The Company has stock-based employee compensation plans, which are described in the Company’s 20192020 Annual Report. The following tables below summarize transactions under the Company’s equity plans for the three months ended March 31, 2020:2021:
Note 11: New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13,2016-13, Financial Instruments-Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19)(2018-19), November 2019 (2019-10(2019-10 and 2019-11)2019-11) and a January 2020 Update (2020-02)(2020-02) that provided additional guidance on this Topic. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has formed a committee that is assessing our data and evaluating the impact of adopting ASU 2016-13.2016-13. The Company has also selected a third-partythird-party vendor to assist in generating loan level cash flows and disclosures. Based on the results from larger SEC filers and preliminary internal calculations there is likely a significant financial impact of adopting this standard. Estimated amounts and decisions pertaining to implementation of this standard will be evaluated over the next several quarters.
In January 2017, the FASB issued ASU No. 2017-04,2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductibletax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the quantitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. This standard has been delayed and is now effective for fiscal years beginning after December 15, 2022.
In August 2017,was adopted during the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to accounting for hedging activities. Additional guidance on this Topic was released in October 2018 (ASU 2018-16), November 2019 (2019-10) and January 2020 (2020-01). The purposesecond quarter of this updated guidance is to better align financial reporting for hedging activities2020 with the economic objectives of those activities. The amendments in this update are effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The standard requires the modified retrospective transition approach as of the date of adoption. Implementation of this standard did not have a materialno impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,2018-13, Fair Value Measurement (Topic 820)820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU applies to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. Disclosures removed by this ASU are the amount and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels and the valuation process for Level 3 measurements. This ASU modifies disclosures relating to investments in certain entities that calculate net asset value. Additional disclosures require by the ASU include: 1)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)2) range and weighted average of significant observable inputs used to develop Level 3 measurements. The prospective method of transition is required for the new disclosure requirements. The other amendments should be applied retrospectively. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years or January 1, 2020 for the Company. The Company adopted this standard during the first quarter of 2020 with no significant impact on the financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). This ASU provides guidance and timelines for the future transition from London Interbank Offered Rate (LIBOR) to alternative reference rates that are more observable or transaction based and less susceptible to manipulation. For financial institutions this will likely impact contracts already in place that reference LIBOR as the variable rate component. Items likely to be impacted are interest rate swaps, subordinated debt offerings, certain adjustable-rate loan contracts, certain variable rate investment instruments as well as other variable rate contracts. Current guidance has the use of LIBOR reference rates to end by December 31, 2021. In the meantime, institutions are to identify contracts that reference LIBOR, prepare their current systems for a transition to a new reference rate and to communicate any changes to impacted parties. The Company has identified existing items that reference LIBOR and is in the process of evaluating fall back language in each situation along with working with system providers and other third parties to ensure a successful adoption of new reference rates. The financial impact of adopting this standard is being evaluated with estimated amounts and decisions pertaining to implementation of this standard to be evaluated over the next several quarters.
Note 12: Derivative Financial Instruments
The Company records all derivative financial instruments at fair value in the financial statements. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.
When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as 1)1) a hedge of fair value of a recognized asset or liability (fair value hedge) or 2)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-monththree-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 March 31, 2020, 2021, the Company reported a $2,950,329$2,053,389 unrealized loss, net of a $1,009,844$648,438 tax effect, in other comprehensive income related to this cash flow hedge.
In March 2019, the Company entered into a forward start 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-monththree-month floating LIBOR plus 145 basis points with a termination date of February 2026. 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 March 31, 2020, 2021, the Company reported a $946,742$628,821 unrealized loss, net of a $324,052$198,575 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 hedges, its analysis of actual and expected hedge effectiveness.
As of March 31, 2020, 2021, based on current fair values, the Company pledged cash collateral of $5.0$4.1 million to its counterparty for the swaps.swaps, included on the balance sheet in interest-bearing demand deposits in other financial institutions. As of December 31, 2019, 2020, based on then current fair values, the Company had pledged cash collateral of $1.9$5.1 million to the counterparty.
The following table presents the notional amounts and fair values of derivatives designated as hedging instruments on the consolidated balance sheets at March 31, 2020 2021 and December 31, 2019: 2020:
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | March 31, 2020 | | | | | | | | | | | | | | | | | | | | March 31, 2021 | | | | | |
Forward Start | | Termination | | Derivative | | Notional | | | Rate | | | Rate | | Balance Sheet | | Estimated Fair Value at: | | | Termination | | Derivative | | Notional | | Rate | | Rate | | Balance Sheet | | Estimated Fair Value at: | |
Inception Date | | Date | | Type | | Amount | | | Paid | | | Hedged | | Classfication | | March 31, 2020 | | | December 31, 2019 | | | Date | | Type | | Amount | | | Paid | | Hedged | | Classfication | | March 31, 2021 | | | December 31, 2020 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2/28/2018 | | 2/28/2025 | | Interest rate swap - FHLB Advances | | $ | 50,000,000 | | | 2.12 | % | | 3 month LIBOR Floating | | Other liabilites | | $ | (3,960,173 | ) | | $ | (1,067,935 | ) | | 2/28/2025 | | Interest rate swap - FHLB Advances | | $ | 50,000,000 | | | 2.12 | % | | 3 month LIBOR Floating | | Other liabilites | | $ | (2,701,827 | ) | | $ | (3,760,287 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
5/23/2019 | | 2/23/2026 | | Interest rate swap - Subordinated Debentures | | $ | 10,310,000 | | | 4.09 | % | | 3 month LIBOR Floating +145 bps | | Other liabilites | | $ | (1,270,794 | ) | | $ | (560,388 | ) | | 2/23/2026 | | Interest rate swap - Subordinated Debentures | | $ | 10,310,000 | | | 4.09 | % | | 3 month LIBOR Floating +145 bps | | Other liabilites | | $ | (827,396 | ) | | $ | (1,180,909 | ) |
The following table presents amounts included in the consolidated statements of income for derivatives designated as hedging instruments for the periods indicated:
Derivative | | Income Statement | | Three months ended March 31, | | | Income Statement | | Three months ended March 31, | |
Type | | Classfication | | 2020 | | | 2019 | | | Classfication | | 2021 | | | 2020 | |
| | | | | | | | | | | | | | | | |
Interest rate swap - FHLB Advances | | Interest expense | | $39,841 | | | $(69,888) | | | Interest expense | | $ | 238,411 | | | $ | 39,841 | |
| | | | | | | | | | | | | | | | |
Interest rate swap - Subordinated Debentures | | Interest expense | | $21,441 | | | - | | | Interest expense | | $ | 62,962 | | | $ | 21,441 | |
Note 13: Disclosures about Fair Value of Assets and Liabilities
ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
The following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-sale securities: Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sidedtwo-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 fall at March 31, 2020 2021 and December 31, 2019 (dollar2020 (dollar amounts in thousands):
March 31, 2020 | | | | | | | | | | | | | | | | | |
March 31, 2021 | | | | | | | | | | | | | | | | | |
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 | | $ | - | | | $ | 2,515 | | | $ | - | | | $ | 2,515 | | | $ | 0 | | | $ | 6,985 | | | $ | 0 | | | $ | 6,985 | |
Municipals | | | - | | | | 45,048 | | | | - | | | | 45,048 | | | 0 | | | 67,466 | | | 0 | | | 67,466 | |
Corporates | | | - | | | | 21,541 | | | | - | | | | 21,541 | | | 0 | | | 34,634 | | | 0 | | | 34,634 | |
Mortgage-backed securities - private label | | | - | | | | 13,561 | | | | - | | | | 13,561 | | | 0 | | | 16,007 | | | 0 | | | 16,007 | |
Government sponsored asset-backed securities and SBA loan pools | | | - | | | | 57,344 | | | | - | | | | 57,344 | | | | 0 | | | | 54,243 | | | | 0 | | | | 54,243 | |
Available-for-sale securities | | $ | - | | | $ | 140,009 | | | $ | - | | | $ | 140,009 | | | $ | 0 | | | $ | 179,335 | | | $ | 0 | | | $ | 179,335 | |
| | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | - | | | $ | 5,231 | | | $ | - | | | $ | 5,231 | | | $ | 0 | | | $ | 3,529 | | | $ | 0 | | | $ | 3,529 | |
December 31, 2019 | | | | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | |
| | | Level 1 inputs | | | Level 2 inputs | | | Level 3 inputs | | | Total fair value | |
Debt securities: | | | | | | | | | | | | | | | | |
Government agencies | | $ | - | | | $ | 2,488 | | | $ | - | | | $ | 2,488 | |
Municipals | | | - | | | | 36,175 | | | | - | | | | 36,175 | |
Corporates | | | - | | | | 15,535 | | | | - | | | | 15,535 | |
Mortgage-backed securities - private label | | | - | | | | 13,811 | | | | | | | | 13,811 | |
Government sponsored mortgage-backed securities and SBA loan pools | | | - | | | | 50,236 | | | | - | | | | 50,236 | |
Available-for-sale securities | | $ | - | | | $ | 118,245 | | | $ | - | | | $ | 118,245 | |
| | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | - | | | $ | 1,628 | | | $ | - | | | $ | 1,628 | |
December 31, 2020 | | | | | | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | |
| | | Level 1 inputs | | | Level 2 inputs | | | Level 3 inputs | | | Total fair value | |
Debt securities: | | | | | | | | | | | | | | | | |
Government agencies | | $ | 0 | | | $ | 6,284 | | | $ | 0 | | | $ | 6,284 | |
Municipals | | | 0 | | | | 61,969 | | | | 0 | | | | 61,969 | |
Corporates | | | 0 | | | | 30,601 | | | | 0 | | | | 30,601 | |
Mortgage-backed securities - private label | | | 0 | | | | 14,896 | | | | 0 | | | | 14,896 | |
Government sponsored mortgage-backed securities and SBA loan pools | | | 0 | | | | 50,371 | | | | 0 | | | | 50,371 | |
Available-for-sale securities | | $ | 0 | | | $ | 164,121 | | | $ | 0 | | | $ | 164,121 | |
| | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | 0 | | | $ | 4,941 | | | $ | 0 | | | $ | 4,941 | |
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 fall at March 31, 2020 2021 and December 31, 2019 (dollar2020 (dollar amounts in thousands):
Impaired loans: | | | | | | | | | | | | | | | | |
| | | Level 1 inputs | | | Level 2 inputs | | | Level 3 inputs | | | Total fair value | |
March 31, 2020 | | $ | - | | | $ | - | | | $ | 2,401 | | | $ | 2,401 | |
| | | | | | | | | | | | | | | | | |
December 31, 2019 | | $ | - | | | $ | - | | | $ | 1,483 | | | $ | 1,483 | |
Impaired loans: | | | | | | | | | | | | | | | | |
| | | Level 1 inputs | | | Level 2 inputs | | | Level 3 inputs | | | Total fair value | |
March 31, 2021 | | $ | 0 | | | $ | 0 | | | $ | 1,418 | | | $ | 1,418 | |
| | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 0 | | | $ | 0 | | | $ | 5,809 | | | $ | 5,809 | |
Foreclosed assets held for sale: | | | | | | | | | | | | | | | | |
| | | Level 1 inputs | | | Level 2 inputs | | | Level 3 inputs | | | Total fair value | |
March 31, 2020 | | $ | - | | | $ | - | | | $ | 150 | | | $ | 150 | |
| | | | | | | | | | | | | | | | | |
December 31, 2019 | | $ | - | | | $ | - | | | $ | 233 | | | $ | 233 | |
Foreclosed assets held for sale: | | | | | | | | | | | | | | | | |
| | | Level 1 inputs | | | Level 2 inputs | | | Level 3 inputs | | | Total fair value | |
March 31, 2021 | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 0 | | | $ | 0 | | | $ | 371 | | | $ | 371 | |
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 March 31, 2020 | | Valuation Technique | | Unobservable Input | | Range
(Weighted Average) | | |
| | | | | | | | | | | | | | | | Fair Value March 31, 2021 | | Valuation Technique | | Unobservable Input | | Range
(Weighted Average) |
Impaired loans (collateral dependent) | | $ | 2,401 | | Market Comparable | | Discount to reflect realizable value | | 0% | - | 100% | (15%) | | | $ | 1,418 | | Market Comparable | | Discount to reflect realizable value | | 0% | - | 80% | (16%) |
Foreclosed assets held for sale | | $ | 150 | | Market Comparable | | Discount to reflect realizable value | | 35% | - | 35% | (35%) | | | $ | 0 | | Market Comparable | | Discount to reflect realizable value | | | | 0% | (0%) |
| | | Fair Value December 31, 2020 | | Valuation Technique | | Unobservable Input | | Range
(Weighted Average) |
Impaired loans (collateral dependent) | | $ | 5,809 | | Market Comparable | | Discount to reflect realizable value | | 1% | - | 80% | (7%) |
Foreclosed assets held for sale | | $ | 371 | | Market Comparable | | Discount to reflect realizable value | | 4% | - | 4% | (4%) |
The following tables present estimated fair values of the Company’s financial instruments at March 31, 2020 2021 and December 31, 2019.2020.
| | | March 31, 2021 | | | December 31, 2020 | |
| | | Carrying
Amount | | | Fair
Value | | | Hierarchy
Level | | | Carrying
Amount | | | Fair
Value | | | Hierarchy
Level | |
Financial assets: | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 220,238,289 | | | $ | 220,238,289 | | | 1 | | | $ | 148,422,908 | | | $ | 148,422,908 | | | 1 | |
Interest-bearing time deposits at other institutions | | | 2,455,000 | | | | 2,455,135 | | | 2 | | | | 4,760,089 | | | | 4,771,605 | | | 2 | |
Federal Home Loan Bank stock | | | 4,088,700 | | | | 4,088,700 | | | 2 | | | | 3,896,900 | | | | 3,896,900 | | | 2 | |
Mortgage loans held for sale | | | 7,990,141 | | | | 8,177,951 | | | 2 | | | | 11,359,174 | | | | 11,626,174 | | | 2 | |
Loans, net | | | 743,220,776 | | | | 735,178,970 | | | 3 | | | | 742,149,271 | | | | 737,701,011 | | | 3 | |
Interest receivable | | | 4,043,621 | | | | 4,043,621 | | | 2 | | | | 4,060,795 | | | | 4,060,795 | | | 2 | |
Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 1,023,136,682 | | | | 1,023,880,736 | | | 2 | | | | 938,672,541 | | | | 939,806,149 | | | 2 | |
FHLB advances | | | 66,000,000 | | | | 66,072,251 | | | 2 | | | | 66,000,000 | | | | 66,089,183 | | | 2 | |
Subordinated debentures issued to Capital Trusts | | | 15,465,000 | | | | 15,465,000 | | | 3 | | | | 15,465,000 | | | | 15,465,000 | | | 3 | |
Subordinated notes, net | | | 19,575,492 | | | | 27,001,113 | | | 3 | | | | 19,564,131 | | | | 25,608,997 | | | 3 | |
Interest payable | | | 564,439 | | | | 564,439 | | | 2 | | | | 932,172 | | | | 932,172 | | | 2 | |
Unrecognized financial instruments (net of contractual value): | | | | | | | | | | | | | | | | | | | | | | |
Commitments to extend credit | | | - | | | | - | | | - | | | | - | | | | - | | | - | |
Unused lines of credit | | | - | | | | - | | | - | | | | - | | | | - | | | - | |
Note 14: Subsequent Event
On April 8, 2021, the Company notified investors of its $5,155,000 aggregate principal amount of 6.92% Fixed Rate Junior Subordinated Debt Securities due 2036 (the “Debt Securities”) issued by a statutory trust subsidiary, Guaranty Statutory Trust I; and of its intent to fully redeem the issuance as allowed per Debt Securities agreements from its inception in 2005. All outstanding principal amounts, plus accrued and unpaid distributions will be redeemed as of May 23, 2021. Proceeds from a 2020 subordinated debt offering and a cash dividend from the Bank will be used to redeem the 2005 debt securities. The Company received all necessary regulatory approvals prior to the redemption of these instruments.
| | | March 31, 2020 | |
| | | Carrying Amount | | | Fair Value | | | Hierarchy
Level | |
Financial assets: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 84,343,930 | | | $ | 84,343,930 | | | 1 | |
Interest-bearing time deposits at other financial institutions | | | 3,534,996 | | | | 3,535,959 | | | 2 | |
Federal Home Loan Bank stock | | | 3,212,100 | | | | 3,212,100 | | | 2 | |
Mortgage loans held for sale | | | 1,980,896 | | | | 1,980,896 | | | 2 | |
Loans, net | | | 721,062,691 | | | | 722,567,482 | | | 3 | |
Interest receivable | | | 3,533,856 | | | | 3,533,856 | | | 2 | |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | |
Deposits | | | 849,535,941 | | | | 851,761,814 | | | 2 | |
Federal Home Loan Bank advances | | | 50,000,000 | | | | 49,958,347 | | | 2 | |
Subordinated debentures | | | 15,465,000 | | | | 15,465,000 | | | 3 | |
Note payable to bank | | | 11,200,000 | | | | 11,200,000 | | | 3 | |
Interest payable | | | 799,338 | | | | 799,338 | | | 2 | |
| | | | | | | | | | | | |
Unrecognized financial instruments (net of contractual value): | | | | | | | | | | | |
Commitments to extend credit | | | - | | | | - | | | - | |
Unused lines of credit | | | - | | | | - | | | - | |
| | | December 31, 2019 | |
| | | Carrying Amount | | | Fair Value | | | Hierarchy
Level | |
Financial assets: | | | | | | | | | | | |
Cash and cash equivalents | | $ | 92,671,909 | | | $ | 92,671,909 | | | 1 | |
Interest-bearing time deposits at other financial institutions | | | 250,000 | | | | 250,315 | | | 2 | |
Federal Home Loan Bank stock | | | 3,757,500 | | | | 3,757,500 | | | 2 | |
Mortgage loans held for sale | | | 2,786,564 | | | | 2,786,564 | | | 2 | |
Loans, net | | | 720,732,402 | | | | 723,363,117 | | | 3 | |
Interest receivable | | | 3,511,875 | | | | 3,511,875 | | | 2 | |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | |
Deposits | | | 821,406,532 | | | | 822,046,988 | | | 2 | |
Federal Home Loan Bank advances | | | 65,000,000 | | | | 66,015,635 | | | 2 | |
Subordinated debentures | | | 15,465,000 | | | | 15,465,000 | | | 3 | |
Note payable to bank | | | 11,200,000 | | | | 11,200,000 | | | 3 | |
Interest payable | | | 793,746 | | | | 793,746 | | | 2 | |
| | | | | | | | | | | | |
Unrecognized financial instruments (net of contractual value): | | | | | | | | | | | |
Commitments to extend credit | | | - | | | | - | | | - | |
Unused lines of credit | | | - | | | | - | | | - | |
Note 14: Recent Events15: Concentration of Cash Holdings
The COVID-19 pandemic is creating disruptionsDuring the normal course of business, the Bank may have excess cash on deposit at other financial institutions. Each institution’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At March 31, 2021, the overall economy and to the lives of individuals throughout our local communities. Governments, businesses, and the publicBank had $81.0 million in deposits above FDIC insured limits. These funds are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, government stimulus programs, and legislation designed to deliver monetary aid and other relief to many segments of the economy. While the scope, duration, and impacts of COVID-19held with three institutions that are continuing to evolve and are not fully known, the pandemic and related efforts to contain it have disrupted economic activities, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period a sustained economic downturn or recession may result causing many of the risk factors identified in our Form 10-Keach shown to be exacerbated and such effects could have a material adverse impact on uswell capitalized as of March 31, 2021. Additionally, the Bank held $127.3 million in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as described in more detail below and in Part II of this filing.deposits at the Federal Reserve Bank at March 31, 2021.
Item 2. Management’sManagement’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 March 31, 2020,2021, and the results of operations for the three months ended March 31, 20202021 and 2019.2020.
Forward-Looking Statements
The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. The following factors or combination of factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the severity, magnitude and duration of COVID-19 and the direct and indirect impacts of COVID-19, as well as responses to COVID-19 by the government, businesses and consumers; the disruption of global, national, state and local economies associated with COVID-19; the strength of the United States economy in general and the strength of the real estate values and the local economies in which the Company conducts operations; effects of the coronavirus pandemic (COVID-19) on our Company, the communities where we have our branches, the state of Missouri and the United States, related to the economy and overall financial stability; insufficient provisions for loan losses (which could reduce earnings for several periods until acceptable levels are reached;reached); new accounting standards for calculating loan loss reserves (which may have a material adverse impact on our financial condition;condition); merger or acquisition activity (which may not produce anticipated results;results); changes in portfolio composition; a decrease in cash flows from our investment portfolio (which may adversely affect our liquidity;liquidity); changes in management strategy; increased competition from both bank and non-bank companies, the impact of recent and potential future changes in the laws, rules, regulations, interpretations and policies relating to financial institutions, accounting, insurance, tax, monetary and fiscal matters and their application by our regulators; the effects of, and changes in, trade, monetary and fiscal policies and laws, changes in interest rates including negative interest rates; changes in LIBOR including the impact of the possibleanticipated elimination of LIBOR and resultant transition to a new benchmark; the timely development of and acceptance of new products and services of the companyCompany and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; asset quality deterioration; environmental liability associated with real estate collateral; technological changes and cybersecurity risks; employee retention; the success of the Company at managing the risks resulting from these factors; and other factors set forth in reports and other documents filed by the Company with the SECSecurities and Exchange Commission (the “SEC”) from time to time, including the risk factors described under Item 1A. of this Quarterly Report on Form 10-Q and Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020.
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.
Actions Taken by Bank in Response to Challenges Arising FromImpacts from COVID-19 on Our Financial Statements and Results of Operations
Impacts fromThe spread of the COVID-19 pandemic has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States, including the markets that we serve. Governmental responses to the pandemic have caused abruptincluded orders closing businesses not deemed essential and drasticdirecting individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that led to a loss of revenues and a rapid increase in unemployment, disrupted supply chains, market downturns and volatility, changes in many aspects of everyday life greatly influencing how we operate both personally and professionally. Our initial thoughts are with the safety and well-being of our staff, those in our communities and the many persons who continue to work I jobs considered essential despite challenging times in nearly every industry we interact with. As we adapt to operating in this “new normal” we continue to focus on serving our customers, employees and increasing our stockholder value while operating in a socially distant environment. The goal to best serve our communities has not changed, but the manner in which we achieve this has. Summaries of some of the areas in which we have seen the greatest change while continuing to be a valued business partner to those we serve are below:
Associates: Despite commercial banking being an essential service, approximately 40% of our workforce is working remotely. Limiting staff in our facilities when possible to assist in flattening the infection curve is our contribution to many of our communities ordered to shelter-at-home. For individual employees who have had their health or wellness impacted by the virus or need assistance due to high-risk family members in their household, our Human Resources staff has made available resources during this time to assist them.
Customer Service: Staffing has been increased to handle higher volumes of inquiries. Inquiresconsumer behavior related to stimulus deposits, loan modificationspandemic fears, related emergency response legislation and accessing government loan programs have been top-of-mind of many customers, greatly increasingan expectation that Federal Reserve policy will maintain a low interest rate environment for the workload of nearly each department within the Bank. Also, resources to educate and inform our customer base of potential scams and how to protect their finances during this time have been developed and distributed via our website and social media channels.
Technology: Our online banking platform and seven video banking machines have seen increased usage during this time. Investments to build out these resources have proven to be worthwhile not only as our industry was trending towards this before the COVID-19 pandemic, but now as customers are able to access financial information at any time while complying with mandates to limit social interactions. This has allowed us to serve our customer baseforeseeable future. However, in a nearly seamless manner.
Financial Impacts to the Bank: Unemploymentrecent months, unemployment and business closings have already occurred and will likely continue to risemoderated in our markets along with infection rates while community health guidelines are adjusted as vaccines and additional information become available.
Financial Impacts to the impactsBank: Due to segments of anour loan portfolio experiencing weakness as a result of COVID-19-related economic shutdown are expectedslowdowns and travel restrictions, we recorded a significant increase in our provision for loan losses in 2020 of $3,600,000 with $500,000 recorded during the first three months of 2020. For the first three months of 2021, a provision of $400,000 was recorded. We expect that we could continue to continueexperience increases in our provision for the foreseeable future.loan losses. We expect to continue working with impacted customers on a case-by-case basis based on their specific circumstances. The Bank expects other ramifications to offer relief in the form of loan payment deferrals and loan modifications even as a gradual lifting of sheltering orders hopefully allows for a slow return to normal. The ramifications of this for the Bank will likely be increases in provisions for loan losses,continue which may include increases in realized losses on loans and decreased fee income due to lower loan originations and deposit activity. Market interest rates have declinedfluctuated significantly and these reductions, especially if prolonged,over the past year which could continue to adversely affect our net interest income, net interest margin, unrealized gains and losses on certain financial instruments and overall earnings.
Paycheck Protection Program (PPP) Activity: The Federal government has approved various stimulus packages to assist small businesses, individuals, health care entities, education systems and certain governmental entities over the past weeks.year. Availability and coverage of these programs continues to evolve as the breadth of the economic impact from COVID-19 unfolds. One of the most notable programs iswas the Coronavirus Aid, Relief and Economic Security (CARES) Act which made over $600 billion in funds available relief to small businesses through Small Business Administration (SBA) PPP loans that, based on certain qualifications, could provide funds to qualified borrowers for payroll rent and utilities andcertain other costs with portions or all or a portion of such loans will bepotentially forgiven if use of fundsused on certain expenses and other criteria arewere met. An initial amount of $349The PPP funding programs were heavily utilized by businesses leading to robust activity at many financial institutions, including ours. The Bank approved and funded 661 PPP loans during 2020 totaling $55.1 million and impacting nearly 8,400 jobs in the communities we serve. In late December 2020, an additional $284 billion ofin PPP funds was authorized in late March 2020 and was fully exhausted within two weeks of start-up. An additional $310 billion of PPP funds was authorized in late April 2020 with those funds to be exhausted by Mid-May. As of April 30, 2020 Guarantyapproved for eligible entities based on certain qualifications. The Bank has approved and funded over 500226 PPP loans for a totaltotaling $14.1 million during the quarter ended March 31, 2021 in this most recent round of funding. Overall, approximately $51$3.1 million impactingin origination fees will be recognized over 8,000 jobsthe life of the individual PPP loans by the Bank. As of March 31, 2021, $33.8 million in PPP loans are included in our commercial loan portfolio. PPP loans originated in 2020 totaling $35.4 million have already been granted forgiveness by the communitiesSBA. The Bank is continually monitoring regulatory guidelines that will impact PPP loans that we serve.are involved with along with any additional governmental programs that could materially impact our customers and the Bank’s financial situation.
Loan Modifications: As previously mentioned, increased loan payment deferrals and other loan modifications have adversely impacted and we expect that they will continue to adversely impact the performance of our loan portfolio. Based on recent guidance by federal banking regulators, the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB), short-term loan modifications made in response to COVID-19 to borrowers with a current payment status are not considered troubled debt restructurings (TDRs) for reporting purposes. As of April 30, 2020, we have modified 227 loans for $188.4 million. Additional details are noted in the following table.
COVID-19 Loan Modifications
Collateral Type | | # Loans Modified | | | $ of Loans Modified | | | Interest Only 3 Months or Less | | | Interest Only 4-6 Months | | | Full Payment Deferral 3 Months | | | Full Payment Deferral 3 Months + Interest Only 3 Months | | | Full Payment Deferral 4-6 Months | | | Other | |
Hotel/Motel | | 25 | | | $ | 49,653,201 | | | $ | - | | | $ | 843,262 | | | $ | 26,053,514 | | | $ | 22,144,206 | | | $ | 612,220 | | | $ | - | |
Multifamily | | 23 | | | | 23,199,874 | | | | 3,013,500 | | | | 654,387 | | | | 2,684,713 | | | | - | | | | 16,847,274 | | | | - | |
Theatre | | 6 | | | | 19,901,432 | | | | - | | | | - | | | | - | | | | 19,901,432 | | | | - | | | | - | |
1-4 Family Investment | | 63 | | | | 19,082,918 | | | | 768,486 | | | | 8,580,431 | | | | 6,296,429 | | | | 3,156,914 | | | | - | | | | 280,659 | |
Retail (C&I & RE) | | 21 | | | | 18,918,204 | | | | 110,497 | | | | 18,183,950 | | | | - | | | | 623,757 | | | | - | | | | - | |
Office | | 10 | | | | 15,581,154 | | | | 1,869,960 | | | | 2,694,266 | | | | 429,008 | | | | 10,587,921 | | | | - | | | | - | |
Warehouse | | 9 | | | | 10,211,140 | | | | - | | | | 8,750,457 | | | | - | | | | 1,460,683 | | | | - | | | | - | |
Automotive/Transportation | | 17 | | | | 9,686,218 | | | | - | | | | 2,559,438 | | | | 6,839,540 | | | | 287,241 | | | | - | | | | - | |
Restaurant | | 15 | | | | 5,749,749 | | | | - | | | | 3,733,156 | | | | 247,720 | | | | 1,768,873 | | | | - | | | | - | |
Stock | | 1 | | | | 4,742,000 | | | | - | | | | - | | | | - | | | | 4,742,000 | | | | - | | | | - | |
Land & Land Development | | 6 | | | | 2,460,186 | | | | - | | | | 648,430 | | | | - | | | | 1,811,756 | | | | - | | | | - | |
Religious Organizations | | 3 | | | | 2,180,584 | | | | 144,956 | | | | 1,880,000 | | | | - | | | | | | | | - | | | | 155,627 | |
Other | | 28 | | | | 7,022,148 | | | | 1,169,037 | | | | 2,730,986 | | | | 1,147,648 | | | | 1,290,470 | | | | - | | | | 684,006 | |
Total | | 227 | | | $ | 188,388,809 | | | $ | 7,076,436 | | | $ | 51,258,763 | | | $ | 43,698,572 | | | $ | 67,775,252 | | | $ | 17,459,494 | | | $ | 1,120,293 | |
Market Volatility Risk –: As noted herein, the COVID-19 pandemic has led to disruption and volatility in the global capital markets. These conditions may require us to recognize an elevated level of other than temporary impairments on investment securities in our portfolio as issues of these securities are negatively impacted by the economic slowdown. Declines in fair value of investment securities in our portfolio could also reduce the unrealized
gains reported as part of our consolidated comprehensive income.
Loan Modifications: As previously mentioned, increased loan payment deferrals and other loan modifications have adversely impacted, and we expect that they will continue to adversely impact, the performance of our loan portfolio. Based on recent guidance by federal banking regulators, the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) and provisions within the CARES Act, short-term loan modifications made in response to COVID-19 to borrowers with a current payment status are not to be considered troubled debt restructurings (TDRs) for reporting purposes. As of March 31, 2021, 13 loans with an aggregate balance of $19.4 million were modified in response to COVID-19 with additional details noted in the following table.
COVID-19 Loan Modifications
Collateral Type | | # Loans Modified | | | Amount of Loans Modified ($) | | | Interest Only 3 Months or Less | | | Interest Only 4-6 Months | | | Full Payment Deferral 3 Months | | | Full Payment Deferral 3 Months + Interest Only 3 Months | | | Full Payment Deferral 4-6 Months | | | Full Payment Deferral > 6 Months | |
Hotel/Motel | | 4 | | | $ | 7,840,689 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,849,520 | | | $ | - | | | $ | 5,991,169 | |
Theatre | | 5 | | | | 10,586,792 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 10,586,792 | |
Restaurant (C&I & RE) | | 1 | | | | 287,793 | | | | - | | | | 287,793 | | | | - | | | | - | | | | - | | | | - | |
1-4 Family Consumer | | 1 | | | | 23,758 | | | | - | | | | - | | | | 23,758 | | | | - | | | | - | | | | - | |
Other | | 2 | | | | 630,657 | | | | 537,557 | | | | 93,100 | | | | - | | | | - | | | | - | | | | - | |
Total Modified Loans | | 13 | | | $ | 19,369,689 | | | $ | 537,557 | | | $ | 380,894 | | | $ | 23,758 | | | $ | 1,849,520 | | | $ | - | | | $ | 16,577,961 | |
Financial Condition
The Company’s total assets increased $15,607,473 (2%$82,782,569 (7%) from $1,012,024,625$1,146,252,939 as of December 31, 2019,2020, to $1,027,632,098$1,229,035,508 as of March 31, 2020.2021, primarily due to cash and investments activity resulting from increased deposit balances.
Available-for-sale securities increased $21,764,140 (18%$15,213,696 (9%) from $118,245,314$164,120,869 as of December 31, 2019,2020, to $140,009,454$179,334,565 as of March 31, 2020.2021. The Company had purchases of $35,896,426 and an increase$30,918,248 offset by a decrease in unrealized gains of $989,655 offset by$3,137,599 and sales, calls, maturities and principal payments of $11,764,041$12,513,814 during the quarter.three-month period.
Net loans receivable increased by $330,289$1,071,505 (less than 1%) from $720,732,402$742,149,271 as of December 31, 20192020 to $721,062,691$743,220,776 as of March 31, 2020. For the quarter,2021. Year-to-date, construction loans increased $14,864,621 (21%), commercial real estate loans increased $2,987,353 (1%), one-to-four family mortgage loans increased $5,563,818 (5%decreased $1,092,930 (1%), commercial loans increased $4,133,715 (4%), construction loans decreased $4,194,302 (5%) and permanent multi-family loans decreased $4,899,441 (6%$1,675,390 (2%), consumer loans decreased $2,089,611 (8%) and commercial loans decreased $11,249,628 (8%). The Company continues to focus its lending efforts in the commercial, owner occupiedowner-occupied real estate and small business lending categories.
Allowance for loan losses increased $441,677 (6%$270,915 (3%) from $7,607,587$9,617,024 as of December 31, 20192020 to $8,049,264$9,887,939 as of March 31, 2020.2021. Provisions for loan losses of $500,000$400,000 were recorded by the Company for the quarterthree months ended March 31, 2020.2021. This expense reflects an increased provision resulting from stress on our loan portfolio from the increase in unemployment and economic effects attributable to the COVID-19 pandemic. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of March 31, 20202021 and December 31, 20192020 was 1.10%1.31% and 1.04%1.28%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of March 31, 20202021 and December 31, 20192020 was 72.2%55.6% and 76.1%51.6%, respectively. Management believes the allowance for loan losses at March 31, 2021 is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio even after taking the expected loan defaults attributable to COVID-19 into account.
In accordance with generally accepted accounting principles (GAAP) for acquisition accounting, the loans acquired through the Hometown acquisition were recorded at fair value; therefore, there was no allowance associated with these loans. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount of $750,000 atapproximately $490,000 as of March 31, 2020.2021.
Deposits increased $28,129,409 (3%$84,464,141 (9%) from $821,406,532$938,672,541 as of December 31, 2019,2020, to $849,535,941$1,023,136,682 as of March 31, 2020.2021. For the three months ended March 31, 2020,2021, checking and savings accounts increased by $38,327,551 and certificates of deposit decreased by $10,198,142. The increase in checking and savings accounts was$98,753,934 (13%) primarily due to the Bank’s continued focus to increase core transaction deposits, includingon attracting and retaining retail, commercial and public funds.fund relationships. Additionally, a significant amount of the increase was due to government stimulus program funds being retained in deposit accounts by both individuals and businesses. Certificates of deposit balances decreased by $14,289,793 (8%) as many higher yielding balances matured and choose to reinvest into more liquid accounts. See also the discussion under Item 3 - “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”
Federal Home Loan Bank advances decreased $15,000,000 (23%Stockholders’ equity increased $358,172 (less than 1%) from $65,000,000$88,968,366 as of December 31, 20192020, to $50,000,000$89,326,538 as of March 31, 2020 due to principal reductions from excess funds generated from the deposit growth noted above.
Accrued expenses and other liabilities increased $3,345,850 (81%) to $7,499,612 from $4,153,762 during the quarter. The majority of this amount is due to mark-to-market adjustments on interest rate swaps, net of tax, which increased unrealized losses during the quarter by $3,602,643 as interest rates continued to decline, running counter to our hedged position.
Stockholders’ equity (including net unrealized gains and losses on available-for-sale securities and interest rate swaps) decreased $868,668 (1%) from $84,631,882 as of December 31, 2019, to $83,763,214 as of March 31, 2020.2021. The Company’s net income during this period exceeded dividends paid or declared by $1,450,110, however, stock repurchase and award activity decreased$1,561,168. Other items impacting equity balances during the three-month period include decreases in unrealized gains in the investment portfolio of $2,723,449 offset by $332,919 and the equity portion of the Company’san improvement in unrealized losses on available-for-sale securities and effects offrom interest rate swaps decreased equity balances by an additional $1,985,859.of $1,411,973. On a per common share basis, tangible book value decreasedincreased to $18.43 at$19.78 as of March 31, 2020 as2021 compared to $18.71$19.71 as of December 31, 2019.2020.
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 3/31/2020 | | | Three months ended 3/31/2019 | |
| | | Average Balance | | | Interest | | | Yield / Cost | | | Average Balance | | | Interest | | | Yield / Cost | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 733,591 | | | $ | 9,553 | | | | 5.24 | % | | $ | 779,764 | | | $ | 10,303 | | | | 5.36 | % |
Investment securities | | | 125,851 | | | | 885 | | | | 2.83 | % | | | 90,061 | | | | 598 | | | | 2.69 | % |
Other assets | | | 96,515 | | | | 361 | | | | 1.50 | % | | | 30,906 | | | | 196 | | | | 2.57 | % |
Total interest-earning | | | 955,957 | | | | 10,799 | | | | 4.54 | % | | | 900,731 | | | | 11,097 | | | | 5.00 | % |
Noninterest-earning | | | 71,533 | | | | | | | | | | | | 59,405 | | | | | | | | | |
| | | $ | 1,027,490 | | | | | | | | | | | $ | 960,136 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing: | | | | | | | | | | | | | | | | | | | | | | | | |
Savings accounts | | $ | 39,704 | | | | 26 | | | | 0.26 | % | | $ | 39,897 | | | $ | 30 | | | | 0.30 | % |
Transaction accounts | | | 503,138 | | | | 1,378 | | | | 1.10 | % | | | 410,061 | | | | 1,475 | | | | 1.46 | % |
Certificates of deposit | | | 199,349 | | | | 1,090 | | | | 2.20 | % | | | 239,248 | | | | 1,101 | | | | 1.87 | % |
FHLB advances | | | 51,482 | | | | 274 | | | | 2.14 | % | | | 60,204 | | | | 357 | | | | 2.40 | % |
Subordinated debentures | | | 15,465 | | | | 196 | | | | 5.10 | % | | | 21,753 | | | | 291 | | | | 5.43 | % |
Other borrowed funds | | | 11,491 | | | | 123 | | | | 4.31 | % | | | 5,000 | | | | 68 | | | | 5.52 | % |
Total interest-bearing | | | 820,629 | | | | 3,087 | | | | 1.51 | % | | | 776,163 | | | | 3,322 | | | | 1.74 | % |
Noninterest-bearing | | | 120,825 | | | | | | | | | | | | 101,813 | | | | | | | | | |
Total liabilities | | | 941,454 | | | | | | | | | | | | 877,976 | | | | | | | | | |
Stockholders’ equity | | | 86,036 | | | | | | | | | | | | 82,160 | | | | | | | | | |
| | | $ | 1,027,490 | | | | | | | | | | | $ | 960,136 | | | | | | | | | |
Net earning balance | | $ | 135,328 | | | | | | | | | | | $ | 124,568 | | | | | | | | | |
Earning yield less costing rate | | | | | | | | | | | 3.03 | % | | | | | | | | | | | 3.26 | % |
Net interest income, and net yield spread on interest earning assets | | | | | | $ | 7,712 | | | | 3.24 | % | | | | | | $ | 7,775 | | | | 3.50 | % |
Ratio of interest-earning assets to interest-bearing liabilities | | | | | | | 116 | % | | | | | | | | | | | 116 | % | | | | |
| | | Three months ended 3/31/2021 | | | Three months ended 3/31/2020 | |
| | | Average Balance | | | Interest | | | Yield / Cost | | | Average Balance | | | Interest | | | Yield / Cost | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning: | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 760,814 | | | $ | 8,817 | | | | 4.70 | % | | $ | 733,591 | | | $ | 9,553 | | | | 5.24 | % |
Investment securities | | | 171,137 | | | | 1,025 | | | | 2.43 | % | | | 125,851 | | | | 885 | | | | 2.83 | % |
Other assets | | | 197,564 | | | | 135 | | | | 0.28 | % | | | 96,515 | | | | 361 | | | | 1.50 | % |
Total interest-earning | | | 1,129,515 | | | | 9,977 | | | | 3.58 | % | | | 955,957 | | | | 10,799 | | | | 4.54 | % |
Noninterest-earning | | | 69,606 | | | | | | | | | | | | 71,533 | | | | | | | | | |
| | | $ | 1,199,121 | | | | | | | | | | | $ | 1,027,490 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing: | | | | | | | | | | | | | | | | | | | | | | | | |
Savings accounts | | $ | 51,011 | | | | 16 | | | | 0.13 | % | | $ | 39,704 | | | | 26 | | | | 0.26 | % |
Transaction accounts | | | 586,019 | | | | 495 | | | | 0.34 | % | | | 503,138 | | | | 1,378 | | | | 1.10 | % |
Certificates of deposit | | | 178,252 | | | | 789 | | | | 1.80 | % | | | 199,349 | | | | 1,090 | | | | 2.20 | % |
FHLB advances | | | 66,000 | | | | 311 | | | | 1.91 | % | | | 51,482 | | | | 274 | | | | 2.14 | % |
Subordinated debentures issued to Capital Trusts | | | 15,465 | | | | 195 | | | | 5.11 | % | | | 15,465 | | | | 196 | | | | 5.10 | % |
Subordinated notes, net | | | 19,568 | | | | 263 | | | | 5.45 | % | | | - | | | | - | | | | 0.00 | % |
Other borrowed funds | | | 521 | | | | 2 | | | | 1.56 | % | | | 11,491 | | | | 123 | | | | 4.31 | % |
Total interest-bearing | | | 916,836 | | | | 2,071 | | | | 0.92 | % | | | 820,629 | | | | 3,087 | | | | 1.51 | % |
Noninterest-bearing | | | 191,848 | | | | | | | | | | | | 120,825 | | | | | | | | | |
Total liabilities | | | 1,108,684 | | | | | | | | | | | | 941,454 | | | | | | | | | |
Stockholders’ equity | | | 90,437 | | | | | | | | | | | | 86,036 | | | | | | | | | |
| | | $ | 1,199,121 | | | | | | | | | | | $ | 1,027,490 | | | | | | | | | |
Net earning balance | | $ | 212,679 | | | | | | | | | | | $ | 135,328 | | | | | | | | | |
Earning yield less costing rate | | | | | | | | | | | 2.66 | % | | | | | | | | | | | 3.03 | % |
Net interest income, and net yield spread on interest earning assets | | | | | | $ | 7,906 | | | | 2.84 | % | | | | | | $ | 7,712 | | | | 3.24 | % |
Ratio of interest-earning assets to interest-bearing liabilities | | | | | | | 123 | % | | | | | | | | | | | 116 | % | | | | |
Results of Operations - Comparison of Three-Month Periods Ended March 31, 20202021 and 20192020
Net income for the three-monthsthree months ended March 31, 2021 was $2,216,016 compared to $2,104,845 for the three months ended March 31, 2020, and 2019 was $2,104,845 and $2,120,364, respectively, which represents a decreasean increase in earnings of $15,519 (1%$111,171 (5%).
Interest Income
Total interest income for the three-months ended March 31, 2020 decreased $297,579 (3%) as compared to the three months ended March 31, 2019. For2021 decreased $822,253 (8%) when compared to the same period in 2020. When compared to the three-month period ended March 31, 2020 compared to2021 with the same period in 2019,2020, the average yield on interest earning assets decreased 4696 basis points to 4.54%,3.58% while the average balance of interest earning assets increased approximately $55,226,000.$173,558,000. The declineincrease in the average yieldbalances for the period is primarily due to declining interest rates and the asset mix of having greater percentages ofincreased cash and investment holdings rather than loans when compared to prior periods. The average balance of loans decreased $46,173,000 compared to March 30, 2019. Theinvestments balances generated from increased deposits. For the three-month period, the yield on loans decreased 1254 basis points to 5.24%4.70%. Negatively impacting loan interest income and $210,000yield on loans were continued decreases in loan accretionrates on new and repricing credits. Helping to offset this decline was $511,441 of loan fees recognized onfrom the origination and forgiveness of PPP loans acquiredin the three-month period ended March 31, 2021. No loan fees from Hometown compared to $373,000this source were recognized in the same quarter of 2019.period in 2020.
Interest Expense
Total interest expense for the three-monthsthree months ended March 31, 20202021 decreased $235,193 (7%$1,015,392 (33%) when compared to the three months ended March 31, 2019.2020. For the three-month periodthree months ended March 31, 2020, the average cost of interest bearing liabilities decreased 23 basis points to 1.51%, and the average balance of interest bearing liabilities increased approximately $44,466,000 when2021 compared to the same period in 2019. The decline in2020, the average cost isof interest-bearing liabilities decreased 59 basis points to 0.92% primarily due to successful initiativesthe reductions to increase lower-cost core deposits overkey interest rates by the past year.Federal Reserve during the first quarter of 2020 and higher rate liabilities resetting lower as they reprice or mature. Offsetting rate declines, the average balance of interest-bearing liabilities increased approximately $96,207,000 for the three-month period as depositors, in general, maintained higher balances in accounts and the continued growth in public funds. The Company intends to continue to utilize a cost-effective mix of retail and commercial deposits along with non-core, wholesale funding.
Provision for Loan Losses
Provisions for loan losses are charged or credited to earnings to bring the total allowance for loan losses to a level considered adequate by the Company to provide for potential loan losses in the existing loan portfolio. When making its assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and impaired and past due loans in the Company’s loan portfolio. In addition, the Company considers general economic conditions and other factors related to collectability of the Company’s loan portfolio, including the effect on the ability of some borrowers to repay their loans in accordance with their terms or at all due to the impact of COVID-19.
Based on its internal analysis and methodology, management recorded a provision for loan losses of $500,000$400,000 for the three months ended March 31, 2020,2021 compared to no provision$500,000 for the same period in 2019.2020. The decision to fund the provision for the quarter was based on expected stresses that will likely occurgrowth in the loan portfolioconstruction loans and a conservative approach to possible continued weaknesses due to the COVID-19 pandemic. Overall economic conditions impacting both individuals and businesses have already led to loan payment deferrals and modifications of loan agreements. agreements discussed earlier.
The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management may need to increase the allowance for loan losses through charges to the provision for loan losses if anticipated growth in the Bank’s loan portfolio increases or other circumstances warrant.
Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.
Non-InterestNon-Interest Income
Non-interest income increased $534,797 (34%$516,350 (25%) for the three months ended March 31, 20202021 when compared to the three months ended March 31, 2019. This was primarily due2020. When compared to the first three months of 2020, the Company had decreased income of $555,490 (100%) recognized from fees generated from a new commercial loan swap product that debuted during the quarter, increasedand service charge revenue decreased by $45,142 (11%). However, higher income recognized from the sale of mortgage loans of $117,413 (28%$528,401 (97%) and an increase in realized gains from the sale of investment securities of $59,000 (190%). Offsetting these items was a decrease ofincreased income from the salesales of SBASmall Business Administration (“SBA”) and other government guaranteed loans of $250,119$423,539 (100%) due to none of these loans being sold duringmore than offset the quarter.previously noted decreases.
Non-InterestNon-Interest Expense
Noninterest expenses decreased $44,930 (1%Non-interest expense increased $656,454 (10%) duringfor the quarter. Salaries and employee benefit expenses decreased $9,706 (less than 1%) while occupancy expenses increased $17,726 (2%)three months ended March 31, 2021 when compared to the same quarterperiod in 2019, respectively. Due to full staffing at nearly each facility and no changes in the number of locations over the past year, no significant fluctuations were experienced in these categories. Additional2020. Significant non-interest expense items impacting noninterest expense during the quarter included:are as follows:
| | ● | Data processingSalaries and employee benefit expenses increased $208,670 (54%$416,765 (11%) for the quarter due whenended March 31, 2021 compared to the prior yearsame period in 2020 primarily due to 2020 havingthe hiring of a full quarter of expensesnew commercial banking executive and relationship managers and increased commissions and incentives related to upgrades made to our core processing system in last half of 2019.strong mortgage lending activity.
|
| | ● | A $99,535 (100%) reduction in FDIC assessment premiums was experiencedincreased by $143,206 (100%) when compared to the first quarter of 2020 due to previously awarded credits completely offsetting current fees.
|
| ●
| Loan expenses decreased $70,200 (51%) due to lower loan origination activity.
|
| ●
| Postage expenses were lower by $25,656 (46%) due to efficiencies gained from the upgrading of core processing systems and increased electronic delivery of items.
|
| ●
| Decreased professional service expenses of $29,363 (15%) were experienced because initial expenses related to new SEC accelerated filer thresholds and expenses related to the implementation of new accounting standards that occurredfees in the first quarterbeginning of 2019 were not present during the comparable 2020 quarter.2020.
|
Provision for Income Taxes
The provision for income taxes increased by $32,860 (9%$41,864 (10%) for the three monthsthree-month period ended March 31, 20202021 when compared to the three months ended March 31, 2019.same period in 2020. The increase in the provision for income taxes for the quarter is primarily due to reducedslightly higher taxable income amounts and corporate income tax credits to offset actual tax expense. rates.
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 March 31, 20202021 and December 31, 20192020 was 72.2%55.6% and 76.1%51.6%, respectively. Total loans classified as substandard, doubtful or loss as of March 31, 2020,2021 were $21,897,000$56,810,000 or 2.13%4.62% of total assets as compared to $18,553,000$63,491,000 or 1.83%5.54% of total assets at December 31, 2019.2020. 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.
| | | 3/31/2020 | | | 12/31/2019 | | | 12/31/2018 | |
Nonperforming loans | | $ | 11,143 | | | $ | 10,003 | | | $ | 13,082 | |
Real estate acquired in settlement of loans | | | 869 | | | | 992 | | | | 1,127 | |
Total nonperforming assets | | $ | 12,012 | | | $ | 10,995 | | | $ | 14,209 | |
| | | | | | | | | | | | | |
Total nonperforming assets as a percentage of total assets | | | 1.17 | % | | | 1.09 | % | | | 1.47 | % |
Allowance for loan losses | | $ | 8,049 | | | $ | 7,608 | | | $ | 7,996 | |
Allowance for loan losses as a percentage of gross loans | | | 1.10 | % | | | 1.04 | % | | | 1.02 | % |
| | | 3/31/2021 | | | 12/31/2020 | | | 12/31/2019 | |
Nonperforming loans | | $ | 17,780 | | | $ | 18,629 | | | $ | 10,003 | |
Real estate acquired in settlement of loans | | | 745 | | | | 546 | | | | 992 | |
Total nonperforming assets | | $ | 18,525 | | | $ | 19,175 | | | $ | 10,995 | |
| | | | | | | | | | | | | |
Total nonperforming assets as a percentage of total assets | | | 1.51 | % | | | 1.67 | % | | | 1.09 | % |
Allowance for loan losses | | $ | 9,888 | | | $ | 9,617 | | | $ | 7,608 | |
Allowance for loan losses as a percentage of gross loans | | | 1.31 | % | | | 1.28 | % | | | 1.04 | % |
| | | | | | | | | | | | | |
Nonperforming Loans | | | 17,780 | | | | 18,629 | | | | 10,003 | |
Allowance for loan losses as a percentage of nonperforming loans | | | 55.6 | % | | | 51.6 | % | | | 76.1 | % |
Liquidity and Capital Resources
Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company’s primary sources of liquidity include cash and cash equivalents, customer deposits and FHLB borrowings. The Company also has established secured borrowing lines available from the Federal Reserve Bank which, is considered a secondary source of funds.
The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $84,343,930$220,238,289 as of March 31, 20202021 and $92,671,909$148,422,908 as of December 31, 2019,2020, representing a decreasean increase of $8,327,979.$71,815,381 (48%). The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments and deposit fluctuations.
A final rule issued on September 17, 2019 by federal banking regulators provides a simpler method of measuring adequate capital ratios for community banking organizations. The community bank leverage ratio (CBLR) framework is an optional framework that is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. The framework provides a simple measure of capital adequacy for qualifying community banking organizations, consistent with sectionSection 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act. Qualifying community banking organizations that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9 percent are considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rule. These institutions also must have met well-capitalized ratio requirements for purposes of sectionSection 38 of the Federal Deposit Insurance Act. The final rule went into effect on January 1, 2020. During the first quarter of 2020, the CARES Act introduced interim CBLR provisions that allow for extended periods for institutions that fall below the 99.0 percent threshold to gradually increase their ratio from minimums of 8.0 percent8.00% in 2020, 8.5 percent8.50% in 2021 and 9.0 percent9.00% in 2022.
Nonetheless, Additionally, federal banking guidelines provide that financial institutions experiencing significant growth could be expected to maintain capital levels above the minimum requirements without significant reliance on intangible assets. Additionally, higher capital levels could be required under certain circumstances, such as situations involving interest rate risk, risk from concentrations of credit, or nontraditional activities. Accordingly, the Company and the Bank could be required to maintain higher capital levels in the future even if we otherwise fully comply with the CBLR rule.
The Bank has opted in to the new CBLR framework during the first quarter of 2020. As of March 31, 2020,2021, the Bank’s CBLRcommon equity Tier 1 ratio was 10.27%9.60% which exceeded the current minimum of 9.00%8.50%.
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 March 31, 20202021 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 | | | | Estimated Net Portfolio Value | | | NPV as % of PV of Assets | |
in Rates | | | $ Amount | | | $ Change | | | % Change | | | NPV Ratio | | | Change | | | | $ Amount | | | $ Change | | | % Change | | | NPV Ratio | | | Change | |
+200 | | | $ | 103,237 | | | $ | 23,506 | | | | 30 | % | | | 10.37 | % | | | 2.51 | % | | | $ | 152,052 | | | $ | 24,819 | | | 20 | % | | 12.71 | % | | 2.29 | % |
+100 | | | | 93,292 | | | | 13,561 | | | | 17 | % | | | 9.28 | % | | | 1.41 | % | | | 141,456 | | | 14,223 | | | 11 | % | | 11.70 | % | | 1.27 | % |
NC | | | | 79,731 | | | | - | | | | 0 | % | | | 7.87 | % | | | 0.00 | % | | | 127,233 | | | - | | | 0 | % | | 10.42 | % | | 0.00 | % |
| -100 | | | | 76,870 | | | | (2,861 | ) | | | -4 | % | | | 7.53 | % | | | -0.34 | % | | | 100,673 | | | (26,560 | ) | | -21 | % | | 8.17 | % | | -2.26 | % |
| -200 | | | | 89,838 | | | | 10,107 | | | | 13 | % | | | 8.75 | % | | | 0.89 | % | | | 97,607 | | | (29,626 | ) | | -23 | % | | 7.85 | % | | -2.57 | % |
Computations of prospective effects of hypothetical interest rate changes are based on an internally generated model using actual maturity and repricing schedules for the Bank’s loans and deposits, and are based on numerous assumptions, including relative levels of market interest rates, loan repayments and deposit run-offs, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates. For further discussion of the Company’s market risk, see the Interest Rate Sensitivity Analysis section of Quantitative and Qualitative Disclosures About Market Risk included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020.
Management cannot predict future interest rates or their effect on the Bank’s NPV in the future. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in differing degrees to changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have an initial fixed rate period typically from one to five years, and over the remaining life of the asset changes in the interest rate are restricted. In addition, the proportion of adjustable-rate loans in the Bank’s portfolio could decrease in future periods due to refinancing activity if market interest rates remain steady in the future. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in the table. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.
The Bank’s Board of Directors (the “Board”) is responsible for reviewing the Bank’s asset and liability management policies. The Board meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. The Bank’s management is responsible for administering the policies and determinations of the Board with respect to the Bank’s asset and liability goals and strategies.
Item 4. Controls and Procedures
(a) The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act") that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the quarter ended March 31, 2020,2021, 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 March 31, 2020.2021.
(b) There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 20202021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
Item 1.Legal Proceedings
None.
Item 1A. Risk Factors
The disclosures below supplement the risk factors previously disclosed under Item 1A. of the Company’s 2019 Annual Report on Form 10-K.
In the quarter ended March 31, 2020, our financial results were adversely impacted by the COVID-19 pandemic, primarily due to our recording of a provision for loan losses of $500,000 based on expected stresses that will occur in the loan portfolio due to the pandemic and, to a lesser extent, by loan payment deferrals and loan modifications. Our future business and financial results could also be adversely impacted by COVID-19. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic is creating disruptions to the overall economy and to the lives of individuals throughout our local communities. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, government stimulus programs, and legislation designed to deliver monetary aid and other relief to many segments of the economy. While the scope, duration, and impacts of COVID-19 are continuing to evolve and are not fully known, the pandemic and related efforts to contain it have disrupted economic activities, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period a sustained economic downturn or recession may result causing many of the risk factors identified in our Form 10-K to be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, human capital and self-insurance, as described in more detail below.
Credit Risk - Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrower’s business. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor disruptions, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan and mortgage payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and other services, and the financial condition and credit risk of our customers. Further, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure, in the event of delinquencies. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment like this, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the COVID-19 pandemic, we are participating in the Paycheck Protection Program (“PPP”) under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers to which we would have otherwise extended credit.Not applicable.
Strategic Risk- Our results may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may negatively impact our funding costs, reduced demand for our financial products due to economic conditions and the various responses of governmental, non-governmental and regulatory authorities. In recent weeks, the COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. In our two major market areas of Springfield and Joplin, Missouri, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating of loans and lower usage of ATMs and debit cards.
Operational Risk- Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these remote work measures also introduces additional operational risk, including increased cybersecurity risk. These cybersecurity risks include increased phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.
Moreover, we rely on many third parties in our business operations, including appraisers of the real property collateral securing our loans, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the COVID-19 pandemic, many of these entities may limit the availability and access of their services. For example, loan originations could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.
Interest Rate Risk - Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate by 150 basis points to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on overall markets. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition. Because there have been no comparable recent global pandemics that resulted in similar global impacts, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ abilities to support our operations, and any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
During the quarter ended March 31, 2020, theThe Company concludedhas a stock repurchase plan which was announced on August 20, 2007. This plan authorized the purchase by the Company of up to 350,000 shares of the Company’s common stock. A new repurchase plan of the Company’s stock was approved on February 28, 2020. This 2020 plan allows for the purchase of up to 250,000 shares of the Company’s outstanding common stock and expires December 31, 2022. There are no other repurchase plans in effect at this time. During the quarter ended March 31, 2020,2021, the Company repurchased 16,716 shares at an average pricehad no repurchase activity of $23.35.its common stock. As of March 31, 2020,2021, the ability to repurchase up to 235,591 shares under the 2020 repurchase plan remains.
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 | |
January 1, 2020 - January 31, 2020 | | - | | | - | | | - | | | 2,307 | |
February 1, 2020 - February 29, 2020 | | 2,307 | | | 24.06 | | | 2,307 | | | - | |
March 1, 2020 - March 31, 2020 | | 14,409 | | | 23.23 | | | 14,409 | | | 235,591 | |
Item 3.Defaults Upon Senior Securities
Not applicable.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None
Item 6.Exhibits
| | 101 | The following materials from Guaranty Federal Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 20202021 formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Income (unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (unaudited), (iv) Condensed Consolidated Statement of Stockholders’ Equity (unaudited), (v) the Condensed Consolidated Statements of Cash Flows (unaudited), and (vi) related notes. |
| 104 | Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Management contract or compensatory plan or arrangement
† Filed herewith
| | (1) | Filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on March 25, 20205, 2021 and incorporated herein by reference. |
| | (2) | Filed as Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on March 25, 20205, 2021 and incorporated herein by reference. |
| | (3) | Filed as Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on March 25, 20205, 2021 and incorporated herein by reference. |
| | (4) | Filed as Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on March 25, 20205, 2021 and incorporated herein by reference. |
| | (5) | Filed as Exhibit 10.5 to the Current Report on Form 8-K filed by the Registrant on March 25, 2020 and incorporated herein by reference. |
| (6)
| Filed as Exhibit 10.6 to the Current Report on Form 8-K filed by the Registrant on March 25, 2020 and incorporated herein by reference.
|
| (7)
| Filed as Exhibit 10.7 to the Current Report on Form 8-K filed by the Registrant on March 25, 2020 and incorporated herein by reference.
|
| (8)
| Filed as Exhibit 10.8 to the Current Report on Form 8-K filed by the Registrant on March 25, 2020 and incorporated herein by reference.
|
| (9)
| Filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on April 22, 20205, 2021 and incorporated herein by reference.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Guaranty Federal Bancshares, Inc.
Signature and Title | Date |
| | |
/s/ Shaun A. Burke | May 8, 20207, 2021 |
Shaun A. Burke | |
President and Chief Executive Officer | |
(Principal Executive Officer and Duly Authorized Officer) | |
| | |
| | |
| | |
/s/ Carter M. Peters | May 8, 2020 |
| Carter M. Peters | May 7, 2021 |
Carter M. Peters | |
Executive Vice President and Chief Financial Officer | |
(Principal Financial and Accounting Officer) | | |
