Notes to Unaudited Consolidated Financial Statements
NOTE
1 – BASIS OF PRESENTATION
The unaudited consolidated financial statements of County Bancorp, Inc. (“we,” “us,” ”our,” or the “Company”) and its subsidiaries, including Investors Community Bank (the “Bank”), have been prepared, in the opinion of management, to reflect all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows as of and for the three months ended March 31, 2019. The results of operations for the three months ended March 31, 2019 may not necessarily be indicative of the results to be expected for the year ending December 31, 2019, or for any other period.
Management of the Company is required to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ significantly from those estimates.
These
unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). Certain information in footnote disclosure normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses
, to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted for the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. Entities should apply this amendment a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company has engaged a third-party software consultant and is currently testing the model’s methodology in parallel to current loss model calculations. At this time, the effect this ASU will have on its consolidated financial statements is still being quantified as the Company ensures data, assumptions, and methods all comply with the requirements of ASU 2016-13.
In March 2017, the FASB issued updated guidance codified within ASU No. 2017-08,
Receivables – Nonrefundable Fees and Other Costs
, which is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. The amendment became effective January 1, 2019; however, the Company has no callable debt securities; therefore, this amendment has no effect on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815)
, to permit entities to better portray the economic results of their hedging strategies in their financial statements. In addition, the amendments make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendment is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including adoption in an interim period. The Company has chosen to early adopt this amendment in connection with the interest rate swap that commenced on June 15, 2018 with no material impact on its results of operation, financial position, or liquidity.
In February 2016, the FASB issued ASU No. 2016-02,
Leases: Amendments to the FASB Accounting Standards Codification
which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of
6
cash flows is largely unchanged from previ
ous GAAP.
In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842) – Targeted Improvements
, which provide
d
an additional and optional transition method with which to adopt the new leases standard. The updated ASU allows entities to initially apply t
he new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
The amendment
became
effective
January 1, 2019, and was adopted by
the
Company retrospectively t
o
the
beginning of the adoption period. Since all of the Company’s leases are operating leases, there was no impact to the Statement of Operations, however, a right-of-use asset
of $0.2 million
and
a corresponding
liability were recorded on the Company’s
balance sheet as of the effective date of the amendment.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement
(Topic 842) – Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
, which focuses on improving the effectiveness of disclosures in the notes to the financial statements. The amendment is effective for the fiscal years beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the effect this standard will have on the Company’s financial statements.
NOTE
2 – EARNINGS PER SHARE
Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share plus the dilutive effect of share-based compensation using the treasury stock method.
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Net income from continuing operations
|
|
$
|
3,762
|
|
|
$
|
4,054
|
|
Less: preferred stock dividends
|
|
|
117
|
|
|
|
97
|
|
Income available to common shareholders for basic
earnings per common share
|
|
$
|
3,645
|
|
|
$
|
3,957
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares issued
|
|
|
7,153,174
|
|
|
|
7,106,685
|
|
Less: weighted average treasury shares
|
|
|
443,729
|
|
|
|
439,833
|
|
Plus: weighted average of participating restricted stock units
|
|
|
16,260
|
|
|
|
11,309
|
|
Weighted average number of common shares and participating
securities outstanding
|
|
|
6,725,705
|
|
|
|
6,678,161
|
|
Effect of dilutive options
|
|
|
21,323
|
|
|
|
90,804
|
|
Weighted average number of common shares outstanding
used to calculate diluted earnings per common share
|
|
|
6,747,028
|
|
|
|
6,768,965
|
|
Weighted average of anti-dilutive options
|
|
|
134,824
|
|
|
|
—
|
|
7
NOTE 3
– SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of securities available-for-sale as of March 31, 2019 and December 31, 2018 were as follows:
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
3,964
|
|
|
$
|
—
|
|
|
$
|
(35
|
)
|
|
$
|
3,929
|
|
U.S. treasury securities
|
|
|
2,497
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2,499
|
|
Municipal securities
|
|
|
31,615
|
|
|
|
333
|
|
|
|
(75
|
)
|
|
|
31,873
|
|
Mortgage-backed securities
|
|
|
153,534
|
|
|
|
1,353
|
|
|
|
(978
|
)
|
|
|
153,909
|
|
|
|
$
|
191,610
|
|
|
$
|
1,688
|
|
|
$
|
(1,088
|
)
|
|
$
|
192,210
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
4,368
|
|
|
$
|
—
|
|
|
$
|
(37
|
)
|
|
$
|
4,331
|
|
U.S. treasury securities
|
|
|
2,497
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
2,491
|
|
Municipal securities
|
|
|
34,985
|
|
|
|
33
|
|
|
|
(498
|
)
|
|
|
34,520
|
|
Mortgage-backed securities
|
|
|
157,147
|
|
|
|
203
|
|
|
|
(2,747
|
)
|
|
|
154,603
|
|
|
|
$
|
198,997
|
|
|
$
|
236
|
|
|
$
|
(3,288
|
)
|
|
$
|
195,945
|
|
The amortized cost and fair value of securities at March 31, 2019 and December 31, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
3,270
|
|
|
$
|
3,269
|
|
Due from one to five years
|
|
|
10,387
|
|
|
|
10,355
|
|
Due from five to ten years
|
|
|
8,659
|
|
|
|
8,694
|
|
Due after ten years
|
|
|
15,760
|
|
|
|
15,983
|
|
Mortgage-backed securities
|
|
|
153,534
|
|
|
|
153,909
|
|
|
|
$
|
191,610
|
|
|
$
|
192,210
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
5,848
|
|
|
$
|
5,843
|
|
Due from one to five years
|
|
|
11,113
|
|
|
|
10,974
|
|
Due from five to ten years
|
|
|
8,458
|
|
|
|
8,382
|
|
Due after ten years
|
|
|
16,431
|
|
|
|
16,143
|
|
Mortgage-backed securities
|
|
|
157,147
|
|
|
|
154,603
|
|
|
|
$
|
198,997
|
|
|
$
|
195,945
|
|
There were no security sales for the three months ended March 31, 2019 and 2018.
At March 31, 2019 and December 31, 2018, no securities were pledged to secure the Federal Home Loan Bank (
“FHLB”
) advances besides
FHLB stock of $3.0 million
. There were no securities pledged to secure the Federal Reserve Bank line of credit at March 31, 2019 and December 31, 2018; however, there were $33.5 million and $53.4 million of securitied pledged to secure municipial customer deposts at March 31, 2019 and December 31, 2019, respectively.
8
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temorarily impaired, aggregated by investment category and length of time that individual securiti
es have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018:
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,929
|
|
|
$
|
(35
|
)
|
|
|
3,929
|
|
|
|
(35
|
)
|
U.S. treasury securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Municipal securities
|
|
|
—
|
|
|
|
—
|
|
|
|
11,723
|
|
|
|
(75
|
)
|
|
|
11,723
|
|
|
|
(75
|
)
|
Mortgage-backed securities
|
|
|
285
|
|
|
|
(1
|
)
|
|
|
79,778
|
|
|
|
(977
|
)
|
|
|
80,063
|
|
|
|
(978
|
)
|
|
|
$
|
285
|
|
|
$
|
(1
|
)
|
|
$
|
95,430
|
|
|
$
|
(1,087
|
)
|
|
$
|
95,715
|
|
|
$
|
(1,088
|
)
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,331
|
|
|
$
|
(37
|
)
|
|
|
4,331
|
|
|
|
(37
|
)
|
U.S. treasury securities
|
|
|
2,491
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,491
|
|
|
|
(6
|
)
|
Municipal securities
|
|
|
4,291
|
|
|
|
(15
|
)
|
|
|
25,377
|
|
|
|
(483
|
)
|
|
|
29,668
|
|
|
|
(498
|
)
|
Mortgage-backed securities
|
|
|
41,925
|
|
|
|
(208
|
)
|
|
|
83,319
|
|
|
|
(2,539
|
)
|
|
|
125,244
|
|
|
|
(2,747
|
)
|
|
|
$
|
48,707
|
|
|
$
|
(229
|
)
|
|
$
|
113,027
|
|
|
$
|
(3,059
|
)
|
|
$
|
161,734
|
|
|
$
|
(3,288
|
)
|
The unrealized losses on the investments at March 31, 2019 and December 31, 2018 were due to market conditions as well as normal fluctuations and pricing inefficiencies. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell the investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of the amortized cost basis, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2019 and December 31, 2018.
NOTE 4
– LOANS
The components of loans were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Agricultural loans
|
|
$
|
722,107
|
|
|
$
|
724,508
|
|
Commercial real estate loans
|
|
|
289,824
|
|
|
|
299,212
|
|
Commercial loans
|
|
|
113,666
|
|
|
|
116,460
|
|
Residential real estate loans
|
|
|
57,146
|
|
|
|
66,843
|
|
Installment and consumer other
|
|
|
220
|
|
|
|
272
|
|
Total gross loans
|
|
|
1,182,963
|
|
|
|
1,207,295
|
|
Allowance for loan losses
|
|
|
(17,493
|
)
|
|
|
(16,505
|
)
|
Net loans
|
|
$
|
1,165,470
|
|
|
$
|
1,190,790
|
|
9
Changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019
and
2018
were as follows:
|
|
Agricultural
|
|
|
Commercial
Real Estate
|
|
|
Commercial
|
|
|
Residential
Real Estate
|
|
|
Installment and
Consumer Other
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
12,258
|
|
|
$
|
2,779
|
|
|
$
|
1,414
|
|
|
$
|
53
|
|
|
$
|
1
|
|
|
$
|
16,505
|
|
Provision for loan losses
|
|
|
(135
|
)
|
|
|
1,138
|
|
|
|
(214
|
)
|
|
|
(37
|
)
|
|
|
—
|
|
|
|
752
|
|
Loans charged off
|
|
|
—
|
|
|
|
(390
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(390
|
)
|
Recoveries
|
|
|
—
|
|
|
|
625
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
626
|
|
Balance, end of period
|
|
$
|
12,123
|
|
|
$
|
4,152
|
|
|
$
|
1,201
|
|
|
$
|
16
|
|
|
$
|
1
|
|
|
$
|
17,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
9,712
|
|
|
$
|
1,978
|
|
|
$
|
1,508
|
|
|
$
|
47
|
|
|
$
|
2
|
|
|
$
|
13,247
|
|
Provision for loan losses
|
|
|
1,537
|
|
|
|
(1,118
|
)
|
|
|
(319
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
97
|
|
Loans charged off
|
|
|
—
|
|
|
|
(42
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(42
|
)
|
Recoveries
|
|
|
1
|
|
|
|
1,240
|
|
|
|
68
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1,310
|
|
Balance, end of period
|
|
$
|
11,250
|
|
|
$
|
2,058
|
|
|
$
|
1,257
|
|
|
$
|
45
|
|
|
$
|
2
|
|
|
$
|
14,612
|
|
10
The following
tables present the balances in the allowance for loan losses and the recorded balance in loans by portfolio segment and based on impairment method as of March 31, 2019 and December 31, 2018:
|
|
March 31, 2019
|
|
|
|
Individually
Evaluated for
Impairment
|
|
|
Collectively
Evaluated for
Impairment
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
$
|
2,691
|
|
|
$
|
9,432
|
|
|
$
|
12,123
|
|
Commercial real estate loans
|
|
|
2,472
|
|
|
|
1,680
|
|
|
|
4,152
|
|
Commercial loans
|
|
|
648
|
|
|
|
553
|
|
|
|
1,201
|
|
Residential real estate loans
|
|
|
—
|
|
|
|
16
|
|
|
|
16
|
|
Installment and consumer other
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Total ending allowance for loan losses
|
|
|
5,811
|
|
|
|
11,682
|
|
|
|
17,493
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
|
54,251
|
|
|
|
667,856
|
|
|
|
722,107
|
|
Commercial real estate loans
|
|
|
6,031
|
|
|
|
283,793
|
|
|
|
289,824
|
|
Commercial loans
|
|
|
1,135
|
|
|
|
112,531
|
|
|
|
113,666
|
|
Residential real estate loans
|
|
|
—
|
|
|
|
57,146
|
|
|
|
57,146
|
|
Installment and consumer other
|
|
|
—
|
|
|
|
220
|
|
|
|
220
|
|
Total loans
|
|
|
61,417
|
|
|
|
1,121,546
|
|
|
|
1,182,963
|
|
Net loans
|
|
$
|
55,606
|
|
|
$
|
1,109,864
|
|
|
$
|
1,165,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Individually
Evaluated for
Impairment
|
|
|
Collectively
Evaluated for
Impairment
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
$
|
2,325
|
|
|
$
|
9,933
|
|
|
$
|
12,258
|
|
Commercial real estate loans
|
|
|
583
|
|
|
|
2,196
|
|
|
|
2,779
|
|
Commercial loans
|
|
|
745
|
|
|
|
669
|
|
|
|
1,414
|
|
Residential real estate loans
|
|
|
—
|
|
|
|
53
|
|
|
|
53
|
|
Installment and consumer other
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Total ending allowance for loan losses
|
|
|
3,653
|
|
|
|
12,852
|
|
|
|
16,505
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
|
52,947
|
|
|
|
671,561
|
|
|
|
724,508
|
|
Commercial real estate loans
|
|
|
2,037
|
|
|
|
297,175
|
|
|
|
299,212
|
|
Commercial loans
|
|
|
1,773
|
|
|
|
114,687
|
|
|
|
116,460
|
|
Residential real estate loans
|
|
|
—
|
|
|
|
66,843
|
|
|
|
66,843
|
|
Installment and consumer other
|
|
|
—
|
|
|
|
272
|
|
|
|
272
|
|
Total loans
|
|
|
56,757
|
|
|
|
1,150,538
|
|
|
|
1,207,295
|
|
Net loans
|
|
$
|
53,104
|
|
|
$
|
1,137,686
|
|
|
$
|
1,190,790
|
|
11
The following table presents the aging of the recorded investment in past due loans at March 31, 2019 and December 31, 2018:
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90+ Days
Past Due
|
|
|
Total
Past Due
|
|
|
Loans Not
Past Due
|
|
|
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
$
|
3,269
|
|
|
$
|
167
|
|
|
$
|
7,048
|
|
|
$
|
10,484
|
|
|
$
|
711,623
|
|
|
$
|
722,107
|
|
Commercial real estate loans
|
|
|
1,012
|
|
|
|
3,998
|
|
|
|
—
|
|
|
|
5,010
|
|
|
|
284,814
|
|
|
|
289,824
|
|
Commercial loans
|
|
|
110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
110
|
|
|
|
113,556
|
|
|
|
113,666
|
|
Residential real estate loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,146
|
|
|
|
57,146
|
|
Installment and consumer other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
220
|
|
|
|
220
|
|
Total
|
|
$
|
4,391
|
|
|
$
|
4,165
|
|
|
$
|
7,048
|
|
|
$
|
15,604
|
|
|
$
|
1,167,359
|
|
|
$
|
1,182,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
$
|
460
|
|
|
$
|
969
|
|
|
$
|
7,968
|
|
|
$
|
9,397
|
|
|
$
|
715,111
|
|
|
$
|
724,508
|
|
Commercial real estate loans
|
|
|
—
|
|
|
|
—
|
|
|
|
2,037
|
|
|
|
2,037
|
|
|
|
297,175
|
|
|
|
299,212
|
|
Commercial loans
|
|
|
—
|
|
|
|
—
|
|
|
|
600
|
|
|
|
600
|
|
|
|
115,860
|
|
|
|
116,460
|
|
Residential real estate loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,843
|
|
|
|
66,843
|
|
Installment and consumer other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
|
|
272
|
|
Total
|
|
$
|
460
|
|
|
$
|
969
|
|
|
$
|
10,605
|
|
|
$
|
12,034
|
|
|
$
|
1,195,261
|
|
|
$
|
1,207,295
|
|
The following table lists information on nonaccrual, troubled debt restructured, and certain past due loans at March 31, 2019 and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Nonaccrual loans, 90 days or more past due
|
|
$
|
7,048
|
|
|
$
|
10,605
|
|
Nonaccrual loans 30-89 days past due
|
|
|
5,010
|
|
|
|
868
|
|
Nonaccrual loans, less than 30 days past due
|
|
|
13,822
|
|
|
|
11,510
|
|
Troubled debt restructured loans not on nonaccrual status
|
|
|
21,111
|
|
|
|
19,389
|
|
90 days or more past due and still accruing
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
46,991
|
|
|
$
|
42,372
|
|
The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days on accrual by class of loan:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Agricultural loans
|
|
$
|
19,735
|
|
|
$
|
19,173
|
|
Commercial real estate loans
|
|
|
5,010
|
|
|
|
2,037
|
|
Commercial loans
|
|
|
1,135
|
|
|
|
1,773
|
|
Total
|
|
$
|
25,880
|
|
|
$
|
22,983
|
|
12
The following table presents the average recorded investment and interest income recognized on impaired loans by portfolio segment for three months ended March 31, 2019 and 2018:
|
|
As of and for the Three Months Ended March 31, 2019
|
|
|
|
Unpaid Principal Balance
|
|
|
Recorded Investment
|
|
|
Allowance for Loan Losses Allocated
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
|
|
|
|
(dollars in thousands)
|
|
Agricultural loans
|
|
$
|
56,844
|
|
|
$
|
54,251
|
|
|
$
|
2,691
|
|
|
$
|
53,599
|
|
|
$
|
1,173
|
|
Commercial real estate loans
|
|
|
6,031
|
|
|
|
6,031
|
|
|
|
2,472
|
|
|
|
4,034
|
|
|
|
24
|
|
Commercial loans
|
|
|
1,142
|
|
|
|
1,135
|
|
|
|
648
|
|
|
|
1,454
|
|
|
|
2
|
|
Total
|
|
$
|
64,017
|
|
|
$
|
61,417
|
|
|
$
|
5,811
|
|
|
$
|
59,087
|
|
|
$
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended March 31, 2018
|
|
|
|
Unpaid Principal Balance
|
|
|
Recorded Investment
|
|
|
Allowance for Loan Losses Allocated
|
|
|
Average Recorded Investment
|
|
|
Interest Income Recognized
|
|
|
|
(dollars in thousands)
|
|
Agricultural loans
|
|
$
|
35,980
|
|
|
$
|
35,545
|
|
|
$
|
2,419
|
|
|
$
|
32,145
|
|
|
$
|
646
|
|
Commercial real estate loans
|
|
|
582
|
|
|
|
575
|
|
|
|
—
|
|
|
|
1,520
|
|
|
|
—
|
|
Commercial loans
|
|
|
1,163
|
|
|
|
1,153
|
|
|
|
273
|
|
|
|
1,473
|
|
|
|
1
|
|
Residential real estate loans
|
|
|
114
|
|
|
|
114
|
|
|
|
—
|
|
|
|
57
|
|
|
|
1
|
|
Total
|
|
$
|
37,839
|
|
|
$
|
37,387
|
|
|
$
|
2,692
|
|
|
$
|
35,195
|
|
|
$
|
648
|
|
Impaired loans include nonaccrual loans, troubled debt restructured loans, and loans that are 90 days or more past due and still accruing. For nonaccrual loans included in impaired loans, the interest income that would have been recognized had those loans been performing in accordance with their original terms would have been approximately $0.6 million and $0.4 million for the three months ended March 31, 2019 and 2018, respectively.
Troubled Debt Restructurings
The Company has allocated approximately $2.6 million and $2.0 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDR”) at March 31, 2019 and December 31, 2018, respectively. The Company had no additional lending commitments at March 31, 2019 or December 31, 2018 to customers with outstanding loans that are classified as TDRs.
A TDR on nonaccrual status is classified as a nonaccrual loan until evaluation supports reasonable assurance of repayment and there has been a satisfactory period of performance according to the modified terms of the loan. Once this assurance is reached, the TDR is classified as a restructured loan. The following table presents the TDRs by loan class at March 31, 2019 and December 31, 2018:
|
|
Non-Accrual
|
|
|
Restructured and Accruing
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
$
|
11,056
|
|
|
$
|
20,090
|
|
|
$
|
31,146
|
|
Commercial real estate loans
|
|
|
—
|
|
|
|
1,021
|
|
|
|
1,021
|
|
Commercial loans
|
|
|
1,135
|
|
|
|
—
|
|
|
|
1,135
|
|
Total
|
|
$
|
12,191
|
|
|
$
|
21,111
|
|
|
$
|
33,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
$
|
12,034
|
|
|
$
|
19,389
|
|
|
$
|
31,423
|
|
Commercial loans
|
|
|
92
|
|
|
|
—
|
|
|
|
92
|
|
Total
|
|
$
|
12,126
|
|
|
$
|
19,389
|
|
|
$
|
31,515
|
|
The following table provides the number of loans modified in a troubled debt restructuring investment by class for the three months ended March 31, 2019 and 2018:
13
|
|
For the Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
Number of Loans
|
|
|
Recorded Investment
|
|
|
Number of Loans
|
|
|
Recorded Investment
|
|
|
|
(dollars in thousands)
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agricultural loans
|
|
|
8
|
|
|
$
|
1,704
|
|
|
|
7
|
|
|
$
|
2,842
|
|
Commercial real estate loans
|
|
|
1
|
|
|
|
1,021
|
|
|
|
—
|
|
|
|
—
|
|
Commercial loans
|
|
|
2
|
|
|
|
1,046
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
11
|
|
|
$
|
3,771
|
|
|
|
7
|
|
|
$
|
2,842
|
|
The following table provides the troubled debt restructurings for the three months ended March 31, 2019 and 2018 grouped by type of concession:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
|
|
Number of Loans
|
|
|
Recorded Investment
|
|
|
Number of Loans
|
|
|
Recorded Investment
|
|
|
|
(dollars in thousands)
|
|
Agricultural loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment concessions
|
|
|
1
|
|
|
$
|
262
|
|
|
|
6
|
|
|
$
|
2,751
|
|
Extension of interest-only payments
|
|
|
7
|
|
|
|
1,442
|
|
|
|
1
|
|
|
|
91
|
|
Commercial real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment concessions
|
|
|
1
|
|
|
|
1,021
|
|
|
|
—
|
|
|
|
—
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combination of extension of term and interest rate
concessions
|
|
|
2
|
|
|
|
1,046
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
11
|
|
|
$
|
3,771
|
|
|
|
7
|
|
|
$
|
2,842
|
|
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes agricultural, commercial, and commercial real estate loans individually by classifying the credits as to credit risk. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits with total exposure in excess of $300,000. The Company uses the following definitions for credit risk ratings:
Sound.
Credits classified as sound show very good probability of ongoing ability to meet and/or exceed obligations.
Acceptable.
Credits classified as acceptable show a good probability of ongoing ability to meet and/or exceed obligations.
Satisfactory.
Credits classified as satisfactory show fair probability of ongoing ability to meet and/or exceed obligations.
Low Satisfactory
. Credits classified as low satisfactory show fair probability of ongoing ability to meet and/or exceed obligations. Low satisfactory credits may be newer or have a less established track record of financial performance, inconsistent earnings, or may be going through an expansion.
Watch.
Credits classified as watch show some questionable probability of ongoing ability to meet and/or exceed obligations.
Special Mention.
Credits classified as special mention show potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.
Substandard – Performing.
Credits classified as substandard – performing generally have well-defined weaknesses. Collateral coverage is adequate and the loans are not considered impaired. Payments are being made and the loans are on accrual status.
14
Substandard - Impaired
. Credits classified as substandard generally have well-defined weaknesses that jeopardize the repayment of the debt. They have a distinct possibility that a loss will be sustained if the deficiencies are n
ot corrected.
Loans are considered impaired. Loans are either exhibiting signs of delinquency, are on non-accrual or are identified as a TDR.
Doubtful.
Credits classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable.
The Company categorizes residential real estate, installment and consumer other loans as satisfactory at the time of origination based on information obtained as to the ability of the borrower(s) to service their debt, such as current financial information, employment status and history, historical payment experience, credit scores and type and amount of collateral among other factors. The Company updates relevant information on these types of loans at the time of refinance, troubled debt restructuring or other indications of financial difficulty, downgrading as needed using the same category descriptions as for agricultural, commercial, and commercial real estate loans. In addition, the Company further considers current payment status as an indicator of which risk category to assign the borrower.
The greater the level of deteriorated risk as indicated by a loan’s assigned risk category, the greater the likelihood a loss will occur in the future. If the loan is substandard - impaired, then the loan loss reserves for the loan are recorded at the loss level of impairment. If the loan is not impaired, then its loan loss reserves are determined by the application of a loss rate that increases with risk in accordance with the allowance for loan loss analysis.
Based on the most recent analysis performed by management, the risk category of loans by class of loans was as follows as of March 31, 2019 and December 31, 2018:
|
|
As of March 31, 2019
|
|
|
|
Sound/
Acceptable/
Satisfactory/
Low Satisfactory
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard Performing
|
|
|
Substandard
Impaired
|
|
|
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
Agricultural loans
|
|
$
|
479,399
|
|
|
$
|
156,910
|
|
|
$
|
540
|
|
|
$
|
31,007
|
|
|
$
|
54,251
|
|
|
$
|
722,107
|
|
Commercial real estate loans
|
|
|
258,101
|
|
|
|
10,303
|
|
|
|
2,593
|
|
|
|
12,796
|
|
|
|
6,031
|
|
|
|
289,824
|
|
Commercial loans
|
|
|
101,882
|
|
|
|
7,181
|
|
|
|
1,368
|
|
|
|
2,100
|
|
|
|
1,135
|
|
|
|
113,666
|
|
Residential real estate loans
|
|
|
56,726
|
|
|
|
248
|
|
|
|
—
|
|
|
|
172
|
|
|
|
—
|
|
|
|
57,146
|
|
Installment and consumer other
|
|
|
220
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
220
|
|
Total
|
|
$
|
896,328
|
|
|
$
|
174,642
|
|
|
$
|
4,501
|
|
|
$
|
46,075
|
|
|
$
|
61,417
|
|
|
$
|
1,182,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
Sound/
Acceptable/
Satisfactory/
Low Satisfactory
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard Performing
|
|
|
Substandard
Impaired
|
|
|
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
Agricultural loans
|
|
$
|
495,418
|
|
|
$
|
133,582
|
|
|
$
|
564
|
|
|
$
|
41,997
|
|
|
$
|
52,947
|
|
|
$
|
724,508
|
|
Commercial real estate loans
|
|
|
253,853
|
|
|
|
18,968
|
|
|
|
4,642
|
|
|
|
19,712
|
|
|
|
2,037
|
|
|
|
299,212
|
|
Commercial loans
|
|
|
95,842
|
|
|
|
15,237
|
|
|
|
1,360
|
|
|
|
2,248
|
|
|
|
1,773
|
|
|
|
116,460
|
|
Residential real estate loans
|
|
|
62,787
|
|
|
|
3,883
|
|
|
|
—
|
|
|
|
173
|
|
|
|
—
|
|
|
|
66,843
|
|
Installment and consumer other
|
|
|
272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
272
|
|
Total
|
|
$
|
908,172
|
|
|
$
|
171,670
|
|
|
$
|
6,566
|
|
|
$
|
64,130
|
|
|
$
|
56,757
|
|
|
$
|
1,207,295
|
|
NOTE 5 – LOAN SERVICING RIGHTS
Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates. The unpaid principal balances of mortgage and other loans serviced for others were approximately $675.3 million and $661.3 million at March 31, 2019 and December 31, 2018, respectively. The fair value of these rights were approximately $13.3 million and $13.2 million at March 31, 2019 and December 31, 2018. The fair value of servicing rights was determined using an assumed discount rate of 20 percent and prepayment speeds primarily ranging from 4 percent to 9 percent, depending upon the stratification of the specific right, and nominal credit losses.
15
The following summarizes servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Loan servicing rights:
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
9,047
|
|
|
$
|
8,950
|
|
Additions
|
|
|
851
|
|
|
|
2,879
|
|
Impairment
|
|
|
(73
|
)
|
|
|
(597
|
)
|
Amortization
|
|
|
(550
|
)
|
|
|
(2,185
|
)
|
Balance, end of period
|
|
$
|
9,275
|
|
|
$
|
9,047
|
|
NOTE 6 – GOODWILL AND CORE DEPOSIT INTANGIBLE
The excess of the purchase price in an acquisition over the fair value of net assets acquired consists primarily of goodwill and the core deposit intangible. Goodwill is not amortized but is instead subject to impairment tests on at least an annual basis. Core deposit intangible, which arose from value ascribed to the deposit base of a bank acquired, has an estimated finite life and is amortized on an accelerated basis to expense over a 66-month period.
Management will periodically review the carrying value of its long-lived and intangible assets to determine if any impairment has occurred, in which case an impairment charge would be recorded as an expense in the period of impairment, or whether changes in circumstances have occurred that would require a revision to the remaining useful life which would impact expense prospectively. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible.
Goodwill
: Goodwill resulted from the acquisition of Fox River Valley Bancorp, Inc. (“Fox River Valley”) on May 13, 2016. The carrying amount of goodwill was $5.0 million at March 31, 2019 and December 31, 2018
.
Core deposit intangible:
Core deposit intangible, primarily related to acquired customer relationships, is amortized over its estimated finite life. The core deposit intangible related to the Fox River Valley acquisition had a gross carrying amount of $1.8 million.
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
(dollars in thousands)
|
|
Core deposit intangible:
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
1,801
|
|
|
$
|
1,801
|
|
Accumulated amortization
|
|
|
(1,371
|
)
|
|
|
(1,288
|
)
|
Net book value
|
|
$
|
430
|
|
|
$
|
513
|
|
NOTE 7 – DEPOSITS
Deposits are summarized as follows at March 31, 2019 and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Demand deposits
|
|
$
|
101,434
|
|
|
$
|
121,436
|
|
NOW and interest checking
|
|
|
49,902
|
|
|
|
51,779
|
|
Savings
|
|
|
6,210
|
|
|
|
5,770
|
|
Money market accounts
|
|
|
225,975
|
|
|
|
218,929
|
|
National time deposits
|
|
|
146,805
|
|
|
|
160,445
|
|
Brokered deposits
|
|
|
269,917
|
|
|
|
308,504
|
|
Certificates of deposit
|
|
|
376,034
|
|
|
|
356,484
|
|
Total deposits
|
|
$
|
1,176,277
|
|
|
$
|
1,223,347
|
|
16
NOTE 8—ADVANCES FROM FHLB AND OTHER BORROWINGS
The Bank had advances outstanding from the FHLB in the amount of $100.4 million and $89.4 million on March 31, 2019 and December 31, 2018, respectively. These advances, rates, and maturities were as follows:
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Maturity
|
|
Rate
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Fixed rate, fixed term
|
|
01/02/2019
|
|
|
2.54
|
%
|
|
$
|
—
|
|
|
$
|
3,000
|
|
Fixed rate, fixed term
|
|
01/04/2019
|
|
|
2.55
|
%
|
|
|
—
|
|
|
|
12,000
|
|
Fixed rate, fixed term
|
|
02/27/2019
|
|
|
1.47
|
%
|
|
|
—
|
|
|
|
5,000
|
|
Fixed rate, fixed term
|
|
03/08/2019
|
|
|
1.54
|
%
|
|
|
—
|
|
|
|
10,000
|
|
Fixed rate, fixed term
|
|
04/10/2019
|
|
|
2.58
|
%
|
|
|
9,000
|
|
|
|
—
|
|
Fixed rate, fixed term
|
|
04/18/2019
|
|
|
2.59
|
%
|
|
|
12,000
|
|
|
|
—
|
|
Fixed rate, fixed term
|
|
04/25/2019
|
|
|
2.56
|
%
|
|
|
10,000
|
|
|
|
—
|
|
Fixed rate, fixed term
|
|
06/06/2019
|
|
|
2.61
|
%
|
|
|
10,000
|
|
|
|
—
|
|
Fixed rate, fixed term
|
|
07/15/2019
|
|
|
1.11
|
%
|
|
|
8,000
|
|
|
|
8,000
|
|
Fixed rate, fixed term
|
|
08/12/2019
|
|
|
2.24
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
Fixed rate, fixed term
|
|
08/14/2019
|
|
|
1.77
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
Fixed rate, fixed term
|
|
02/20/2020
|
|
|
1.71
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
Fixed rate, fixed term
|
|
07/16/2020
|
|
|
1.85
|
%
|
|
|
800
|
|
|
|
800
|
|
Fixed rate, fixed term
|
|
08/25/2020
|
|
|
1.84
|
%
|
|
|
3,000
|
|
|
|
3,000
|
|
Fixed rate, fixed term
|
|
08/27/2020
|
|
|
1.88
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
Fixed rate, fixed term
|
|
12/30/2020
|
|
|
2.09
|
%
|
|
|
4,000
|
|
|
|
4,000
|
|
Fixed rate, fixed term
|
|
12/31/2020
|
|
|
1.94
|
%
|
|
|
600
|
|
|
|
600
|
|
Fixed rate, fixed term
|
|
04/12/2021
|
|
|
1.92
|
%
|
|
|
8,000
|
|
|
|
8,000
|
|
Fixed rate, fixed term
|
|
06/15/2021
|
|
|
1.39
|
%
|
|
|
5,000
|
|
|
|
5,000
|
|
Fixed rate, fixed term
|
|
08/16/2021
|
|
|
2.29
|
%
|
|
|
3,000
|
|
|
|
3,000
|
|
Fixed rate, fixed term
|
|
12/30/2021
|
|
|
2.29
|
%
|
|
|
2,000
|
|
|
|
2,000
|
|
Fixed rate, putable, no call 2 years
|
|
01/12/2023
|
|
|
2.03
|
%
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
$
|
100,400
|
|
|
$
|
89,400
|
|
The terms of security agreements with the FHLB require the Bank to pledge collateral for its borrowings. The collateral consists of qualifying first mortgage loans and stock of the FHLB. At March 31, 2019 and December 31, 2018, the Bank had pledged qualifying mortgage loans of $434.4 million and $453.8 million, respectively.
The Bank had no irrevocable letters of credit with the FHLB as of March 31, 2019 and December 31, 2018.
Future maturities of FHLB borrowings as of March 31, 2019 and December 31, 2018 were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
1 year or less
|
|
$
|
61,000
|
|
|
$
|
45,000
|
|
1 to 2 years
|
|
|
13,400
|
|
|
|
18,400
|
|
2 to 3 years
|
|
|
18,000
|
|
|
|
18,000
|
|
3 to 4 years
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
$
|
100,400
|
|
|
$
|
89,400
|
|
As of
March 31, 2019 and December 31, 2018, the Bank also had a line of credit available with the Federal Reserve Bank of Chicago. Borrowings under this line of credit are limited by the amount of collateral pledged by the Bank, which totaled $137.4 million and $143.4 million in loans at March 31, 2019 and December 31, 2018, respectively. There were no outstanding advances included in other borrowings at March 31, 2019 and December 31, 2018.
As of March 31, 2019 and December 31, 2018, the Company had a credit agreement with U.S. Bank National Association for a $15.0 million revolving line of credit with an interest rate of the one-month LIBOR rate plus 2.25%. The line also bears a non-usage fee of 0.275% per annum. The line did not have an outstanding balance as of March 31, 2019 and December 31, 2018.
Other borrowings are borrowings as a result of sold loans that do not qualify for sale accounting. These agreements are recorded as financing transactions as the Bank maintains effective control over the transferred loans. The dollar amount of the loans underlying
17
the sale agreements continues to be carried in the Bank’s loan portfolio, and the transfer is reported as a secured borrowing with pledge of collateral. At March 31, 2019 and December 31, 2018, the amounts of these borrowings were
$1.4
milli
on and
$0.8
million, respectively.
The following table sets forth information concerning balances and interest rates on other borrowings as of and for the periods indicated:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Balance outstanding at end of period
|
|
$
|
1,412
|
|
|
$
|
827
|
|
Average amount outstanding during the period
|
|
|
844
|
|
|
|
1,027
|
|
Maximum amount outstanding at any month end
|
|
|
1,412
|
|
|
|
1,278
|
|
Weighted average interest rate during the period
|
|
|
5.27
|
%
|
|
|
4.81
|
%
|
Weighted average interest rate at end of period
|
|
|
5.22
|
%
|
|
|
4.51
|
%
|
NOTE 9 – EQUITY INCENTIVE PLAN
Under the Company’s 2016 Long Term Incentive Plan (the “Plan”), the Company may grant
options to purchase shares of common stock and issue restricted stock to its directors, officers, and employees. Both qualified and non-qualified stock options and restricted stock may be granted and issued, respectively, under the Plan. As of March 31, 2019, 180,230 options or shares of restricted stock remain available under the Plan.
The exercise price
of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. Vesting periods range from one to five years from the date of grant. The restricted stock vesting periods range from one to five years from the date of issuance.
The status of the Plan as of March 31, 2019 and changes in the Plan during the three months ended March 31, 2019 were as follows:
|
|
March 31, 2019
|
|
|
|
Number
of
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
(1)
|
|
|
|
(dollars in thousands except option and per share data)
|
|
Outstanding, beginning of year
|
|
|
208,988
|
|
|
$
|
18.15
|
|
|
|
|
|
Granted
|
|
|
14,237
|
|
|
|
18.06
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Forfeited/expired
|
|
|
(1,678
|
)
|
|
|
19.88
|
|
|
|
|
|
Outstanding, end of period
|
|
|
221,547
|
|
|
$
|
18.13
|
|
|
$
|
392
|
|
Options exercisable at period-end
|
|
|
170,038
|
|
|
$
|
17.02
|
|
|
$
|
382
|
|
Weighted-average fair value of options granted during
the period
(2)
|
|
|
|
|
|
$
|
6.31
|
|
|
|
|
|
(1)
|
The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2019. This amount changes based on changes in the market value of the Company’s stock.
|
(2)
|
The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.
|
18
Activity in restricted stock awards and restricted stock units for the three months ended March 31, 2019 was as follows:
|
|
March 31, 2019
|
|
|
|
Restricted Stock Awards
|
|
|
Weighted
Average Grant
Price
|
|
Outstanding, beginning of year
|
|
|
28,701
|
|
|
$
|
21.02
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(11,552
|
)
|
|
|
19.19
|
|
Forfeited/expired
|
|
|
(226
|
)
|
|
|
27.15
|
|
Outstanding, end of period
|
|
|
16,923
|
|
|
$
|
22.19
|
|
|
|
March 31, 2019
|
|
|
|
Restricted Stock Units
|
|
|
Weighted
Average Grant
Price
|
|
Outstanding, beginning of year
|
|
|
11,772
|
|
|
$
|
27.15
|
|
Granted
|
|
|
18,178
|
|
|
|
18.11
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Forfeited/expired
|
|
|
(375
|
)
|
|
|
18.11
|
|
Outstanding, end of period
|
|
|
29,575
|
|
|
$
|
21.91
|
|
For the three months ended March 31, 2019 and 2018, share-based compensation expense, including options and restricted stock awards, applicable to the Plan was $118 thousand and $117 thousand, respectively.
As of March 31, 2019, unrecognized share-based compensation expense related to nonvested options and restricted stock awards amounted to $0.8 million and is expected to be recognized over a weighted average period of 1.88 years.
NOTE 10 – REGULATORY MATTERS
The Company (on a consolidated basis) and the Bank are each subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1 and Tier 1 Common Equity capital to risk-weighted assets, and of Tier 1 capital to average assets, as such terms are defined in the regulations. Management believed, as of March 31, 2019 and December 31, 2018, that the Company and the Bank met all capital adequacy requirements to which they were subject.
As a result of the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. The Bank has not elected to be subject to this new definition.
As of March 31, 2019, the Bank’s capital ratios met those required to be considered as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 Common Equity risk-based, and Tier 1 leverage ratios as set forth in the following tables.
19
The Bank’s actual capital amounts and ratios are presented in the following table:
|
|
Actual
|
|
|
Minimum For
Capital Adequacy
Purposes
(a)
:
|
|
|
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets)
|
|
$
|
208,042
|
|
|
|
15.87
|
%
|
|
$
|
137,632
|
|
|
|
10.50
|
%
|
|
$
|
131,078
|
|
|
|
10.00
|
%
|
Tier 1 Capital (to risk weighted assets)
|
|
|
191,643
|
|
|
|
14.62
|
%
|
|
|
111,417
|
|
|
|
8.50
|
%
|
|
|
104,863
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to average assets)
|
|
|
191,643
|
|
|
|
12.83
|
%
|
|
|
59,761
|
|
|
|
4.00
|
%
|
|
|
74,701
|
|
|
|
5.00
|
%
|
Tier 1 Common Equity Ratio (to risk
weighted assets)
|
|
|
191,643
|
|
|
|
14.62
|
%
|
|
|
91,755
|
|
|
|
7.00
|
%
|
|
|
85,201
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
210,768
|
|
|
|
15.81
|
%
|
|
$
|
131,664
|
|
|
|
9.875
|
%
|
|
Not applicable
|
|
|
|
|
|
Bank
|
|
|
204,327
|
|
|
|
15.35
|
%
|
|
|
131,488
|
|
|
|
9.875
|
%
|
|
$
|
133,153
|
|
|
|
10.00
|
%
|
Tier 1 Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
164,675
|
|
|
|
12.35
|
%
|
|
|
104,998
|
|
|
|
7.875
|
%
|
|
Not applicable
|
|
|
|
|
|
Bank
|
|
|
187,679
|
|
|
|
14.09
|
%
|
|
|
104,858
|
|
|
|
7.875
|
%
|
|
|
106,522
|
|
|
|
8.00
|
%
|
Tier 1 Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
164,675
|
|
|
|
11.09
|
%
|
|
|
59,374
|
|
|
|
4.00
|
%
|
|
Not applicable
|
|
|
|
|
|
Bank
|
|
|
187,679
|
|
|
|
12.44
|
%
|
|
|
60,330
|
|
|
|
4.00
|
%
|
|
|
75,413
|
|
|
|
5.00
|
%
|
Tier 1 Common Equity Ratio (to risk
weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
141,085
|
|
|
|
10.58
|
%
|
|
|
84,999
|
|
|
|
6.375
|
%
|
|
Not applicable
|
|
|
|
|
|
Bank
|
|
|
187,679
|
|
|
|
14.09
|
%
|
|
|
84,885
|
|
|
|
6.375
|
%
|
|
|
86,549
|
|
|
|
6.50
|
%
|
|
(a)
|
The ratios for March 31, 2019 and December 31, 2018 include a capital conservation buffer of 2.5% and 1.875%, respectively.
|
The rules of the Basel III regulatory capital framework implemented a capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer was subject to a three year phase-in period that began on January 1, 2016 and was fully phased in on January 1, 2019 at 2.5%. The ratios for the Company and the Bank are sufficient to meet the conservation buffer.
NOTE
11 – FAIR VALUE MEASUREMENTS
ASC 820-10 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. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.
ASC 820-10 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives
20
the highest priority to quoted prices in a
ctive markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2—Valuation is based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3—Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments recorded at fair value on a recurring basis:
Securities Available for Sale
Where quoted prices are available in an active market, the Company classifies the securities within Level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.
If quoted market prices are not available, the Company estimates fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes and credit spreads.
Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include U.S. government and agency securities, corporate bonds and other securities. Mortgage-backed securities are included in Level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies those securities in Level 3.
21
Derivative Instruments
The Company's derivative instruments consist of interest rate swaps, which are accounted for as cash flow hedges. The Company's derivative positions are classified within Level 2 of the fair value hierarchy and are valued using models generally accepted in the financial services industry and that use actively quoted or observable market input values from external market data providers and/or non-binding broker-dealer quotations. The fair value of the derivatives is determined using discounted cash flow models. These models’ key assumptions include the contractual terms of the respective contract along with significant observable inputs, including interest rates, yield curves, nonperformance risk and volatility.
Assets measured at fair value on a recurring basis are summarized below:
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total
Fair
Value
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
—
|
|
|
$
|
3,929
|
|
|
$
|
—
|
|
|
$
|
3,929
|
|
U.S. treasury Securities
|
|
|
—
|
|
|
|
2,499
|
|
|
|
—
|
|
|
|
2,499
|
|
Municipal securities
|
|
|
—
|
|
|
|
31,873
|
|
|
|
—
|
|
|
|
31,873
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
153,909
|
|
|
|
—
|
|
|
$
|
153,909
|
|
Total assets at fair value
|
|
$
|
—
|
|
|
$
|
192,210
|
|
|
$
|
—
|
|
|
$
|
192,210
|
|
Derivative instruments, interest rate swaps
|
|
|
—
|
|
|
|
660
|
|
|
|
—
|
|
|
$
|
660
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
660
|
|
|
$
|
—
|
|
|
$
|
660
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
—
|
|
|
$
|
4,331
|
|
|
$
|
—
|
|
|
$
|
4,331
|
|
U.S. treasury Securities
|
|
|
—
|
|
|
|
2,491
|
|
|
|
—
|
|
|
|
2,491
|
|
Municipal securities
|
|
|
—
|
|
|
|
34,520
|
|
|
|
—
|
|
|
|
34,520
|
|
Mortgage-backed securities
|
|
|
—
|
|
|
|
154,603
|
|
|
|
—
|
|
|
$
|
154,603
|
|
Total assets at fair value
|
|
$
|
—
|
|
|
$
|
195,945
|
|
|
$
|
—
|
|
|
$
|
195,945
|
|
Derivative instruments, interest rate swaps
|
|
|
—
|
|
|
|
179
|
|
|
|
—
|
|
|
$
|
179
|
|
Total liabilities at fair value
|
|
$
|
—
|
|
|
$
|
179
|
|
|
$
|
—
|
|
|
$
|
179
|
|
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy for which a nonrecurring change in fair value has been recorded:
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
|
(dollars in thousands)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,606
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
5,019
|
|
Total assets at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,625
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,995
|
|
Other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
6,568
|
|
Total assets at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,563
|
|
22
The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis are as follows:
March 31, 2019
|
|
|
Valuation
Techniques
|
|
Unobservable
Inputs
|
|
Range
(Average)
|
Impaired loans
|
|
Evaluation of collateral
|
|
Estimation of value
|
|
NM*
|
Other real estate owned
|
|
Appraisal
|
|
Appraisal adjustment
|
|
3%-70% (31%)
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Valuation
Techniques
|
|
Unobservable
Inputs
|
|
Range
(Average)
|
Impaired loans
|
|
Evaluation of collateral
|
|
Estimation of value
|
|
NM*
|
Other real estate owned
|
|
Appraisal
|
|
Appraisal adjustment
|
|
16%-39% (14%)
|
*
|
Not Meaningful.
Evaluations of the underlying assets are completed for each impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivable, inventory, a variety of equipment, and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered include aging of receivables, condition of the collateral, potential market for the collateral, and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.
|
The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Input
Level
|
|
|
(dollars in thousands)
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
62,426
|
|
|
$
|
62,426
|
|
|
$
|
61,087
|
|
|
$
|
61,087
|
|
|
1
|
Securities available for sale
|
|
|
192,210
|
|
|
|
192,210
|
|
|
|
195,945
|
|
|
|
195,945
|
|
|
2
|
FHLB Stock
|
|
|
2,998
|
|
|
|
2,998
|
|
|
|
2,978
|
|
|
|
2,978
|
|
|
2
|
Loans, net of allowance for loan losses
|
|
|
1,165,470
|
|
|
|
1,164,369
|
|
|
|
1,190,790
|
|
|
|
1,187,330
|
|
|
3
|
Loans held for sale
|
|
|
2,750
|
|
|
|
2,750
|
|
|
|
2,949
|
|
|
|
2,949
|
|
|
3
|
Accrued interest receivable
|
|
|
4,020
|
|
|
|
4,020
|
|
|
|
3,878
|
|
|
|
3,878
|
|
|
2
|
Loan servicing rights
|
|
|
9,275
|
|
|
|
13,320
|
|
|
|
9,047
|
|
|
|
13,198
|
|
|
3
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
|
|
|
772,967
|
|
|
|
772,053
|
|
|
|
805,240
|
|
|
|
801,267
|
|
|
2
|
Other deposits
|
|
|
403,310
|
|
|
|
403,310
|
|
|
|
418,107
|
|
|
|
418,107
|
|
|
1
|
Other borrowings
|
|
|
1,412
|
|
|
|
1,412
|
|
|
|
827
|
|
|
|
827
|
|
|
3
|
Advances from FHLB
|
|
|
100,400
|
|
|
|
100,016
|
|
|
|
89,400
|
|
|
|
88,725
|
|
|
2
|
Subordinated debentures
|
|
|
44,742
|
|
|
|
44,742
|
|
|
|
44,703
|
|
|
|
44,703
|
|
|
3
|
Accrued interest payable
|
|
|
5,215
|
|
|
|
5,215
|
|
|
|
4,013
|
|
|
|
4,013
|
|
|
2
|
Derivative instruments, interest rate swaps
|
|
|
660
|
|
|
|
660
|
|
|
|
179
|
|
|
|
179
|
|
|
2
|
NOTE
12 – OTHER REAL ESTATE OWNED
Changes in other real estate owned were as follows:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
6,568
|
|
|
$
|
4,962
|
|
Assets foreclosed
|
|
|
1,147
|
|
|
|
4,417
|
|
Net gain on sales of other real estate owned
|
|
|
136
|
|
|
|
—
|
|
Proceeds from sale of other real estate owned
|
|
|
(2,832
|
)
|
|
|
—
|
|
Balance, end of period
|
|
$
|
5,019
|
|
|
$
|
9,379
|
|
23
Income
(
expenses)
applicable to other real estate owned included in non-interest expense include
d
the following:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Net gain on sales of other real estate owned
|
|
$
|
136
|
|
|
$
|
—
|
|
Operating expenses, net of rental income
|
|
|
(25
|
)
|
|
|
(108
|
)
|
|
|
$
|
111
|
|
|
$
|
(108
|
)
|
NOTE 13 – DERIVATIVE FINANCIAL INSTRUMENTS
On June 15, 2018, the Company executed an interest rate swap to manage interest rate risk on two sets of its trust preferred securities. This derivative contract involves the receipt of floating rate interest from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value. This instrument is designated as a cash flow hedge as the receipt of floating rate interest from the counterparty is used to manage interest rate risk associated with three month LIBOR advances. The change in the fair value of this hedging instrument is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.
The Company had two outstanding interest rate swaps designated as a cash flow hedge each with an aggregate notional value of $6.0 million at March 31, 2019 and December 31, 2018. Both interest rate swaps mature on June 15, 2028. A pre-tax unrealized loss of $0.5 thousand was recognized in accumulated other comprehensive income for the three months ended March 31, 2019, and there was no ineffective portion of this hedge. There were no interest rate swaps designated as a cash flow hedge outstanding at March 31, 2018.
The Company is exposed to credit risk in the event of nonperformance by the interest rate swaps counterparty. The Company minimizes this risk by entering into derivative contracts with only large, stable financial institutions, and the Company has not experienced, and does not expect, any losses from counterparty nonperformance on the interest rate swaps. The Company monitors counterparty risk in accordance with the provisions of FASB ASC 815. In addition, the interest rate swap agreements contains language outlining collateral-pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits. Derivative contracts are executed with a Credit Support Annex, which is a bilateral ratings-sensitive agreement that requires collateral postings at established credit threshold levels. These agreements protect the interests of the Company and its counterparties should either party suffer a credit rating deterioration. The Company was required to pledge $0.5 million of cash as collateral to the counterparty as of March 31, 2019.
NOTE 14 – SUBSEQUENT EVENTS
Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after March 31, 2019, but prior to May 9, 2019, that provided additional evidence about conditions that existed at March 31, 2019.
24