 include securities in lessliquid markets and may include certain municipal securities. The Corporation does not have any Level 3securities at December 31, 2018 or 2017.

19



Loans

Level 1 Level 2 Level 3 Total

-$ 1,958,462$ -$ 1,958,462$ Government-sponsored enterprises - 11,159,795 - 11,159,795 States and municipal - 14,740,937 - 14,740,937 Mortgage-backed - 1,735,656 - 1,735,656

Total assets at fair value -$ 29,594,850$ -$ 29,594,850$

2018

Investment securities available-for-sale:Corporate bonds

Assets at Fair Value

The preceding methods described may produce a fair value calculation that may not be indicative of netrealizable value or reflective of future fair values. Furthermore, although the Corporation believes itsvaluation methods are appropriate and consistent with other market participants, the use of differentmethodologies or assumptions to determine the fair value of certain assets could result in a different fairvalue measurement at the reporting date.

The following tables set forth by level, within the fair value hierarchy, the recorded amount of assetsmeasured at fair value on a recurring basis as of December 31:

Assets Recorded at Fair Value on a Recurring Basis

The carrying amounts for assets held for sale are reported in the accompanying consolidated balancesheet under "other assets". Upon transfer from premises and equipment, assets held for sale are adjustedto and subsequently carried at the lower of carrying value or fair value less costs to sell. Fair value isbased upon independent market prices, appraised values of the collateral or management's estimation ofthe value of the collateral. When the fair value of the collateral is based on an observable market price orcurrent appraised value, the Bank classifies the asset held for sale as nonrecurring Level 2. When acurrent appraised value is not available or management determines the fair value of the collateral isfurther impaired below the appraised value and there is no observable market price, the Bank classifiesthe asset held for sale as a nonrecurring Level 3.

Asset Held for Sale

The Corporation does not record loans at fair value on a recurring basis. However, from time to time, aloan is considered impaired and an allowance for loan losses is established. Loans for which it is probablethat payment of interest and principal will not be made in accordance with the contractual terms of theloan agreement are considered impaired. Once a loan is identified as individually impaired, managementmeasures impairment in accordance with accounting standards for subsequent measurement ofreceivables. The fair value of impaired loans is estimated using one of several methods, includingcollateral value, fair value of similar debt, enterprise value, liquidation value, and discounted cash flows.Those impaired loans not requiring an allowance represent loans for which the fair value of the expectedrepayments or collateral exceed the recorded investments in such loans. At December 31, 2018 and 2017,substantially all of the total impaired loans were evaluated based on the fair value of the collateral.Impaired loans where an allowance is established based on the fair value of collateral requireclassification in the fair value hierarchy. When the fair value of the collateral is based on an observablemarket price or a current appraised value, the Corporation classifies the impaired loan as nonrecurringLevel 2. When a current appraised value is not available or management determines the fair value of thecollateral is further impaired below the appraised value and there is no observable market price, theCorporation classifies the impaired loan as nonrecurring Level 3.

20




749,180$ -$ -$ 749,180$ Government-sponsored enterprises - 12,925,200 - 12,925,200 States and municipal - 17,077,736 - 17,077,736 Mortgage-backed - 2,247,707 - 2,247,707

Total assets at fair value 749,180$ 32,250,643$ -$ 32,999,823$

Assets Recorded at Fair Value on a Nonrecurring Basis


Impaired loans (1) -$ -$ 319,176$ 319,176$ Asset held for sale (2) - - 99,900 99,900


Impaired loans (1) -$ -$ 669,123$ 669,123$

(1)

(2)

Fair Valuation UnobservableValue Technique Input Range

Impaired Loans 319,176$ Discounted Discount Applied 5% - 40%

Appraisal Value to CollateralAppraisal

Asset held for sale 99,900$ Market Valuation Discount Applied 5% - 10%to Collateral

Fair Valuation UnobservableValue Technique Input Range

Impaired Loans 669,123$ Discounted Discount Applied 10% - 30%

Appraisal Value to CollateralAppraisal

Assets at Fair Value

2017

Investment securities available-for-sale:

Certain impaired loans were remeasured and reported at fair value through a specific valuation allowancebased upon the estimated fair value of the underlying collateral. Impaired loans of $319,176 and $669,123at December 31, 2018 and 2017, respectively, were reduced by a specific valuation allowance totaling$61,000 and $111,000 as of December 31, 2018 and 2017, respectively.

Quantitative information about Level 3 fair value measurements is as follows as of December 31:

Assets at Carrying Value

The asset held for sale had a write-down during 2018 resulting in a charge to earnings of $102,221. Therewere no assets held for sale or non-recurring losses on assets held for sale during 2017.

Assets at Carrying Value

2018

2017

The following table sets forth by level, within the fair value hierarchy, the recorded amount of assetsmeasured at fair value on a nonrecurring basis as of December 31:

U.S. Treasury notes

Level 3 Instruments

Level 3 Instruments

Instrument

2018

2017

Instrument

21



3.

Gross GrossAmortized Unrealized Unrealized Fair

Cost Gains Losses Value

Held-to-Maturity1,688,950$ 2,498$ 4,087$ 1,687,361$

1,979,151 - 20,689 1,958,462 Government-sponsored enterprises 11,284,318 - 124,523 11,159,795 States and municipal 14,916,237 - 175,300 14,740,937 Mortgage-backed 1,791,873 - 56,217 1,735,656

29,971,579 - 376,729 29,594,850

Total 31,660,529$ 2,498$ 380,816$ 31,282,211$

Gross GrossAmortized Unrealized Unrealized Fair

Cost Gains Losses Value

Held-to-Maturity1,591,926$ 112$ 820$ 1,591,218$

752,453 - 3,273 749,180 Government-sponsored enterprises 12,991,389 9,390 75,579 12,925,200 States and municipal 17,252,908 2,941 178,113 17,077,736 Mortgage-backed 2,268,973 183 21,449 2,247,707

33,265,723 12,514 278,414 32,999,823

Total 34,857,649$ 12,626$ 279,234$ 34,591,041$

Corporate bonds

The amortized cost and fair value of available-for-sale debt securities, including gross unrealized gains andlosses, are summarized as follows as of December 31:

INVESTMENT SECURITIES

2018

States and municipal

Available-for-Sale

Total available-for-sale

2017


Available-for-SaleU.S. Treasury notes

Total available-for-sale

22



Due After Due After Securities

Due in One Year Five Years with Variable

One Year Through Through Monthly

Or Less Five Years Ten Years Payments Total

States and municipal 1,250,560$ 438,390$ -$ -$ 1,688,950$

Available-for-sale

Corporate Bonds - 1,979,151 - - 1,979,151

Government-sponsored enterprises 4,753,045 6,531,273 - - 11,284,318

States and municipal 2,308,093 12,608,144 - - 14,916,237

Mortgage-backed - - - 1,791,873 1,791,873

Total available-for-sale 7,061,138 21,118,568 - 1,791,873 29,971,579

Total amortized cost 8,311,698$ 21,556,958$ -$ 1,791,873$ 31,660,529$

Fair value 8,289,005$ 21,257,550$ -$ 1,735,656$ 31,282,211$

Maturing

Because of their variable monthly payments, mortgage-backed securities are not reported by a specificmaturity group.

During 2018, proceeds from sales of available-for-sale securities amounted to $998,490. Gross realized lossesamounted to $1,166 during 2018. This resulted in a reclassification of $1,166 ($921 net of tax) fromaccumulated other comprehensive loss to loss on sale of securities, a component of other noninterest expenseon the 2018 consolidated statement of income. There were no sales of available-for-sale securities during2017.

Expected maturities may differ from contractual maturities because issuers may have the right to call orprepay obligations.

There were no securities pledged as of December 31, 2018 or 2017.

The amortized cost and fair value of held-to-maturity securities and available-for-sale securities grouped bycontractual maturity at December 31, 2018, are summarized as follows:

Held-to-Maturity

23



Gross Gross Total Gross

Fair Unrealized Fair Unrealized Fair Unrealized

Value Loss Value Loss Value Losses

Securities held-to-maturityStates and municipal 1,275,832$ 1,519$ 258,786$ 2,568$ 1,534,618$ 4,087$

Securities available-for-

sale

1,958,462$ 20,689$ -$ -$ 1,958,462$ 20,689$

Government-sponsored

2,496,176 3,472 8,663,619 121,051 11,159,795 124,523

2,039,043 7,387 12,701,894 167,913 14,740,937 175,300

- - 1,735,656 56,217 1,735,656 56,217

Total securitiesavailable-for-sale 6,493,681$ 31,548$ 23,101,169$ 345,181$ 29,594,850$ 376,729$

Gross Gross Total Gross

Fair Unrealized Fair Unrealized Fair Unrealized

Value Loss Value Loss Value Losses

Securities held-to-maturityStates and municipal 336,942$ 820$ -$ -$ 336,942$ 820$

Securities available-for-

sale

-$ -$ 749,180$ 3,273$ 749,180$ 3,273$

Government-sponsored

4,267,104 19,789 4,893,599 55,790 9,160,703 75,579

13,466,069 124,429 2,185,132 53,684 15,651,201 178,113

1,870,808 11,935 244,013 9,514 2,114,821 21,449

Total securitiesavailable-for-sale 19,603,981$ 156,153$ 8,071,924$ 122,261$ 27,675,905$ 278,414$

▪

▪

Information pertaining to securities with unrealized losses aggregated by investment category and the lengthof time that individual securities have been in a continuous loss position at December 31 is as follows:

As of December 31, 2018 and 2017, management conducted an analysis to determine whether securitiescurrently in an unrealized loss position should be considered other-than-temporarily-impaired (“OTTI”). Suchanalyses considered, among other factors, the following criteria:

Has the value of the investment declined more than what is deemed reasonable based on a risk andmaturity adjusted discount rate?

Is the investment credit rating below investment grade?

Over 12 Months

2017

U.S. Treasury notes

enterprisesStates and municipal

As of December 31, 2018, the Corporation’s investment security portfolio consisted of 141 securities, 101 ofwhich were in an unrealized loss position. The unrealized losses are related to the Corporation’s Corporatebonds, government-sponsored enterprises, states and municipal and mortgage-backed securities.

enterprises

Mortgage-backed


Mortgage-backed

Less than 12 Months

Corporate bonds

Less than 12 Months Over 12 Months

2018

24



▪

▪

▪

4.

Based on the Corporation’s analysis using the above criteria, the fact that management has asserted that itdoes not have the intent to sell these securities in an unrealized loss position, and that it is more likely thannot the Corporation will not have to sell the securities before recovery of their cost basis, management doesnot believe that the values of any securities are other-than-temporarily impaired as of December 31, 2018 or2017.

LOANS AND ALLOWANCE FOR LOAN LOSSES

The Bank grants commercial, consumer and residential mortgage loans to customers situated primarily in theTuscola County Area. The ability of the Bank’s debtors to honor their contracts is dependent upon the realestate and general economic conditions in this area. Substantially all of the consumer and residential loans arecollateralized by various items of property, while commercial loans are collateralized primarily by businessassets and personal guarantees; a portion of loans are unsecured.

Is it probable that the issuer will be unable to pay the amount when due?

Is it more likely than not that the Corporation will not have to sell the security before recovery of itscost basis?

Has the duration of the investment been extended for an unreasonable period of time?

25


Commercial Real

and Commercial Estate Residential Consumer

Industrial Real Estate Construction Real Estate and Other Unallocated Total

3,794$ 12,660$ 773$ 304,727$ 28,229$ 165,822$ 516,005$

3,207 27,188 1,761 (103,238) 9,593 61,489 -

- - - - (21,391) - (21,391)

- - - 70,139 7,197 - 77,336

7,001$ 39,848$ 2,534$ 271,628$ 23,628$ 227,311$ 571,950$

-$ -$ -$ 61,000$ -$ -$ 61,000$

7,001 39,848 2,534 210,628 23,628 227,311 510,950

7,001$ 39,848$ 2,534$ 271,628$ 23,628$ 227,311$ 571,950$

-$ 153,088$ -$ 1,076,519$ -$ 1,229,607$

1,061,067 4,543,691 1,013,424 26,571,428 2,544,527 35,734,137

1,061,067 4,696,779 1,013,424 27,647,947 2,544,527 36,963,744

1,163 25,559 - 85,275 8,267 120,264

1,062,230$ 4,722,338$ 1,013,424$ 27,733,222$ 2,552,794$ 37,084,008$

Accrued interest

receivable


Allowance for loan losses:

Balance at beginning

of year

Provision for loan losses

Loans charged-off

2018

The allowance for loan losses and recorded investment in loans are as follows for the years endedDecember 31:

Recoveries

Balance at end of year

Allowance for loan losses

attributable to:

Individually evaluated

for impairment

Collectively evaluated

for impairment

Total allowance for loan

losses

Loans:


for impairment


for impairment

Total loans

Total recorded

investment in loans

26



Commercial Real

and Commercial Estate Residential Consumer

Industrial Real Estate Construction Real Estate and Other Unallocated Total

2,862$ 16,358$ 183$ 441,820$ 21,911$ 83,536$ 566,670$

932 (3,698) 590 (94,465) 14,355 82,286 -

- - - (54,850) (8,710) - (63,560)

- - - 12,222 673 - 12,895

3,794$ 12,660$ 773$ 304,727$ 28,229$ 165,822$ 516,005$

-$ -$ -$ 111,000$ -$ -$ 111,000$

3,794 12,660 773 193,727 28,229 165,822 405,005

3,794$ 12,660$ 773$ 304,727$ 28,229$ 165,822$ 516,005$

-$ 159,812$ -$ 1,135,237$ -$ 1,295,049$

1,516,375 3,465,969 772,721 25,648,887 2,069,779 33,473,731

1,516,375 3,625,781 772,721 26,784,124 2,069,779 34,768,780

15,354 11,355 - 104,052 5,487 136,248

1,531,729$ 3,637,136$ 772,721$ 26,888,176$ 2,075,266$ 34,905,028$ investment in loans

Total allowance for loan

Loans:

Total loans

Accrued interest

receivable

Total recorded

for impairment


for impairment

2017

Allowance for loan losses:

Allowance for loan losses

Balance at beginning

of year

Provision for loan losses

Loans charged-off

losses


Balance at end of year

attributable to:


for impairment


for impairment

Recoveries

27


Special Mention

Pass or Watch Substandard Doubtful Total

788,935$ 272,132$ -$ -$ 1,061,067$

4,406,332 137,359 - 153,088 4,696,779

5,195,267$ 409,491$ -$ 153,088$ 5,757,846$

Real Estate Residential Consumer

Construction Real Estate and Other Total

1,013,424$ 27,605,213$ 2,537,926$ 31,156,563$

- 42,734 6,601 49,335

1,013,424$ 27,647,947$ 2,544,527$ 31,205,898$

Special Mention

Pass or Watch Substandard Doubtful Total

1,215,444$ 300,931$ -$ -$ 1,516,375$

3,421,291 44,678 159,812 - 3,625,781

4,636,735$ 345,609$ 159,812$ -$ 5,142,156$

The following table shows the loans allocated by management’s internal risk ratings as of December 31:

The following table shows the homogeneous loans allocated by payment activity as of December 31:

The following table shows the loans allocated by management’s internal risk ratings as of December 31:

2018

Payment activity

Performing

Nonperforming

Total

2017

Total

Commercial Credit Risk Profile by Risk Rating

2018

Consumer Credit Risk Profile by Payment Activity

Commercial Credit Risk Profile by Risk Rating

Risk Rating

Commercial and

industrial

Commercial

Total

real estate


Risk Rating

Commercial and

industrial

Commercial

real estate

28



Real Estate Residential Consumer

Construction Real Estate and Other Total

772,721$ 26,705,622$ 2,069,779$ 29,548,122$

- 78,502 - 78,502

772,721$ 26,784,124$ 2,069,779$ 29,626,624$

More Than

30-89 Days 90 Days Total Total

Current Past Due Past Due Nonaccrual Loans

1,061,067$ -$ -$ -$ 1,061,067$

4,696,779 - - - 4,696,779

1,013,424 - - - 1,013,424

26,740,016 865,197 13,547 29,187 27,647,947

2,450,544 87,382 6,601 - 2,544,527

35,961,830$ 952,579$ 20,148$ 29,187$ 36,963,744$

More Than

30-89 Days 90 Days Total Total

Current Past Due Past Due Nonaccrual Loans

1,424,059$ 92,316$ -$ -$ 1,516,375$

3,599,575 26,206 - - 3,625,781

772,721 - - - 772,721

25,813,496 892,126 78,502 - 26,784,124

1,989,633 80,146 - - 2,069,779

33,599,484$ 1,090,794$ 78,502$ -$ 34,768,780$

The following table shows the homogeneous loans allocated by payment activity as of December 31:

2017

Payment activity

Performing

Nonperforming

Total

The following table shows an aging analysis of the loan portfolio by time past due as of December 31:

Accruing Interest

Commercial and industrial

Commercial real estate

Real estate construction


Residential real estate

2018

Accruing Interest

2017

Consumer Credit Risk Profile by Payment Activity


Consumer and other

Total

Real estate construction

Consumer and other

Total

Commercial and industrial

29



Unpaid Average Interest

Loan Principal Related Recorded Income

Balance Balance Allowance Investment Recognized

153,088$ 153,088$ -$ 156,450$ 9,438$

757,343 757,343 - 776,420 53,551

319,176 319,176 61,000 325,164 18,494

153,088 153,088 - 156,450 9,438

1,076,519 1,076,519 61,000 1,101,584 72,045

1,229,607$ 1,229,607$ 61,000$ 1,258,034$ 81,483$

Unpaid Average Interest

Loan Principal Related Recorded Income

Balance Balance Allowance Investment Recognized

159,812$ 159,812$ -$ 165,806$ 10,654$

466,114 466,114 - 477,660 32,889

669,123 669,123 111,000 682,002 45,343

159,812 159,812 - 165,806 10,654

1,135,237 1,135,237 111,000 1,159,662 78,232

1,295,049$ 1,295,049$ 111,000$ 1,325,468$ 88,886$

The following table presents information related to impaired loans as of December 31:

Loans with an allowance

recorded

The Bank does not have material commitments to lend additional funds to borrowers with loans whose termshave been modified in troubled debt restructurings or whose loans are on nonaccrual.


Total



Total



Total impaired loans



Loans with an allowance


Loans with no related

allowance recorded


Total impaired loans


2017

recorded

Loans with no related

allowance recorded

2018

30



Pre- Post-Modification ModificationOutstanding Outstanding

Number of Recorded Recorded Loans Investment Investment

1 34,311$ 34,311$

5.

Real estate owned activity was as follows:

2018 2017

Beginning balance 76,300$ 23,100$ Loans transferred to real estate owned - 76,300 Direct write-downs - (8,100) Sales of real estate owned (76,300) (15,000)

End of year -$ 76,300$

2018 2017

Net gain on sales (17,668)$ (3,803)$ Direct write-downs - 8,100 Operating expenses 4,971 2,564

(12,697)$ 6,861$

There were no loans modified in troubled debt restructurings during 2018.

FORECLOSED ASSETS

At December 31, 2017, the balance of real estate owned consisted of foreclosed residential real estateproperties recorded as a result of obtaining physical possession of the property. There were no formalforeclosure proceedings in process at December 31, 2018 or 2017.

Income and expenses related to foreclosed assets are included in other noninterest income and expenseson the consolidated statements of income and consist of the following:


All modifications during 2017 consisted of interest rate reductions.

TDRs that defaulted during 2018 and 2017 were not significant.

Troubled Debt Restructurings

A summary of loans that were modified in troubled debt restructurings during 2017, is as follows:

31



6.

2018 2017

318,428$ 318,428$ 3,637,415 1,186,493 1,288,690 1,137,212

5,244,533 2,642,133 2,183,241 2,117,008

3,061,292$ 525,125$

7.

Amount

2019 16,945,510$ 2020 3,092,350 2021 1,277,989 2022 1,375,315 2023 1,176,460 Thereafter 10,402

Total 23,878,026$

Land and improvementsBuildings and improvements

TotalLess accumulated depreciation

PREMISES AND EQUIPMENT

Furniture and equipment

Net premises and equipment consists of the following amounts at December 31:

Premises and equipment, net

Depreciation expense was $66,233 and $56,923 for 2018 and 2017, respectively.

DEPOSITS

Scheduled maturities of time deposits for each of the five years succeeding December 31, 2018, andthereafter, are summarized as follows:

As of December 31, 2018, the Bank has outstanding commitments of approximately $363,000 related tothe completion of their new branch and operations building. Such amount is expected to be paid in2019.

The Corporation transferred a building with a carrying value of $202,121 from buildings andimprovements to other assets in 2018. Subsequently, the property was listed for sale, at which timemanagement performed a valuation and recorded an impairment charge of $102,221.

Year

32



8.

2018 2017

Currently payable 96,000$ 87,000$ Deferred (benefit) expense (6,000) 98,000

Income taxes 90,000$ 185,000$

2018 2017

163,000$ 259,000$ (55,000) (96,000)

- 89,000 Other - net (18,000) (67,000)

Income taxes 90,000$ 185,000$

FEDERAL INCOME TAXES

The provision for federal income taxes consists of the following components for the years endedDecember 31:

The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017. The Act reduces the U.S.federal corporate tax rate from 35% to 21%, among other provisions. In 2017, the Corporationremeasured certain deferred tax assets and liabilities based on the rates at which they are expected toreverse in the future, which is generally 21%, resulting in an immediate tax charge of approximately$89,000.

A reconciliation between federal income tax expense reported and the amount computed by applyingthe statutory federal income tax rate of 21% for 2018 and 34% for 2017 to income before federal incometaxes is as follows for the years ended December 31:

Income tax provision at statutory rateEffect of tax-exempt interest incomeRemeasurement of deferred taxes due to changes

in federal tax law

33



2018 2017

79,000$ 79,000$ - 4,000

21,000 - - 1,000

2,000 10,000 79,000 56,000

181,000 150,000

3,000 1,000 Accretion 2,000 2,000

4,000 4,000

9,000 7,000

172,000$ 143,000$

9.

Significant components of the Corporation’s deferred income tax assets and liabilities presented in theaccompanying consolidated balance sheets (measured at a 21% tax rate) within other assets arecomprised of the following amounts as of December 31:

Deferred tax assetsAllowance for loan lossesNonaccrued interest

Deferred tax liabilities

FHLB stock dividends

OtherDepreciationUnrealized loss on available-for-sale securities

Total deferred tax assets

Prepaid expenses

In the ordinary course of business, the Bank grants loans to certain directors, executive officers andtheir affiliates. Such loans aggregated approximately $1,101,000 and $383,600 as of December 31, 2018and 2017, respectively.

Deposits

Deposits of Corporation directors, executive officers and their affiliates were approximately $1,995,000and $1,949,000 as of December 31, 2018 and 2017, respectively.

Total deferred tax liabilities

Net deferred tax asset

The Corporation concluded that there are no significant uncertain tax positions requiring recognition inthe Corporation’s consolidated financial statements based on the evaluation performed for the years2015 through 2018, the years which remain subject to examination by major tax jurisdictions as ofDecember 31, 2018. The Corporation does not expect the total amount of unrecognized tax benefits(“UTB”) (e.g. tax deductions, exclusions, or credits claimed or expected to be claimed) to significantlyincrease in the next 12 months. The Corporation does not have any amounts accrued for interest andpenalties related to UTBs at December 31, 2018 or 2017, and it is not aware of any claims for suchamounts by federal or state income tax authorities.

Asset impairment

RELATED PARTY TRANSACTIONS

Loans

34



10.

2018 2017

4,727,000$ 3,480,000$ 310,600 809,700

Commercial and standby letters of credit are conditional commitments issued by the Bank to guaranteethe performance of a customer to a third party. These letters of credit are primarily issued to supportpublic and private borrowing arrangements. Essentially all letters of credit issued have expiration dateswithin one year. The credit risk involved in issuing letters of credit is essentially the same as thatinvolved in extending loan facilities to customers. The Bank generally holds collateral supporting thosecommitments, if deemed necessary. The Bank considers standby letters of credit to be guarantees;however, as the amount of the liability related to such guarantees on the commitment date is notsignificant, a liability related to such guarantees is not recorded at December 31, 2018 or 2017.

Unfunded commitments under commercial lines of credit, revolving home equity lines of credit andoverdraft protection agreements are commitments for possible future extensions of credit to existingcustomers. The commitments for equity lines of credit may expire without being drawn upon. Theselines of credit are uncollateralized and usually do not contain a specified maturity date and may not bedrawn upon to the total extent to which the Bank is committed. A majority of such commitments are atfixed rates of interest; a portion is unsecured.

Commitments to extend credit, if any, are agreements to lend to a customer as long as there is noviolation of any condition established in the contract. Commitments generally have fixed expirationdates or other termination clauses and may require payment of a fee. The commitments may expirewithout being drawn upon. Therefore, the total commitment amounts do not necessarily representfuture cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, isbased on management’s credit evaluation of the customer.

OFF-BALANCE SHEET ACTIVITIES

The Bank is a party to credit related financial instruments with off-balance-sheet risk in the normalcourse of business to meet the financing needs of its customers. These financial instruments includecommitments to extend credit, standby letters of credit and commercial letters of credit. Suchcommitments involve, to varying degrees, elements of credit and interest rate risk in excess of theamount recognized in the consolidated balance sheets. The Bank’s exposure to credit loss is representedby the contractual amount of these commitments. The Bank follows the same credit policy in makingcommitments, including requirements for collateral, as it does for on-balance-sheet instruments; nosignificant losses are anticipated as a result of these commitments.

At December 31, 2018 and 2017, the following financial instruments were outstanding whose contractamounts represent credit risk:

Contract Amount

Unfunded commitments under lines of creditCommercial and standby letters of credit

35


11.

Capital Requirements

Amount Ratio Amount Ratio Amount Ratio

9,938$ 24.21 % 4,053$ 9.875 % 4,105$ 10.00 %

9,430 22.97 3,233 7.875 3,284 8.00

9,430 22.97 2,617 6.375 2,668 6.50

9,430 22.97 3,534 4.000 4,418 5.00

REGULATORY REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the federal bankingagencies. Failure to meet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators, that if undertaken, could have a direct material effect onthe Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Bank must meet specific capital guidelines that involve quantitativemeasures of their assets, liabilities, capital and certain off-balance-sheet items as defined in theregulations and calculated under regulatory accounting practices. The capital amounts and classificationare also subject to qualitative judgments by the regulators about components, risk weightings and otherfactors.

Failure to meet capital requirements can initiate regulatory action. The final rules related to theimplementation of the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (BaselIII rules) became effective for the Bank on January 1, 2015, with full compliance of all of therequirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Thecapital conservation buffer as of December 31, 2018 is 1.875% (1.25% for 2017). The net unrealized gain orloss on available for sale securities is not included in computing regulatory capital.

Quantitative measurements established by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios (set forth in the following table). Management believes, as ofDecember 31, 2018 and 2017, that the Bank met all capital adequacy requirements to which it is subject.

Weighted Assets

Requirements Action Provisions

Average Assets

Tier 1 (Core) Capital to Risk

Tier 1 (Core) Capital to

December 31, 2018

(Dollars in thousands)

Total Capital to Risk Weighted

Weighted Assets

Actual

Common Tier 1 (CET1)


Minimum To Be Well

Minimum Capitalized Under Prompt

Capital Corrective

As of December 31, 2018, the most recent notification from the Federal Deposit Insurance Corporationcategorized the Bank as well capitalized under the regulatory framework for prompt corrective action.There are no conditions or events since the notification that management believes have changed theBank’s category. The Bank’s actual capital amounts and ratios as of December 31, 2018 and 2017 are alsopresented in the table.

36



Amount Ratio Amount Ratio Amount Ratio

9,715$ 27.62 % 3,254$ 9.25 % 3,518$ 10.00 %

9,275 26.36 2,551 7.25 2,814 8.00

9,275 26.36 2,023 5.75 2,287 6.50

9,275 10.31 3,599 4.00 4,499 5.00

12.

13. EMPLOYEE BENEFIT PLANS

CONTINGENCIES

The Bank sponsors a profit sharing plan qualified under Section 401(k) of the Internal Revenue Code.Substantially all full-time employees of the Bank are covered under the Plan. Contributions to the Plan arediscretionary, and amounted to $29,000 and $26,500 in 2018 and 2017, respectively.

Litigation

The Corporation may be party to litigation arising during the normal course of business. No such litigationhas been asserted as of December 31, 2018.

As a result of acquiring real estate from foreclosure proceedings, the Corporation is subject to potentialclaims and possible legal proceedings involving environmental matters. No such claims have been assertedas of December 31, 2018.

Banks are generally required by regulatory agencies to maintain legal cash reserves based on the level ofcertain customer deposits. There was no required reserve balance at December 31, 2018 or 2017.

Restrictions on Cash and Amounts Due from Banks

Tier 1 (Core) Capital to

Average Assets

Total Capital to Risk Weighted

Environmental Issues

Restrictions on Dividends, Loans and Advances

December 31, 2017

(Dollars in thousands)

Weighted Assets

Common Tier 1 (CET1)

Weighted Assets

Tier 1 (Core) Capital to Risk

Corrective

Minimum Capitalized Under Prompt

Capital

Minimum To Be Well

Federal and state banking regulations place certain restrictions on the amount of loans or advances thatcan be extended to the Corporation by the Bank and dividends that can be paid to the Corporation bythe Bank. The total amount of dividends which may be paid at any date is generally limited to theretained earnings of the Bank, and loans or advances are limited to 10% of the Bank’s capital stock andsurplus on a secured basis. In addition, dividends paid by the Bank to the Corporation would beprohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimumcapital requirements.

Action ProvisionsActual Requirements

37



14.

Interest

Income taxes 151,631$

SUPPLEMENTAL CASH FLOWS INFORMATION

48,477$

217,062$

Other Cash Flow Information

Non-Cash Investing Activities

Cash paid for interest and income taxes amounted to the following during the years ended December 31:

Collateral repossessed on real estate loans having carrying values in the amount of $76,300 on the date oftransfer was transferred to foreclosed assets in 2017. There were no loans transferred to foreclosed assetsin 2018.

2,018 2017

235,240$

In 2018, the Corporation transferred a building with a net carrying value of $202,121 from premises andequipment to other assets. Additionally, included in buildings and improvements and accrued expensesand other liabilities as of December 31, 2018, is $400,740 of premises and equipment purchases for whichassets had been received but the related invoices had not yet been paid.

38

Date post:	14-Jul-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Mayville Financial Corporation€¦ · on the average MFC stock price of $24.38 for the year. The...

Documents