UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from _______ to _______
Commission file number
Guaranty Federal Bancshares, Inc.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| | |
| | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number: 1-
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period of complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding as of July 31, 2020 | |||||
| Common Stock, Par Value $0.10 per share | | |||||
| GUARANTY FEDERAL BANCSHARES, INC. |
|
| TABLE OF CONTENTS |
| Page |
| PART I. FINANCIAL INFORMATION |
|
| Item 1. Financial Statements Condensed Consolidated Financial Statements (Unaudited): |
|
| Condensed Consolidated Balance Sheets |
2 |
| Condensed Consolidated Statements of Income |
3 |
| Condensed Consolidated Statements of Comprehensive Income |
4 |
| Condensed Consolidated Statements of Stockholders’ Equity |
5 |
| Condensed Consolidated Statements of Cash Flows |
7 |
| Notes to Condensed Consolidated Financial Statements |
8 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
37 |
| Item 4. Controls and Procedures |
38 |
| PART II. OTHER INFORMATION |
|
| Item 1. Legal Proceedings |
39 |
| Item 1A. Risk factors |
39 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
41 |
| Item 3. Defaults Upon Senior Securities |
41 |
| Item 4. Mine Safety Disclosures |
41 |
| Item 5. Other Information |
41 |
| Item 6. Exhibits |
41 |
| Signatures |
42 |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
| GUARANTY FEDERAL BANCSHARES, INC. |
||
| CONDENSED CONSOLIDATED BALANCE SHEETS |
||
| JUNE 30, 2020 (UNAUDITED) AND DECEMBER 31, 2019 |
| 6/30/2020 | 12/31/2019 | |||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest-bearing demand deposits in other financial institutions | ||||||||
| Cash and cash equivalents | ||||||||
| Interest-bearing time deposits at other financial institutions | ||||||||
| Available-for-sale securities | ||||||||
| Stock in Federal Home Loan Bank, at cost | ||||||||
| Mortgage loans held for sale | ||||||||
| Loans receivable, net of allowance for loan losses of June 30, 2020 - $ and December 31, 2019 - $, respectively | ||||||||
| Accrued interest receivable | ||||||||
| Prepaid expenses and other assets | ||||||||
| Goodwill | ||||||||
| Core deposit intangible | ||||||||
| Foreclosed assets held for sale | ||||||||
| Premises and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Bank owned life insurance | ||||||||
| Deferred and receivable income taxes | ||||||||
| $ | $ | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES | ||||||||
| Deposits | $ | $ | ||||||
| Federal Home Loan Bank advances | ||||||||
| Subordinated debentures | ||||||||
| Note payable to bank | ||||||||
| Advances from borrowers for taxes and insurance | ||||||||
| Accrued expenses and other liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Accrued interest payable | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Capital Stock: | ||||||||
| Common stock, $ par value; authorized shares; issued June 30, 2020 and December 31, 2019 - shares | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings, substantially restricted | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost; June 30, 2020 and December 31, 2019 - and shares, respectively | ( | ) | ( | ) | ||||
| $ | $ | |||||||
See Notes to Condensed Consolidated Financial Statements
| GUARANTY FEDERAL BANCSHARES, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
| THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED) |
| Three months ended |
Six months ended |
|||||||||||||||
| 6/30/2020 |
6/30/2019 | 6/30/2020 | 6/30/2019 | |||||||||||||
| Interest Income |
||||||||||||||||
| Loans |
$ | $ | $ | $ | ||||||||||||
| Investment securities |
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| Other |
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| Interest Expense |
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| Deposits |
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| FHLB advances |
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| Subordinated debentures |
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| Other |
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| Net Interest Income |
||||||||||||||||
| Provision for Loan Losses |
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| Net Interest Income After Provision for Loan Losses |
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| Noninterest Income |
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| Service charges |
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| Net gain on sale of investment securities |
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| Gain on sale of mortgage loans held for sale |
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| Gain on sale of Small Business Administration loans |
||||||||||||||||
| Commercial loan referral income |
||||||||||||||||
| Net gain (loss) on foreclosed assets |
( |
) | ( |
) | ||||||||||||
| Other income |
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| Noninterest Expense |
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| Salaries and employee benefits |
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| Occupancy |
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| FDIC deposit insurance premiums |
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| Data processing |
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| Advertising |
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| Amortization of core deposit intangible |
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| Other expense |
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| Income Before Income Taxes |
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| Provision for Income Taxes |
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| Net Income Available to Common Shareholders |
$ | $ | $ | $ | ||||||||||||
| Basic Income Per Common Share |
$ | $ | $ | $ | ||||||||||||
| Diluted Income Per Common Share |
$ | $ | $ | $ | ||||||||||||
See Notes to Condensed Consolidated Financial Statements
| GUARANTY FEDERAL BANCSHARES, INC. |
| CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED) |
| Three months ended |
Six months ended |
|||||||||||||||
| 6/30/2020 |
6/30/2019 |
6/30/2020 |
6/30/2019 |
|||||||||||||
| NET INCOME |
$ | $ | $ | $ | ||||||||||||
| OTHER ITEMS OF COMPREHENSIVE INCOME: |
||||||||||||||||
| Change in unrealized gain on investment securities available-for-sale, before income taxes |
||||||||||||||||
| Change in unrealized loss on interest rate swaps, before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Less: Reclassification adjustment for realized gains on investment securities included in net income, before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total other items of comprehensive income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
| Income tax expense (benefit) related to other items of comprehensive income |
( |
) | ( |
) | ||||||||||||
| Other comprehensive income (loss) |
( |
) | ( |
) | ( |
) | ||||||||||
| TOTAL COMPREHENSIVE INCOME |
$ | $ | $ | |||||||||||||
See Notes to Condensed Consolidated Financial Statements
| GUARANTY FEDERAL BANCSHARES, INC. |
||||||
| CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY |
||||||
| THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2020 (UNAUDITED) |
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Treasury stock purchased | ( | ) | ( | ) | ||||||||||||||||||||
| Stock award plans | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||
| Dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Stock award plans | ( | ) | ( | ) | ||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements
| GUARANTY FEDERAL BANCSHARES, INC. |
||||||
| CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY |
||||||
| QUARTERLY AND TWELVE MONTHS ENDED DECEMBER 31, 2019 |
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
| Balance, January 1, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||
| Dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Stock award plans | ( | ) | ||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||
| Balance, March 31, 2019 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Treasury stock purchased | ( | ) | ( | ) | ||||||||||||||||||||
| Stock award plans | ( | ) | ||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||
| Balance, June 30, 2019 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Treasury stock purchased | ( | ) | ( | ) | ||||||||||||||||||||
| Stock award plans | ( | ) | ||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||
| Balance, September 30, 2019 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Other comprehensive loss | ||||||||||||||||||||||||
| Dividends on common stock ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Treasury stock purchased | ( | ) | ( | ) | ||||||||||||||||||||
| Stock award plans | ( | ) | ||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements
| GUARANTY FEDERAL BANCSHARES, INC. |
||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
||
| SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED) |
| 6/30/2020 |
6/30/2019 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
| Net income |
$ | $ | ||||||
| Items not requiring (providing) cash: |
||||||||
| Deferred income taxes |
( |
) | ||||||
| Depreciation and amortization |
||||||||
| Provision for loan losses |
||||||||
| Gain on sale of Small Business Administration loans |
( |
) | ||||||
| Gain on sale of mortgage loans held for sale and investment securities |
( |
) | ( |
) | ||||
| Loss (gain) on sale of foreclosed assets |
( |
) | ||||||
| Gain on sale of premises, equipment and other assets |
( |
) | ||||||
| Amortization of deferred income, premiums and discounts, net |
||||||||
| Amortization of intangible assets |
||||||||
| Stock award plans activity |
( |
) | ||||||
| Accretion of purchase accounting adjustments |
( |
) | ( |
) | ||||
| Origination of loans held for sale |
( |
) | ( |
) | ||||
| Proceeds from sale of loans held for sale |
||||||||
| Increase in cash surrender value of bank owned life insurance |
( |
) | ( |
) | ||||
| Changes in: |
||||||||
| Accrued interest receivable |
( |
) | ( |
) | ||||
| Prepaid expenses and other assets |
( |
) | ||||||
| Accounts payable and accrued expenses |
( |
) | ||||||
| Net cash provided by operating activities |
||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
| Net change in loans |
( |
) | ||||||
| Principal payments on available-for-sale and held-to-maturity securities |
||||||||
| Proceeds from maturities of available-for-sale securities |
||||||||
| Purchase of premises and equipment |
( |
) | ( |
) | ||||
| Purchase of available-for-sale securities |
( |
) | ( |
) | ||||
| Proceeds from sale of available-for-sale securities |
||||||||
| Redemption (purchase) of FHLB stock |
( |
) | ||||||
| Purchase of tax credit investments |
( |
) | ||||||
| Proceeds from sale of foreclosed assets held for sale |
||||||||
| Capitalized cost on foreclosed assets held for sale |
( |
) | ||||||
| Net cash provided by (used in) investing activities |
( |
) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
| Net increase in demand deposits, NOW accounts and savings accounts |
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| Net increase (decrease) in certificates of deposit |
( |
) | ||||||
| Proceeds from FHLB advances |
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| Repayments of FHLB advances |
( |
) | ( |
) | ||||
| Proceeds from issuance of notes payable |
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| Repayments of notes payable |
( |
) | ||||||
| Advances from borrowers for taxes and insurance |
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| Stock options exercised |
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| Cash dividends paid |
( |
) | ( |
) | ||||
| Treasury stock purchased |
( |
) | ( |
) | ||||
| Net cash provided by (used in) financing activities |
( |
) | ||||||
| INCREASE IN CASH AND CASH EQUIVALENTS |
||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | $ | ||||||
See Notes to Condensed Consolidated Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Guaranty Federal Bancshares, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). The results of operations for the periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2019, 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 GAAP have been condensed or omitted.
Note 2: Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Guaranty Bank (the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation.
Note 3: Acquisition
On April 2, 2018, the Company completed the acquisition of Carthage, Missouri-based Hometown Bancshares, Inc. (“Hometown”), including its wholly owned bank subsidiary, Hometown Bank, National Association. Under the terms of the Agreement and Plan of Merger, each share of Hometown common stock was exchanged for $
Note 4: Securities
The amortized cost and approximate fair values of securities classified as available-for-sale were as follows:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Approximate Fair Value | |||||||||||||
| As of June 30, 2020 | ||||||||||||||||
| Debt Securities: | ||||||||||||||||
| U. S. government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Municipals | ( | ) | ||||||||||||||
| Corporates | ( | ) | ||||||||||||||
| Mortgage-backed securities - private label | ( | ) | ||||||||||||||
| Government sponsored asset-backed securities and SBA loan pools | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Approximate Fair Value | |||||||||||||
| As of December 31, 2019 | ||||||||||||||||
| Debt Securities: | ||||||||||||||||
| U. S. government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Municipals | ( | ) | ||||||||||||||
| Corporates | ( | ) | ||||||||||||||
| Mortgage-backed securities - private label | ( | ) | ||||||||||||||
| Government sponsored mortgage-backed securities and SBA loan pools | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
Maturities of available-for-sale debt securities as of June 30, 2020:
| Amortized Cost | Approximate Fair Value | |||||||
| 1-5 years | $ | $ | ||||||
| 6-10 years | ||||||||
| After 10 years | ||||||||
| Mortgage-backed securities - private label not due on a single maturity date | ||||||||
| Government sponsored asset-backed securities and SBA loan pools not due on a single maturity date | ||||||||
| $ | $ | |||||||
The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $
Realized gains and losses are recorded as net securities gains. Gains and losses on sales of securities are determined on the specific identification method. Gross gains of $
The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. Certain investment securities are valued at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold the debt securities to maturity or until recovery of the unrealized loss. Should the impairment of any of these debt 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, to the extent the loss is related to credit issues, and to other comprehensive income to the extent the decline on debt securities is related to other factors and the Company does not intend to sell the security prior to recovery of the unrealized loss.
Certain other 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 June 30, 2020 and December 31, 2019, was $
The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2020 and December 31, 2019.
| As of June 30, 2020 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Description of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
| U.S. government agencies | $ | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||||||||
| Municipals | ( | ) | ||||||||||||||||||||||
| Corporates | ( | ) | ( | ) | ||||||||||||||||||||
| Mortgage-backed securities - private label | ( | ) | ( | ) | ||||||||||||||||||||
| Government sponsored asset-backed securities and SBA loan pools | ( | ) | ( | ) | ||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | |||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Description of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
| U.S. government agencies | $ | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||||||||
| Municipals | ( | ) | ( | ) | ||||||||||||||||||||
| Corporates | ( | ) | ( | ) | ||||||||||||||||||||
| Mortgage-backed securities - private label | ( | ) | ( | ) | ||||||||||||||||||||
| Government sponsored asset-backed securities and SBA loan pools | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||
Note 5: Loans and Allowance for Loan Losses
Categories of loans at June 30, 2020 and December 31, 2019 include:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Real estate - residential mortgage: | ||||||||
| One to four family units | $ | $ | ||||||
| Multi-family | ||||||||
| Real estate - construction | ||||||||
| Real estate - commercial | ||||||||
| Commercial loans | ||||||||
| Consumer and other loans | ||||||||
| Total loans | ||||||||
| Less: | ||||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Deferred loan fees/costs, net | ( | ) | ( | ) | ||||
| Net loans | $ | $ | ||||||
Classes of loans by aging at June 30, 2020 and December 31, 2019 were as follows:
| As of June 30, 2020 | ||||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days and more Past Due | Total Past | Current | Total Loans | Total Loans > | ||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||
| Real estate - residential mortgage: | ||||||||||||||||||||||||||||
| One to four family units | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||
| Real estate - construction | ||||||||||||||||||||||||||||
| Real estate - commercial | ||||||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||||||
| Consumer and other loans | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days and more Past Due | Total Past | Current | Total Loans | Total Loans > | ||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||
| Real estate - residential mortgage: | ||||||||||||||||||||||||||||
| One to four family units | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||||||
| Real estate - construction | ||||||||||||||||||||||||||||
| Real estate - commercial | ||||||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||||||
| Consumer and other loans | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Nonaccruing loans are summarized as follows:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Real estate - residential mortgage: | ||||||||
| One to four family units | $ | $ | ||||||
| Multi-family | ||||||||
| Real estate - construction | ||||||||
| Real estate - commercial | ||||||||
| Commercial loans | ||||||||
| Consumer and other loans | ||||||||
| Total | $ | $ | ||||||
The following tables present the activity in the allowance for loan losses based on portfolio segment for the three and six months ended June 30, 2020 and 2019:
| Three months ended | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
|
| (In Thousands) | |||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision charged to expense | ( | ) | ( | ) | ( | ) | $ | |||||||||||||||||||||||||
| Losses charged off | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Recoveries | $ | |||||||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six months ended | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
|
| (In Thousands) | |||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision charged to expense | ( | ) | ( | ) | $ | |||||||||||||||||||||||||||
| Losses charged off | ( | ) | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
| Recoveries | $ | |||||||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Three months ended | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
|
| (In Thousands) | |||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision charged to expense | ( | ) | ( | ) | ( | ) | $ | |||||||||||||||||||||||||
| Losses charged off | ( | ) | ( | ) | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Recoveries | $ | |||||||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Six months ended | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Provision charged to expense | ( | ) | ( | ) | ( | ) | $ | |||||||||||||||||||||||||
| Losses charged off | ( | ) | ( | ) | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Recoveries | $ | |||||||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following tables present the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2020 and December 31, 2019:
| June 30, 2020 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for loan losses: | (In Thousands) | |||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: loans acquired with deteriorated credit quality | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: loans acquired with deteriorated credit quality | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| As of December 31, 2019 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
| Allowance for loan losses: | (In Thousands) | |||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: loans acquired with deteriorated credit quality | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||||||||||
| Ending balance: individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Ending balance: loans acquired with deteriorated credit quality | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
Included in the Company’s loan portfolio are certain loans acquired in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and performing assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest 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 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.
The following table summarizes the recorded investment in impaired loans at June 30, 2020 and December 31, 2019:
| June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||
| Recorded | Unpaid | Specific |
| Unpaid | Specific | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||||||||||
| Real estate - residential mortgage: | ||||||||||||||||||||||||
| One to four family units | $ | $ | $ | - | $ | $ | $ | - | ||||||||||||||||
| Multi-family | - | - | ||||||||||||||||||||||
| Real estate - construction | - | - | ||||||||||||||||||||||
| Real estate - commercial | - | - | ||||||||||||||||||||||
| Commercial loans | - | - | ||||||||||||||||||||||
| Consumer and other loans | - | - | ||||||||||||||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||||||||||
| Real estate - residential mortgage: | ||||||||||||||||||||||||
| One to four family units | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Multi-family | - | - | - | - | - | |||||||||||||||||||
| Real estate - construction | ||||||||||||||||||||||||
| Real estate - commercial | ||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||
| Consumer and other loans | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||
| Real estate - residential mortgage: | ||||||||||||||||||||||||
| One to four family units | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Multi-family | ||||||||||||||||||||||||
| Real estate - construction | ||||||||||||||||||||||||
| Real estate - commercial | ||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||
| Consumer and other loans | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||||||
The following table summarizes average impaired loans and related interest recognized on impaired loans for the six months ended June 30, 2020 and 2019:
| For the Six Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2020 | June 30, 2019 | |||||||||||||||
| Average | Interest | Average | Interest | |||||||||||||
| (In Thousands) | ||||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||
| Real estate - residential mortgage: | ||||||||||||||||
| One to four family units | $ | $ | $ | $ | ||||||||||||
| Multi-family | ||||||||||||||||
| Real estate - construction | ||||||||||||||||
| Real estate - commercial | ||||||||||||||||
| Commercial loans | ||||||||||||||||
| Consumer and other loans | ||||||||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||
| Real estate - residential mortgage: | ||||||||||||||||
| One to four family units | $ | $ | $ | $ | ||||||||||||
| Multi-family | ||||||||||||||||
| Real estate - construction | ||||||||||||||||
| Real estate - commercial | ||||||||||||||||
| Commercial loans | ||||||||||||||||
| Consumer and other loans | ||||||||||||||||
| Total | ||||||||||||||||
| Real estate - residential mortgage: | ||||||||||||||||
| One to four family units | $ | $ | $ | $ | ||||||||||||
| Multi-family | ||||||||||||||||
| Real estate - construction | ||||||||||||||||
| Real estate - commercial | ||||||||||||||||
| Commercial loans | ||||||||||||||||
| Consumer and other loans | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
At June 30, 2020, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.
In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.
The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.
The following table presents the carrying balance of TDRs as of June 30, 2020 and December 31, 2019:
| June 30, 2020 | December 31, 2019 | |||||||
| Real estate - residential mortgage: | ||||||||
| One to four family units | $ | $ | ||||||
| Multi-family | ||||||||
| Real estate - construction | ||||||||
| Real estate - commercial | ||||||||
| Commercial loans | ||||||||
| Total | $ | |||||||
The Bank has allocated $
There were
As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:
Pass: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.
Special mention: This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.
Substandard: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Doubtful: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Risk characteristics applicable to each segment of the loan portfolio are described as follows.
Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Real estate-Multi-Family: Loans secured by multi-family residential 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 concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.
Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.
Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.
Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.
Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.
The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of June 30, 2020 and December 31, 2019:
| June 30, 2020 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Total | |||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||
| Rating: | ||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| December 31, 2019 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Total | |||||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||||||
| Rating: | ||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
The above amounts include purchased credit impaired loans. At June 30, 2020, purchased credit impaired loans comprised of $
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan 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 nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is 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 the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Commercial Loan Referral Income: In certain circumstances, the Company enters into variable-rate loan agreements (Assumable Rate Conversion “ARC” Master Servicing Agreements) with commercial loan customers, and the customer simultaneously enters into an interest swap agreement directly with a third-party (the “counterparty”). This allows the loan customer to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. The Company is required to enter into a transaction agreement as part of each loan. The agreement results in the assumption of credit and market risk equivalent by the Bank. The agreement states that in an event of default by the loan customer, the Bank must pay a termination amount to the extent it is positive. The termination value is defined by the Master Agreement, which is in essence the fair value of the derivative on the event date. The counterparty pays a fee to the Company for brokering the transaction and for servicing the loan/swap agreement between the customer and the counterparty. Fee income related to these agreements was $
Note 6: Accounting for Certain Loans Acquired
As part of the Hometown acquisition in 2018, certain loans were acquired that evidenced deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.
The carrying amount of purchased credit impaired loans are included in the balance sheet amounts of loans receivable at June 30, 2020 and December 31, 2019. The amount of these loans is shown below:
| June 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| (In Thousands) | (In Thousands) | |||||||
| Real estate - commercial | $ | $ | ||||||
| Commercial loans | ||||||||
| Outstanding balance | $ | |||||||
| Carrying amount, net of fair value adjustment of at June 30, 2020 and at December 31, 2019 | $ | |||||||
Changes in the carrying amount of the accretable yield for all purchased credit impaired loans were as follows for the three and six months ended June 30, 2020 and 2019:
| Three months ended |
Six months ended |
|||||||
| June 30, 2020 |
June 30, 2020 |
|||||||
| (In Thousands) |
(In Thousands) |
|||||||
| Balance at beginning of period |
$ | ( |
) | $ | ( |
) | ||
| Additions |
||||||||
| Accretion |
( |
) | ( |
) | ||||
| Reclassification from nonaccretable difference |
||||||||
| Disposals |
||||||||
| Balance at end of period |
$ | |||||||
| Three months ended |
Six months ended |
|||||||
| June 30, 2019 |
June 30, 2019 |
|||||||
| (In Thousands) |
(In Thousands) |
|||||||
| Balance at beginning of period |
$ | $ | ||||||
| Additions |
||||||||
| Accretion |
( |
) | ( |
) | ||||
| Reclassification from nonaccretable difference |
||||||||
| Disposals |
||||||||
| Balance at end of period |
$ | |||||||
The Company’s allowance for loan losses related to purchased credit impaired loans was $
Note 7: Intangible Assets
The Company recorded $
Also as part of the Hometown acquisition, core deposit premiums of $
The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at June 30, 2020 and December 31, 2019 were as follows:
| June 30, |
December 31, |
|||||||
| 2020 |
2019 |
|||||||
| (in Thousands) |
(in Thousands) |
|||||||
| Goodwill |
$ | $ | ||||||
| Core deposit intangible |
||||||||
| Gross carrying amount |
||||||||
| Accumulated amortization |
( |
) | ( |
) | ||||
| Core deposit intangible, net |
||||||||
| Remaining balance |
$ | $ | ||||||
The Company’s estimated remaining amortization expense on intangibles as of June 30, 2020 is as follows:
| Amortization Expense | |||||
| (in Thousands) | |||||
| Remainder of: | 2020 | $ | |||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| Therafter | |||||
| Total | $ | ||||
Note 8: Leases
During the first quarter of 2019, the Company adopted ASU 2016-02, “Leases”. As of June 30, 2020, the Company had recorded operating Right of Use (“ROU”) assets of $
Expenses for finance leases are included in other interest expense and occupancy expense line items, whereas, operating leases are expensed entirely in the occupancy expense line item. Leases with a term of less than twelve months are not recorded on the balance sheet and are expensed on a straight-line basis over the lease term. Discount rates used for the purpose of valuing the leases were based on rates available to the Company on fixed rate borrowings for similar lease terms.
The components of lease expense and their impact on the statement of income for the three and six months ended June 30, 2020 and 2019 are as follows:
| Six months ended | Three months ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (In Thousands) | (In Thousands) | |||||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Operating lease cost | ||||||||||||||||
| Sublease income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total lease costs | $ | $ | $ | $ | ||||||||||||
| Additional lease information: | ||||
| Weighted-average remaining lease term - financing leases (in years) | ||||
| Weighted-average remaining lease term - operating leases (in years) | ||||
| Weighted-average discount rate - financing leases | % | |||
| Weighted-average discount rate - operating leases | % |
The following table sets forth, as of June 30, 2020, the future minimum lease cash payments and a reconciliation of the undiscounted cash flows to the lease liability:
| Financing | Operating | Total | |||||||||||
| (In Thousands) | |||||||||||||
| Remainder of: | 2020 | $ | $ | $ | |||||||||
|
| 2021 | ||||||||||||
|
| 2022 | ||||||||||||
|
| 2023 | ||||||||||||
|
| 2024 | ||||||||||||
|
| Thereafter | ||||||||||||
|
| Total undiscounted future minimum lease cash payments | $ | $ | $ | |||||||||
|
| Present value discount | ( | ) | ( | ) | ( | ) | ||||||
|
| Lease liability | $ | $ | $ | |||||||||
Note 9: Benefit Plans
The Company has stock-based employee compensation plans, which are described in the Company’s 2019 Annual Report. The following tables below summarize transactions under the Company’s equity plans for the six months ended June 30, 2020:
Stock Options
All remaining stock options from prior year issuances were exercised in 2019 leaving
| Restricted Stock | Number of Shares | Weighted Average Grant- Date Fair Value | ||||||
| Balance of shares non-vested as of January 1, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Balance of shares non-vested as of June 30, 2020 | $ | |||||||
In February 2020, the Company granted
For the six months ended June 30, 2020 and 2019, the Company granted
| Restricted Stock Units | Performance Stock Units | Weighted Average Grant- Date Fair Value | ||||||
| Balance of shares non-vested as of January 1, 2020 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Forfeited | ||||||||
| Balance of shares non-vested as of June 30, 2020 | $ | |||||||
On March 19, 2020, the Company granted restricted stock units representing
Total stock-based compensation expense recognized for the six months ended June 30, 2020 and 2019 was $
Note 10: Income Per Common Share
| For three months ended June 30, 2020 |
For six months ended June 30, 2020 | |||||||||||||||||||||||
| Income Available to Common Shareholders |
Average Common Shares Outstanding |
Per Common Share |
Income Available to Common Shareholders |
Average Common Shares Outstanding |
Per Common Share |
|||||||||||||||||||
| Basic Income Per Common Share |
$ | $ | $ | $ | ||||||||||||||||||||
| Effect of Dilutive Securities |
||||||||||||||||||||||||
| Diluted Income Per Common Share |
$ | $ | $ | $ | ||||||||||||||||||||
| For three months ended June 30, 2019 |
For six months ended June 30, 2020 |
|||||||||||||||||||||||
| Income Available to Common Shareholders |
Average Common Shares Outstanding |
Per Common Share |
Income Available to Common Shareholders |
Average Common Shares Outstanding |
Per Common Share |
|||||||||||||||||||
| Basic Income Per Common Share |
$ | $ | $ | $ | ||||||||||||||||||||
| Effect of Dilutive Securities |
||||||||||||||||||||||||
| Diluted Income Per Common Share |
$ | $ | $ | $ | ||||||||||||||||||||
Note 11: New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. Among other things, the amendments in this ASU require the measurement of 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. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has formed a committee that is assessing our data and evaluating the impact of adopting ASU 2016-13. The Company has also selected a third-party vendor to assist in generating loan level cash flows and disclosures. Based on the results from larger SEC filers and preliminary internal calculations there is likely a significant financial impact of adopting this standard. Estimated amounts and decisions pertaining to implementation of this standard will be evaluated over the next several quarters.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the quantitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. This standard was adopted during the second quarter of 2020 with no impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to accounting for hedging activities. Additional guidance on this Topic was released in October 2018 (ASU 2018-16), November 2019 (2019-10) and January 2020 (2020-01). The purpose of this updated guidance is to better align financial reporting for hedging activities with the economic objectives of those activities. The amendments in this update are effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The standard requires the modified retrospective transition approach as of the date of adoption. Implementation of this standard did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU applies to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. Disclosures removed by this ASU are the amount and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels and the valuation process for Level 3 measurements. This ASU modifies disclosures relating to investments in certain entities that calculate net asset value. Additional disclosures require by the ASU include: 1) change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and 2) range and weighted average of significant observable inputs used to develop Level 3 measurements. The prospective method of transition is required for the new disclosure requirements. The other amendments should be applied retrospectively. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years or January 1, 2020 for the Company. The Company adopted this standard during the first quarter of 2020 with no significant impact on the financial statements.
Note 12: Derivative Financial Instruments
The Company records all derivative financial instruments at fair value in the financial statements. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.
When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as 1) a hedge of fair value of a recognized asset or liability (fair value hedge) or 2) a hedge of a forecasted transaction, such as, the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective.
In June 2017, the Company entered into a forward start interest rate swap agreement totaling $
In March 2019, the Company entered into a forward start interest rate swap agreement totaling $
The Company documents, both at inception and periodically over the life of the hedges, its analysis of actual and expected hedge effectiveness.
As of June 30, 2020, based on current fair values, the Company pledged cash collateral of $
The following table presents the notional amounts and fair values of derivatives designated as hedging instruments on the consolidated balance sheets at June 30, 2020 and December 31, 2019:
| Derivatives designated as hedging instruments: |
||||||||||||||||||||||||
| June 30, 2020 |
Estimated Fair Value at: | |||||||||||||||||||||||
| Forward Start Inception Date |
Termination Date |
Derivative Type |
Notional Amount |
Rate Paid |
Rate Hedged |
Balance Sheet Classfication |
June 30, 2020 |
December 31, 2019 |
||||||||||||||||
| 2/28/2018 | 2/28/2025 |
Interest rate swap - FHLB Advances |
$ | % | 3 month LIBOR Floating |
Other liabilites |
$ | ( |
) | $ | ( |
) | ||||||||||||
| 5/23/2019 | 2/23/2026 |
Interest rate swap - Subordinated Debentures |
$ | % |
|
Other liabilites |
$ | ( |
) | $ | ( |
) | ||||||||||||
The following table presents amounts included in the consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:
| Derivative |
Income Statement |
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| Type |
Classfication |
2020 |
2019 |
2020 | 2019 |
|||||||||||||
| Interest rate swap - FHLB Advances |
Interest expense |
$ | $ | ( |
) | $ | $ | ( |
) | |||||||||
| Interest rate swap - Subordinated Debentures |
Interest expense |
$ | $ | $ | $ | |||||||||||||
Note 13: Disclosures about Fair Value of Assets and Liabilities
ASC Topic 820, Fair Value Measurements, defines fair value as 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. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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
The following is a description of the inputs and valuation methodologies 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.
Available-for-sale securities: Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. government agencies, municipal securities and government sponsored mortgage-backed securities. The Company has
Derivative financial instruments (Cash flow hedge): The Company’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets.
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 June 30, 2020 and December 31, 2019 (dollar amounts in thousands):
| June 30, 2020 | ||||||||||||||||
| Financial assets: |
||||||||||||||||
| Level 1 inputs |
Level 2 inputs |
Level 3 inputs |
Total fair value |
|||||||||||||
| Debt securities: |
||||||||||||||||
| Government agencies |
$ | $ | $ | $ | ||||||||||||
| Municipals |
||||||||||||||||
| Corporates |
||||||||||||||||
| Mortgage-backed securities - private label |
||||||||||||||||
| Goverment sponsored asset-backed securities and SBA loan pools |
||||||||||||||||
| Available-for-sale securities |
$ | $ | $ | $ | ||||||||||||
| Financial liabilities: |
||||||||||||||||
| Interest rate swaps |
$ | $ | $ | $ | ||||||||||||
| December 31, 2019 |
||||||||||||||||
| Financial assets: |
||||||||||||||||
| Level 1 inputs |
Level 2 inputs |
Level 3 inputs |
Total fair value |
|||||||||||||
| Debt securities: |
||||||||||||||||
| Government agencies |
$ | $ | $ | $ | ||||||||||||
| Municipals |
||||||||||||||||
| Corporates |
||||||||||||||||
| Mortgage-backed securities - private label |
||||||||||||||||
| Goverment sponsored asset-backed securities and SBA loan pools |
||||||||||||||||
| Available-for-sale securities |
$ | $ | $ | $ | ||||||||||||
| Financial liabilities: |
||||||||||||||||
| Interest rate swaps |
$ | $ | $ | $ | ||||||||||||
The following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy.
Foreclosed Assets Held for Sale: Fair value is estimated using recent appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for selling costs and discounts based on management’s assessment of the condition and marketability of the collateral. Foreclosed assets held for sale are classified within Level 3 of the valuation hierarchy.
Impaired loans (Collateral Dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
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 June 30, 2020 and December 31, 2019 (dollar amounts in thousands):
| Impaired loans: |
||||||||||||||||
| Level 1 inputs | Level 2 inputs |
Level 3 inputs |
Total fair value |
|||||||||||||
| June 30, 2020 |
$ | $ | $ | $ | ||||||||||||
| December 31, 2019 |
$ | $ | $ | $ | ||||||||||||
| Foreclosed assets held for sale: |
||||||||||||||||
| Level 1 inputs | Level 2 inputs |
Level 3 inputs |
Total fair value |
|||||||||||||
| June 30, 2020 |
$ | $ | $ | $ | ||||||||||||
| December 31, 2019 |
$ | $ | $ | $ | ||||||||||||
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurement (dollar amounts in thousands):
| Fair Value June 30, 2020 | Valuation Technique | Unobservable Input | Range | ||||||||
| Impaired loans (collateral dependent) | $ | Market Comparable | Discount to reflect realizable value | ||||||||
| Foreclosed assets held for sale | $ | Market Comparable | Discount to reflect realizable value | ||||||||
|
| Valuation Technique | Unobservable Input | Range | ||||||||
| Impaired loans (collateral dependent) | $ | Market Comparable | Discount to reflect realizable value | ||||||||
| Foreclosed assets held for sale | $ | Market Comparable | Discount to reflect realizable value | ||||||||
The following tables present estimated fair values of the Company’s financial instruments at June 30, 2020 and December 31, 2019.
| June 30, 2020 | ||||||||||||
| Carrying Amount | Fair Value | Hierarchy | ||||||||||
| Financial assets: | ||||||||||||
| Cash and cash equivalents | $ | $ | 1 | |||||||||
| Interest-bearing time deposits at other financial institutions | 2 | |||||||||||
| Federal Home Loan Bank stock | 2 | |||||||||||
| Mortgage loans held for sale | 2 | |||||||||||
| Loans, net | 3 | |||||||||||
| Interest receivable | 2 | |||||||||||
| Financial liabilities: | ||||||||||||
| Deposits | 2 | |||||||||||
| Federal Home Loan Bank advances | 2 | |||||||||||
| Subordinated debentures | 3 | |||||||||||
| Note payable to bank | 3 | |||||||||||
| Interest payable | 2 | |||||||||||
| Unrecognized financial instruments (net of contractual value): | ||||||||||||
| Commitments to extend credit | - | - | - | |||||||||
| Unused lines of credit | - | - | - | |||||||||
| December 31, 2019 |
||||||||||||
| Carrying Amount |
Fair Value |
Hierarchy |
||||||||||
| Financial assets: |
||||||||||||
| Cash and cash equivalents |
$ | $ | 1 | |||||||||
| Interest-bearing time deposits at other financial institutions |
2 | |||||||||||
| Federal Home Loan Bank stock |
2 | |||||||||||
| Mortgage loans held for sale |
2 | |||||||||||
| Loans, net |
3 | |||||||||||
| Interest receivable |
2 | |||||||||||
| Financial liabilities: |
||||||||||||
| Deposits |
2 | |||||||||||
| Federal Home Loan Bank advances |
2 | |||||||||||
| Subordinated debentures |
3 | |||||||||||
| Note payable to bank |
3 | |||||||||||
| Interest payable |
2 | |||||||||||
| Unrecognized financial instruments (net of contractual value): |
||||||||||||
| Commitments to extend credit |
- | - | - | |||||||||
| Unused lines of credit |
- | - | - | |||||||||
Note 14: Recent Events
The COVID-19 pandemic is creating disruptions to the overall economy and to the lives of individuals throughout our local communities. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, government stimulus programs, and legislation designed to deliver monetary aid and other relief to many segments of the economy. While the scope, duration, and impacts of COVID-19 are continuing to evolve and are not fully known, the pandemic and related efforts to contain it have disrupted economic activities, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period, a sustained economic downturn or recession may result causing many of the risk factors identified in our Form 10-K and this Form 10-Q to be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as described in more detail below and in Part II of this filing.
Note 15: Concentration of Cash Holdings
During the normal course of business, the Bank may have excess cash on deposit at other financial institutions. Each institution deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At June 30, 2020, the Bank had $
Note 16: Subsequent Events
On July 30, 2020, the Company announced the closing of its private offering of $
On July 30, 2020, the Company fully paid off a $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The primary function of the Company is to monitor and oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews material changes in the Company’s financial condition as of June 30, 2020, and the results of operations for the three and six months ended June 30, 2020 and 2019.
The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. The following factors or combination of factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the real estate values and the local economies in which the Company conducts operations; effects of the coronavirus pandemic (COVID-19) on our Company, the communities where we have our branches, the state of Missouri and the United States, related to the economy and overall financial stability; insufficient provisions for loan losses could reduce earnings for several periods until acceptable levels are reached; new accounting standards for calculating loan loss reserves may have a material adverse impact on our financial condition; merger or acquisition activity may not produce anticipated results; changes in portfolio composition; a decrease in cash flows from our investment portfolio may adversely affect our liquidity; changes in management strategy; increased competition from both bank and non-bank companies, the impact of recent and potential future changes in the laws, rules, regulations, interpretations and policies relating to financial institutions, accounting, insurance, tax, monetary and fiscal matters and their application by our regulators; the effects of, and changes in, trade, monetary and fiscal policies and laws, changes in interest rates including negative interest rates; changes in LIBOR including the impact of the possible elimination of LIBOR and resultant transition to a new benchmark; the timely development of and acceptance of new products and services of the company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; asset quality deterioration; environmental liability associated with real estate collateral; technological changes and cybersecurity risks; employee retention; the success of the Company at managing the risks resulting from these factors; and other factors set forth in reports and other documents filed by the Company with the SEC from time to time, including the risk factors described under Item 1A. of this Quarterly Report on Form 10-Q, Item 1A. of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
The Company cautions that the listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.
Impacts from COVID-19 on Our Financial Statements and Results of Operations
The spread of the COVID-19 pandemic has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States, including the markets that we serve. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.
Financial Impacts to the Bank: Unemployment and business closings will likely continue to rise in our markets while there are increased infection rates and changing community health guidelines. Due to segments of our loan portfolio experiencing weakness as a result of COVID-19-related economic slowdowns and travel restrictions, we recorded a significant increase in our provision for loan losses in 2020. The provision for loan losses totaled $1,250,000 for the first six months of 2020, compared to $100,000 for the same period of 2019. We expect that we may continue to experience increases in our provision for loan losses. We expect to continue to offer relief in the form of loan payment deferrals and loan modifications as sheltering orders or limitations on in-person interactions may persist longer than anticipated. The Bank expects other ramifications to include increases in realized losses on loans and decreased fee income due to lower loan originations and deposit activity. Market interest rates have declined significantly and these reductions, especially if prolonged, could adversely affect our net interest income, net interest margin and overall earnings.
Paycheck Protection Program (PPP) Activity: The Federal government has approved various stimulus packages to assist small businesses, individuals, health care entities and certain governmental entities over the past months. Availability and coverage of these programs continues to evolve as the breadth of the economic impact from COVID-19 unfolds. One of the most notable programs is the Coronavirus Aid, Relief and Economic Security (CARES) Act which made available relief to small businesses through Small Business Administration (SBA) PPP loans that, based on certain qualifications, could provide funds to qualified borrowers for payroll and certain other costs and all or a portion of such loans will be forgiven if use of funds criteria are met. An initial amount of $349 billion of PPP funds was authorized in late March 2020 and was fully exhausted within two weeks of start-up. An additional $321 billion of PPP funds was authorized in late April 2020 with those funds being available to qualified applicants until August 8, 2020. As of June 30, 2020 the Bank has approved and funded 650 PPP loans for a total of approximately $55 million, impacting over 8,300 jobs in the communities we serve. Income for originating these loans is approximately $2.2 million for the Bank to be recognized over the life of the individual PPP loans. This is the primary driver causing net deferred loan fees/costs to increase from $574,000 to $2,328,00 (305%) during the past six months.
Loan Modifications: As previously mentioned, increased loan payment deferrals and other loan modifications have adversely impacted and we expect that they will continue to adversely impact the performance of our loan portfolio. Based on recent guidance by federal banking regulators, the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB), short-term loan modifications made in response to COVID-19 to borrowers with a current payment status are not considered troubled debt restructurings (TDRs) for reporting purposes. As of June 30, 2020, 251 loans with an aggregate balance of $205.1 million were modified with additional details noted in the following table.
COVID-19 Loan Modifications
| Collateral Type |
# Loans Modified |
$ of Loans Modified |
Interest Only 3 Months or Less |
Interest Only 4-6 Months |
Full Payment Deferral 3 Months |
Full Payment Deferral 3 Months + Interest Only 3 Months |
Full Payment Deferral 4-6 Months |
Other |
||||||||||||||||||||||||
| Hotel/Motel |
27 | $ | 59,411,260 | $ | 7,946,164 | $ | 2,655,156 | $ | 26,053,514 | $ | 22,144,206 | $ | 612,220 | $ | - | |||||||||||||||||
| Theatre |
7 | 24,997,330 | - | - | - | 24,997,330 | - | - | ||||||||||||||||||||||||
| Multifamily |
24 | 23,247,507 | 3,013,500 | 654,387 | 2,732,346 | - | 16,847,274 | - | ||||||||||||||||||||||||
| 1-4 Family Investment |
74 | 20,350,028 | 1,910,414 | 8,702,896 | 6,299,145 | 3,156,914 | - | 280,659 | ||||||||||||||||||||||||
| Retail (C&I & RE) |
20 | 16,403,065 | 110,497 | 15,668,811 | - | 623,757 | - | - | ||||||||||||||||||||||||
| Office |
12 | 16,357,550 | - | 4,564,226 | 1,205,404 | 10,587,921 | - | - | ||||||||||||||||||||||||
| Warehouse |
9 | 10,211,140 | - | 8,750,457 | - | 1,460,683 | - | - | ||||||||||||||||||||||||
| Automotive/Transportation |
17 | 9,686,218 | - | 2,559,438 | 6,839,540 | 287,241 | - | - | ||||||||||||||||||||||||
| Restaurant |
16 | 5,797,874 | - | 3,733,156 | 247,720 | 1,816,998 | - | - | ||||||||||||||||||||||||
| Stock |
1 | 4,742,000 | - | - | - | 4,742,000 | - | - | ||||||||||||||||||||||||
| Land & Land Development |
7 | 2,770,091 | 309,905 | 648,430 | - | 531,878 | - | 1,279,878 | ||||||||||||||||||||||||
| Religious Organizations |
3 | 2,180,584 | 144,956 | 1,880,000 | - | - | - | 155,627 | ||||||||||||||||||||||||
| Agricultural / Farmland |
3 | 1,368,621 | - | 880,850 | - | - | - | 487,770 | ||||||||||||||||||||||||
| 1-4 Family Consumer |
8 | 633,828 | - | 18,666 | 583,050 | - | - | 32,112 | ||||||||||||||||||||||||
| Other |
23 | 6,972,356 | 1,353,113 | 1,831,470 | 793,169 | 1,290,470 | 1,540,010 | 164,124 | ||||||||||||||||||||||||
| Total |
251 | $ | 205,129,452 | $ | 14,788,549 | $ | 52,547,943 | $ | 44,753,888 | $ | 71,639,398 | $ | 18,999,504 | $ | 2,400,170 | |||||||||||||||||
Market Volatility Risk: As noted herein, the COVID-19 pandemic has led to disruption and volatility in the global capital markets. These conditions may require us to recognize an elevated level of other than temporary impairments on investment securities in our portfolio as issues of these securities are negatively impacted by the economic slowdown. Declines in fair value of investment securities in our portfolio could also reduce the unrealized gains reported as part of our consolidated comprehensive income.
Actions Taken by Bank in Response to Challenges Arising From COVID-19
Impacts from the COVID-19 pandemic have caused abrupt and drastic changes in many aspects of everyday life greatly influencing how we operate both personally and professionally. As we continue to adapt to operating in this “new normal” we maintain our focus on serving our customers, employees and increasing our stockholder value while operating in a socially distant environment. The goal to best serve our communities has not changed, but the manner in which we achieve this has. Summaries of some of the areas in which we have seen the greatest change while continuing to be a valued business partner to those we serve are below:
Associates: We are limiting staff in our facilities, when possible, to aid in lowering the possibility of infections in our communities. We have increased sanitation efforts, instituted protective equipment in the form of masks, gloves and screens at our locations and increased guidance and flexibility for our employees from our Human Resources department.
Customer Service: Staffing has been increased to handle higher volumes of inquiries. Inquires related to stimulus deposits, loan modifications and accessing government loan programs have been top-of-mind of many customers, greatly increasing the workload of nearly each department within the Bank
Technology: Our online banking platform and ten video banking machines have seen increased usage during this time. Investments to build out these resources continue during the COVID-19 pandemic to best serve our customers in a socially distant environment while still being able to access financial information at any time. This has allowed us to serve our customer base in a nearly seamless manner.
Financial Condition
The Company’s total assets increased $116,435,984 (12%) from $1,012,024,625 as of December 31, 2019, to $1,128,460,609 as of June 30, 2020.
Available-for-sale securities increased $28,777,560 (24%) from $118,245,314 as of December 31, 2019, to $147,022,874 as of June 30, 2020. The Company had purchases of $65,436,639 and an increase in unrealized gains of $2,507,140 offset by sales, calls, maturities and principal payments of $31,677,260 during the six-month period.
Net loans receivable increased by $51,625,599 (7%) from $720,732,402 as of December 31, 2019 to $772,358,001 as of June 30, 2020. Year-to-date, commercial loans increased $54,331,225 (48%) (See section above titled “Impacts from COVID-19 on Our Financial Statements and Results of Operations” for details on PPP lending activity, which is included in the commercial category), one-to-four family mortgage loans increased $8,364,075 (7%), commercial real estate loans increased $6,080,624 (2%), permanent multi-family loans decreased $1,624,186 (2%), consumer loans decreased $1,637,384 (5%) and construction loans decreased $10,954,150 (14%). The Company continues to focus its lending efforts in the commercial, owner occupied real estate and small business lending categories.
Allowance for loan losses increased $1,180,330 (16%) from $7,607,587 as of December 31, 2019 to $8,787,917 as of June 30, 2020. Provisions for loan losses of $1,250,000 were recorded by the Company for the six months ended June 30, 2020. This expense reflects an increased provision resulting from stress on our loan portfolio from the increase in unemployment and economic effects attributable to the COVID-19 pandemic. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of June 30, 2020 and December 31, 2019 was 1.12% and 1.04%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2020 and December 31, 2019 was 78.0% and 76.1%, respectively. Management believes the allowance for loan losses at June 30, 2020 are at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio even after taking the expected loan defaults attributable to COVID-19 into account.
In accordance with generally accepted accounting principles (GAAP) for acquisition accounting, the loans acquired through the Hometown acquisition were recorded at fair value; therefore, there was no allowance associated with these loans. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount of $580,000 as of June 30, 2020.
Deposits increased $109,549,629 (13%) from $821,406,532 as of December 31, 2019, to $930,956,161 as of June 30, 2020. For the six months ended June 30, 2020, checking and savings accounts increased by $125,371,529 (20%) primarily due to the continued focus on attracting and retaining retail, commercial and public fund relationships. Also, a significant amount of the increase was due to the retaining of borrower PPP funds in their corresponding deposit accounts until utilization is necessary. Certificates of deposit balances decreased by $15,615,416 (8%) due to less reliance on brokered and internet accounts due to the large increases in transaction accounts noted above. See also the discussion under Item 3 - “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”
Accrued expenses and other liabilities increased by $4,753,530 (114%) to $8,907,292 from $4,153,762 during the year. The majority of this amount is due to mark-to-market adjustments on interest rate swaps, net of tax, which increased unrealized losses during the year by $3,905,915 as interest rates continue to remain low, running counter to the hedged position.
Stockholders’ equity increased $1,148,523 (1%) from $84,631,882 as of December 31, 2019, to $85,780,405 as of June 30, 2020. The Company’s net income during this period exceeded dividends paid or declared by $2,678,366. Other items impacting equity balances during the six-month period include increases in unrealized gains in the investment portfolio of $2,507,140 offset by stock repurchase and award activity of $390,420 and increased unrealized losses from interest rate swaps of $3,646,563. On a per common share basis, tangible book value increased to $18.92 as of June 30, 2020 compared to $18.71 as of December 31, 2019.
Average Balances, Interest and Average Yields
The Company’s profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Non-interest income, non-interest expense, and income taxes also impact net income.
The following tables sets forth certain information relating to the Company’s average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields. All dollar amounts are in thousands.
| Analysis of Net Interest Income and Margin: |
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| Three months ended 6/30/2020 |
Three months ended 6/30/2019 |
|||||||||||||||||||||||
| Average Balance |
Interest |
Yield / Cost |
Average Balance |
Interest |
Yield / Cost |
|||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||
| Interest-earning: |
||||||||||||||||||||||||
| Loans |
$ | 772,447 | $ | 9,094 | 4.74 | % | $ | 768,176 | $ | 10,395 | 5.43 | % | ||||||||||||
| Investment securities |
136,145 | 923 | 2.73 | % | 96,422 | 681 | 2.83 | % | ||||||||||||||||
| Other assets |
102,506 | 142 | 0.56 | % | 37,253 | 224 | 2.41 | % | ||||||||||||||||
| Total interest-earning |
1,011,098 | 10,159 | 4.04 | % | 901,851 | 11,300 | 5.03 | % | ||||||||||||||||
| Noninterest-earning |
70,534 | 68,080 | ||||||||||||||||||||||
| $ | 1,081,632 | $ | 969,931 | |||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||||||||||||||
| Interest-bearing: |
||||||||||||||||||||||||
| Savings accounts |
$ | 45,737 | 17 | 0.15 | % | $ | 40,598 | 32 | 0.32 | % | ||||||||||||||
| Transaction accounts |
508,861 | 544 | 0.43 | % | 417,536 | 1,551 | 1.49 | % | ||||||||||||||||
| Certificates of deposit |
192,793 | 981 | 2.05 | % | 234,515 | 1,216 | 2.08 | % | ||||||||||||||||
| FHLB advances |
58,264 | 284 | 1.96 | % | 51,677 | 289 | 2.24 | % | ||||||||||||||||
| Other borrowed funds |
11,202 | 115 | 4.13 | % | 5,000 | 64 | 5.13 | % | ||||||||||||||||
| Subordinated debentures |
15,465 | 195 | 5.07 | % | 21,731 | 297 | 5.48 | % | ||||||||||||||||
| Total interest-bearing |
832,322 | 2,136 | 1.03 | % | 771,057 | 3,449 | 1.79 | % | ||||||||||||||||
| Noninterest-bearing |
164,259 | 115,033 | ||||||||||||||||||||||
| Total liabilities |
996,581 | 886,090 | ||||||||||||||||||||||
| Stockholders’ equity |
85,051 | 83,841 | ||||||||||||||||||||||
| 1,081,632 | 969,931 | |||||||||||||||||||||||
| Net earning balance |
$ | 178,776 | 130,794 | |||||||||||||||||||||
| Earning yield less costing rate |
3.01 | % | 3.24 | % | ||||||||||||||||||||
| Net interest income, and net yield spread on interest earning assets |
$ | 8,023 | 3.19 | % | $ | 7,851 | 3.49 | % | ||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities |
121 | % | 117 | % | ||||||||||||||||||||
| Six months ended 6/30/2020 |
Six months ended 6/30/2019 |
|||||||||||||||||||||||
| Average Balance |
Interest |
Yield / Cost |
Average Balance |
Interest |
Yield / Cost |
|||||||||||||||||||
| ASSETS |
||||||||||||||||||||||||
| Interest-earning: |
||||||||||||||||||||||||
| Loans |
$ | 753,443 | $ | 18,647 | 4.98 | % | $ | 774,227 | $ | 20,698 | 5.39 | % | ||||||||||||
| Investment securities |
130,993 | 1,808 | 2.78 | % | 93,259 | 1,279 | 2.77 | % | ||||||||||||||||
| Other assets |
99,515 | 503 | 1.02 | % | 34,098 | 419 | 2.48 | % | ||||||||||||||||
| Total interest-earning |
983,951 | 20,958 | 4.29 | % | 901,584 | 22,396 | 5.01 | % | ||||||||||||||||
| Noninterest-earning |
70,607 | 63,477 | ||||||||||||||||||||||
| 1,054,558 | 965,061 | |||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
| Interest-bearing: |
||||||||||||||||||||||||
| Savings accounts |
$ | 42,720 | 43 | 0.20 | % | $ | 40,250 | 62 | 0.31 | % | ||||||||||||||
| Transaction accounts |
506,512 | 1,922 | 0.76 | % | 414,440 | 3,027 | 1.47 | % | ||||||||||||||||
| Certificates of deposit |
196,071 | 2,071 | 2.12 | % | 236,868 | 2,317 | 1.97 | % | ||||||||||||||||
| FHLB advances |
54,872 | 558 | 2.04 | % | 55,917 | 645 | 2.33 | % | ||||||||||||||||
| Other borrowed funds |
11,347 | 238 | 4.22 | % | 5,000 | 132 | 5.32 | % | ||||||||||||||||
| Subordinated debentures |
15,465 | 391 | 5.08 | % | 21,742 | 588 | 5.45 | % | ||||||||||||||||
| Total interest-bearing |
826,987 | 5,223 | 1.27 | % | 774,217 | 6,771 | 1.76 | % | ||||||||||||||||
| Noninterest-bearing |
142,028 | 107,839 | ||||||||||||||||||||||
| Total liabilities |
969,015 | 882,056 | ||||||||||||||||||||||
| Stockholders’ equity | 85,543 | 83,005 | ||||||||||||||||||||||
| 1,054,558 | 965,061 | |||||||||||||||||||||||
| Net earning balance |
$ | 156,964 | 127,367 | |||||||||||||||||||||
| Earning yield less costing rate |
3.02 | % | 3.25 | % | ||||||||||||||||||||
| Net interest income, and net yield spread on interest earning assets | $ | 15,735 | 3.22 | % | 15,625 | 3.50 | % | |||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities |
119 | % | 116 | % | ||||||||||||||||||||
Results of Operations - Comparison of Three and Six-Month Periods Ended June 30, 2020 and 2019
Net income for the three and six months ended June 30, 2020 was $1,883,383 and $3,988,228, respectively, compared to $2,428,499 and $4,548,863 for the three and six months ended June 30, 2019, respectively, which represents a decrease in earnings of $545,116 (22%) and $560,635 (12%) for the three and six month periods, respectively. Generally, earnings were negatively impacted by higher provisions for loans losses and decreased interest margins when compared to the previous year.
Interest Income
Total interest income for the three and six months ended June 30, 2020 decreased $1,140,449 (10%) and $1,438,028 (6%), respectively, when compared to the same periods in 2019. When compared to the three and six month periods ended June 30, 2020 with the same periods in 2019, the average yield on interest earning assets decreased 99 basis points to 4.04% and decreased 72 basis points to 4.29%, while the average balance of interest earning assets increased approximately $109,247,000 for the three month period and increased approximately $82,367,000 for the six month period. The increase in the year-to-date amounts is primarily due to increased cash, investments and loan portfolio balances as funds from increased deposits are being used to diversify holdings while loan growth outside of PPP loans remained steady when compared to the same periods in 2019. For the three-month period, the yield on loans decreased 69 basis points to 4.74% with $169,000 in loan accretion recognized on loans acquired from Hometown compared to $452,000 in the same quarter of 2019. Partially offsetting this anticipated decline in accretion income was $197,000 of loan fees recognized from the origination of PPP loans previously mentioned.
Interest Expense
Total interest expense for the three and six months ended June 30, 2020 decreased $1,312,743 (38%) and $1,547,936 (23%), respectively, when compared to the three and six months ended June 30, 2019. For the three and six months period ended June 30, 2020 compared to the same periods in 2019, the average cost of interest bearing liabilities decreased 76 basis points to 1.03% and decreased 49 basis points to 1.27%, primarily due to the reductions to key interest rates by the Federal Reserve during the first quarter of 2020. Offsetting rate declines, the average balance of interest-bearing liabilities increased approximately $61,265,000 for the three-month period and increased approximately $52,770,000 for the six-month period. The increases are primarily due to increased liability balances across savings and transaction accounts as stimulus amounts and cash holdings have generally been maintained by account holders during the first half of 2020 and the Company’s business development efforts. The Company intends to continue to utilize a cost-effective mix of retail and commercial deposits along with non-core, wholesale funding.
Provision for Loan Losses
Provisions for loan losses are charged or credited to earnings to bring the total allowance for loan losses to a level considered adequate by the Company to provide for potential loan losses in the existing loan portfolio. When making its assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and impaired and past due loans in the Company’s loan portfolio. In addition, the Company considers general economic conditions and other factors related to collectability of the Company’s loan portfolio, including the effect on the ability of some borrowers to repay their loans in accordance with their terms or at all due to the impact of COVID-19.
Based on its internal analysis and methodology, management recorded a provision for loan losses of $750,000 for the three months ended June 30, 2020 and $1,250,000 for the six months ended June 30, 2020, compared to $100,000 for both periods in 2019. The decision to fund the provision for the second quarter was based on weaknesses developing within the loan portfolio due to the COVID-19 pandemic. Overall economic conditions impacting both individuals and businesses have already led to loan payment deferrals and modifications of loan agreements. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management may need to increase the allowance for loan losses through charges to the provision for loan losses if anticipated growth in the Bank’s loan portfolio increases or other circumstances warrant.
Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.
Non-Interest Income
Non-interest income increased $379,380 (20%) and $914,177 (26%) for the three and six months ended June 30, 2020 when compared to the three and six months ended June 30, 2019. For the periods, the Company had increased income of $380,996 (100%) and $936,486 (100%) recognized from fees generated from a new commercial loan swap product, improved income recognized from the sale of mortgage loans of $321,291 (57%) and $438,704 (44%) and realized gains on the sale of investment securities increased by $56,382 (71%) and $114,929 (238%) compared to the same three and six month periods in 2019. Offsetting the increases, were reduced gains on the sale of foreclosed assets of $113,701 (285%) and $101,570 (487%), lower income from sales of Small Business Administration (“SBA”) loans of $247,457 (100%) and $497,576 (100%), and decreased service charge revenue of $105,515 (25%) and $98,143 (12%), respectively, when compared to the same three and six month periods in 2019.
Non-Interest Expense
Non-interest expenses increased $426,848 (6%) and $381,918 (3%) for the three and six months ended June 30, 2020 when compared to the same periods in 2019. Significant non-interest expense items are as follows:
| ● |
Data processing expenses increased $156,525 (37%) and $365,195 (45%) for the quarter and year-to-date compared to the same periods in 2019 due to expenses related to upgrades made to our core processing system in last half of 2019. |
| ● |
Salaries and employee benefit expenses increased $185,909 (5%) and $176,203 (2%) for the quarter and year-to-date compared to the same periods in 2019 primarily due to the hiring of new commercial relationship managers and increased commissions and incentives related to strong mortgage lending activity. |
| ● |
A non-recurring early termination fee related to an ATM/debit card processing contract of $134,000 (100%) was recorded during the second quarter of 2020. |
| ● |
A $33,093 (28%) and $132,628 (61%) reduction in FDIC assessment premiums for the second quarter and year-to-date periods of 2020 compared to the same periods in 2019 was experienced due to previously awarded credits offsetting current fees. |
Provision for Income Taxes
The provision for income taxes increased by $19,942 (5%) and $52,802 (7%) for the three and six months ended June 30, 2020 when compared to the same periods in 2019. The increase in the provision for income taxes for the 2020 periods is primarily due to an increase in our overall effective tax rate from the reduced availability and utilization of various federal and state income tax credits.
Nonperforming Assets
The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank’s existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers’ intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2020 and December 31, 2019 was 73.2% and 76.1%, respectively. Total loans classified as substandard, doubtful or loss as of June 30, 2020, were $23,450,000 or 2.08% of total assets as compared to $18,553,000 or 1.83% of total assets at December 31, 2019. Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank’s allowance for loan losses.
The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk. Nonperforming assets of the Bank are comprised of nonperforming loans (including troubled debt restructurings) and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.
| 6/30/2020 |
12/31/2019 |
12/31/2018 |
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| Nonperforming loans |
$ | 11,239 | $ | 10,003 | $ | 13,082 | ||||||
| Real estate acquired in settlement of loans |
771 | 992 | 1,127 | |||||||||
| Total nonperforming assets |
$ | 12,010 | $ | 10,995 | $ | 14,209 | ||||||
| Total nonperforming assets as a percentage of total assets |
1.06 | % | 1.09 | % | 1.47 | % | ||||||
| Allowance for loan losses |
$ | 8,788 | $ | 7,608 | $ | 7,996 | ||||||
| Allowance for loan losses as a percentage of gross loans |
1.12 | % | 1.04 | % | 1.02 | % | ||||||
Liquidity and Capital Resources
Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company’s primary sources of liquidity include cash and cash equivalents, customer deposits and FHLB borrowings. The Company also has established secured borrowing lines available from the Federal Reserve Bank which is considered a secondary source of funds.
The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $113,625,054 as of June 30, 2020 and $92,671,909 as of December 31, 2019, representing an increase of $20,953,145. The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments and deposit fluctuations.
A final rule issued on September 17, 2019 by federal banking regulators provides a simpler method of measuring adequate capital ratios for community banking organizations. The community bank leverage ratio (CBLR) framework is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. The framework provides a simple measure of capital adequacy for qualifying community banking organizations, consistent with section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rule. These institutions also must have met well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. The final rule went into effect on January 1, 2020. During the first quarter of 2020, the CARES Act introduced interim CBLR provisions that allow for extended periods for institutions that fall below the 9.0 percent threshold to gradually increase their ratio from minimums of 8.0 percent in 2020, 8.5 percent in 2021 and 9.0 percent in 2022. Additionally, federal banking guidelines provide that financial institutions experiencing significant growth could be expected to maintain capital levels above the minimum requirements without significant reliance on intangible assets. Additionally, higher capital levels could be required under certain circumstances, such as situations involving interest rate risk, risk from concentrations of credit, or nontraditional activities. Accordingly, the Company and the Bank could be required to maintain higher capital levels in the future even if we otherwise fully comply with the CBLR rule.
The Bank opted in to the new CBLR framework during the first quarter of 2020. As of June 30, 2020, the Bank’s common equity Tier 1 ratio was 9.9738% which exceeded the current minimum of 8.00%.
Subsequent Event - Issuance of Subordinated Notes
The Company is unable to predict the extent, severity or duration of the COVID-19 pandemic and the resultant adverse business conditions and operational trends as described above. In light of this, the Company believes that it is prudent to increase its regulatory capital in a cost-effective way without diluting its current shareholders. On July 30, 2020, the Company announced the closing of its private offering of $20.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2030 (the “Notes”). The net proceeds of the Notes will be used for general corporate purposes, including supplementing capital ratios. In addition, the Company plans to retire an existing term loan. For additional detail regarding the terms of the Notes, see Note 16 to the Notes to Condensed Consolidated Financial Statements (unaudited) included herein.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset/Liability Management
The goal of the Bank’s asset/liability policy is to manage interest rate risk so as to maximize net interest income over time in changing interest rate environments. Management monitors the Bank’s net interest spreads (the difference between yields received on assets and paid on liabilities) and, although constrained by market conditions, economic conditions, and prudent underwriting standards, the Bank offers deposit rates and loan rates designed to maximize net interest income. Management also attempts to fund the Bank’s assets with liabilities of a comparable duration to minimize the impact of changing interest rates on the Bank’s net interest income. Since the relative spread between financial assets and liabilities is constantly changing, the Bank’s current net interest income may not be an indication of future net interest income.
As a part of its asset and liability management strategy and throughout the past several years, the Bank has continued to emphasize the origination of short-term commercial real estate, commercial business and consumer loans, while originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market.
The Bank constantly monitors its deposits in an effort to decrease their interest rate sensitivity. Rates of interest paid on deposits at the Bank are priced competitively in order to meet the Bank’s asset/liability management objectives and spread requirements. The Bank believes, based on historical experience, that a substantial portion of such accounts represents non-interest rate sensitive core deposits.
Interest Rate Sensitivity Analysis
The following table sets forth as of June 30, 2020 management’s estimates of the projected changes in net portfolio value (“NPV”) in the event of 100 and 200 basis point (“BP”) instantaneous and permanent increases and decreases in market interest rates. Dollar amounts are expressed in thousands.
| BP Change |
Estimated Net Portfolio Value |
NPV as % of PV of Assets |
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| in Rates |
$ Amount |
$ Change |
% Change |
NPV Ration |
Change |
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| +200 |
$ | 111,974 | $ | 25,891 | 30 | % | 10.27 | % | 2.53 | % | |||||||||||
| +100 |
100,788 | 14,705 | 17 | % | 9.14 | % | 1.41 | % | |||||||||||||
| NC |
86,083 | - | 0 | % | 7.74 | % | 0.00 | % | |||||||||||||
| -100 | 88,049 | 1,966 | 2 | % | 7.85 | % | 0.11 | % | |||||||||||||
| -200 | 96,198 | 10,115 | 12 | % | 8.52 | % | 0.79 | % | |||||||||||||
Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using actual maturity and repricing schedules for the Bank’s loans and deposits, and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity Analysis section of Quantitative and Qualitative Disclosures About Market Risk included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Management cannot predict future interest rates or their effect on the Bank’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have an initial fixed rate period typically from one to five years, and over the remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable-rate loans in the Bank’s portfolio could decrease in future periods due to refinancing activity if market interest rates remain steady in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.
The Bank’s Board of Directors (the “Board”) is responsible for reviewing the Bank’s asset and liability management policies. The Board meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank’s management is responsible for administering the policies and determinations of the Board with respect to the Bank’s asset and liability goals and strategies.
Item 4. Controls and Procedures
(a) The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the quarter ended June 30, 2020, the Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020.
(b) There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The disclosures below supplement the risk factors previously disclosed under Item 1A. of the Company’s 2019 Annual Report on Form 10-K.
In the quarter ended June 30, 2020, our financial results were adversely impacted by the COVID-19 pandemic, primarily due to our recording of a provision for loan losses of $750,000 based on expected stresses that will occur in the loan portfolio due to the pandemic and, to a lesser extent, by loan payment deferrals and loan modifications. Our future business and financial results will likely also be adversely impacted by COVID-19. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic is creating disruptions to the overall economy and to the lives of individuals throughout our local communities. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, government stimulus programs, and legislation designed to deliver monetary aid and other relief to many segments of the economy. While the scope, duration, and impacts of COVID-19 are continuing to evolve and are not fully known, the pandemic and related efforts to contain it have disrupted economic activities, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period a sustained economic downturn or recession may result causing many of the risk factors identified in our Form 10-K to be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as described in more detail below.
Credit Risk - Business customers of the Bank, including without limitation hotel and motel industry customers, as well as consumer customers of the Bank are experiencing varying degrees of financial distress, which is expected to increase over coming months and will likely adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor disruptions, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan and mortgage payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and other services, and the financial condition and credit risk of our customers. Further, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure, in the event of delinquencies. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment like this, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the COVID-19 pandemic, we are participating in the PPP under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers to which we would have otherwise extended credit. Detailed information regarding PPP loans and loan modifications are included above in the General section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Strategic Risk - Our results may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may negatively impact our funding costs, reduced demand for our financial products due to economic conditions and the various responses of governmental, non-governmental and regulatory authorities. Over the past several months, the COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. In our two major market areas of Springfield and Joplin, Missouri, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating of loans and lower usage of ATMs and debit cards.
Operational Risk - Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these remote work measures also introduces additional operational risk, including increased cybersecurity risk. These cybersecurity risks include increased phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.
Moreover, we rely on many third parties in our business operations, including appraisers of the real property collateral securing our loans, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the COVID-19 pandemic, many of these entities may limit the availability and access of their services. For example, loan originations could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.
Interest Rate Risk - Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate by 150 basis points to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on overall markets. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition. Because there have been no comparable recent global pandemics that resulted in similar global impacts, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ abilities to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
The Company has a repurchase plan which was announced on February 28, 2020. This plan allows for the purchase of up to 250,000 shares of the Company’s outstanding common stock and expires December 31, 2022. There are no other repurchase plans in effect at this time. During the quarter ended June 30, 2020, the Company had no repurchase activity of its common stock. As of June 30, 2020, the ability to repurchase up to 235,591 shares under the 2020 repurchase plan remains.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
4.1 Form of 5.25% Fixed-to-Floating Rate Subordinated Note due 2030 (1)
10.1 Employment Agreement, dated April 20, between Company and Craig Dunn*(2)
32 Officer certifications pursuant to 18 U.S.C. Section 1350 †
101 The following materials from Guaranty Federal Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Income (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (unaudited), (iv) Condensed Consolidated Statement of Stockholders’ Equity (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited), and (vi) related notes.
104 Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Management contract or compensatory plan or arrangement
† Filed herewith
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| (1) |
Filed as Exhibit A to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on July 30, 2020 and incorporated herein by reference. |
| (2) |
Filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on April 22, 2020 and incorporated herein by reference. |
| (3) |
Filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on May 12, 2020 and incorporated herein by reference. |
| (4) |
Filed as Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on May 12, 2020 and incorporated herein by reference. |
| (5) |
Filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on July 30, 2020 and incorporated herein by reference. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Guaranty Federal Bancshares, Inc. |
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| Signature and Title |
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Date |
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| /s/ Shaun A. Burke | August 7, 2020 | ||
| Shaun A. Burke | |||
| President and Chief Executive Officer | |||
| (Principal Executive Officer and Duly Authorized Officer) | |||
| /s/ Carter M. Peters | August 7, 2020 | ||
| Carter M. Peters | |||
| Executive Vice President and Chief Financial Officer | |||
| (Principal Financial and Accounting Officer) | |||