UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One) | [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20189
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-23325
Guaranty Federal Bancshares, Inc.
(Exact(Exact name of registrant as specified in its charter)
Delaware | 43-1792717 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
2144 E Republic Rd, Suite F200 | |
Springfield, Missouri | 65804 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (417) 520-4333number: 1-833-875-2492
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, Par Value $0.10 per share | GFED | NASDAQ Global Market |
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. Yes [X] No [ ]
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). Yes [X] No [ ]
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 [ ] Accelerated filer [ ][X] Non-accelerated filer [ ] Smaller reporting company [X] 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 [ ] No [X]
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 |
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 | 3 | ||
Condensed Consolidated Statements of Income | 4 | ||
Condensed Consolidated Statements of Comprehensive Income | 5 | ||
Condensed Consolidated Statements of Stockholders’ Equity | 6 | ||
Condensed Consolidated Statements of Cash Flows |
| ||
Notes to Condensed Consolidated Financial Statements |
| ||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
| ||
Item 4. Controls and Procedures |
| ||
PART II. OTHER INFORMATION | |||
Item 1. Legal Proceedings |
| ||
Item 1A. Risk factors |
| ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| ||
Item 3. Defaults Upon Senior Securities |
| ||
Item 4. Mine Safety Disclosures |
| ||
Item 5. Other Information |
| ||
Item 6. Exhibits |
| ||
Signatures |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
GUARANTY FEDERAL BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2019 (UNAUDITED) AND DECEMBER 31, 2018
| |||
| |||
|
| 9/30/18 | 12/31/17 | 9/30/2019 | 12/31/2018 | ||||||||||||
ASSETS | ||||||||||||||||
Cash and due from banks | $ | 5,222,458 | $ | 4,094,694 | $ | 3,974,694 | $ | 5,818,955 | ||||||||
Interest-bearing deposits in other financial institutions | 25,989,332 | 33,312,236 | 82,446,686 | 28,302,687 | ||||||||||||
Cash and cash equivalents | 31,211,790 | 37,406,930 | 86,421,380 | 34,121,642 | ||||||||||||
Interest-bearing time deposits at other financial institutions | 250,000 | 250,000 | ||||||||||||||
Available-for-sale securities | 85,605,143 | 81,478,673 | 106,353,702 | 86,266,197 | ||||||||||||
Held-to-maturity securities | 12,722 | 16,457 | ||||||||||||||
Stock in Federal Home Loan Bank, at cost | 5,043,200 | 4,597,500 | 3,157,500 | 5,387,200 | ||||||||||||
Mortgage loans held for sale | 961,654 | 1,921,819 | 944,969 | 1,516,849 | ||||||||||||
Loans receivable, net of allowance for loan losses of September 30, 2018 - $7,731,707 - December 31, 2017 - $7,107,418 | 780,316,319 | 629,605,009 | ||||||||||||||
Loans receivable, net of allowance for loan losses of September 30, 2019 - $7,557,311 - December 31, 2018 - $7,995,569 | 744,022,856 | 778,298,606 | ||||||||||||||
Accrued interest receivable | 3,403,810 | 2,449,847 | 3,475,749 | 3,390,944 | ||||||||||||
Prepaid expenses and other assets | 7,518,208 | 3,846,686 | 9,054,815 | 6,261,159 | ||||||||||||
Goodwill | 2,615,352 | - | 1,434,982 | 1,434,982 | ||||||||||||
Core deposit intangible | 3,205,714 | - | 2,623,160 | 2,980,910 | ||||||||||||
Foreclosed assets held for sale | 1,133,160 | 282,785 | 1,490,960 | 1,126,963 | ||||||||||||
Premises and equipment, net | 22,158,095 | 10,607,094 | 19,560,814 | 20,095,161 | ||||||||||||
Operating lease right-of-use asset | 9,194,850 | - | ||||||||||||||
Bank owned life insurance | 20,083,039 | 19,740,623 | 24,543,725 | 20,198,074 | ||||||||||||
Deferred and income taxes receivable | 3,112,541 | 2,506,097 | ||||||||||||||
Income taxes receivable | - | 158,631 | ||||||||||||||
Deferred income taxes | 3,800,037 | 3,650,552 | ||||||||||||||
$ | 966,380,747 | $ | 794,459,520 | $ | 1,016,329,499 | $ | 965,137,870 | |||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
LIABILITIES | ||||||||||||||||
Deposits | $ | 760,729,322 | $ | 607,364,350 | $ | 839,988,502 | $ | 749,618,822 | ||||||||
Federal Home Loan Bank advances | 96,700,000 | 94,300,000 | 50,000,000 | 105,300,000 | ||||||||||||
Subordinated debentures | 15,465,000 | 21,760,829 | ||||||||||||||
Note payable to bank | 5,000,000 | - | 11,200,000 | 5,000,000 | ||||||||||||
Subordinated debentures | 21,782,794 | 15,465,000 | ||||||||||||||
Advances from borrowers for taxes and insurance | 730,438 | 180,269 | 698,438 | 289,808 | ||||||||||||
Accrued expenses and other liabilities | 2,032,290 | 1,962,865 | 4,834,402 | 1,868,008 | ||||||||||||
Operating lease liability | 9,236,695 | - | ||||||||||||||
Income taxes payable | 348,818 | - | ||||||||||||||
Accrued interest payable | 791,216 | 295,543 | 832,494 | 821,811 | ||||||||||||
887,766,060 | 719,568,027 | 932,604,349 | 884,659,278 | |||||||||||||
COMMITMENTS AND CONTINGENCIES | - | - | - | - | ||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||
Capital Stock: | ||||||||||||||||
Common stock, $0.10 par value; authorized 10,000,000 shares; issued September 30, 2018 and December 31, 2017 - 6,895,503 and 6,878,503 shares; respectively | 689,550 | 687,850 | ||||||||||||||
Common stock, $0.10 par value; authorized 10,000,000 shares; issued September 30, 2019 and December 31, 2018 - 6,916,003 and 6,902,003 shares; respectively | 691,600 | 690,200 | ||||||||||||||
Additional paid-in capital | 51,266,714 | 50,856,069 | 51,782,472 | 51,382,585 | ||||||||||||
Retained earnings, substantially restricted | 64,025,061 | 60,679,308 | 71,195,470 | 65,829,687 | ||||||||||||
Accumulated other comprehensive loss | (391,610 | ) | (206,193 | ) | (700,936 | ) | (452,756 | ) | ||||||||
115,589,715 | 112,017,034 | 122,968,606 | 117,449,716 | |||||||||||||
Treasury stock, at cost; September 30, 2018 and December 31, 2017 - 2,443,780 and 2,453,728 shares, respectively | (36,975,028 | ) | (37,125,541 | ) | ||||||||||||
Treasury stock, at cost; September 30, 2019 and December 31, 2018 - 2,534,691 and 2,443,522 shares, respectively | (39,243,456 | ) | (36,971,124 | ) | ||||||||||||
78,614,687 | 74,891,493 | 83,725,150 | 80,478,592 | |||||||||||||
$ | 966,380,747 | $ | 794,459,520 | $ | 1,016,329,499 | $ | 965,137,870 |
See Notes to Condensed Consolidated Financial Statements
GUARANTY FEDERAL BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED) | |||||||
| |||||||
|
Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
9/30/2018 | 9/30/2017 | 9/30/2018 | 9/30/2017 | 9/30/2019 | 9/30/2018 | 9/30/2019 | 9/30/2018 | |||||||||||||||||||||||||
Interest Income | ||||||||||||||||||||||||||||||||
Loans | $ | 12,773,881 | $ | 7,052,544 | $ | 29,971,163 | $ | 20,042,667 | $ | 10,429,973 | $ | 12,773,881 | $ | 31,128,087 | $ | 29,971,163 | ||||||||||||||||
Investment securities | 523,736 | 431,560 | 1,466,036 | 1,361,069 | 735,044 | 523,736 | 2,013,548 | 1,466,036 | ||||||||||||||||||||||||
Other | 80,258 | 41,083 | 276,117 | 134,361 | 416,604 | 80,258 | 835,929 | 276,117 | ||||||||||||||||||||||||
13,377,875 | 7,525,187 | 31,713,316 | 21,538,097 | 11,581,621 | 13,377,875 | 33,977,564 | 31,713,316 | |||||||||||||||||||||||||
Interest Expense | ||||||||||||||||||||||||||||||||
Deposits | 1,825,559 | 893,197 | 4,967,743 | 2,261,752 | 2,880,067 | 1,825,559 | 8,285,507 | 4,967,743 | ||||||||||||||||||||||||
FHLB advances | 481,968 | 419,918 | 1,221,312 | 1,269,543 | 282,845 | 481,968 | 928,131 | 1,221,312 | ||||||||||||||||||||||||
Subordinated debentures | 282,393 | 160,075 | 728,954 | 467,665 | 185,202 | 282,393 | 773,325 | 728,954 | ||||||||||||||||||||||||
Other | 58,949 | - | 62,782 | - | 111,364 | 58,949 | 243,385 | 62,782 | ||||||||||||||||||||||||
2,648,869 | 1,473,190 | 6,980,791 | 3,998,960 | 3,459,478 | 2,648,869 | 10,230,348 | 6,980,791 | |||||||||||||||||||||||||
Net Interest Income | 10,729,006 | 6,051,997 | 24,732,525 | 17,539,137 | 8,122,143 | 10,729,006 | 23,747,216 | 24,732,525 | ||||||||||||||||||||||||
Provision for Loan Losses | 200,000 | 450,000 | 925,000 | 1,500,000 | 100,000 | 200,000 | 200,000 | 925,000 | ||||||||||||||||||||||||
Net Interest Income After Provision for Loan Losses | 10,529,006 | 5,601,997 | 23,807,525 | 16,039,137 | 8,022,143 | 10,529,006 | 23,547,216 | 23,807,525 | ||||||||||||||||||||||||
Noninterest Income | ||||||||||||||||||||||||||||||||
Service charges | 475,484 | 311,070 | 1,344,661 | 869,102 | 442,051 | 475,484 | 1,262,821 | 1,344,661 | ||||||||||||||||||||||||
Net gain (loss) on sale of investment securities | (885 | ) | 11,199 | (8,090 | ) | 73,473 | 31,493 | (885 | ) | 79,756 | (8,090 | ) | ||||||||||||||||||||
Gain on sale of mortgage loans held for sale | 595,384 | 618,732 | 1,591,869 | 1,550,880 | 722,909 | 595,384 | 1,710,839 | 1,591,869 | ||||||||||||||||||||||||
Gain on sale of Small Business Administration loans | 263,755 | 228,895 | 659,996 | 484,240 | 301,187 | 263,755 | 798,763 | 659,996 | ||||||||||||||||||||||||
Net gain (loss) on foreclosed assets | (459,308 | ) | 47,787 | (338,496 | ) | 56,051 | ||||||||||||||||||||||||||
Net loss on foreclosed assets | (134,145 | ) | (459,308 | ) | (113,279 | ) | (338,496 | ) | ||||||||||||||||||||||||
Other income | 587,328 | 353,186 | 1,484,669 | 1,133,548 | 573,635 | 587,328 | 1,695,903 | 1,484,669 | ||||||||||||||||||||||||
1,461,758 | 1,570,869 | 4,734,609 | 4,167,294 | 1,937,130 | 1,461,758 | 5,434,803 | 4,734,609 | |||||||||||||||||||||||||
Noninterest Expense | ||||||||||||||||||||||||||||||||
Salaries and employee benefits | 3,887,582 | 3,052,417 | 11,162,747 | 8,844,836 | 4,144,402 | 3,887,582 | 12,056,592 | 11,162,747 | ||||||||||||||||||||||||
Occupancy | 1,112,702 | 591,961 | 2,920,774 | 1,563,344 | 1,149,242 | 1,112,702 | 3,389,417 | 2,920,774 | ||||||||||||||||||||||||
FDIC deposit insurance premiums | 101,762 | 63,522 | 296,897 | 176,011 | 40,000 | 101,762 | 257,628 | 296,897 | ||||||||||||||||||||||||
Impairment on investment tax credits | - | 146,857 | - | 146,857 | ||||||||||||||||||||||||||||
Data processing | 328,692 | 268,508 | 1,095,584 | 730,260 | 368,374 | 328,692 | 1,177,515 | 1,095,584 | ||||||||||||||||||||||||
Advertising | 131,250 | 131,250 | 397,150 | 393,750 | 102,500 | 131,250 | 402,500 | 397,150 | ||||||||||||||||||||||||
Merger costs | 150,877 | - | 3,570,927 | - | - | 150,877 | 34,011 | 3,570,927 | ||||||||||||||||||||||||
Amortization of core deposit intangible | 119,250 | 94,286 | 357,750 | 314,286 | ||||||||||||||||||||||||||||
Other expense | 952,984 | 757,317 | 2,920,262 | 2,144,310 | 1,029,688 | 858,698 | 2,948,085 | 2,605,976 | ||||||||||||||||||||||||
6,665,849 | 5,011,832 | 22,364,341 | 13,999,368 | 6,953,456 | 6,665,849 | 20,623,498 | 22,364,341 | |||||||||||||||||||||||||
Income Before Income Taxes | 5,324,915 | 2,161,034 | 6,177,793 | 6,207,063 | 3,005,817 | 5,324,915 | 8,358,521 | 6,177,793 | ||||||||||||||||||||||||
Provision for Income Taxes | 1,390,673 | 443,651 | 1,230,790 | 1,467,866 | 455,275 | 1,390,673 | 1,259,116 | 1,230,790 | ||||||||||||||||||||||||
Net Income Available to Common Shareholders | $ | 3,934,242 | $ | 1,717,383 | $ | 4,947,003 | $ | 4,739,197 | $ | 2,550,542 | $ | 3,934,242 | $ | 7,099,405 | $ | 4,947,003 | ||||||||||||||||
Basic Income Per Common Share | $ | 0.89 | $ | 0.39 | $ | 1.12 | $ | 1.08 | $ | 0.58 | $ | 0.89 | $ | 1.60 | $ | 1.12 | ||||||||||||||||
Diluted Income Per Common Share | $ | 0.88 | $ | 0.39 | $ | 1.10 | $ | 1.07 | $ | 0.57 | $ | 0.88 | $ | 1.58 | $ | 1.10 |
See Notes to Condensed Consolidated Financial Statements
GUARANTY FEDERAL BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED) | ||||||||
| ||||||||
|
Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
9/30/2018 | 9/30/2017 | 9/30/2018 | 9/30/2017 | 9/30/2019 | 9/30/2018 | 9/30/2019 | 9/30/2018 | |||||||||||||||||||||||||
NET INCOME | $ | 3,934,242 | $ | 1,717,383 | $ | 4,947,003 | $ | 4,739,197 | $ | 2,550,542 | $ | 3,934,242 | $ | 7,099,405 | $ | 4,947,003 | ||||||||||||||||
OTHER ITEMS OF COMPREHENSIVE INCOME: | ||||||||||||||||||||||||||||||||
Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes | (766,021 | ) | (39,661 | ) | (2,455,951 | ) | 1,408,504 | 721,464 | (766,021 | ) | 3,441,561 | (2,455,951 | ) | |||||||||||||||||||
Change in unrealized gain (loss) on interest rate swaps, before income taxes | 430,248 | (76,222 | ) | 2,198,977 | 151,420 | (852,090 | ) | 430,248 | (3,694,933 | ) | 2,198,977 | |||||||||||||||||||||
Less: Reclassification adjustment for realized (gains) losses on investment securities included in net income, before income taxes | 885 | (11,199 | ) | 8,090 | (73,473 | ) | (31,493 | ) | 885 | (79,756 | ) | 8,090 | ||||||||||||||||||||
Total other items of comprehensive income (loss) | (334,888 | ) | (127,082 | ) | (248,884 | ) | 1,486,451 | |||||||||||||||||||||||||
Income tax expense related to other items of comprehensive income (loss) | (85,397 | ) | (47,022 | ) | (63,467 | ) | 549,986 | |||||||||||||||||||||||||
Other comprehensive income (loss) | (249,491 | ) | (80,060 | ) | (185,417 | ) | 936,465 | |||||||||||||||||||||||||
Total other items of comprehensive loss | (162,119 | ) | (334,888 | ) | (333,128 | ) | (248,884 | ) | ||||||||||||||||||||||||
Income tax (benefit) related to other items of comprehensive income | (137,408 | ) | (85,397 | ) | (84,948 | ) | (63,467 | ) | ||||||||||||||||||||||||
Other comprehensive (loss) | (24,711 | ) | (249,491 | ) | (248,180 | ) | (185,417 | ) | ||||||||||||||||||||||||
TOTAL COMPREHENSIVE INCOME | $ | 3,684,751 | $ | 1,637,323 | $ | 4,761,586 | $ | 5,675,662 | $ | 2,525,831 | $ | 3,684,751 | $ | 6,851,225 | $ | 4,761,586 |
See Notes to Condensed Consolidated Financial Statements
| ||||||
| ||||||
|
Common Stock | Additional Paid- In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
Balance, January 1, 2018 | $ | 687,850 | $ | 50,856,069 | $ | (37,125,541 | ) | $ | 60,679,308 | $ | (206,193 | ) | $ | 74,891,493 | ||||||||||
Net income | - | - | - | 4,947,003 | - | 4,947,003 | ||||||||||||||||||
Other comprehensive income (loss) | - | - | - | - | (185,417 | ) | (185,417 | ) | ||||||||||||||||
Dividends on common stock ($0.36 per share) | - | - | - | (1,601,250 | ) | - | (1,601,250 | ) | ||||||||||||||||
Stock award plans | - | 125,878 | 150,513 | - | - | 276,391 | ||||||||||||||||||
Stock options exercised | 1,700 | 284,767 | - | - | - | 286,467 | ||||||||||||||||||
Balance, September 30, 2018 | $ | 689,550 | $ | 51,266,714 | $ | (36,975,028 | ) | $ | 64,025,061 | $ | (391,610 | ) | $ | 78,614,687 |
GUARANTY FEDERAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
QUARTERLY AND NINE MONTHS ENDED SEPTEMBER 30, 2019 (UNAUDITED)
Common Stock | Additional Paid- In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
Balance, January 1, 2019 | $ | 690,200 | $ | 51,382,585 | $ | (36,971,124 | ) | $ | 65,829,687 | $ | (452,756 | ) | $ | 80,478,592 | ||||||||||
Net income | - | - | - | 2,120,364 | - | 2,120,364 | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 380,791 | 380,791 | ||||||||||||||||||
Dividends on common stock ($0.13 per share) | - | - | - | (582,817 | ) | - | (582,817 | ) | ||||||||||||||||
Stock award plans | - | (53,689 | ) | 222,789 | - | - | 169,100 | |||||||||||||||||
Stock options exercised | 1,000 | 50,900 | - | - | - | 51,900 | ||||||||||||||||||
Balance, March 31, 2019 | 691,200 | 51,379,796 | (36,748,335 | ) | 67,367,234 | (71,965 | ) | 82,617,930 | ||||||||||||||||
Net income | - | - | - | 2,428,499 | - | 2,428,499 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (604,260 | ) | (604,260 | ) | ||||||||||||||||
Dividends on common stock ($0.13 per share) | - | - | - | (581,021 | ) | - | (581,021 | ) | ||||||||||||||||
Treasury stock purchased | - | - | (312,892 | ) | - | - | (312,892 | ) | ||||||||||||||||
Stock award plans | - | 195,599 | (5,583 | ) | - | - | 190,016 | |||||||||||||||||
Balance, June 30, 2019 | 691,200 | 51,575,395 | (37,066,810 | ) | 69,214,712 | (676,225 | ) | 83,738,272 | ||||||||||||||||
Net income | - | - | - | 2,550,542 | - | 2,550,542 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (24,711 | ) | (24,711 | ) | ||||||||||||||||
Dividends on common stock ($0.13 per share) | - | - | - | (569,784 | ) | - | (569,784 | ) | ||||||||||||||||
Treasury stock purchased | - | - | (2,151,696 | ) | - | - | (2,151,696 | ) | ||||||||||||||||
Stock award plans | - | 187,157 | (24,950 | ) | - | - | 162,207 | |||||||||||||||||
Stock options exercised | 400 | 19,920 | - | - | - | 20,320 | ||||||||||||||||||
Balance, September 30, 2019 | $ | 691,600 | $ | 51,782,472 | $ | (39,243,456 | ) | $ | 71,195,470 | $ | (700,936 | ) | $ | 83,725,150 |
See Notes to Condensed Consolidated Financial Statements
GUARANTY FEDERAL BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY QUARTERLY AND TWELVE MONTHS ENDED DECEMBER 31, 2018 | ||||
|
9/30/2018 | 9/30/2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 4,947,003 | $ | 4,739,197 | ||||
Items not requiring (providing) cash: | ||||||||
Deferred income taxes | 706,286 | (603,683 | ) | |||||
Depreciation | 1,096,490 | 791,473 | ||||||
Provision for loan losses | 925,000 | 1,500,000 | ||||||
Gain on sale of mortgage loans held for sale and investment securities | (1,583,779 | ) | (1,624,353 | ) | ||||
Gain (loss) on sale of foreclosed assets | 308,811 | (119,157 | ) | |||||
Gain on sale of Small Business Administration Loans | (659,996 | ) | (484,240 | ) | ||||
Amortization of deferred income, premiums and discounts | 453,575 | 728,144 | ||||||
Amortization of intangible assets | 314,286 | - | ||||||
Accretion of purchase accounting adjustments | (3,282,074 | ) | - | |||||
Stock award plan expense | 276,391 | 330,985 | ||||||
Origination of loans held for sale | (52,789,116 | ) | (52,757,873 | ) | ||||
Proceeds from sale of loans held for sale | 55,341,150 | 53,975,866 | ||||||
Increase in cash surrender value of bank owned life insurance | (342,416 | ) | (350,826 | ) | ||||
Changes in: | ||||||||
Accrued interest receivable | (953,963 | ) | (217,215 | ) | ||||
Prepaid expenses and other assets | 6,203,190 | 44,393 | ||||||
Accounts payable and accrued expenses | (1,441,136 | ) | 529,150 | |||||
Income taxes receivable | (8,972 | ) | 232,186 | |||||
Net cash provided by operating activities | 9,510,730 | 6,714,047 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds on sale of loans | 9,489,176 | 24,919,859 | ||||||
Net change in loans | (13,591,488 | ) | (105,083,322 | ) | ||||
Principal payments on available-for-sale securities | 12,202,207 | 5,153,878 | ||||||
Principal payments on held-to-maturity securities | 3,735 | 9,104 | ||||||
Purchase of premises and equipment | (2,581,491 | ) | (1,633,608 | ) | ||||
Net cash received for acquisition | 2,455,964 | - | ||||||
Purchase of available-for-sale securities | (25,151,079 | ) | (13,350,996 | ) | ||||
Proceeds from sale of available-for-sale securities | 13,602,508 | 18,388,216 | ||||||
Redemption (purchase) of Federal Home Loan Bank stock | (445,700 | ) | 473,500 | |||||
Purchase of tax credit investments | (3,617,366 | ) | (1,214,781 | ) | ||||
Proceeds from sale of foreclosed assets held for sale | 187,468 | 2,433,660 | ||||||
Net cash used in investing activities | (7,446,066 | ) | (69,904,490 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Cash dividends paid on common stock | (1,598,016 | ) | (1,325,308 | ) | ||||
Net increase in demand deposits, NOW accounts and savings accounts | 69,132,414 | 50,768,740 | ||||||
Net increase (decrease) in certificates of deposit | (76,871,838 | ) | 27,957,127 | |||||
Proceeds from Federal Home Loan Bank advances | 470,835,000 | 333,700,000 | ||||||
Repayments of Federal Home Loan Bank and Federal Reserve advances | (470,435,000 | ) | (346,600,000 | ) | ||||
Proceeds from issuance of notes payable | 5,000,000 | - | ||||||
Repayment of notes payable | (3,000,000 | ) | - | |||||
Net decrease of securities sold under agreements to repurchase | (2,159,000 | ) | - | |||||
Advances from borrowers for taxes and insurance | 550,169 | 322,627 | ||||||
Stock options exercised | 286,467 | - | ||||||
Net cash provided by (used in) financing activities | (8,259,804 | ) | 64,823,186 | |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (6,195,140 | ) | 1,632,743 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 37,406,930 | 9,088,441 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 31,211,790 | $ | 10,721,184 |
Common Stock | Additional Paid- In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||
Balance, January 1, 2018 | $ | 687,850 | $ | 50,856,069 | $ | (37,125,541 | ) | $ | 60,679,308 | $ | (206,193 | ) | $ | 74,891,493 | ||||||||||
Net income | - | - | - | 1,355,745 | - | 1,355,745 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (26,942 | ) | (26,942 | ) | ||||||||||||||||
Dividends on common stock ($0.12 per share) | - | - | - | (532,771 | ) | - | (532,771 | ) | ||||||||||||||||
Stock award plans | - | (35,357 | ) | 158,592 | - | - | 123,235 | |||||||||||||||||
Stock options exercised | 450 | 23,330 | - | - | - | 23,780 | ||||||||||||||||||
Balance, March 31, 2018 | 688,300 | 50,844,042 | (36,966,949 | ) | 61,502,282 | (233,135 | ) | 75,834,540 | ||||||||||||||||
Net income | - | - | - | (342,984 | ) | - | (342,984 | ) | ||||||||||||||||
Other comprehensive income | - | - | - | - | 91,016 | 91,016 | ||||||||||||||||||
Dividends on common stock ($0.12 per share) | - | - | - | (534,272 | ) | - | (534,272 | ) | ||||||||||||||||
Stock award plans | - | 161,235 | - | - | - | 161,235 | ||||||||||||||||||
Stock options exercised | 750 | 37,900 | - | - | - | 38,650 | ||||||||||||||||||
Balance, June 30, 2018 | 689,050 | 51,043,177 | (36,966,949 | ) | 60,625,026 | (142,119 | ) | 75,248,185 | ||||||||||||||||
Net income | - | - | - | 3,934,242 | - | 3,934,242 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (249,491 | ) | (249,491 | ) | ||||||||||||||||
Dividends on common stock ($0.12 per share) | - | - | - | (534,207 | ) | - | (534,207 | ) | ||||||||||||||||
Stock award plans | - | 154,137 | (8,079 | ) | - | - | 146,058 | |||||||||||||||||
Stock options exercised | 500 | 69,400 | - | - | - | 69,900 | ||||||||||||||||||
Balance, September 30, 2018 | 689,550 | 51,266,714 | (36,975,028 | ) | 64,025,061 | (391,610 | ) | 78,614,687 | ||||||||||||||||
Net income | - | - | - | 2,384,876 | - | 2,384,876 | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (61,146 | ) | (61,146 | ) | ||||||||||||||||
Dividends on common stock ($0.13 per share) | - | - | - | (580,250 | ) | - | (580,250 | ) | ||||||||||||||||
Stock award plans | - | 82,621 | 3,904 | - | - | 86,525 | ||||||||||||||||||
Stock options exercised | 650 | 33,250 | - | - | - | 33,900 | ||||||||||||||||||
Balance, December 31, 2018 | $ | 690,200 | $ | 51,382,585 | $ | (36,971,124 | ) | $ | 65,829,687 | $ | (452,756 | ) | $ | 80,478,592 |
See Notes to Condensed Consolidated Financial Statements
GUARANTY FEDERAL BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)
9/30/2019 | 9/30/2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 7,099,405 | $ | 4,947,003 | ||||
Items not requiring (providing) cash: | ||||||||
Deferred income taxes | (64,536 | ) | 706,286 | |||||
Depreciation | 1,427,906 | 1,096,490 | ||||||
Lease amortization | 41,845 | - | ||||||
Provision for loan losses | 200,000 | 925,000 | ||||||
Gain on sale of Small Business Administration loans | (798,763 | ) | (659,996 | ) | ||||
Gain on sale of mortgage loans held for sale and investment securities | (1,790,595 | ) | (1,583,779 | ) | ||||
Loss on sale of foreclosed assets | 44,159 | 308,811 | ||||||
Gain on sale of premises and equipment | (6,069 | ) | - | |||||
Amortization of deferred income, premiums and discounts | 313,686 | 453,575 | ||||||
Amortization of intangible assets | 357,750 | 314,286 | ||||||
Stock award plan expense | 521,323 | 276,391 | ||||||
Accretion of purchase accounting adjustments | (1,281,313 | ) | (3,282,074 | ) | ||||
Origination of loans held for sale | (24,039,578 | ) | (52,789,116 | ) | ||||
Proceeds from sale of loans held for sale | 26,322,296 | 55,341,150 | ||||||
Increase in cash surrender value of bank owned life insurance | (345,651 | ) | (342,416 | ) | ||||
Changes in: | ||||||||
Accrued interest receivable | (84,805 | ) | (953,963 | ) | ||||
Prepaid expenses and other assets | (2,183,001 | ) | 6,203,190 | |||||
Accounts payable and accrued expenses | 1,850,394 | (1,441,136 | ) | |||||
Income taxes receivable/payable | 507,448 | (8,972 | ) | |||||
Net cash provided by operating activities | 8,091,901 | 9,510,730 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from sale of loans | 6,445,267 | 9,489,176 | ||||||
Net change in loans | 28,608,984 | (13,591,488 | ) | |||||
Principal payments on available-for-sale securities | 4,947,415 | 12,202,207 | ||||||
Principal payments on held-to-maturity securities | 11,728 | 3,735 | ||||||
Purchase of premises and equipment | (887,490 | ) | (2,581,491 | ) | ||||
Net cash received for acquisition | - | 2,455,964 | ||||||
Purchase of available-for-sale securities | (56,910,103 | ) | (25,151,079 | ) | ||||
Proceeds from sale of available-for-sale securities | 35,035,814 | 13,602,508 | ||||||
Purchase of bank owned life insurance | (4,000,000 | ) | - | |||||
Redemption (purchase) of FHLB stock | 2,229,700 | (445,700 | ) | |||||
Purchase of tax credit investments | (3,168,435 | ) | (3,617,366 | ) | ||||
Proceeds from sale of foreclosed assets held for sale | 507,969 | 187,468 | ||||||
Net cash provided by (used in) investing activities | 12,820,849 | (7,446,066 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Cash dividends paid | (1,744,091 | ) | (1,598,016 | ) | ||||
Net increase in demand deposits, NOW accounts and savings accounts | 104,780,937 | 69,132,414 | ||||||
Net decrease in certificates of deposit | (14,380,120 | ) | (76,871,838 | ) | ||||
Net decrease of securities sold under agreements to repurchase | - | (2,159,000 | ) | |||||
Proceeds from FHLB advances | 93,965,000 | 470,835,000 | ||||||
Repayments of FHLB advances | (149,265,000 | ) | (470,435,000 | ) | ||||
Proceeds from issuance of notes payable | 7,200,000 | 5,000,000 | ||||||
Repayments of notes payable | (1,000,000 | ) | (3,000,000 | ) | ||||
Repayment of Hometown Bancshares subordinated debentures | (6,186,000 | ) | - | |||||
Advances from borrowers for taxes and insurance | 408,630 | 550,169 | ||||||
Stock options exercised | 72,220 | 286,467 | ||||||
Treasury stock purchased | (2,464,588 | ) | - | |||||
Net cash provided by (used in) financing activities | 31,386,988 | (8,259,804 | ) | |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 52,299,738 | (6,195,140 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 34,121,642 | 37,406,930 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 86,421,380 | $ | 31,211,790 |
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, 20172018 (“20172018 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, 2017,2018, 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 $20.00 in cash and the transaction was valued at approximately $4.6 million. Hometown’s subsidiary bank, Hometown Bank, National Association, was merged into Guaranty Bank on June 8, 2018.
Including the effects of the acquisition method accounting adjustments, the Company acquired approximately $178.8$180.0 million in assets, including approximately $143.9 million in loans (inclusive of loan discounts) and approximately $161.2 million in deposits. Goodwill of $2.6$1.4 million was recorded as a result of the transaction. The merger strengthened the Company’s position in Southwest Missouri and the Company will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, and other administrative functions all of which gave rise to the goodwill recorded. The goodwill will not be deductible for tax purposes.
A summary, at fair value, of the assets acquired and liabilities assumed in the Hometown transaction, as of acquisition date, is as follows:
Guaranty Federal Bancshares, Inc.
Net Assets Acquired from Hometown
April 2, 2018
(In Thousands)
Acquired from | Fair Value | Fair |
Acquired from | Fair Value | Fair | |||||||||||||||||||
Hometown | Adjustments | Value | Hometown | Adjustments | Value | |||||||||||||||||||
Assets Acquired | ||||||||||||||||||||||||
Cash and Due From Banks | $ | 7,083 | $ | - | $ | 7,083 | $ | 7,083 | $ | - | $ | 7,083 | ||||||||||||
Investment Securities | 7,521 | - | 7,521 | 7,521 | - | 7,521 | ||||||||||||||||||
Loans | 150,390 | (6,471 | ) | 143,919 | 150,390 | (6,471 | ) | 143,919 | ||||||||||||||||
Allowance for Loan Losses | (2,348 | ) | 2,348 | - | (2,348 | ) | 2,348 | - | ||||||||||||||||
Net Loans | 148,042 | (4,123 | ) | 143,919 | 148,042 | (4,123 | ) | 143,919 | ||||||||||||||||
Fixed Assets | 9,268 | 798 | 10,066 | 9,268 | 798 | 10,066 | ||||||||||||||||||
Foreclosed Assets held for sale | 1,647 | (400 | ) | 1,247 | 1,647 | (400 | ) | 1,247 | ||||||||||||||||
Core Deposit Intangible | - | 3,520 | 3,520 | - | 3,520 | 3,520 | ||||||||||||||||||
Other Assets | 4,146 | 1,283 | 5,429 | 4,146 | 2,463 | 6,609 | ||||||||||||||||||
Total Assets Acquired | $ | 177,707 | $ | 1,078 | $ | 178,785 | $ | 177,707 | $ | 2,258 | $ | 179,965 | ||||||||||||
Liabilities Assumed | ||||||||||||||||||||||||
Deposits | 161,001 | 247 | 161,248 | 161,001 | 247 | 161,248 | ||||||||||||||||||
Federal Home Loan Bank advances | 2,000 | - | 2,000 | 2,000 | - | 2,000 | ||||||||||||||||||
Securities Sold Under Agreements to Repurchase | 2,159 | - | 2,159 | 2,159 | - | 2,159 | ||||||||||||||||||
Other borrowings | 3,000 | - | 3,000 | 3,000 | - | 3,000 | ||||||||||||||||||
Subordinated debentures | 6,186 | 176 | 6,362 | 6,186 | 176 | 6,362 | ||||||||||||||||||
Other Liabilities | 2,003 | - | 2,003 | 2,003 | - | 2,003 | ||||||||||||||||||
Total Liabilities Assumed | 176,349 | $ | 423 | 176,772 | 176,349 | $ | 423 | 176,772 | ||||||||||||||||
Stockholders' Equity | ||||||||||||||||||||||||
Common Stock | 231 | (231 | ) | - | 231 | (231 | ) | - | ||||||||||||||||
Capital Surplus | 18,936 | (18,936 | ) | - | 18,936 | (18,936 | ) | - | ||||||||||||||||
Retained Earnings | (17,587 | ) | 17,587 | - | (17,587 | ) | 17,587 | - | ||||||||||||||||
Accumulated Other Comprehensive Loss | (222 | ) | 222 | - | (222 | ) | 222 | - | ||||||||||||||||
Treasury Stock | - | - | - | - | - | - | ||||||||||||||||||
Total Stockholders' Equity Assumed | 1,358 | $ | (1,358 | ) | - | 1,358 | $ | (1,358 | ) | - | ||||||||||||||
Total Liabilities and Stockholders' Equity Assumed | $ | 177,707 | $ | (935 | ) | $ | 176,772 | $ | 177,707 | $ | (935 | ) | $ | 176,772 | ||||||||||
Net Assets Acquired | $ | 2,013 | $ | 3,193 | ||||||||||||||||||||
Purchase Price | 4,628 | 4,628 | ||||||||||||||||||||||
Goodwill | $ | 2,615 | $ | 1,435 |
The following is a description of the methods used to determine the fair values of significant assets and liabilities presented in the acquisitions above. The purchase price allocation and certain fair value measurements have been finalized.
Cash and due from banks – The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
Investment securities – Investment securities were acquired with an adjustment to fair value based upon quoted market prices if material. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.
Loans acquired – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.
Fixed assets – Fixed assets were acquired with an adjustment to fair value, which represents the difference between the Company’s current analysis of property and equipment values completed in connection with the acquisition and book value acquired.
Foreclosed assets held for sale – These assets are presented at the estimated present values that management expects to receive when the properties are sold, net of related costs of disposal.
Core deposit intangible – This intangible asset represents the value of the relationships that Hometown had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base and the net maintenance cost attributable to customer deposits.
Other assets – The fair value adjustment results from recording additional deferred tax assets related to the transaction. Otherwise, the carrying amount of these assets was deemed to be a reasonable estimate of fair value.
Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. The Company performed a fair value analysis of the estimated weighted average interest rate of the certificates of deposits compared to the current market rates and recorded a fair value adjustment for the difference when material.
Federal Home Loan Bank advances and Other borrowings – The fair value of Federal Home Loan Bank advances and other borrowings are estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.
Securities sold under agreement to repurchase – The carrying amount of securities sold under agreement to repurchase is a reasonable estimate of fair value based on the short-term nature of these liabilities.
Subordinated debentures – The fair value of subordinated debentures is estimated based on borrowing rates currently available to the Company for borrowings with similar terms and maturities.
Other liabilities – The carrying amount of these other liabilities was deemed to be reasonable estimate of fair value.
Pro Forma Financial Information
The results of operations of Hometown have been included in the Company’s consolidated financial statements since the acquisition date. The following schedule includes pro forma results (unaudited) for the three and nine months ended September 30, 2018 and 2017, as if the Hometown acquisition occurred as of the beginning of the reporting periods presented.
Three months ended September 30, | ||||||||
2018 | 2017 | |||||||
(In Thousands, Except Per Share Data) | ||||||||
Summary of Operations | ||||||||
Net interest income | $ | 10,729 | $ | 7,597 | ||||
Provision for loan losses | 200 | 437 | ||||||
Net interest income after provision for loan losses | 10,529 | 7,160 | ||||||
Non interest income | 1,462 | 1,753 | ||||||
Non interest expense | 6,666 | 6,898 | ||||||
Income before income taxes | 5,325 | 2,015 | ||||||
Provision for income taxes | 1,391 | 680 | ||||||
Net income | $ | 3,934 | $ | 1,335 | ||||
Basic income per common share | $ | 0.89 | $ | 0.31 | ||||
Diluted income per common share | $ | 0.88 | $ | 0.30 |
Nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
(In Thousands, Except Per Share Data) | ||||||||
Summary of Operations | ||||||||
Net interest income | $ | 26,445 | $ | 22,792 | ||||
Provision for loan losses | 925 | 1,313 | ||||||
Net interest income after provision for loan losses | 25,520 | 21,479 | ||||||
Non interest income | 5,036 | 5,258 | ||||||
Non interest expense | 24,391 | 20,693 | ||||||
Income before income taxes | 6,165 | 6,044 | ||||||
Provision for income taxes | 1,260 | 2,040 | ||||||
Net income | $ | 4,905 | $ | 4,004 | ||||
Basic income per common share | $ | 1.12 | $ | 0.92 | ||||
Diluted income per common share | $ | 1.10 | $ | 0.90 |
The pro forma information is presented for information purposes only and not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results. The pro forma information includes net losses from Hometown of approximately ($163,000) and ($313,000) for the three and nine months ended September 30, 2017, respectively.
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 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Approximate Fair Value | |||||||||||||||||||||||||
As of September 30, 2018 | ||||||||||||||||||||||||||||||||
As of September 30, 2019 | ||||||||||||||||||||||||||||||||
Debt Securities: | ||||||||||||||||||||||||||||||||
U. S. government agencies | $ | 1,499,752 | $ | - | $ | (9,071 | ) | $ | 1,490,681 | |||||||||||||||||||||||
Municipals | $ | 34,569,371 | $ | 2,046 | $ | (1,231,864 | ) | $ | 33,339,553 | 30,172,564 | 805,092 | (22,646 | ) | 30,955,010 | ||||||||||||||||||
Corporates | 3,000,000 | - | (17,024 | ) | 2,982,976 | 13,487,865 | 164,686 | (13,115 | ) | 13,639,436 | ||||||||||||||||||||||
Mortgage-backed securities - private label | 10,963,720 | 9,367 | (184 | ) | 10,972,903 | |||||||||||||||||||||||||||
Government sponsored mortgage-backed securities and SBA loan pools | 51,197,672 | 22,354 | (1,937,412 | ) | 49,282,614 | 48,704,459 | 734,188 | (142,975 | ) | 49,295,672 | ||||||||||||||||||||||
$ | 88,767,043 | $ | 24,400 | $ | (3,186,300 | ) | $ | 85,605,143 | $ | 104,828,360 | $ | 1,713,333 | (187,991 | ) | 106,353,702 |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Approximate Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Approximate Fair Value | |||||||||||||||||||||||||
As of December 31, 2017 | ||||||||||||||||||||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||||||||||||||
Debt Securities: | ||||||||||||||||||||||||||||||||
Municipals | $ | 33,908,207 | $ | 253,872 | $ | (263,621 | ) | $ | 33,898,458 | $ | 34,470,648 | $ | 10,581 | $ | (710,709 | ) | $ | 33,770,520 | ||||||||||||||
Corporates | 3,000,000 | 65,000 | - | 3,065,000 | 3,000,000 | 18,927 | - | 3,018,927 | ||||||||||||||||||||||||
Government sponsored mortgage-backed securities and SBA loan pools | 45,414,845 | 9,283 | (908,913 | ) | 44,515,215 | 50,632,011 | 81,999 | (1,237,260 | ) | 49,476,750 | ||||||||||||||||||||||
$ | 82,323,052 | $ | 328,155 | $ | (1,172,534 | ) | $ | 81,478,673 | $ | 88,102,659 | $ | 111,507 | $ | (1,947,969 | ) | $ | 86,266,197 |
Maturities of available-for-sale debt securities as of September 30, 2018:2019:
Amortized Cost | Approximate Fair Value | Amortized Cost | Approximate Fair Value | |||||||||||||
Less than 1 year | - | - | ||||||||||||||
1-5 years | 430,889 | 428,979 | $ | 386,057 | $ | 391,105 | ||||||||||
6-10 years | 11,928,256 | 11,601,504 | 15,321,979 | 15,495,164 | ||||||||||||
After 10 years | 25,210,226 | 24,292,046 | 29,452,145 | 30,198,857 | ||||||||||||
Mortgage-backed securities - private label not due on a single maturity date | 10,963,720 | 10,972,903 | ||||||||||||||
Government sponsored mortgage-backed securities and SBA loan pools not due on a single maturity date | 51,197,672 | 49,282,614 | 48,704,459 | 49,295,673 | ||||||||||||
$ | 88,767,043 | $ | 85,605,143 | $ | 104,828,360 | $ | 106,353,702 |
The amortized cost and approximate fair values of securities classified as held to maturity are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Approximate Fair Value | |||||||||||||
As of September 30, 2018 | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Government sponsored mortgage-backed securities | $ | 12,722 | $ | 154 | $ | (71 | ) | $ | 12,805 |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Approximate Fair Value | |||||||||||||
As of December 31, 2017 | ||||||||||||||||
Debt Securities: | ||||||||||||||||
Government sponsored mortgage-backed securities | $ | 16,457 | $ | 327 | $ | (55 | ) | $ | 16,729 |
Maturities of held-to-maturity securities as of September 30, 2018:
Amortized Cost | Approximate Fair Value | |||||||
Government sponsored mortgage-backed securities not due on a single maturity date | $ | 12,722 | $ | 12,805 |
The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $29,466,642$5,572,723 and $35,774,863$24,943,176 as of September 30, 20182019 and December 31, 2017,2018, respectively. The approximate fair value of pledged securities amounted to $28,493,596$5,673,630 and $35,355,969$24,374,187 as of September 30, 20182019 and December 31, 2017,2018, respectively.
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 (losses) of ($8,090)$214,125 and $73,473 as$26,061 and gross losses of $134,369 and $34,151 for the nine months ended September 30, 20182019 and September 30, 2017,2018, respectively, were realized from the sale of available-for-sale securities. The tax effect of these net gains (losses)and losses was $16,749 and ($2,063) and $27,185 as offor the nine months ended September 30, 20182019 and September 30, 2017,2018, respectively.
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, or declines in stock prices of equity securities.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 and equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 20182019 and December 31, 2017,2018, was $80,223,968$20,627,201 and $62,107,660,$70,434,596, respectively, which is approximately 94%19% and 76%82% of the Company’s investment portfolio.
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 September 30, 20182019 and December 31, 2017.2018.
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||||||||||||
As of September 30, 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 | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||||||
U. S. government agencies | $ | 1,490,680 | $ | (9,071 | ) | $ | - | $ | - | $ | 1,490,680 | $ | (9,071 | ) | ||||||||||||||||||||||||||||||||||
Municipals | 1,124,104 | (22,646 | ) | - | - | 1,124,104 | (22,646 | ) | ||||||||||||||||||||||||||||||||||||||||
Corporates | $ | 2,982,976 | $ | (17,024 | ) | $ | - | $ | - | $ | 2,982,976 | $ | (17,024 | ) | 2,540,521 | (13,115 | ) | - | - | 2,540,521 | (13,115 | ) | ||||||||||||||||||||||||||
Municipals | 15,318,000 | (360,210 | ) | 16,854,043 | (871,654 | ) | 32,172,043 | (1,231,864 | ) | |||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities - private label | 2,063,242 | (184 | ) | - | - | 2,063,242 | (184 | ) | ||||||||||||||||||||||||||||||||||||||||
Government sponsored mortgage-backed securities and SBA loan pools | 13,890,846 | (324,934 | ) | 31,178,103 | (1,612,549 | ) | 45,068,949 | (1,937,483 | ) | 8,979,065 | (46,080 | ) | 4,429,589 | (96,895 | ) | 13,408,654 | (142,975 | ) | ||||||||||||||||||||||||||||||
$ | 32,191,822 | $ | (702,168 | ) | $ | 48,032,146 | $ | (2,484,203 | ) | $ | 80,223,968 | $ | (3,186,371 | ) | $ | 16,197,612 | $ | (91,096 | ) | $ | 4,429,589 | $ | (96,895 | ) | $ | 20,627,201 | $ | (187,991 | ) |
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Description of Securities | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||||||||
Municipals | $ | 11,024,593 | $ | (103,747 | ) | $ | 8,802,796 | $ | (159,874 | ) | $ | 19,827,389 | $ | (263,621 | ) | $ | 6,324,750 | $ | (67,774 | ) | $ | 23,223,221 | $ | (642,935 | ) | $ | 29,547,971 | $ | (710,709 | ) | ||||||||||||||||||
Government sponsored mortgage-backed securities and SBA loan pools | 20,088,694 | (253,907 | ) | 22,191,577 | (655,006 | ) | 42,280,271 | (908,913 | ) | 7,127,597 | (112,282 | ) | 33,759,028 | (1,124,978 | ) | 40,886,625 | (1,237,260 | ) | ||||||||||||||||||||||||||||||
$ | 31,113,287 | $ | (357,654 | ) | $ | 30,994,373 | $ | (814,880 | ) | $ | 62,107,660 | $ | (1,172,534 | ) | $ | 13,452,347 | $ | (180,056 | ) | $ | 56,982,249 | $ | (1,767,913 | ) | $ | 70,434,596 | $ | (1,947,969 | ) |
Note 5: Loans and Allowance for Loan Losses
Categories of loans at September 30, 20182019 and December 31, 20172018 include:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Real estate - residential mortgage: | ||||||||||||||||
One to four family units | $ | 135,292,752 | $ | 106,300,790 | $ | 121,690,131 | $ | 132,410,810 | ||||||||
Multi-family | 93,320,376 | 85,225,074 | 93,628,789 | 90,548,265 | ||||||||||||
Real estate - construction | 90,819,134 | 64,743,582 | 88,175,253 | 88,553,995 | ||||||||||||
Real estate - commercial | 313,283,043 | 261,866,285 | 308,270,953 | 322,921,323 | ||||||||||||
Commercial loans | 122,288,207 | 94,522,840 | 108,738,413 | 119,369,484 | ||||||||||||
Consumer and other loans | 33,745,549 | 24,716,447 | 31,721,831 | 33,091,017 | ||||||||||||
Total loans | 788,749,061 | 637,375,018 | 752,225,370 | 786,894,894 | ||||||||||||
Less: | ||||||||||||||||
Allowance for loan losses | (7,731,707 | ) | (7,107,418 | ) | (7,557,311 | ) | (7,995,569 | ) | ||||||||
Deferred loan fees/costs, net | (701,035 | ) | (662,591 | ) | (645,203 | ) | (600,719 | ) | ||||||||
Net loans | $ | 780,316,319 | $ | 629,605,009 | $ | 744,022,856 | $ | 778,298,606 |
Classes of loans by aging at September 30, 20182019 and December 31, 20172018 were as follows:
As of September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days and more Past Due | Total Past | Current | Total Loans | Total Loans > | 30-59 Days | 60-89 Days | 90 Days and more Past Due | Total Past | Current | Total Loans | Total Loans > | |||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - residential mortgage: | Real estate - residential mortgage: | Real estate - residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
One to four family units | $ | 68 | $ | 181 | $ | 2,238 | $ | 2,487 | $ | 132,806 | $ | 135,293 | $ | - | $ | 290 | $ | 246 | $ | 157 | $ | 693 | $ | 120,997 | $ | 121,690 | $ | - | ||||||||||||||||||||||||||||
Multi-family | - | 5,990 | - | 5,990 | 87,330 | 93,320 | - | 5,930 | - | - | 5,930 | 87,699 | 93,629 | - | ||||||||||||||||||||||||||||||||||||||||||
Real estate - construction | 323 | - | - | 323 | 90,496 | 90,819 | - | 581 | - | - | 581 | 87,594 | 88,175 | - | ||||||||||||||||||||||||||||||||||||||||||
Real estate - commercial | 2,667 | 1,054 | 698 | 4,419 | 308,864 | 313,283 | - | 853 | - | - | 853 | 307,418 | 308,271 | - | ||||||||||||||||||||||||||||||||||||||||||
Commercial loans | 1,386 | 73 | 212 | 1,671 | 120,617 | 122,288 | - | 186 | 5 | - | 191 | 108,547 | 108,738 | - | ||||||||||||||||||||||||||||||||||||||||||
Consumer and other loans | 909 | 9 | 7 | 925 | 32,821 | 33,746 | - | - | 18 | - | 18 | 31,704 | 31,722 | - | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 5,353 | $ | 7,307 | $ | 3,155 | $ | 15,815 | $ | 772,934 | $ | 788,749 | $ | - | $ | 7,840 | $ | 269 | $ | 157 | $ | 8,266 | $ | 743,959 | $ | 752,225 | $ | - |
As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days and more Past Due | Total Past | Current | Total Loans | Total Loans > | 30-59 Days | 60-89 Days | 90 Days and more Past Due | Total Past | Current | Total Loans | Total Loans > | |||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - residential mortgage: | Real estate - residential mortgage: | Real estate - residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
One to four family units | $ | 510 | $ | 731 | $ | 2,495 | $ | 3,736 | $ | 102,565 | $ | 106,301 | $ | - | $ | 177 | $ | 329 | $ | 2,164 | $ | 2,670 | $ | 129,741 | $ | 132,411 | $ | - | ||||||||||||||||||||||||||||
Multi-family | 775 | - | - | 775 | 84,450 | 85,225 | - | 5,952 | - | - | 5,952 | 84,596 | 90,548 | - | ||||||||||||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | - | 64,744 | 64,744 | - | - | - | - | - | 88,554 | 88,554 | - | ||||||||||||||||||||||||||||||||||||||||||
Real estate - commercial | 243 | 135 | - | 378 | 261,488 | 261,866 | - | �� | 1,000 | 81 | - | 1,081 | 321,840 | 322,921 | - | |||||||||||||||||||||||||||||||||||||||||
Commercial loans | 276 | - | 588 | 864 | 93,659 | 94,523 | - | 228 | 433 | 71 | 732 | 118,638 | 119,370 | - | ||||||||||||||||||||||||||||||||||||||||||
Consumer and other loans | 8 | 8 | - | 16 | 24,700 | 24,716 | - | 107 | 12 | - | 119 | 32,972 | 33,091 | - | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,812 | $ | 874 | $ | 3,083 | $ | 5,769 | $ | 631,606 | $ | 637,375 | $ | - | $ | 7,464 | $ | 855 | $ | 2,235 | $ | 10,554 | $ | 776,341 | $ | 786,895 | $ | - |
At September 30, 2018, there were purchased credit impaired loans of $2,015,591 30-59 days past due, $560,683 60-89 days past due and $387,003 that were greater than 90 days past due.
Nonaccruing loans are summarized as follows:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Real estate - residential mortgage: | ||||||||||||||||
One to four family units | $ | 4,407,862 | $ | 4,423,074 | $ | 2,166,284 | $ | 4,136,342 | ||||||||
Multi-family | - | - | - | - | ||||||||||||
Real estate - construction | 4,179,409 | 4,452,409 | 3,815,409 | 4,088,409 | ||||||||||||
Real estate - commercial | 4,212,886 | 161,491 | 2,956,289 | 3,592,476 | ||||||||||||
Commercial loans | 1,167,417 | 802,628 | 768,846 | 1,262,910 | ||||||||||||
Consumer and other loans | 16,561 | 121,915 | 73,189 | 1,542 | ||||||||||||
Total | $ | 13,984,135 | $ | 9,961,517 | $ | 9,780,017 | $ | 13,081,679 |
At September 30, 2018, purchased credit impaired loans comprised $3.0 million of nonaccrual loans.
The following tables present the activity in the allowance for loan losses based on portfolio segment for the three and nine months ended September 30, 20182019 and 2017:2018:
Three months ended September 30, 2018 | Construction | Commercial | One to four family | Multi- family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 2,484 | $ | 1,787 | $ | 1,237 | $ | 553 | $ | 1,085 | $ | 367 | $ | 60 | $ | 7,573 | $ | 2,169 | $ | 2,188 | $ | 948 | $ | 673 | $ | 1,236 | $ | 397 | $ | 60 | $ | 7,671 | ||||||||||||||||||||||||||||||||
Provision charged to expense | (219 | ) | 158 | 96 | 97 | (44 | ) | 65 | 47 | $ | 200 | (245 | ) | 242 | 42 | 50 | (125 | ) | 99 | 37 | $ | 100 | ||||||||||||||||||||||||||||||||||||||||||
Losses charged off | - | - | (3 | ) | - | (14 | ) | (74 | ) | - | $ | (91 | ) | - | (122 | ) | - | - | (106 | ) | (85 | ) | - | $ | (313 | ) | ||||||||||||||||||||||||||||||||||||||
Recoveries | 36 | - | 1 | - | 4 | 9 | - | $ | 50 | 28 | 1 | 1 | - | 55 | 14 | - | $ | 99 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, end of period | $ | 2,301 | $ | 1,945 | $ | 1,331 | $ | 650 | $ | 1,031 | $ | 367 | $ | 107 | $ | 7,732 | $ | 1,952 | $ | 2,309 | $ | 991 | $ | 723 | $ | 1,060 | $ | 425 | $ | 97 | $ | 7,557 |
Nine months ended September 30, 2018 | Construction | Commercial | One to four family | Multi- family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nine months ended | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 2,244 | $ | 1,789 | $ | 946 | $ | 464 | $ | 1,031 | $ | 454 | $ | 179 | $ | 7,107 | $ | 2,306 | $ | 2,093 | $ | 1,297 | $ | 641 | $ | 1,160 | $ | 373 | $ | 126 | $ | 7,996 | ||||||||||||||||||||||||||||||||
Provision charged to expense | (13 | ) | 155 | 386 | 186 | 98 | 185 | (72 | ) | $ | 925 | (523 | ) | 317 | (41 | ) | 82 | 175 | 219 | (29 | ) | $ | 200 | |||||||||||||||||||||||||||||||||||||||||
Losses charged off | - | - | (3 | ) | - | (110 | ) | (301 | ) | - | $ | (414 | ) | - | (122 | ) | (271 | ) | - | (381 | ) | (199 | ) | - | $ | (973 | ) | |||||||||||||||||||||||||||||||||||||
Recoveries | 70 | 1 | 2 | - | 12 | 29 | - | $ | 114 | 169 | 21 | 6 | - | 106 | 32 | - | $ | 334 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, end of period | $ | 2,301 | $ | 1,945 | $ | 1,331 | $ | 650 | $ | 1,031 | $ | 367 | $ | 107 | $ | 7,732 | $ | 1,952 | $ | 2,309 | $ | 991 | $ | 723 | $ | 1,060 | $ | 425 | $ | 97 | $ | 7,557 |
Three months ended September 30, 2017 | Construction | Commercial | One to four family | Multi- family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three months ended | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 1,739 | $ | 1,954 | $ | 936 | $ | 323 | $ | 1,226 | $ | 335 | $ | 127 | $ | 6,640 | $ | 2,484 | $ | 1,787 | $ | 1,237 | $ | 553 | $ | 1,085 | $ | 367 | $ | 60 | $ | 7,573 | ||||||||||||||||||||||||||||||||
Provision charged to expense | 524 | (116 | ) | (81 | ) | 52 | (99 | ) | 126 | 44 | $ | 450 | (219 | ) | 158 | 96 | 97 | (44 | ) | 65 | 47 | $ | 200 | |||||||||||||||||||||||||||||||||||||||||
Losses charged off | - | (71 | ) | - | - | - | (46 | ) | - | $ | (117 | ) | - | - | (3 | ) | - | (14 | ) | (74 | ) | - | $ | (91 | ) | |||||||||||||||||||||||||||||||||||||||
Recoveries | 16 | - | 1 | - | 7 | 12 | - | $ | 36 | 36 | - | 1 | - | 4 | 9 | - | $ | 50 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, end of period | $ | 2,279 | $ | 1,767 | $ | 856 | $ | 375 | $ | 1,134 | $ | 427 | $ | 171 | $ | 7,009 | $ | 2,301 | $ | 1,945 | $ | 1,331 | $ | 650 | $ | 1,031 | $ | 367 | $ | 107 | $ | 7,732 |
Nine months ended September 30, 2017 | Construction | Commercial | One to four family | Multi- family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nine months ended | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, beginning of period | $ | 1,377 | $ | 1,687 | $ | 856 | $ | 206 | $ | 1,168 | $ | 337 | $ | 111 | $ | 5,742 | $ | 2,244 | $ | 1,789 | $ | 946 | $ | 464 | $ | 1,031 | $ | 454 | $ | 179 | $ | 7,107 | ||||||||||||||||||||||||||||||||
Provision charged to expense | 847 | 151 | 2 | 169 | 40 | 231 | 60 | $ | 1,500 | (13 | ) | 155 | 386 | 186 | 98 | 185 | (72 | ) | $ | 925 | ||||||||||||||||||||||||||||||||||||||||||||
Losses charged off | - | (71 | ) | (11 | ) | - | (85 | ) | (169 | ) | - | $ | (336 | ) | - | - | (3 | ) | - | (110 | ) | (301 | ) | - | $ | (414 | ) | |||||||||||||||||||||||||||||||||||||
Recoveries | 55 | - | 9 | - | 11 | 28 | - | $ | 103 | 70 | 1 | 2 | - | 12 | 29 | - | $ | 114 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance, end of period | $ | 2,279 | $ | 1,767 | $ | 856 | $ | 375 | $ | 1,134 | $ | 427 | $ | 171 | $ | 7,009 | $ | 2,301 | $ | 1,945 | $ | 1,331 | $ | 650 | $ | 1,031 | $ | 367 | $ | 107 | $ | 7,732 |
The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 20182019 and December 31, 2017:2018:
As of September 30, 2018 | Construction | Commercial | One to four family | Multi- family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 552 | $ | 51 | $ | 606 | $ | - | $ | 231 | $ | 26 | $ | - | $ | 1,466 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 1,749 | $ | 1,894 | $ | 725 | $ | 650 | $ | 800 | $ | 341 | $ | 107 | $ | 6,266 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 4,180 | $ | 922 | $ | 4,405 | $ | 5,990 | $ | 863 | $ | 153 | $ | - | $ | 16,513 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 86,639 | $ | 309,488 | $ | 130,888 | $ | 87,330 | $ | 121,382 | $ | 33,145 | $ | - | $ | 768,872 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | 2,873 | $ | - | $ | - | $ | 43 | $ | 448 | $ | - | $ | 3,364 |
December 31, 2017 | Construction | Commercial | One to four family | Multi- family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 738 | $ | - | $ | 127 | $ | - | $ | 246 | $ | 138 | $ | - | $ | 1,249 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 1,506 | $ | 1,789 | $ | 819 | $ | 464 | $ | 785 | $ | 316 | $ | 179 | $ | 5,858 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 4,452 | $ | 161 | $ | 4,424 | $ | 775 | $ | 739 | $ | 276 | $ | - | $ | 10,827 | ||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 60,292 | $ | 261,705 | $ | 101,877 | $ | 84,450 | $ | 93,784 | $ | 24,440 | $ | - | $ | 626,548 |
September 30, 2019 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending balance: individually | $ | 554 | $ | 24 | $ | 202 | $ | - | $ | 214 | $ | 20 | $ | - | $ | 1,014 | ||||||||||||||||
Ending balance: collectively | $ | 1,398 | $ | 2,285 | $ | 789 | $ | 723 | $ | 846 | $ | 402 | $ | 97 | $ | 6,540 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 3 | $ | - | $ | 3 | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance: individually | $ | 3,816 | $ | 412 | $ | 2,166 | $ | 5,930 | $ | 599 | $ | 185 | $ | - | $ | 13,108 | ||||||||||||||||
Ending balance: collectively | $ | 84,359 | $ | 305,188 | $ | 119,524 | $ | 87,699 | $ | 108,072 | $ | 31,247 | $ | - | $ | 736,089 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | 2,671 | $ | - | $ | - | $ | 67 | $ | 290 | $ | - | $ | 3,028 |
December 31, 2018 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Unallocated | Total | ||||||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Ending balance: individually | $ | 552 | $ | 106 | $ | 573 | $ | - | $ | 363 | $ | 18 | $ | - | $ | 1,612 | ||||||||||||||||
Ending balance: collectively | $ | 1,754 | $ | 1,987 | $ | 724 | $ | 641 | $ | 797 | $ | 355 | $ | 126 | $ | 6,384 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||
Ending balance: individually | $ | 4,088 | $ | 1,588 | $ | 4,520 | $ | 5,952 | $ | 1,062 | $ | 169 | $ | - | $ | 17,379 | ||||||||||||||||
Ending balance: collectively | $ | 84,507 | $ | 317,488 | $ | 128,258 | $ | 84,663 | $ | 118,459 | $ | 32,968 | $ | - | $ | 766,343 | ||||||||||||||||
Ending balance: loans acquired with deteriorated credit quality | $ | - | $ | 2,782 | $ | - | $ | - | $ | 216 | $ | 175 | $ | - | $ | 3,173 |
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 nonclassifiednon-classified 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 September 30, 20182019 and December 31, 2017:2018:
September 30, 2018 | December 31, 2017 | September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Recorded | Unpaid | Specific | Recorded | Unpaid | Specific | Recorded | Unpaid | Specific | Recorded | Unpaid | Specific | |||||||||||||||||||||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Loans without a specific valuation allowance | Loans without a specific valuation allowance | |||||||||||||||||||||||||||||||||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||
One to four family units | $ | 836 | $ | 836 | $ | - | $ | 3,180 | $ | 3,180 | $ | - | $ | 943 | $ | 943 | $ | - | $ | 2 | $ | 2 | $ | - | ||||||||||||||||||||||||
Multi-family | - | - | - | 775 | 775 | - | 5,930 | 5,930 | - | 5,952 | 5,952 | - | ||||||||||||||||||||||||||||||||||||
Real estate - construction | - | - | - | 2,840 | 2,840 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 3,549 | 3,549 | - | 161 | 161 | - | 2,921 | 2,921 | - | 3,138 | 3,138 | - | ||||||||||||||||||||||||||||||||||||
Commercial loans | 242 | 242 | - | 465 | 465 | - | 25 | 25 | - | 216 | 216 | - | ||||||||||||||||||||||||||||||||||||
Consumer and other loans | 457 | 457 | - | 3 | 3 | - | 363 | 363 | - | 225 | 225 | - | ||||||||||||||||||||||||||||||||||||
Loans with a specific valuation allowance | Loans with a specific valuation allowance | |||||||||||||||||||||||||||||||||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||
One to four family units | $ | 3,569 | $ | 3,569 | $ | 606 | $ | 1,244 | $ | 1,244 | $ | 127 | $ | 1,224 | $ | 1,224 | $ | 202 | $ | 4,518 | $ | 4,518 | $ | 573 | ||||||||||||||||||||||||
Multi-family | 5,990 | 5,990 | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Real estate - construction | 4,180 | 5,413 | 552 | 1,612 | 2,845 | 738 | 3,815 | 5,048 | 554 | 4,088 | 5,321 | 552 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 246 | 246 | 51 | - | - | - | 162 | 162 | 24 | 1,232 | 1,317 | 106 | ||||||||||||||||||||||||||||||||||||
Commercial loans | 664 | 664 | 231 | 274 | 274 | 246 | 641 | 641 | 214 | 1,062 | 1,062 | 363 | ||||||||||||||||||||||||||||||||||||
Consumer and other loans | 144 | 144 | 26 | 273 | 273 | 138 | 112 | 112 | 23 | 119 | 119 | 18 | ||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||||||||||||||||||||||||||||||||||
One to four family units | $ | 4,405 | $ | 4,405 | $ | 606 | $ | 4,424 | $ | 4,424 | $ | 127 | $ | 2,167 | $ | 2,167 | $ | 202 | $ | 4,520 | $ | 4,520 | $ | 573 | ||||||||||||||||||||||||
Multi-family | 5,990 | 5,990 | - | 775 | 775 | - | 5,930 | 5,930 | - | 5,952 | 5,952 | - | ||||||||||||||||||||||||||||||||||||
Real estate - construction | 4,180 | 5,413 | 552 | 4,452 | 5,685 | 738 | 3,815 | 5,048 | 554 | 4,088 | 5,321 | 552 | ||||||||||||||||||||||||||||||||||||
Real estate - commercial | 3,795 | 3,795 | 51 | 161 | 161 | - | 3,083 | 3,083 | 24 | 4,370 | 4,455 | 106 | ||||||||||||||||||||||||||||||||||||
Commercial loans | 906 | 906 | 231 | 739 | 739 | 246 | 666 | 666 | 214 | 1,278 | 1,278 | 363 | ||||||||||||||||||||||||||||||||||||
Consumer and other loans | 601 | 601 | 26 | 276 | 276 | 138 | 475 | 475 | 23 | 344 | 344 | 18 | ||||||||||||||||||||||||||||||||||||
Total | $ | 19,877 | $ | 21,110 | $ | 1,466 | $ | 10,827 | $ | 12,060 | $ | 1,249 | $ | 16,136 | $ | 17,369 | $ | 1,017 | $ | 20,552 | $ | 21,870 | $ | 1,612 |
The above amounts include purchased credit impaired loans. At September 30, 2018, purchased credit impaired loans comprised $3.4 million of impaired loans without a specific valuation allowance.
The following table summarizes average impaired loans and related interest recognized on impaired loans for the three and nine months ended September 30, 20182019 and 2017:2018:
For the Three Months Ended | For the Three Months Ended | For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | September 30, 2019 | September 30, 2018 | |||||||||||||||||||||||||||||
Average | Interest | Average | Interest | Average | Interest | Average | Interest | |||||||||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||
Loans without a specific valuation allowance | Loans without a specific valuation allowance | |||||||||||||||||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||||||||||||||||||
One to four family units | $ | 1,025 | $ | - | $ | 1,946 | $ | - | $ | 1,046 | $ | 1 | $ | 1,649 | $ | - | ||||||||||||||||
Multi-family | 2,001 | 25 | - | - | 5,933 | - | 1,006 | 25 | ||||||||||||||||||||||||
Real estate - construction | - | - | 2,937 | - | - | - | 1,525 | - | ||||||||||||||||||||||||
Real estate - commercial | 2,496 | - | 161 | - | 3,353 | 4 | 2,383 | 46 | ||||||||||||||||||||||||
Commercial loans | 143 | - | 504 | - | 161 | - | 658 | - | ||||||||||||||||||||||||
Consumer and other loans | 93 | - | 2 | - | 268 | - | 37 | - | ||||||||||||||||||||||||
Loans with a specific valuation allowance | Loans with a specific valuation allowance | |||||||||||||||||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||||||||||||||||||
One to four family units | $ | 3,308 | $ | - | $ | 183 | $ | - | $ | 1,970 | $ | - | $ | 2,671 | $ | - | ||||||||||||||||
Multi-family | 1,997 | - | - | - | - | - | 666 | - | ||||||||||||||||||||||||
Real estate - construction | 4,212 | - | 2,373 | - | 3,866 | - | 2,774 | - | ||||||||||||||||||||||||
Real estate - commercial | 190 | - | - | - | 657 | - | 81 | - | ||||||||||||||||||||||||
Commercial loans | 566 | - | 431 | - | 702 | - | 457 | - | ||||||||||||||||||||||||
Consumer and other loans | 84 | - | 123 | - | 119 | - | 116 | - | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||||||||||||||||||
One to four family units | $ | 4,333 | $ | - | $ | 2,129 | $ | - | $ | 3,016 | $ | 1 | $ | 4,320 | $ | - | ||||||||||||||||
Multi-family | 3,998 | 25 | - | - | 5,933 | - | 1,672 | 25 | ||||||||||||||||||||||||
Real estate - construction | 4,212 | - | 5,310 | - | 3,866 | - | 4,299 | - | ||||||||||||||||||||||||
Real estate - commercial | 2,686 | - | 161 | - | 4,010 | 4 | 2,464 | 46 | ||||||||||||||||||||||||
Commercial loans | 709 | - | 935 | - | 863 | - | 1,115 | - | ||||||||||||||||||||||||
Consumer and other loans | 177 | - | 125 | - | 387 | - | 153 | - | ||||||||||||||||||||||||
Total | $ | 16,115 | $ | 25 | $ | 8,660 | $ | - | $ | 18,075 | $ | 5 | $ | 14,023 | $ | 71 |
For the Nine Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2018 | September 30, 2017 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
(In Thousands) | ||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||
One to four family units | $ | 1,649 | $ | - | $ | 1,886 | $ | - | ||||||||
Multi-family | 1,006 | 25 | - | - | ||||||||||||
Real estate - construction | 1,525 | - | 2,964 | - | ||||||||||||
Real estate - commercial | 2,383 | 46 | 360 | - | ||||||||||||
Commercial loans | 658 | - | 557 | - | ||||||||||||
Consumer and other loans | 37 | - | 8 | - | ||||||||||||
Loans with a specific valuation allowance | ||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||
One to four family units | $ | 2,671 | $ | - | $ | 90 | $ | - | ||||||||
Multi-family | 666 | - | - | - | ||||||||||||
Real estate - construction | 2,774 | - | 2,395 | - | ||||||||||||
Real estate - commercial | 81 | - | - | - | ||||||||||||
Commercial loans | 457 | - | 481 | - | ||||||||||||
Consumer and other loans | 116 | - | 94 | - | ||||||||||||
Total | ||||||||||||||||
Real estate - residential mortgage: | ||||||||||||||||
One to four family units | $ | 4,320 | $ | - | $ | 1,976 | $ | - | ||||||||
Multi-family | 1,672 | 25 | - | - | ||||||||||||
Real estate - construction | 4,299 | - | 5,359 | - | ||||||||||||
Real estate - commercial | 2,464 | 46 | 360 | - | ||||||||||||
Commercial loans | 1,115 | - | 1,038 | - | ||||||||||||
Consumer and other loans | 153 | - | 102 | - | ||||||||||||
Total | $ | 14,023 | $ | 71 | $ | 8,835 | $ | - |
At September 30, 2018,2019, 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 summarizes, by class, loans that were newly classified as TDRs for the three months ended September 30, 2018:
Number of Loans | Pre-Modification | Post-Modification | ||||||||||
Real estate - residential mortgage: | ||||||||||||
One to four family units | - | $ | - | $ | - | |||||||
Multi-family | - | - | - | |||||||||
Real estate - construction | - | - | - | |||||||||
Real estate - commercial | - | - | - | |||||||||
Commercial loans | 3 | 225,046 | 225,046 | |||||||||
Consumer and other loans | - | - | - | |||||||||
Total | 3 | $ | 225,046 | $ | 225,046 |
The following table summarizes, by type of concession, loans that were newly classified as TDRs for the three months ended September 30, 2018:
Interest Rate | Term | Combination | Total Modification | |||||||||||||
Real estate - residential mortgage: | ||||||||||||||||
One to four family units | $ | - | $ | - | $ | - | $ | - | ||||||||
Multi-family | - | - | - | - | ||||||||||||
Real estate - construction | - | - | - | - | ||||||||||||
Real estate - commercial | - | - | - | - | ||||||||||||
Commercial loans | - | 30,130 | 194,916 | 225,046 | ||||||||||||
Consumer and other loans | - | - | - | - | ||||||||||||
Total | $ | - | $ | 30,130 | $ | 194,916 | $ | 225,046 |
The following table presents the carrying balance of TDRs as of September 30, 20182019 and December 31, 2017:2018:
September 30, 2018 | December 31, 2017 | |||||||
Real estate - residential mortgage: | ||||||||
One to four family units | $ | 1,219,575 | $ | 1,290,462 | ||||
Multi-family | - | - | ||||||
Real estate - construction | 4,179,409 | 4,452,409 | ||||||
Real estate - commercial | 5,551,695 | 5,666,096 | ||||||
Commercial loans | 748,827 | 214,529 | ||||||
Consumer and other loans | - | 118,855 | ||||||
Total | $ | 11,699,506 | $ | 11,742,351 |
September 30, 2019 | December 31, 2018 | |||||||
Real estate - residential mortgage: | ||||||||
One to four family units | $ | 1,175,382 | $ | 1,208,596 | ||||
Multi-family | - | - | ||||||
Real estate - construction | 3,815,409 | 4,088,409 | ||||||
Real estate - commercial | 5,358,591 | 5,508,444 | ||||||
Commercial loans | 599,030 | 504,481 | ||||||
Consumer and other loans | - | - | ||||||
Total | $ | 10,948,412 | $ | 11,309,930 |
The Bank has allocated $877,637$939,647 and $372,321$901,086 of specific reserves to customers whose loan terms have been modified in TDR as of September 30, 20182019 and December 31, 2017,2018, respectively.
There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ending September 30, 20182019 and 2017.2018. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
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-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 September 30, 20182019 and December 31, 2017:
2018:
September 30, 2018 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2019 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rating: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 86,547 | $ | 299,714 | $ | 128,506 | $ | 87,330 | $ | 118,593 | $ | 33,193 | $ | 753,883 | $ | 84,275 | $ | 297,358 | $ | 118,700 | $ | 87,699 | $ | 103,864 | $ | 30,560 | $ | 722,456 | ||||||||||||||||||||||||||||
Special Mention | - | 5,574 | 1,095 | - | 2,238 | - | 8,907 | - | 6,699 | 553 | - | 2,427 | - | 9,679 | ||||||||||||||||||||||||||||||||||||||||||
Substandard | 4,272 | 7,995 | 5,692 | 5,990 | 1,457 | 553 | 25,959 | 3,900 | 4,214 | 2,437 | 5,930 | 2,447 | 1,162 | 20,090 | ||||||||||||||||||||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 90,819 | $ | 313,283 | $ | 135,293 | $ | 93,320 | $ | 122,288 | $ | 33,746 | $ | 788,749 | $ | 88,175 | $ | 308,271 | $ | 121,690 | $ | 93,629 | $ | 108,738 | $ | 31,722 | $ | 752,225 |
December 31, 2017 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2018 | Construction | Commercial | One to four family | Multi-family | Commercial | Consumer | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rating: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 60,291 | $ | 254,658 | $ | 96,723 | $ | 84,450 | $ | 93,102 | $ | 24,440 | $ | 613,664 | $ | 84,375 | $ | 310,486 | $ | 126,586 | $ | 84,596 | $ | 114,525 | $ | 32,686 | $ | 753,254 | ||||||||||||||||||||||||||||
Special Mention | - | 5,578 | 3,799 | - | 200 | - | 9,577 | - | 5,524 | 372 | - | 3,031 | - | 8,927 | ||||||||||||||||||||||||||||||||||||||||||
Substandard | 4,453 | 1,630 | 5,779 | 775 | 708 | 276 | 13,621 | 4,179 | 6,911 | 5,453 | 5,952 | 1,814 | 405 | 24,714 | ||||||||||||||||||||||||||||||||||||||||||
Doubtful | - | - | - | - | 513 | - | 513 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 64,744 | $ | 261,866 | $ | 106,301 | $ | 85,225 | $ | 94,523 | $ | 24,716 | $ | 637,375 | $ | 88,554 | $ | 322,921 | $ | 132,411 | $ | 90,548 | $ | 119,370 | $ | 33,091 | $ | 786,895 |
The above amounts include purchased credit impaired loans. At September 30, 2018,2019, purchased credit impaired loans comprised of $3.4$3.0 million were rated “Substandard”.
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.
Note 6: Accounting for Certain Loans Acquired
The Company acquired loans during the quarter ended June 30, 2018. At acquisition, certain acquired loans 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. During the three months ended September 30, 2018, the Company had $4.3 million of unexpected full payoffs of certain purchased credit impaired loans and recognized $1.8 million of yield accretion due to these payoffs.
The carrying amount of purchased credit impaired loans are included in the balance sheet amounts of loans receivable at September 30, 2019 and December 31, 2018. The amount of these loans is shown below:
September 30, | September 30, | December 31, | ||||||||||
2018 | 2019 | 2018 | ||||||||||
(In Thousands) | (In Thousands) | (In Thousands) | ||||||||||
Real estate - commercial | $ | 3,491 | $ | 3,165 | $ | 3,358 | ||||||
Commercial loans | 50 | 253 | 296 | |||||||||
Consumer and other loans | 680 | 290 | 329 | |||||||||
Outstanding balance | $ | 4,221 | $ | 3,708 | $ | 3,983 | ||||||
Carrying amount, net of fair value adjustment of $857 at September 30, 2018 | $ | 3,364 | ||||||||||
Carrying amount, net of fair value adjustment of $680 at September 30, 2019 and $810 at December 31, 2018 | $ | 3,028 | $ | 3,173 |
Changes in the carrying amount of the accretable yield for all purchased credit impaired loans were as follows for the three months and nine months ended September 30, 2018:2019:
Three months ended | Nine months ended | Three months ended | Nine months ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2018 | 2018 | 2019 | 2019 | |||||||||||||
(In Thousands) | (In Thousands) | (In Thousands) | (In Thousands) | |||||||||||||
Balance at beginning of period | $ | 204 | $ | 238 | $ | 183 | $ | 265 | ||||||||
Additions | - | - | - | - | ||||||||||||
Accretion | (1,724 | ) | (1,758 | ) | (48 | ) | (130 | ) | ||||||||
Reclassification from nonaccretable difference | 1,554 | 1,554 | - | - | ||||||||||||
Disposals | - | - | - | - | ||||||||||||
Balance at end of period | $ | 34 | $ | 34 | $ | 135 | $ | 135 |
During the three and nine months ended September 30, 2018,2019, the Company did not increase or reverse the allowance for loan losses related to these purchased credit impaired loans.
Note 7: Goodwill and Other Intangible Assets
The Company recorded $2.6$1.4 million of goodwill as a result of its 2018 Hometown acquisition and the goodwill is not deductible for tax purposes. Goodwill impairment was neither indicated nor recorded during the three and nine months ended September 30, 2018.2019.
Goodwill is tested annually, or more often if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill totaled $2.6 million at September 30, 2018.
Core deposit premiums are amortized over a seven year period and are periodically evaluated, at least annually, as to the recoverability of their carrying value. Core deposit premiums of $3.5 million were recorded during the second quarter of 2018 as part of the Hometown acquisition. As of September 30, 2019, $2.6 million of core deposit intangible amounts are still to be amortized.
The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at September 30, 2019 and December 31, 2018 were as follows:
September 30, | September 30, | December 31, | ||||||||||
2018 | 2019 | 2018 | ||||||||||
(In Thousands) | (in Thousands) | (in Thousands) | ||||||||||
Goodwill | $ | 2,615 | $ | 1,435 | $ | 1,435 | ||||||
Core deposit intangible: | ||||||||||||
Core deposit intangible | ||||||||||||
Gross carrying amount | 3,520 | 3,520 | 3,520 | |||||||||
Accumulated amortization | (314 | ) | (897 | ) | (539 | ) | ||||||
Core deposit intangible, net | 3,206 | 2,623 | 2,981 | |||||||||
Outstanding balance | $ | 5,821 | ||||||||||
Remaining balance | $ | 4,058 | $ | 4,416 |
The Company’s estimated remaining amortization expense on intangibles as of September 30, 20182019 is as follows:
Amortizaton Expense | ||||
(In Thousands) | ||||
Remainder of 2018 | $ | 94 | ||
2019 | 377 | |||
2020 | 377 | |||
2021 | 377 | |||
2022 | 377 | |||
2023 | 377 | |||
Thereafter | 1,227 | |||
Total | $ | 3,206 |
Amortization Expense | |||||
(in Thousands) | |||||
Remainder of: | 2019 | $ | 119 | ||
2020 | 477 | ||||
2021 | 477 | ||||
2022 | 477 | ||||
2023 | 477 | ||||
Therafter | 596 | ||||
Total | $ | 2,623 |
Note 8: Leases
As discussed in Note 11, on January 1, 2019, the Company adopted ASU 2016-02, “Leases”. The Company recorded initial balances during the quarter ending March 31, 2019 for operating Right of Use (“ROU”) assets of $9,473,587 and corresponding operating ROU liabilities of $9,490,385. Additionally, the Company recorded initial balances for financing ROU assets and liabilities of $453,485. As of September 30, 2019, operating lease liability balances are $9,236,695 and financing lease liability amounts are $399,046. We maintain operating leases on land and buildings for certain branch facilities and our headquarters. Financing leases are primarily for equipment used at banking facilities. Most leases include options to renew, with renewal terms extending between one to twenty years. The exercise of renewal options is based on judgement of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether or not the renewal option is reasonably certain to be exercised include, but are not limited to, the value of the leasehold improvements, the value of the renewal rate compared to market rates and the presence of factors that would cause significant economic penalty to the Company if the option is not exercised.
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 nine months ended September 30, 2019 and 2018 are as follows:
Nine months ended | Three months ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(In Thousands) | (In Thousands) | |||||||||||||||
Finance lease cost: | ||||||||||||||||
Amortization of right-of-use assets | $ | 82,084 | $ | - | $ | 27,226 | $ | - | ||||||||
Interest on lease liabilities | 6,010 | - | 2,138 | - | ||||||||||||
Operating lease cost | 810,124 | 674,137 | 270,042 | 277,037 | ||||||||||||
Sublease income | (32,900 | ) | - | (10,300 | ) | - | ||||||||||
Total lease costs | $ | 865,318 | $ | 674,137 | $ | 289,106 | $ | 277,037 | ||||||||
Additional lease information: | ||||||||||||||||
Operating cash flows from financing leases | $ | - | ||||||||||||||
Operating cash flows from operating leases | 41,845 | |||||||||||||||
Financing cash flows from financing leases | - | |||||||||||||||
Weighted-average remaining lease term - financing leases (in years) | 3.7 | |||||||||||||||
Weighted-average remaining lease term - operating leases (in years) | 15.4 | |||||||||||||||
Weighted-average discount rate - financing leases | 2.05 | % | ||||||||||||||
Weighted-average discount rate - operating leases | 5.50 | % |
The following table sets forth, as of September 30, 2019, 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: | 2019 | $ | 30 | $ | 263 | $ | 293 | ||||||
2020 | 117 | 862 | 979 | ||||||||||
2021 | 118 | 838 | 956 | ||||||||||
2022 | 112 | 827 | 939 | ||||||||||
2023 | 38 | 834 | 872 | ||||||||||
Thereafter | - | 9,923 | 9,923 | ||||||||||
Total undiscounted future minimum lease cash payments | $ | 415 | $ | 13,547 | $ | 13,962 | |||||||
Present value discount | (16 | ) | (4,310 | ) | (4,326 | ) | |||||||
Lease liability | $ | 399 | $ | 9,237 | $ | 9,636 |
Future minimum lease cash payments under non-cancelable operating leases as of December 31, 2018, prior to adoption of ASU 2016-02, were as follows:
December 31, 2018 | ||||
(In Thousands) | ||||
2019 | $ | 1,032 | ||
2020 | 993 | |||
2021 | 964 | |||
2022 | 962 | |||
2023 | 956 | |||
Thereafter | 3,573 | |||
$ | 8,480 |
Note 9: Benefit Plans
The Company has stock-based employee compensation plans, which are described in the Company’s 20172018 Annual Report.
The following tables below summarize transactions under the Company’s equity plans for the nine months ended September 30, 2018:
Stock Options2019:
Stock Options | Number of shares | |||||||||||||||||||||||
Number of shares | Incentive Stock Option | Non- Incentive Stock Option | Weighted Average Exercise Price | |||||||||||||||||||||
Incentive Stock Option | Non- Incentive Stock Option | Weighted Average Exercise Price | ||||||||||||||||||||||
Balance outstanding as of January 1, 2018 | 46,000 | 25,000 | $ | 15.74 | ||||||||||||||||||||
Balance outstanding as of January 1, 2019 | 12,500 | 5,000 | $ | 5.14 | ||||||||||||||||||||
Granted | - | - | - | - | - | - | ||||||||||||||||||
Exercised | (12,000 | ) | (5,000 | ) | 7.78 | (9,000 | ) | (5,000 | ) | 5.16 | ||||||||||||||
Forfeited | (20,000 | ) | (10,000 | ) | 28.71 | - | - | - | ||||||||||||||||
Balance outstanding as of September 30, 2018 | 14,000 | 10,000 | $ | 5.16 | ||||||||||||||||||||
Options exercisable as of September 30, 2018 | 14,000 | 10,000 | $ | 5.16 | ||||||||||||||||||||
Balance outstanding as of September 30, 2019 | 3,500 | - | $ | 5.08 | ||||||||||||||||||||
Options exercisable as of September 30, 2019 | 3,500 | - | $ | 5.08 |
The total intrinsic value of stock options exercised for the nine months ended September 30, 2019 and 2018 was $243,769 and 2017 was $267,366, and $0, respectively. The total intrinsic value of outstanding stock options (including exercisable) was $452,100$67,270 and $669,800$452,100 at September 30, 20182019 and 2017,2018, respectively.
Restricted Stock | Number of Shares | Weighted Average Grant- Date Fair Value | ||||||||||||||
Number of Shares | Weighted Average Grant- Date Fair Value | |||||||||||||||
Balance of shares non-vested as of January 1, 2018 | 45,550 | $ | 16.44 | |||||||||||||
Balance of shares non-vested as of January 1, 2019 | 32,349 | $ | 18.93 | |||||||||||||
Granted | 12,838 | 22.41 | 15,434 | 23.85 | ||||||||||||
Vested | (25,063 | ) | 16.31 | (20,771 | ) | 17.67 | ||||||||||
Forfeited | - | - | (1,649 | ) | 22.27 | |||||||||||
Balance of shares non-vested as of September 30, 2018 | 33,325 | $ | 18.83 | |||||||||||||
Balance of shares non-vested as of September 30, 2019 | 25,363 | $ | 22.74 |
In February 2018,March 2019, the Company granted 5,8525,502 shares of restricted stock to directors pursuant to the 2015 Equity Plan that have a cliff vesting at the end of one year and thus, expensed over that same period. These shares had a grant date market price of $22.41$23.85 per share. The total amount of expense for restricted stock grants to directors (including all grants in previous years grants)years) during the nine months ended September 30, 2019 and 2018 was $97,241 and 2017 was $103,926, and $101,099, respectively.
For the nine months ended September 30, 20182019 and 2017,2018, the Company granted 6,9869,932 and 6,4266,986 shares, respectively, of restricted stock to officers that have a cliff vesting at the end of three years. The expense is being recognized over the applicable vesting period. The total amount of expense for restricted stock grants to officers (including all grants in previous years grants)years) during the nine months ended September 30, 2019 and 2018 was $151,437 and 2017 was $135,810, and $159,413, respectively.
Performance Stock Units
Performance Stock Units | Performance Stock Units | Weighted Average Grant-Date Fair Value | ||||||||||||||
Performance Stock Units | Weighted Average Grant- Date Fair Value | |||||||||||||||
Balance of shares non-vested as of January 1, 2018 | 55,823 | $ | 20.48 | |||||||||||||
Balance of shares non-vested as of January 1, 2019 | 47,322 | $ | 20.48 | |||||||||||||
Granted | - | - | - | - | ||||||||||||
Vested | - | - | - | - | ||||||||||||
Forfeited | - | - | - | - | ||||||||||||
Balance of shares non-vested as of September 30, 2018 | 55,823 | $ | 20.48 | |||||||||||||
Balance of shares non-vested as of September 30, 2019 | 47,322 | $ | 20.48 |
On March 29, 2017, the Company granted restricted stock units representing 55,823 hypothetical shares of common stock to officers. There are three possible levels of incentive awards: threshold (25%); target (50%); and maximum (100%). The restricted stock units vest based on two financial performance factors over the period from March 29, 2017 to December 31, 2019 (the “Performance Period”). The two performance measurements of the Company (and the weight given to each measurement) applicable to each award level are as follows: (i) Total Assets (50%) and (ii) Return on Average Assets (50%). In determining compensation expense, the fair value of the restricted stock unit awards was determined based on the closing price of the Company’s common stock on the date of grant, which was $20.48 per share. The expense is being recognized over the applicable vesting period. Due to the fact that the measurements cannot be determined at the time of the grant, the Company currently estimates that the most likely outcome is the achievement between the target and maximum levels. If during the Performance Period, additional information becomes available to lead the Company to believe a different level will be achieved for the Performance Period, the Company will reassess the number of units that will vest for the grant and adjust its compensation expense accordingly on a prospective basis. The total amount of expense for restricted stock units during the nine months ended September 30, 2019 and 2018 was $290,568 and 2017 was $253,513, and $102,529, respectively.
Total stock-based compensation expense recognized for the three months ended September 30, 2018 and 2017 was $159,115 and $136,263, respectively. Total stock-based compensation expense recognized for the nine months ended September 30, 2019 and 2018 was $535,731 and 2017 was $493,249, and $363,041, respectively. As of September 30, 2018,2019, there was $712,949$407,314 of unrecognized compensation expense related to nonvestednon-vested restricted stock awards, which will be recognized over the remaining vesting period.
Note 9:10: Income Per Common Share
For three months ended September 30, 2018 | For nine months ended September 30, 2018 | For three months ended September 30, 2019 | For nine months ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Income Available to Common Shareholders | Average Common Shares Outstanding | Per Common Share | Income Available to Common Shareholders | Average Common Shares Outstanding | Per Common Share | 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 | $ | 3,934,242 | 4,418,196 | $ | 0.89 | $ | 4,947,003 | 4,406,830 | $ | 1.12 | $ | 2,550,542 | 4,396,241 | $ | 0.58 | $ | 7,099,405 | 4,429,066 | $ | 1.60 | ||||||||||||||||||||||||||||
Effect of Dilutive Securities | 72,389 | 72,058 | 58,091 | 56,532 | ||||||||||||||||||||||||||||||||||||||||||||
Diluted Income Per Common Share | $ | 3,934,242 | 4,490,585 | $ | 0.88 | $ | 4,947,003 | 4,478,888 | $ | 1.10 | $ | 2,550,542 | 4,454,332 | $ | 0.57 | $ | 7,099,405 | 4,485,598 | $ | 1.58 |
For three months ended September 30, 2018 | For nine months ended September 30, 2018 | |||||||||||||||||||||||
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 | $ | 3,934,242 | 4,418,196 | $ | 0.89 | $ | 4,947,003 | 4,406,830 | $ | 1.12 | ||||||||||||||
Effect of Dilutive Securities | 72,389 | 72,058 | ||||||||||||||||||||||
Diluted Income Per Common Share | $ | 3,934,242 | 4,490,585 | $ | 0.88 | $ | 4,947,003 | 4,478,888 | $ | 1.10 |
For three months ended September 30, 2017 | For nine months ended September 30, 2017 | |||||||||||||||||||||||
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 | $ | 1,717,383 | 4,374,725 | $ | 0.39 | $ | 4,739,197 | 4,370,877 | $ | 1.08 | ||||||||||||||
Effect of Dilutive Securities | 72,841 | 64,815 | ||||||||||||||||||||||
Diluted Income Per Common Share | $ | 1,717,383 | 4,447,566 | $ | 0.39 | $ | 4,739,197 | 4,435,692 | $ | 1.07 |
Stock options to purchase 32,500 shares of common stock were outstanding during the three and nine months ended September 30, 2017 but were not included in the computation of diluted income per common share because their exercise price was greater than the average market price of the common shares.
Note 10:11: New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, (Topic 606): Revenue from Contracts with Customers (“ASU 2014-09”). The scope of the guidance applies to revenue arising from contracts with customers, except for the following: lease contracts, insurance contracts, contractual rights and obligations within the scope of other guidance and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The core principle of the new guidance was that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration that the entity receives or expects to receive. ASU 2014-09 did not significantly impact the timing or approach to revenue recognition for financial institutions. Initially, the amendments were effective for public entities for annual reporting periods beginning after December 15, 2016, however, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 by one year to annual and interim periods beginning after December 15, 2017. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under GAAP, which comprises a significant portion of our revenue stream. The Company adopted ASU 2014-09 during the first quarter of 2018 and completed an evaluation of the impact of the revenue streams which are included in the scope of these updates, such as deposit fees and revenue from the sale of other real estate owned. The Company analyzed each revenue stream under Topic 606 and determined that there were no material changes to existing recognition practices. The Company concluded that the adoption of this update did not change significantly from our current practice of recognizing the in-scope non-interest income. In addition, we did not retroactively revise prior period amount or record a cumulative adjustment to retained earnings upon adoption.
Descriptions of our significant revenue-generating transactions that are within the scope of the new revenue recognition standards, which are presented in the consolidated statements of comprehensive income as components of non-interest income, are as follows:
|
|
|
|
In January 2016, the FASB issued ASU 2016-01, Financial Instruments- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 simplifies the impairment assessment of equity investments, clarifies reporting disclosure requirements for financial instruments measured at amortized cost, and requires the exit price notion be disclosed when measuring fair value of financial instruments. ASU 2016-01 details the required separate presentation in other comprehensive income for the change in fair value of a liability related to change in instrument specific credit risk and details the required separate presentation of financial assets and liabilities by measurement category and clarifies the guidance for a valuation allowance on deferred tax assets related to available-for-sale securities. ASU 2016-01 was effective for annual and interim reporting periods beginning after December 15, 2017. ASU 2016-01 was effective for the Company on January 1, 2018 and did not have a material impact on our consolidated financial statements. See Note 9- Disclosures about Fair Value of Assets and Liabilities for further information regarding the valuation method for loans.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) “Leases (Topic 842).” ASU 2016-02 establishes a right-of-use (ROU)ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will beare classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 iswas effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospectiveFASB has issued updated guidance in ASU 2018-11, “Leases (Topic 842) Targeted Improvements” and ASU 2019-01 “Leases (Topic 842) Codification Improvements” which provides additional transition approach is required for lessees for capital and operating leases existing at, or entered into after,options including allowing entities to not apply the beginning oflease standard to the earliest comparative periodperiods presented in thetheir financial statements with certainin the year of adoption. ASC Topic 842 provided a package of practical expedients available.in applying the lease standard to be chosen at the date of adoption. The Company is currently evaluatingchose to elect the impactpackage of practical expedients provided under ASU 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We have determined thatalso chosen not to apply the provisionsrecognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We will resultaccount for lease and non-lease components separately because such amounts are readily determinable under lease contracts. Additionally, we have chosen to elect the use of hindsight, when applicable, in an increasedetermining the lease term, in assets to recognizeassessing the likelihood that a lessee purchase option will be exercised; and in assessing the impairment of ROU assets. The Company determined that it has both operating and finance leases under Topic 842. For operating and finance leases, lease liabilities are initially measured at commencement date based on the present value of lease payments not yet paid, discounted using the discount rate for the lease obligationsat the lease commencement date over the lease term. For operating and finance leases, ROU assets are measured at the commencement date as the amount of initial liability, adjusted for lease payments made to the lessor at or before commencement date, minus incentives; and for any initial direct costs incurred by the lessee. Based on the transition method that the Company has chosen to follow, the initial application date of the standard for all existing leases was January 1, 2019. The lease term used for the initial operating ROU asset and lease liability includes the initial lease term in addition to any renewal options the Company thinks it is reasonably certain to exercise. ASC Topic 842 requires that the implicit rate within the lease agreement be used if available. If not available, the Company should use its incremental borrowing rate in effect at the time of lease commencement date. For operating leases with a corresponding increaseterm of less than 60 months, the Company utilized a 5-year LIBOR rate of approximately 3%. For operating leases with a term of greater than 60 months, the Company utilized a method of analogizing a current variable rate product to a fixed rate product based on LIBOR curve which results in liabilities; however, we do not expecta discount rate of approximately 6%. The discount rate used for finance leases is 2.05% which is the rate specified in the lease agreements at the present value rate. During the first quarter of 2019, the implementation of this to have a materialstandard resulted in the recording of $10.1 million of ROU assets and lease liabilities on the Company’s balance sheet with no significant impact to the Company’s resultsincome statement as a result of operations or cash flows.this standard. Additionally, the Company did not have a cumulative-effect adjustment to the opening balance of retained earnings. See Note 8 of the Condensed Consolidated Financial Statements for additional information and balances as of September 30, 2019.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other things,Instruments. Improvement updates to the proposed standard have been issued in November 2018 (Update 2018-19), April 2019 (Update 2019-04) and May 2019 (Update 2019-05) that provided additional guidance on this Topic. During the third quarter of 2019, the implementation for this standard was delayed for institutions deemed as “smaller reporting companies” based on criteria that measured the size of public float and revenue tests until 2023. Implementation for those exceeding the revenue and public float thresholds will still be required to adopt this standard for filings occurring after December 15, 2019. Currently, 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, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has formed a committee that is assessingin 2018 to assess our data, and evaluatingevaluate the impactimpacts of adopting ASU 2016-13. The Company has also selected2016-13 and to select a third partythird-party vendor to assist in generating loan level cash flows and disclosures. Work by the committee will continue despite the delayed implementation to monitor the status of this standard and to refine assumptions and systems to properly integrate requirements once the standard applies to our Company. The financial impact of adopting this standard is still being evaluated.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update was intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows with respect to eight types of cash flows. This new accounting guidance was effective for interim and annual reporting periods beginning after December 15, 2017. Adoption of ASU 2016-15 did not significantly impact the Company’s consolidated financial statements.
In MayJanuary 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Subtopic 718): ScopeNo. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of Modification Accounting. ASU 2017-09 clarifies when changes to termsgoodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity does not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i)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 award, (ii)amount by which the vesting conditionscarrying 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 award, and (iii)reporting unit should be considered when measuring the classificationgoodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the award as either an equity or liability instrument. ASU 2017-09 was effectivegoodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the fiscal years, andchange in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim periods within thosegoodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. The Company continues to evaluate the impact of adopting the new guidance requires companieson the consolidated financial statements, but it is not expected to apply the requirements prospectively to awards modified on or after the adoption date. ASU 2017-09 was effective for the Company on January 1, 2018 and did not have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. 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. The Company is currently evaluating the adoption of this standard on its Consolidated Financial Statements, but at this time do not believe the standard will have a significant impact on the financial statements.impact.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.Income. This ASU provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive incomeAOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) are recorded. This standard is effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company elected to early adopt ASU 2018-02 and, as a result, reclassified $31,818 from accumulated other comprehensive income to retained earnings as of December 31, 2017. The reclassification impacted the Consolidated Balance Sheet and the Consolidated Statement of Stockholder’s Equity as of and for the year ended December 31, 2017.
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 processesprocess for Level 3 measurements. This ASU modifies disclosures relating to investments in certain entities that calculate net asset value. Additional disclosures requiredrequire by thisthe 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 unobservableobservable inputs used to develop Level 3 fair value 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. Early adoption is permitted. The Company is currently evaluatingcontinues to evaluate the impact of the new standard on our consolidated financial statements, but at this time do not believe the standard will have a significant impact on the financial statements.
Note 11:12: 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 $50 million notional amount to hedge against interest rate risk on FHLB advances. The swap rate paid is 2.12% and is hedged against three-month floating LIBOR with a termination date of February 2025. As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. At September 30, 2018,2019, the Company reported a $1,995,892$1,255,540 unrealized gain,loss, net of a $683,158$429,749 tax effect, in other comprehensive income related to this cash flow hedge.
In March 2019, the Company entered into an interest rate swap agreement totaling $10.3 million notional amount to hedge against interest rate risk on variable rate subordinated debentures. The swap rate paid is 4.09% and is hedged against three-month floating LIBOR plus 145 basis points with a termination date of February 2026. As a cash flow hedge, the offset recordedportion of the change in Prepaid expenses andthe fair value of the derivative that has been deemed highly effective is recognized in other assets oncomprehensive income until the balance sheet. related cash flows from the hedged item are recognized in earnings. At September 30, 2019, the Company reported a $549,889 unrealized loss, net of a $188,217 tax effect, in other comprehensive income related to this cash flow hedge.
The Company documents, both at inception and periodically over the life of the hedge,hedges, its analysis of actual and expected hedge effectiveness. To the extent that the hedge
As of future cash flows is deemed ineffective, changes in the fair value of the derivative are recognized in earnings as a component of other noninterest expense. For the quarter ended September 30, 2019, based on current fair values, the Company pledged cash collateral of $2.5 million to its counterparty for the swaps. As of December 31, 2018, there was no ineffectiveness attributablebased on current fair values, the counterparty had pledged cash collateral of $1.5 million to the cash flow hedge.Company.
A summaryThe following table presents the notional amounts and fair values of derivatives designated as hedging instruments on the Company’s derivative financial instrumentsconsolidated balance sheets at September 30, 2018 is shown2019 and December 31, 2018:
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||
Fair Value | Fair Value | ||||||||||||||||||||
Balance Sheet | Notional | Derivative | Derivative | Derivative | Derivative | ||||||||||||||||
Derivatives designated as | Classification | Amount | Assets | Liablities | Assets | Liablities | |||||||||||||||
hedging instruments: | |||||||||||||||||||||
Interest rate swap - FHLB Advances | Other liabilites | $ | 50,000,000 | $ | - | $ | 1,685,289 | $ | 1,271,538 | $ | - | ||||||||||
Interest rate swap - Subordinated Debentures | Other liabilites | $ | 10,310,000 | $ | - | $ | 738,106 | $ | - | $ | - |
The following table presents amounts included in the following table:consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:
Forward Start | Termination | Derivative | Notional | Rate | Rate | Estimated Fair Value | |||||||||||
2/28/2018 | 2/28/2025 | Interest rate swap | $ | 50,000,000 | 2.12 | % | 3 month LIBOR Floating | $ | 2,679,050 |
Nine Months Ended | Three Months Ended | ||||||||||||||||||||
Income Statement | September, 30 | September, 30 | |||||||||||||||||||
Derivatives designated as | Classification | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||
hedging instruments: | |||||||||||||||||||||
Interest rate swap - FHLB Advances | Interest Expense | $ | (162,517 | ) | $ | (17,261 | ) | $ | (33,424 | ) | $ | (9,423 | ) | ||||||||
Interest rate swap - Subordinated Debentures | Interest Expense | $ | 8,569 | $ | - | $ | 7,268 | $ | - |
Note 12:13: 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 no Level 3 securities.
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 fallare classified at September 30, 20182019 and December 31, 20172018 (dollar amounts in thousands):
9/30/2018 | ||||||||||||||||||||||||||||||||
9/30/2019 | ||||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||||||||||||||
Debt securities: | ||||||||||||||||||||||||||||||||
Government agencies | $ | - | $ | 1,491 | $ | - | $ | 1,491 | ||||||||||||||||||||||||
Municipals | $ | - | $ | 33,339 | $ | - | $ | 33,339 | - | 30,955 | - | 30,955 | ||||||||||||||||||||
Corporates | - | 2,983 | - | 2,983 | - | 13,639 | - | 13,639 | ||||||||||||||||||||||||
Mortgage-backed securities - private label | - | 10,973 | - | 10,973 | ||||||||||||||||||||||||||||
Government sponsored mortgage-backed securities and SBA loan pools | - | 49,283 | - | 49,283 | - | 49,296 | - | 49,296 | ||||||||||||||||||||||||
Available-for-sale securities | $ | - | $ | 85,605 | $ | - | $ | 85,605 | $ | - | $ | 106,354 | $ | - | $ | 106,354 | ||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
Interest rate swaps | $ | - | $ | 2,423 | $ | - | $ | 2,423 |
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
Interest rate swaps | $ | - | $ | 2,679 | $ | - | $ | 2,679 |
12/31/2017 | ||||||||||||||||
Financial assets: | ||||||||||||||||
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
Debt securities: | ||||||||||||||||
Municipals | $ | - | $ | 33,898 | $ | - | $ | 33,898 | ||||||||
Corporates | - | 3,065 | - | 3,065 | ||||||||||||
Government sponsored mortgage-backed securities and SBA loan pools | - | 44,515 | - | 44,515 | ||||||||||||
Available-for-sale securities | $ | - | $ | 81,478 | $ | - | $ | 81,478 |
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
Interest rate swaps | $ | - | $ | 568 | $ | - | $ | 568 |
12/31/2018 | ||||||||||||||||
Financial assets: | ||||||||||||||||
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
Debt securities: | ||||||||||||||||
Municipals | $ | - | $ | 33,770 | $ | - | $ | 33,770 | ||||||||
Corporates | - | 3,019 | - | 3,019 | ||||||||||||
Government sponsored mortgage-backed securities and SBA loan pools | - | 49,477 | - | 49,477 | ||||||||||||
Available-for-sale securities | $ | - | $ | 86,266 | $ | - | $ | 86,266 | ||||||||
Interest rate swaps | $ | - | $ | 1,272 | $ | - | $ | 1,272 |
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: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 fallare classified at September 30, 20182019 and December 31, 20172018 (dollar amounts in thousands):
Impaired loans: | ||||||||||||||||
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
September 30, 2018 | $ | - | $ | - | $ | 9,574 | $ | 9,574 | ||||||||
December 31, 2017 | $ | - | $ | - | $ | 2,224 | $ | 2,224 |
Impaired loans: | ||||||||||||||||
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
September 30, 2019 | $ | - | $ | - | $ | 1,005 | $ | 1,005 | ||||||||
December 31, 2018 | $ | - | $ | - | $ | 10,428 | $ | 10,428 |
Foreclosed assets held for sale: | ||||||||||||||||
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
September 30, 2018 | $ | - | $ | - | $ | 976 | $ | 976 | ||||||||
December 31, 2017 | $ | - | $ | - | $ | - | $ | - |
Foreclosed assets held for sale: | ||||||||||||||||
Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
September 30, 2019 | $ | - | $ | - | $ | 72 | $ | 72 | ||||||||
December 31, 2018 | $ | - | $ | - | $ | 909 | $ | 909 |
There were no transfers between valuation levels for any asset during the ninethree months ended September 30, 20182019 or 2017.2018. If valuation techniques are deemed necessary, the Company considers those transfers to occur at the end of the period when the assets are valued.
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 | Valuation Technique | Unobservable Input | Range | Fair Value September 30, 2019 | Valuation Technique | Unobservable Input | Range | |||||||||||||||||||
Impaired loans (collateral dependent) | $ | 9,574 | Market Comparable | Discount to reflect realizable value | 0% | - | 100% | (5%) | $ | 1,005 | Market Comparable | Discount to reflect realizable value | 0% | - | 59% | (23%) | ||||||||||
Foreclosed assets held for sale | $ | 976 | Market Comparable | Discount to reflect realizable value | N/A | $ | 72 | Market Comparable | Discount to reflect realizable value | 58% | - | 66% | (62%) |
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.
Cash and cash equivalents, interest-bearing deposits and Federal Home Loan Bank stock
The carrying amounts reported in the condensed consolidated balance sheets approximate those assets' fair value.
Held-to-maturity securities
Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans
For September 30, 2018, the fair value of loans is estimated on an exit price basis incorporating contractual cash flow, prepayments discount spreads, credit loss and liquidity premiums. For December 31, 2017, the fair value of loans was estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.
Deposits
Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank advances
The fair value of advances is estimated by using rates on debt with similar terms and remaining maturities.
Subordinated debentures
For these variable rate instruments, the carrying amount is a reasonable estimate of fair value. There is currently a limited market for similar debt instruments and the Company has the option to call the subordinated debentures at an amount close to its par value.
Interest payable
The carrying amount approximates fair value.
Commitments to originate loans, letters of credit and lines of credit
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The following tables present estimated fair values of the Company’s financial instruments at September 30, 20182019 and December 31, 2017.2018.
September 30, 2018 | ||||||||||||
Carrying Amount | Fair Value | Hierarchy | ||||||||||
Financial assets: | ||||||||||||
Cash and cash equivalents | $ | 31,211,790 | $ | 31,211,790 | 1 | |||||||
Held-to-maturity securities | 12,722 | 12,805 | 2 | |||||||||
Federal Home Loan Bank stock | 5,043,200 | 5,043,200 | 2 | |||||||||
Mortgage loans held for sale | 961,654 | 961,654 | 2 | |||||||||
Loans, net | 780,316,319 | 775,577,411 | 3 | |||||||||
Interest receivable | 3,403,810 | 3,403,810 | 2 | |||||||||
Financial liabilities: | ||||||||||||
Deposits | 760,729,322 | 758,855,539 | 2 | |||||||||
Federal Home Loan Bank advances | 96,700,000 | 96,728,237 | 2 | |||||||||
Subordinated debentures | 21,782,794 | 21,782,794 | 3 | |||||||||
Notes payable | 5,000,000 | 5,000,000 | 2 | |||||||||
Interest payable | 791,216 | 791,216 | 2 | |||||||||
Unrecognized financial instruments (net of contractual value): | ||||||||||||
Commitments to extend credit | - | - | - | |||||||||
Unused lines of credit | - | - | - |
December 31, 2017 | September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||
Carrying Amount | Fair Value | Hierarchy | Carrying Amount | Fair Value | Hierarchy | Carrying Amount | Fair Value | Hierarchy | |||||||||||||||||||||||||||||
Financial assets: | Financial assets: | ||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 37,406,930 | $ | 37,406,930 | 1 | $ | 86,421,380 | $ | 86,421,380 | 1 | Cash and cash equivalents | $ | 34,121,642 | $ | 34,121,642 | 1 | |||||||||||||||||||||
Held-to-maturity securities | 16,457 | 16,729 | 2 | ||||||||||||||||||||||||||||||||||
Interest-bearing time deposits at other financial institutions | 250,000 | 250,265 | 2 | Interest-bearing time deposits at other financial institutions | 250,000 | 250,116 | 2 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 4,597,500 | 4,597,500 | 2 | 3,157,500 | 3,157,500 | 2 | Federal Home Loan Bank stock | 5,387,200 | 5,387,200 | 2 | |||||||||||||||||||||||||||
Mortgage loans held for sale | 1,921,819 | 1,921,819 | 2 | 944,969 | 944,969 | 2 | Mortgage loans held for sale | 1,516,849 | 1,516,849 | 2 | |||||||||||||||||||||||||||
Loans, net | 629,605,009 | 627,498,508 | 3 | 744,022,856 | 752,524,071 | 3 | Loans, net | 778,298,606 | 783,910,789 | 3 | |||||||||||||||||||||||||||
Interest receivable | 2,449,847 | 2,449,847 | 2 | 3,475,749 | 3,475,749 | 2 | Interest receivable | 3,390,944 | 3,390,944 | 2 | |||||||||||||||||||||||||||
Financial liabilities: | Financial liabilities: | ||||||||||||||||||||||||||||||||||||
Deposits | 607,364,350 | 606,548,280 | 2 | 839,988,502 | 840,446,988 | 2 | Deposits | 749,618,822 | 747,903,071 | 2 | |||||||||||||||||||||||||||
Federal Home Loan Bank advances | 94,300,000 | 94,417,733 | 2 | 50,000,000 | 50,011,559 | 2 | Federal Home Loan Bank advances | 105,300,000 | 105,325,386 | 2 | |||||||||||||||||||||||||||
Subordinated debentures | 15,465,000 | 15,465,000 | 3 | 15,465,000 | 15,465,000 | 3 | Subordinated debentures | 21,760,829 | 21,760,829 | 3 | |||||||||||||||||||||||||||
Note payable to Bank | 11,200,000 | 11,200,000 | 3 | Note payable to Bank | 5,000,000 | 5,000,000 | 3 | ||||||||||||||||||||||||||||||
Interest payable | 295,543 | 295,543 | 2 | 832,494 | 832,494 | 2 | Interest payable | 821,811 | 821,811 | 2 | |||||||||||||||||||||||||||
Unrecognized financial instruments (net of contractual value): | Unrecognized financial instruments (net of contractual value): | ||||||||||||||||||||||||||||||||||||
Commitments to extend credit | - | - | - | - | - | - | Commitments to extend credit | - | - | - | |||||||||||||||||||||||||||
Unused lines of credit | - | - | - | - | - | - | Unused lines of credit | - | - | - |
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 September 30, 2018,2019, and the results of operations for the three and nine months ended September 30, 20182019 and 2017.2018.
TheseThe discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking statements involve risks and uncertainties, such as statements ofcomments. Such comments are based upon the Company's plans, objectives, expectations, estimates and intentions of Guaranty Federal Bancshares, Inc. (“Guaranty Federal Bancshares”) and its wholly-owned subsidiary, Guaranty Bank (the “Bank”, with Guaranty Federal Bancshares and the Bank being referredinformation currently available to collectively hereinafter as the “Company”) that are subject to change based on various important factors (some of which are beyond the Company's control). The following 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; risks associated with the Company’s acquisition of Hometown Bancshares, Inc. (“Hometown”) and its wholly-owned subsidiary Hometown Bank, National Association (“Hometown Bank”) and the integration of Hometown Bank with the Bank, including the possibility that we may not realize the anticipated benefits of the acquisition; the impact of recent and potential future changes in the laws, rules, regulations, interpretations and policies relating to financial institutions, accounting, 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; the timely development of and acceptance of new products and servicesmanagement of the Company and management’s perception thereof as of the perceived overall valuedate of these productsthis Form 10-Q. When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and servicessimilar 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. Actual results of the Company’s operations could materially differ from those forward-looking comments. The differences could be caused by users,a number of factors or combination of factors including, the features, pricing and quality compared to competitors' products and services; the impact ofbut not limited to: changes in financial services' lawsdemand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; changes in general or local economic conditions; changes in federal or state regulations (including laws concerning taxes, banking, securities and insurance); asset quality deterioration; environmental liability associated with real estate collateral; technological changes and cybersecurity risks; acquisitions; employee retention;legislation governing the successoperations of the Company at managingor the risks resulting from these factors;Bank; and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange CommissionSEC from time to time. For further information about these and other risks, uncertainties andtime, including the risk factors please review the disclosure included indescribed under Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for itsthe fiscal year ended December 31, 2017.2018.
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.
On April 2, 2018, pursuant to the previously announced Agreement and Plan of Merger dated as of November 30, 2017 (the “Merger Agreement”) by and between Guaranty Federal Bancshares and Hometown, Hometown merged with and into Guaranty Federal Bancshares with Guaranty Federal Bancshares being the surviving corporation (the “Merger”). Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each share of Hometown common stock was converted into the right to receive $20.00 in cash. In the aggregate, the Company paid $4.6 million in respect of the outstanding shares of Hometown common stock. Hometown’s subsidiary bank, Hometown Bank, was merged into Guaranty Bank on June 8, 2018.
In connection with the Merger, pursuant to a Second Supplemental Indenture, dated as of April 2, 2018, by and among the Company, Hometown, and Wilmington Trust Company, as trustee (the “Trustee”), the Company assumed Hometown’s rights, duties, and obligations under the Indenture, dated as of October 29, 2002, as supplemented by that certain First Supplemental Indenture, dated as of May 19, 2014, by and between Hometown and the Trustee, under which Hometown issued approximately $6.1 million aggregate principal amount of its Floating Rate Junior Subordinated Debt Securities due 2032.
Financial Condition
The Company’s total assets increased $171,921,227 (22%$51,191,629 (5%) from $794,459,520$965,137,870 as of December 31, 2017,2018, to $966,380,747$1,016,329,499 as of September 30, 2018. The increase is primarily due to the Hometown assets acquired of $178,785,000.2019.
Available-for-sale securities increased $4,126,470 (5%$20,087,505 (23%) from $81,478,673$86,266,197 as of December 31, 2017,2018, to $85,605,143$106,353,702 as of September 30, 2018.2019. The increase was attributable primarily to $7,521,000 in securities acquired in the Hometown acquisition. The Company also had purchases of $25,151,079$56,910,103 and an increase in unrealized gains of $3,361,805 offset by sales and principal payments of $25,804,714 and an increase in unrealized losses of $2,317,521$39,983,229 when compared to December 31, 2017.2018.
Net loans receivable increaseddecreased by $150,711,310 (24%$34,275,750 (4%) from $629,605,009$778,298,606 as of December 31, 20172018 to $780,316,319$744,022,856 as of September 30, 2018. The increase was attributable in large part2019. Year-to-date, multi-family loans increased $3,080,524 (3%), commercial loans decreased $10,631,071 (9%), one-to-four family mortgage loans decreased $10,720,679 (8%) and commercial real estate loans decreased $14,650,370 (5%). Overall, loan balances have decreased due to the Hometown acquisition, which added loans totaling $143,919,000 at fair value.larger than anticipated loan pay-downs and payoffs. The Company continues to focus its lending efforts in the commercial, owner occupied real estate and small business lending categories.categories, however, during the quarter loan principal paydowns and significant unexpected payoffs outpaced loan originations.
Allowance for loan losses increased $624,289 (9%decreased $438,258 (5%) from $7,107,418$7,995,569 as of December 31, 20172018 to $7,731,707$7,557,311 as of September 30, 2018.2019. In addition to the provision for loan losses of $925,000$200,000 recorded by the Company for the nine months ended September 30, 2018,2019, charge-offs of specific loans (classified as nonperforming at December 31, 2017)2018) exceeded loan recoveries by $300,711.$639,486. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of September 30, 20182019 and December 31, 2017 was 0.98% and 1.12%, respectively. The allowance for loan losses including the discount and premiums on acquired loans, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of September 30, 2018 was 1.36%.1.00% and 1.02%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of September 30, 20182019 and December 31, 20172018 was 55.3%67.1% and 71.3%61.1%, respectively. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio.
In accordance with 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 approximately $1.3 million at September 30, 2019.
GoodwillPrepaid expenses and other assets increased $2,615,532 (100%$2,793,656 (45%) and core deposit intangible increased $3,205,714 (100%)from $6,261,159 as of December 31, 2018 to $9,054,815 as of September 30, 2018 when2019. This increase is primarily due an increase of $2,350,906 in partnership interests purchased by the Company for the purpose of gaining low income housing tax credits.
Operating lease right-of-use assets (ROU) of $9,194,850 were recorded during 2019 compared to no amounts recorded as of December 31, 2017. The increases are2018. These amounts were recognized due to the Hometown acquisition and areCompany’s implementation of new lease accounting standards for operating leases further discusseddescribed in Note 7 to8 and Note 11 of the Condensed Consolidated Financial Statements. The recorded assets and liabilities will be amortized over the life of the lease term.
Premises and equipmentBank-owned life insurance (BOLI) increased $11,551,001 (109%$4,345,651 (22%) from $10,607,094$20,198,074 as of December 31, 20172018 to $22,158,095$24,543,725 as of September 30, 2018. This is increase is2019 primarily due to $4,000,000 in new or additional policies purchased on certain key members of management during the $10,066,000third quarter of fixed assets acquired from the Hometown acquisition.2019.
Deposits increased $153,364,972 (25%$90,369,680 (12%) from $607,364,350$749,618,822 as of December 31, 2017,2018, to $760,729,322$839,988,502 as of September 30, 2018. The deposit growth was attributable in large part to the Hometown acquisition, which added deposits of $161,248,424 at fair value.2019. For the nine months ended September 30, 2018,2019, checking and savings accounts increased by $69,132,414 and$104,780,937 offset by reductions in certificates of deposit decreased by $76,871,838.amounts of $14,380,120. The increase in checking and savings accounts was due to the Bank’s continued focus to increase core transaction deposits, including retail, commercial and public funds. See also the discussion under Item 3 - “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”
Federal Home Loan Bank advances increased $2,400,000 (3%decreased $55,300,000 (53%) from $94,300,000$105,300,000 as of December 31, 20172018 to $96,700,000$50,000,000 as of September 30, 2018. The Company acquired $2,000,000 in Federal Home Loan Bank advances2019 due to the Hometown acquisition but the increase was offset by net principal reductions.
Note payable to bank increased $5,000,000 (100%) when compared to December 31, 2017. The Company opened a $5,000,000 revolving line of credit with a variable interest rate tied to Libor which matures on June 28, 2020. Thereductions from excess funds were used to provide additional capital for funding Bank asset growth.generated from core deposit growth noted above.
Subordinated debentures increased $6,317,794 (41%debenture balances decreased $6,295,829 (29%) from $15,465,000$21,760,829 as of December 31, 20172018 to $21,782,794$15,465,000 as of September 30, 2019 due to redemption of the Hometown Bancshares Capital Trust I debentures during the third quarter of 2019. These debentures became obligations of the Company pursuant to its acquisition of Hometown Bancshares, Inc in 2018. Funds utilized to redeem the debentures were obtained from increasing a note payable with another financial institution by $6,200,000 (124%) from $5,000,000 at December 31, 2018 to $11,200,000 as of September 30, 2019.
Accrued expenses and other liabilities increased $2,966,394 (159%) from $1,868,008 as of December 31, 2018 to $4,834,402 as of September 30, 2019. The increasemajority of this amount is due to mark-to-market adjustments on interest rate swaps, net of tax, reversing gains during the Hometown acquisition, which added $6,362,000year by $2,752,725 as interest rates have fallen during the majority of subordinated debentures at fair value.2019 running counter to our hedged position.
Stockholders’ equity (including net unrealized lossgains and losses on available-for-sale securities and interest rate swaps) increased $3,723,194 (5%)$3,246,558 from $74,891,493$80,478,592 as of December 31, 2017,2018, to $78,614,687$83,725,150 as of September 30, 2018.2019. The Company’s net income during this period exceeded dividends paid or declared by $3,345,753.$5,355,315. Starting in the second quarter of 2019, the Company began repurchasing shares of its common stock under an existing repurchase plan. During the third quarter of 2019, the Company repurchased 90,268 shares of common stock at an average price of $23.85. Additional information on the repurchases during the third quarter can be found below in Part II, Item 2. For the entirity of 2019, the Company has repurchased 103,876 shares of common stock at an average price of $23.73. On a per common share basis, tangible book value decreasedstockholders’ equity increased from $17.10$18.18 as of December 31, 20172018 to $16.48$19.22 as of September 30, 2018 due to the Hometown acquisition.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 table 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.
Three months ended 9/30/2018 | Three months ended 9/30/2017 | Three months ended 9/30/2019 | Three months ended 9/30/2018 | |||||||||||||||||||||||||||||||||||||||||||||
Average Balance | Interest | Yield / Cost | Average Balance | Interest | Yield / Cost | Average Balance | Interest | Yield / Cost | Average Balance | Interest | Yield / Cost | |||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans | $ | 787,638 | $ | 12,774 | 6.43 | % | $ | 618,652 | $ | 7,052 | 4.52 | % | $ | 759,961 | $ | 10,430 | 5.45 | % | $ | 787,638 | $ | 12,774 | 6.43 | % | ||||||||||||||||||||||||
Investment securities | 87,182 | 524 | 2.38 | % | 84,577 | 432 | 2.03 | % | 100,142 | 735 | 2.91 | % | 87,182 | 524 | 2.38 | % | ||||||||||||||||||||||||||||||||
Other assets | 18,257 | 80 | 1.74 | % | 10,418 | 41 | 1.56 | % | 71,773 | 417 | 2.31 | % | 18,257 | 80 | 1.74 | % | ||||||||||||||||||||||||||||||||
Total interest-earning | 893,077 | 13,378 | 5.94 | % | 713,647 | 7,525 | 4.18 | % | 931,876 | 11,582 | 4.93 | % | 893,077 | 13,378 | 5.94 | % | ||||||||||||||||||||||||||||||||
Noninterest-earning | 59,509 | 40,386 | 69,711 | 59,509 | ||||||||||||||||||||||||||||||||||||||||||||
$ | 1,001,587 | $ | 952,586 | |||||||||||||||||||||||||||||||||||||||||||||
$ | 952,586 | $ | 754,033 | |||||||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing: | ||||||||||||||||||||||||||||||||||||||||||||||||
Savings accounts | $ | 42,412 | 29 | 0.27 | % | $ | 30,026 | 15 | 0.20 | % | $ | 40,310 | 30 | 0.30 | % | $ | 42,412 | 29 | 0.27 | % | ||||||||||||||||||||||||||||
Transaction accounts | 405,230 | 1,175 | 1.15 | % | 348,925 | 524 | 0.60 | % | 451,237 | 1,624 | 1.43 | % | 405,230 | 1,175 | 1.15 | % | ||||||||||||||||||||||||||||||||
Certificates of deposit | 208,534 | 622 | 1.18 | % | 133,198 | 354 | 1.05 | % | 227,996 | 1,226 | 2.13 | % | 208,534 | 622 | 1.18 | % | ||||||||||||||||||||||||||||||||
FHLB advances | 88,750 | 482 | 2.15 | % | 89,246 | 420 | 1.87 | % | 50,225 | 283 | 2.24 | % | 88,750 | 482 | 2.15 | % | ||||||||||||||||||||||||||||||||
Other borrowed funds | 5,000 | 59 | 4.68 | % | - | - | 0.00 | % | 9,089 | 111 | 4.85 | % | 5,000 | 59 | 4.68 | % | ||||||||||||||||||||||||||||||||
Subordinated debentures | 21,797 | 282 | 5.13 | % | 15,465 | 160 | 4.10 | % | 17,979 | 185 | 4.08 | % | 21,797 | 282 | 5.13 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing | 771,723 | 2,649 | 1.36 | % | 616,860 | 1,473 | 0.95 | % | 796,836 | 3,459 | 1.72 | % | 771,723 | 2,649 | 1.36 | % | ||||||||||||||||||||||||||||||||
Noninterest-bearing | 103,817 | 62,599 | 121,039 | 103,817 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 875,540 | 679,459 | 917,875 | 875,540 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 77,046 | 74,574 | 83,712 | 77,046 | ||||||||||||||||||||||||||||||||||||||||||||
$ | 952,586 | $ | 754,033 | $ | 1,001,587 | $ | 952,586 | |||||||||||||||||||||||||||||||||||||||||
Net earning balance | $ | 121,354 | $ | 96,787 | $ | 135,040 | $ | 121,354 | ||||||||||||||||||||||||||||||||||||||||
Earning yield less costing rate | 4.58 | % | 3.24 | % | 3.21 | % | 4.58 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest income, and net yield spread on interest earning assets | $ | 10,729 | 4.77 | % | $ | 6,052 | 3.36 | % | $ | 8,123 | 3.46 | % | $ | 10,729 | 4.77 | % | ||||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 116 | % | 116 | % | 117 | % | 116 | % |
Nine months ended 9/30/2018 | Nine months ended 9/30/2017 | |||||||||||||||||||||||
Average Balance | Interest | Yield / Cost | Average B alance | Interest | Yield / Cost | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning: | ||||||||||||||||||||||||
Loans | $ | 759,354 | $ | 29,971 | 5.28 | % | $ | 598,925 | $ | 20,043 | 4.47 | % | ||||||||||||
Investment securities | 86,457 | 1,466 | 2.27 | % | 88,783 | 1,361 | 2.05 | % | ||||||||||||||||
Other assets | 19,358 | 276 | 1.91 | % | 12,623 | 134 | 1.42 | % | ||||||||||||||||
Total interest-earning | 865,169 | 31,713 | 4.90 | % | 700,331 | 21,538 | 4.11 | % | ||||||||||||||||
Noninterest-earning | 58,903 | 40,512 | ||||||||||||||||||||||
$ | 924,072 | $ | 740,843 | |||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest-bearing: | ||||||||||||||||||||||||
Savings accounts | $ | 40,325 | 76 | 0.25 | % | $ | 29,360 | 43 | 0.20 | % | ||||||||||||||
Transaction accounts | 407,895 | 3,231 | 1.06 | % | 345,247 | 1,346 | 0.52 | % | ||||||||||||||||
Certificates of deposit | 198,879 | 1,661 | 1.12 | % | 119,011 | 873 | 0.98 | % | ||||||||||||||||
FHLB advances | 77,436 | 1,221 | 2.11 | % | 98,306 | 1,269 | 1.73 | % | ||||||||||||||||
Other borrowed funds | 3,671 | 63 | 2.29 | % | - | - | 0.00 | % | ||||||||||||||||
Subordinated debentures | 20,705 | 729 | 4.71 | % | 15,465 | 468 | 4.05 | % | ||||||||||||||||
Total interest-bearing | 748,911 | 6,981 | 1.25 | % | 607,389 | 3,999 | 0.88 | % | ||||||||||||||||
Noninterest-bearing | 97,388 | 60,478 | ||||||||||||||||||||||
Total liabilities | 846,299 | 667,867 | ||||||||||||||||||||||
Stockholders’ equity | 77,773 | 72,976 | ||||||||||||||||||||||
$ | 924,072 | $ | 740,843 | |||||||||||||||||||||
Net earning balance | $ | 116,258 | $ | 92,942 | ||||||||||||||||||||
Earning yield less costing rate | 3.65 | % | 3.23 | % | ||||||||||||||||||||
Net interest income, and net yield spread on interest earning assets | $ | 24,732 | 3.82 | % | $ | 17,539 | 3.35 | % | ||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 116 | % | 115 | % |
Nine months ended 9/30/2019 | Nine months ended 9/30/2018 | |||||||||||||||||||||||
Average Balance | Interest | Yield / Cost | Average Balance | Interest | Yield / Cost | |||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning: | ||||||||||||||||||||||||
Loans | $ | 769,420 | $ | 31,128 | 5.41 | % | $ | 759,354 | $ | 29,971 | 5.28 | % | ||||||||||||
Investment securities | 95,578 | 2,014 | 2.82 | % | 86,457 | 1,466 | 2.27 | % | ||||||||||||||||
Other assets | 47,004 | 836 | 2.38 | % | 19,358 | 276 | 1.91 | % | ||||||||||||||||
Total interest-earning | 912,002 | 33,978 | 4.99 | % | 865,169 | 31,713 | 4.90 | % | ||||||||||||||||
Noninterest-earning | 65,362 | 58,903 | ||||||||||||||||||||||
$ | 977,364 | $ | 924,072 | |||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest-bearing: | ||||||||||||||||||||||||
Savings accounts | $ | 40,270 | 92 | 0.31 | % | $ | 40,325 | 76 | 0.25 | % | ||||||||||||||
Transaction accounts | 426,841 | 4,651 | 1.46 | % | 407,895 | 3,231 | 1.06 | % | ||||||||||||||||
Certificates of deposit | 233,878 | 3,543 | 2.03 | % | 198,879 | 1,661 | 1.12 | % | ||||||||||||||||
FHLB advances | 53,998 | 928 | 2.30 | % | 77,436 | 1,221 | 2.11 | % | ||||||||||||||||
Other borrowed funds | 6,378 | 243 | 5.09 | % | 3,671 | 63 | 2.29 | % | ||||||||||||||||
Subordinated debentures | 20,474 | 773 | 5.05 | % | 20,705 | 729 | 4.71 | % | ||||||||||||||||
Total interest-bearing | 781,839 | 10,230 | 1.75 | % | 748,911 | 6,981 | 1.25 | % | ||||||||||||||||
Noninterest-bearing | 112,282 | 97,388 | ||||||||||||||||||||||
Total liabilities | 894,121 | 846,299 | ||||||||||||||||||||||
Stockholders’ equity | 83,243 | 77,773 | ||||||||||||||||||||||
$ | 977,364 | $ | 924,072 | |||||||||||||||||||||
Net earning balance | $ | 130,163 | $ | 116,258 | ||||||||||||||||||||
Earning yield less costing rate | 3.24 | % | 3.65 | % | ||||||||||||||||||||
Net interest income, and net yield spread on interest earning assets | $ | 23,748 | 3.48 | % | $ | 24,732 | 3.82 | % | ||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 117 | % | 116 | % |
Results of Operations - Comparison of Three and Nine Month Periods Ended September 30, 20182019 and 20172018
Net income for the three and nine months ended September 30, 20182019 was $2,550,542 and $7,099,405, respectively, compared to $3,934,242 and $4,947,003 respectively, compared to $1,717,383 and $4,739,197 for the three and nine months ended September 30, 2017,2018, respectively, which represents an increasea decrease in earnings of $2,216,859 (129%) and $207,806 (4%$1,383,700 (35%) for the three month period and an increase of $2,152,402 (44%) for the nine month periods,period, respectively. Third quarter comparisons should note that one-time loan accretion income of $2,651,000 due to acquired loans unexpectedly paying off in 2018 was not present in 2019 third quarter income. For year-to-date comparisons, earnings have been positively impacted by higher interest earning balances and the absence of one-time merger costs incurred in 2018 due to the Hometown acquisition.
Net Interest Income
Net interest income for the three and nine months ended September 30, 2018 increased $4,677,009 (77%2019 decreased $2,606,863 (24%) and $7,193,388 (41%$985,309 (4%), respectively, when compared to the same periods in 2017.2018. For the three and nine month periods ended September 30, 2018,2019, the average balance of net interest earning assets over liabilities increased by approximately $24,567,000$13,686,000 and $23,316,000,$13,905,000, respectively, when compared tomore than the average balance of interest-bearing liabilities increased during the same periods in 2017.2018. For the three and nine month periods ended September 30, 2018,2019, the net interest margin increased 141decreased 131 basis points to 4.77%3.46% and 47decreased 34 basis points to 3.82%3.48%, respectively, when compared to the same periods in 2017.2018.
Loan discount accretion and amortization of fair value adjustments for time deposits and subordinated debentures from the Hometown acquisition resulted in an additional $2,639,322 and $2,906,154 in net interest income for the three and nine months ended September 30, 2018, with no comparable amounts during the same periods in 2017. The loan discount accretion for the three months ended September 30, 2018 was $2,733,302 of yield accretion, of which $1,766,977 was recognized upon the unexpected full payoffs of certain PCI loans totaling $4,302,563 during the quarter ended September 30, 2018. The total loan accretion income was significantly greater than originally projected during the quarter due to the accelerated cash flows received from loan principal paydowns and payoffs overall. Combined, these components of net interest income contributed 123 and 51 basis points to net interest margin for the three and nine months ended September 30, 2018.
Interest Income
Total interest income for the three and nine months ended September 30, 2018 increased $5,852,688 (78%2019 decreased $1,796,254 (13%) and $10,175,219 (47%increased $2,264,248 (7%), respectively, as compared to the three and nine months ended September 30, 2017. For the three and nine-month period ended September 30, 2018when compared to the same periods in 2017,2018. For the three and nine month periods ended September 30, 2019 compared to the same periods in 2018, the average yield on interest earning assets increased 176decreased 101 basis points to 5.94%4.93% and increased 79nine basis points to 4.90%, while4.99%. The decrease compared to the average balanceprior year quarter is primarily due to $2,651,000 in loan accretion being recognized on loans acquired from Hometown in 2018 compared to $315,000 in the same period of 2019. Average balances of interest earning assets increased approximately $179,430,000$38,799,000 for the three-month period and increased approximately $164,838,000$46,833,000 for the nine-month period. Increased average interest-earningperiod, respectively. The increase in each period is primarily due to cash and investment balances were primarily attributable to the Hometown acquisition along with organic loanbeing funded by increased core deposit base growth whenand higher yields in each asset class compared to the same periods in 2017. The increase in2018. For the averagethree-month periods, the yield on interest-earning assets was primarilyloans decreased 98 basis points to 5.45% mostly due to the absence of the beforementioned loan discount accretion of $2,733,302 and $3,094,114 for the three and nine months ended September 30, 2018, as discussed above.income in 2019 versus 2018.
Interest Expense
Total interest expense for the three and nine months ended September 30, 20182019 increased $1,175,679 (80%$810,609 (31%) and $2,981,831 (75%$3,249,557 (47%), respectively, when compared to the three and nine months ended September 30, 2017.2018. For the three and nine-month periodnine month periods ended September 30, 20182019 compared to the same periods in 2017,2018, the average cost of interest bearing liabilities increased 4136 basis points to 1.36%1.72% and increased 3750 basis points to 1.25%1.75%, while the average balance of interest bearing liabilities increased approximately $154,863,000$25,113,000 for the three-monththree month period and increased approximately $141,522,000$32,928,000 for the nine-monthnine month period. Increased average interest-bearing balances wereThe increases are primarily attributable to the deposit and subordinated debenture growth, which was due to the Hometown acquisition, offset by a declineplanned growth in average balances ofcore deposits and higher offering rates on nearly all deposit products as many institutions in our market areas are facing liquidity challenges which has significantly increased competition for deposits. Partially offsetting the increases noted above is reduced interest expense on FHLB advances. The increase in the average cost of interest-bearing liabilities was primarilyborrowings due to increased rates ona reduction in balances carried throughout 2019. The Company intends to continue to utilize a cost-effective mix of retail and commercial deposits and FHLB borrowings which was partially offset by the deposit and subordinated debentures adjustments, discussed above.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.
Based on its internal analysis and methodology, management recorded a provision for loan lossesloss expense of $100,000 for the three-month period and $200,000 for the nine-month period ended September 30, 2019, respectively, compared to $200,000 and $925,000 for the three months and nine months ended September 30, 2018, respectively, compared to $450,000 and $1,500,000 for the same periods in 2017.
The Company’s decrease in provision was primarily due to the decrease in construction loan balances to permanent commercial real estate loans which carry a lower general reserve based on risk.2018. 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 continues to increaseincreases or other circumstances warrant.
In accordance with GAAP for acquisition accounting, the loans acquired through the acquisition of Hometown were recorded at fair value; therefore, there was no allowance associated with Hometown’s loans at acquisition. Management continues to evaluate the allowance needed on the acquired Hometown loans factoring in the net remaining discount of $1.3 million at September 30, 2019.
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.
NonNoninterest-Interest Income
NoninterestNon-interest income decreased $109,111 (7%) for the three months and increased $567,315 (14%) for the nine months ended September 30, 2018, respectively, when compared to the three months and nine months ended September 30, 2017. The decline for three months ended September 30, 2018 is primarily due to the Company’s write-downs of foreclosed assets held for sale, including two properties acquired from Hometown. The re-measurements and write-downs were due to a lack of sales activity, further review of surrounding property values and reductions in the property’s listing price (in most cases). Net loss on foreclosed assets were $459,308 and $338,496 for the three and nine months ended September 30, 2018 compared to net gains on foreclosed assets of $47,787 and 56,051 for the three and nine months ended September 30, 2017. The Company had increase in gains on sale of SBA loans of $34,860 and $175,756 for the three and nine months ended September 30, 2018, respectively, when compared to the same periods in 2017. Increases in service charges of $164,418 and $475,563 for the three and nine months ended September 30, 2018 were attributable primarily to the April 2018 Hometown acquisition.
Noninterest Expense
Noninterest expenses increased $1,654,017$475,372 (33%) and $8,364,973 (60%$700,194 (15%) for the three and nine months ended September 30, 20182019 when compared to the same time periods in 2017. The increase is due to a few significant factors.
Due to the Company’s acquisition of Hometown, $150,877 and $3,570,927 of one-time, nonrecurring merger costs were incurred for the three and nine months ended September 30, 2018. The costs relateFor the periods, the Company increased income recognized from the sale of mortgage loans of $127,525 (21%) and $118,970 (7%), increased income from sales of Small Business Administration (“SBA”) loans of $37,432 (14%) and $138,767 (21%), reduced losses on the sale of foreclosed assets of $325,163 (71%) and $225,217 (67%), realized gains on the sale of investment securities increased by $32,378 (3,659%) and 87,846 (1,086%) and debit card and interchange related income increased by $5,424 (2%) and $175,102 (22%) when compared to legal, accountingthe same three and investment advisory fees, as well asnine month periods in 2018. Offsetting the cost incurred for terminationincreases, were decreased service charge revenue of a specific vendor core processing contract of approximately $2 million.$33,433 (7%) and $81,840 (6%), respectively, when compared to the same three and nine month periods in 2018.
Salaries and employee benefitsNon-Interest Expense
Non-interest expenses increased $835,165 (27%$287,607 (4%) and $2,317,911 (26%decreased $1,740,843 (8%) for the three and nine months ended September 30, 20182019 when compared to the same periods in 2017. The increase is primarily due to the Company’s existing expansion in the Joplin, Missouri market (pre-acquisition)2018. One-time merger costs of $150,877 and the Hometown acquisition which contributed approximately $521,000 and $1,390,000 of additional expense for$3,570,927 were incurred during the three and nine months ended September 30,2018.30, 2018, which is the primary reason for the increased expenses for the periods in 2018. Additionally, many of the year-to-date comparisons noted below show significant variances due to the merger occurring on April 2, 2018. Thus, 2019 has nine months of recurring expenses whereas 2018 only has six months of such expenses. Significant categories of non-interest expense are as follows:
Salaries and employee benefits increased $256,820 (7%) and $893,845 (8%) when compared to the same three and nine month periods in 2018, which is primarily due to a greater number of personnel following the Hometown acquisition coupled with increased staffing to fill open positions.
Occupancy expenses increased $520,741 (88%$36,540 (3%) and $1,357,430 (87%$468,643 (16%), respectively, when compared to the prior year periods. This is primarily due to the expenses related to additional leasehold improvement expenses and facility upgrades incurred after the Hometown acquisition.
Professional fees increased $102,502 (59%) and $236,769 (49%) when compared to the same three and nine month periods in 2018 primarily in connection with additional services provided due the redemption of a trust preferred issuance, new financial reporting standard implementation and increased attestation work due to the Company recently exceeding thresholds to qualify as an “accelerated filer” with the U.S. Securities and Exchange Commission.
Provision for Income Taxes
The provision for income taxes decreased by $935,398 (67%) and increased $28,326 (2%) for the three and nine months ended September 30, 2018 when compared to the same periods in 2017. Lease expense on the new headquarters facility began in January 2018 and total expense was approximately $155,000 and $465,000 for the three and nine months ended September 30, 2018. The remaining increases relate to depreciation on furniture and fixtures for the new facility and the newly acquired assets from the Hometown acquisition.
Data processing expenses increased $60,184 (22%) and $365,324 (50%) for the three and nine months ended September 30, 2018 when compared to the same periods in 2017. The increase is primarily due to increased technology investments for the new headquarters facility and additional core processing expense associated with the Hometown acquisition.
Amortization expense of the core deposit intangible from the Hometown acquisition was $94,286 and $314,286 for the three and nine months ended September 30, 2018. There was no amortization expense for the same periods in 2017.
Provision for Income Taxes
The provision for income taxes increased by $947,022 (213%) and decreased by $237,076 (16%) for the three and nine months ended September 30, 20182019 when compared to the same periods of 2017.2018. The decrease in the provision for income taxes for the quarter is primarily due to the increased utilization of tax credits andincome in the decline in federal tax rates as a result of the Tax Cuts and Jobs Act signed into law on December 22, 2017, and the three month increase wasprior year quarter due to the significantly higherloan accretion income causing an increase in 2018.taxable income.
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 September 30, 20182019 and December 31, 20172018 was 55.3%67.1% and 71.3%61.1%, respectively. Total loans classified as substandard, doubtful or loss as of September 30, 2018,2019, were $25,823,000$20,090,000 or 2.67%1.98% of total assets as compared to $14,134,000$24,714,000 or 1.78%2.56% of total assets at December 31, 2017. The Company downgraded to substandard one multi-family real estate loan for approximately $6.0 million during the three months ending September 30, 2018. In addition, acquired loans from Hometown made up $4.1 million of loans classified as substandard at September 30, 2018. 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.
9/30/2018 | 12/31/2017 | 12/31/2016 | ||||||||||
Nonperforming loans | $ | 13,984 | $ | 9,962 | $ | 8,632 | ||||||
Real estate acquired in settlement of loans | 1,133 | 283 | 2,682 | |||||||||
Total nonperforming assets | $ | 15,117 | $ | 10,245 | $ | 11,314 | ||||||
Total nonperforming assets as a percentage of total assets | 1.56 | % | 1.29 | % | 1.64 | % | ||||||
Allowance for loan losses | $ | 7,732 | $ | 7,107 | $ | 5,742 | ||||||
Allowance for loan losses as a percentage of gross loans | 0.98 | % | 1.12 | % | 1.05 | % |
Included in the table above is $4.1 million of nonperforming loans acquired from Hometown and $863,603 in real estate acquired in settlement of loans.
9/30/2019 | 12/31/2018 | 12/31/2017 | ||||||||||
Nonperforming loans | $ | 9,780 | $ | 13,082 | $ | 9,961 | ||||||
Real estate acquired in settlement of loans | 1,491 | 1,127 | 283 | |||||||||
Total nonperforming assets | $ | 11,271 | $ | 14,209 | $ | 10,244 | ||||||
Total nonperforming assets as a percentage of total assets | 1.11 | % | 1.47 | % | 1.29 | % | ||||||
Allowance for loan losses | $ | 7,557 | $ | 7,996 | $ | 7,107 | ||||||
Allowance for loan losses as a percentage of gross loans | 1.00 | % | 1.02 | % | 1.12 | % |
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 Federal Home Loan Bank of Des MoinesFHLB 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 $31,211,790$86,421,380 as of September 30, 20182019 and $37,406,930$34,121,642 as of December 31, 2017,2018, representing a decreasean increase of $6,195,140.$52,299,738. The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments and deposit flows and anticipated future deposit flows, which are subject to, and influenced by, many factors.fluctuations.
In July 2013, the Board of GovernorsFederal Reserve issued a final rule that revised its risk-based and leverage capital requirements for banking organizations to align them with the Basel III regulatory capital framework and meet certain requirements of the Federal Reserve Board and the FDIC approved the final rules implementing the Dodd-Frank Act (“Basel Committee on Banking Supervision'sIII Rule”). The Basel III Rule implemented a revised definition of regulatory capital, guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Bank. The rules include a new common equity tier 1 (“CET1”) minimum capital requirement, and a higher minimum tier1 capital requirement. The final rules also made changes to the prompt corrective action framework for depository institutions by incorporating the new minimum capital ratios into the framework, introducing the CET1 capital measure, and aligning the definition of tangible equity for purposes of the critically undercapitalized prompt corrective action category with the definition of tier 1 capital. Under the Basel III Rule, the following three components comprise a banking organization’s “regulatory capital”: (i) “CET1 capital,” which is predominantly comprised of retained earnings and common stock instruments that meet certain criteria and related surplus (net of any treasury stock), AOCI (for organizations that do not make opt-out elections), and CET1 minority interest, which are subject to certain restrictions; (ii) “Additional Tier 1 Capital,” which consists of non-cumulative perpetual preferred stock and similar instruments meeting specified eligibility criteria and related surplus, Tier 1 minority interests not included in CET1 capital, and “TARP” preferred stock and other instruments issued under the Emergency Economic Stabilization Act of 2008; and (iii) “Tier 2 Capital,” which includes instruments such as subordinated debt that has a minimum original maturity of at least five years and is subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 capital and limited amounts of a banking organization’s allowance for loan and lease losses (ALLL), less applicable regulatory adjustments and deductions.
As of January 1, 2019, the Basel III Rule is fully phased-in and requires the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets ratio (CET1 ratio) of at least 4.5% and, plus a capital2.5% "capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in,buffer" effectively resultsresulting in a minimum CET1 ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%. Basel III raises the upon full implementation); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% toof at least 6.0% (which, with, plus the 2.5% capital conservation buffer effectively resultsresulting in a minimum Tier 1 capital ratio of 8.5% when fully phased-in)upon full implementation); (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer effectively resulting in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in),upon full implementation); and requires(iv) a minimum leverage ratio of 4.0%. Basel III also makes changes, calculated as the ratio of Tier 1 capital to risk weights for certain assets and off-balance-sheet exposures. We expect thataverage assets.
Beginning January 1, 2016, the capital ratios forconservation buffer requirement was phased in at 0.625% of risk-weighted assets, increasing by the Bank under Basel IIIsame amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will continue to exceedface constraints on dividends, equity repurchases, and compensation based on the well capitalized minimum capital requirements, when fully phased in.amount of the shortfall.
The Bank’s capital ratios are above the levels required to be considered a well-capitalized financial institution.Bank is classified as “well capitalized” under current regulatory guidelines. As of September 30, 2018,2019, the Bank’s common equity Tier 1 ratio was 10.94%12.09%, the Bank’s Tier 1 leverage ratio was 10.17%10.16%, its Tier 1 risk-based capital ratio was 10.94%12.09% and the Bank’s total risk-based capital ratio was 11.81%12.99% - all exceeding the minimums of 6.5%7.0%, 5.0%6.0%, 8.0%8.5% and 10.0%10.5%, respectively, as of September 30, 2018.2019.
On October 29, 2019, federal banking regulators issued a final ruling that simplifies the capital requirements for community banks which greatly reduces the regulatory burden on financial institutions with less than $10 billion in total consolidated assets, leverage ratios greater than nine percent and limited off-balance sheet trading assets, liabilities and other off-balance sheet exposures. The combined agencies of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC) and the Comptroller of the Currency, approved the community bank leverage framework (CBLR) to simplify and clarify a number of complex aspects of current regulatory capital rules. The capital rule provisions may be adopted by institutions meeting the framework criteria during the first quarter of 2020.
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 September 30, 20182019 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 | |||||||||||||||||||
in Rates | $ Amount | $ Change | % Change | NPV Ratio | Change | ||||||||||||||||
+200 | $ | 146,714 | $ | 8,549 | 6 | % | 15.55 | % | 1.20 | % | |||||||||||
+100 | 143,843 | 5,678 | 4 | % | 15.08 | % | 0.73 | % | |||||||||||||
NC | 138,165 | - | 0 | % | 14.36 | % | 0.00 | % | |||||||||||||
-100 | 133,615 | (4,550 | ) | -3 | % | 13.78 | % | -0.58 | % | ||||||||||||
-200 | 120,359 | (17,806 | ) | -13 | % | 12.34 | % | -2.01 | % |
BP Change | Estimated Net Portfolio Value | NPV as % of PV of Assets | |||||||||||||||||||
in Rates | $ Amount | $ Change | % Change | NPV Ratio | Change | ||||||||||||||||
+200 | $ | 124,970 | $ | 20,573 | 20 | % | 12.60 | % | 2.24 | % | |||||||||||
+100 | 116,499 | 12,102 | 12 | % | 11.65 | % | 1.28 | % | |||||||||||||
NC | 104,397 | - | 0 | % | 10.36 | % | 0.00 | % | |||||||||||||
-100 | 85,041 | (19,356 | ) | -19 | % | 8.41 | % | -1.96 | % | ||||||||||||
-200 | 79,597 | (24,800 | ) | -24 | % | 7.85 | % | -2.51 | % |
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 Sectionsection of Management’s DiscussionQuantitative and Analysis of Financial Condition and Results of OperationsQualitative Disclosures About Market Risk included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.
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.disclosures.
During the quarter ended September 30, 2018,2019, 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 September 30, 2018.2019.
(b) There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 20182019 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
Not applicable.
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 August 20, 2007. This plan authorizes the purchase by the Company of up to 350,000 shares of the Company’s common stock. There is no expiration date for this plan. There are no other repurchase plans in effect at this time. The Company had no repurchase activityrepurchased 90,268 shares at an average price of the Company’s common stock$23.85 during the quarter ended September 30, 2018.2019. As of September 30, 2019, the repurchase plan has 48,672 shares remaining.
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
July 1, 2019 - July 31, 2019 | 28,878 | 23.62 | 28,878 | 110,062 | ||||||||||||
August 1, 2019 - August 31, 2019 | 36,733 | 23.82 | 36,733 | 73,329 | ||||||||||||
September 1, 2019 - September 30, 2019 | 24,657 | 24.12 | 24,657 | 48,672 |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
Item 6. Exhibits
|
|
31(i).1 | Certification of the Principal Executive Officer pursuant to Rule 13a -14(a) of the Exchange Act |
31(i).2 | Certification of the Principal Financial Officer pursuant to Rule 13a - 14(a) of the Exchange Act |
32 |
101 | The following materials from Guaranty Federal Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, |
*Pursuant to Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as
amended, and otherwise are not subject to liability under those sections.
|
|
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. | |
Signature and Title | Date |
/s/ Shaun A. Burke | November |
Shaun A. Burke | |
President and Chief Executive Officer | |
(Principal Executive Officer and Duly Authorized Officer) | |
/s/ Carter M. Peters | November |
Carter M. Peters | |
Executive Vice President and Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
4845