NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Guaranty Federal Bancshares, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). The results of operations for the periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2016, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.
Note 2: Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Guaranty Bank (the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation.
Note 3: Securities
The amortized cost and approximate fair values of securities classified as available-for-sale
were as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Approximate
Fair
Value
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
34,012,067
|
|
|
$
|
210,255
|
|
|
$
|
(328,991
|
)
|
|
$
|
33,893,331
|
|
Corporates
|
|
|
3,000,000
|
|
|
|
70,000
|
|
|
|
-
|
|
|
|
3,070,000
|
|
Government sponsored mortgage-backed
securities and SBA loan pools
|
|
|
46,936,147
|
|
|
|
32,472
|
|
|
|
(726,755
|
)
|
|
|
46,241,864
|
|
|
|
$
|
83,948,214
|
|
|
$
|
312,727
|
|
|
$
|
(1,055,746
|
)
|
|
$
|
83,205,195
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Approximate
Fair Value
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
39,357,506
|
|
|
$
|
65,673
|
|
|
$
|
(1,085,654
|
)
|
|
$
|
38,337,525
|
|
Corporates
|
|
|
7,003,986
|
|
|
|
54,050
|
|
|
|
(4,514
|
)
|
|
|
7,053,522
|
|
Government sponsored mortgage-backed
securities and SBA loan pools
|
|
|
48,115,793
|
|
|
|
19,432
|
|
|
|
(1,127,037
|
)
|
|
|
47,008,188
|
|
|
|
$
|
94,477,285
|
|
|
$
|
139,155
|
|
|
$
|
(2,217,205
|
)
|
|
$
|
92,399,235
|
|
Maturities of available-for-sale debt securities as of
September 30, 2017:
|
|
Amortized
Cost
|
|
|
Approximate
Fair Value
|
|
1-5 years
|
|
|
564,554
|
|
|
|
581,359
|
|
6-10 years
|
|
|
9,254,809
|
|
|
|
9,317,277
|
|
After 10 years
|
|
|
27,192,704
|
|
|
|
27,064,695
|
|
Government sponsored mortgage-backed securities and
SBA loan pools not due on a single maturity date
|
|
|
46,936,147
|
|
|
|
46,241,864
|
|
|
|
$
|
83,948,214
|
|
|
$
|
83,205,195
|
|
The amortized cost and approximate fair values of securities classified as held to maturity are as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Approximate
Fair Value
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored
mortgage-backed securities
|
|
$
|
18,424
|
|
|
$
|
215
|
|
|
$
|
(57
|
)
|
|
$
|
18,582
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Approximate
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored
mortgage-backed securities
|
|
$
|
27,528
|
|
|
$
|
625
|
|
|
$
|
-
|
|
|
$
|
28,153
|
|
Maturities of held-to-maturity securities as of
September 30, 2017:
|
|
Amortized
Cost
|
|
|
Approximate
Fair Value
|
|
Government sponsored mortgage-backed
securities not due on a single maturity date
|
|
$
|
18,424
|
|
|
$
|
18,582
|
|
The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to
$48,651,661 and $48,723,259 as of September 30, 2017 and December 31, 2016, respectively. The approximate fair value of pledged securities amounted to $48,125,394 and $47,617,900 as of September 30, 2017 and December 31, 2016, respectively.
Realized gains and losses are recorded as net securit
ies gains. Gains on sales of securities are determined on the specific identification method. Gross gains of $73,473 and $155,465 as of September 30, 2017 and September 30, 2016, respectively, were realized from the sale of available-for-sale securities. The tax effect of these net gains was $27,185 and $57,522 as of September 30, 2017 and September 30, 2016, respectively.
The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. Certain investment securities are valued
at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates, or declines in stock prices of equity securities. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold the debt securities to maturity or until recovery of the unrealized loss. Should the impairment of any of these debt securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified, to the extent the loss is related to credit issues, and to other comprehensive income to the extent the decline on debt securities is related to other factors and the Company does not intend to sell the security prior to recovery of the unrealized loss.
Certain other investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2017 and December 31, 2016, was $63,471,654 and $79,361,229, respectively, which is approximately 76% and 86% of the Company’s investment portfolio.
The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016.
|
|
September 30, 2017
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
10,507,517
|
|
|
$
|
(91,926
|
)
|
|
$
|
10,671,807
|
|
|
$
|
(237,065
|
)
|
|
$
|
21,179,324
|
|
|
$
|
(328,991
|
)
|
Government sponsored mortgage-backed
securities and SBA loan pools
|
|
|
21,281,498
|
|
|
|
(219,697
|
)
|
|
|
21,010,832
|
|
|
|
(507,115
|
)
|
|
|
42,292,330
|
|
|
|
(726,812
|
)
|
|
|
$
|
31,789,015
|
|
|
$
|
(311,623
|
)
|
|
$
|
31,682,639
|
|
|
$
|
(744,180
|
)
|
|
$
|
63,471,654
|
|
|
$
|
(1,055,803
|
)
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Description of Securities
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
33,084,816
|
|
|
$
|
(1,082,021
|
)
|
|
$
|
179,402
|
|
|
$
|
(3,633
|
)
|
|
$
|
33,264,218
|
|
|
$
|
(1,085,654
|
)
|
Corporates
|
|
|
1,996,172
|
|
|
|
(3,828
|
)
|
|
|
881,100
|
|
|
|
(686
|
)
|
|
|
2,877,272
|
|
|
|
(4,514
|
)
|
Government sponsored mortgage-backed
securities and SBA loan pools
|
|
|
39,570,463
|
|
|
|
(1,022,511
|
)
|
|
|
3,649,276
|
|
|
|
(104,526
|
)
|
|
|
43,219,739
|
|
|
|
(1,127,037
|
)
|
|
|
$
|
74,651,451
|
|
|
$
|
(2,108,360
|
)
|
|
$
|
4,709,778
|
|
|
$
|
(108,845
|
)
|
|
$
|
79,361,229
|
|
|
$
|
(2,217,205
|
)
|
Note 4: Loans and Allowance for Loan Losses
Categories of loans at September 30, 2017 and December 31, 2016 include:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
107,750,990
|
|
|
$
|
106,410,559
|
|
Multi-family
|
|
|
74,653,469
|
|
|
|
48,483,523
|
|
Real estate - construction
|
|
|
62,046,871
|
|
|
|
40,912,307
|
|
Real estate - commercial
|
|
|
266,292,510
|
|
|
|
249,580,873
|
|
Commercial loans
|
|
|
90,186,600
|
|
|
|
75,404,732
|
|
Consumer and other loans
|
|
|
23,661,618
|
|
|
|
23,606,306
|
|
Total loans
|
|
|
624,592,058
|
|
|
|
544,398,300
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(7,009,097
|
)
|
|
|
(5,742,449
|
)
|
Deferred loan fees/costs, net
|
|
|
(698,909
|
)
|
|
|
(382,211
|
)
|
Net loans
|
|
$
|
616,884,052
|
|
|
$
|
538,273,640
|
|
Classes of loans by aging at September 30, 2017 and December 31, 2016 were as follows:
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and more Past Due
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total Loans
Receivable
|
|
|
Total Loans >
90 Days
and Accruing
|
|
|
|
(In Thousands)
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
1,542
|
|
|
$
|
644
|
|
|
$
|
249
|
|
|
$
|
2,435
|
|
|
$
|
105,316
|
|
|
$
|
107,751
|
|
|
$
|
-
|
|
Multi-family
|
|
|
783
|
|
|
|
-
|
|
|
|
-
|
|
|
|
783
|
|
|
|
73,870
|
|
|
|
74,653
|
|
|
|
-
|
|
Real estate - construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
62,047
|
|
|
|
62,047
|
|
|
|
-
|
|
Real estate - commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
215
|
|
|
|
215
|
|
|
|
266,077
|
|
|
|
266,292
|
|
|
|
-
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
1,384
|
|
|
|
1,384
|
|
|
|
88,803
|
|
|
|
90,187
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
10
|
|
|
|
4
|
|
|
|
-
|
|
|
|
14
|
|
|
|
23,648
|
|
|
|
23,662
|
|
|
|
-
|
|
Total
|
|
$
|
2,335
|
|
|
$
|
648
|
|
|
$
|
1,848
|
|
|
$
|
4,831
|
|
|
$
|
619,761
|
|
|
$
|
624,592
|
|
|
$
|
-
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days and more Past Due
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total Loans
Receivable
|
|
|
Total Loans >
90 Days and
Accruing
|
|
|
|
(In Thousands)
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
367
|
|
|
$
|
495
|
|
|
$
|
103
|
|
|
$
|
965
|
|
|
$
|
105,446
|
|
|
$
|
106,411
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
48,483
|
|
|
|
48,483
|
|
|
|
-
|
|
Real estate - construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40,912
|
|
|
|
40,912
|
|
|
|
-
|
|
Real estate - commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
249,581
|
|
|
|
249,581
|
|
|
|
-
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
593
|
|
|
|
593
|
|
|
|
74,812
|
|
|
|
75,405
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
38
|
|
|
|
23,568
|
|
|
|
23,606
|
|
|
|
-
|
|
Total
|
|
$
|
367
|
|
|
$
|
495
|
|
|
$
|
734
|
|
|
$
|
1,596
|
|
|
$
|
542,802
|
|
|
$
|
544,398
|
|
|
$
|
-
|
|
Nonaccruing loans are summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
2,274,040
|
|
|
$
|
2,060,180
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
5,309,728
|
|
|
|
5,446,896
|
|
Real estate - commercial
|
|
|
376,091
|
|
|
|
161,491
|
|
Commercial loans
|
|
|
1,610,950
|
|
|
|
925,281
|
|
Consumer and other loans
|
|
|
124,161
|
|
|
|
37,791
|
|
Total
|
|
$
|
9,694,970
|
|
|
$
|
8,631,639
|
|
The following tables present the activity in the allowance for loan losses based on portfolio segment for the three and nine months ended September 30, 2017 and 2016:
Three months ended
September 30, 2017
|
|
Construction
|
|
|
Commercial
Real Estate
|
|
|
One to four family
|
|
|
Multi-family
|
|
|
Commercial
|
|
|
Consumer
and Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,739
|
|
|
$
|
1,954
|
|
|
$
|
936
|
|
|
$
|
323
|
|
|
$
|
1,226
|
|
|
$
|
335
|
|
|
$
|
127
|
|
|
$
|
6,640
|
|
Provision charged to expense
|
|
|
524
|
|
|
|
(116
|
)
|
|
|
(81
|
)
|
|
|
52
|
|
|
|
(99
|
)
|
|
|
126
|
|
|
|
44
|
|
|
$
|
450
|
|
Losses charged off
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(46
|
)
|
|
|
-
|
|
|
$
|
(117
|
)
|
Recoveries
|
|
|
16
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
7
|
|
|
|
12
|
|
|
|
-
|
|
|
$
|
36
|
|
Balance, end of period
|
|
$
|
2,279
|
|
|
$
|
1,767
|
|
|
$
|
856
|
|
|
$
|
375
|
|
|
$
|
1,134
|
|
|
$
|
427
|
|
|
$
|
171
|
|
|
$
|
7,009
|
|
Nine months ended
September 30, 2017
|
|
Construction
|
|
|
Commercial
Real Estate
|
|
|
One to four family
|
|
|
Multi-family
|
|
|
Commercial
|
|
|
Consumer
and Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,377
|
|
|
$
|
1,687
|
|
|
$
|
856
|
|
|
$
|
206
|
|
|
$
|
1,168
|
|
|
$
|
337
|
|
|
$
|
111
|
|
|
$
|
5,742
|
|
Provision charged to expense
|
|
|
847
|
|
|
|
151
|
|
|
|
2
|
|
|
|
169
|
|
|
|
40
|
|
|
|
231
|
|
|
|
60
|
|
|
$
|
1,500
|
|
Losses charged off
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
(85
|
)
|
|
|
(169
|
)
|
|
|
-
|
|
|
$
|
(336
|
)
|
Recoveries
|
|
|
55
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
11
|
|
|
|
28
|
|
|
|
-
|
|
|
$
|
103
|
|
Balance, end of period
|
|
$
|
2,279
|
|
|
$
|
1,767
|
|
|
$
|
856
|
|
|
$
|
375
|
|
|
$
|
1,134
|
|
|
$
|
427
|
|
|
$
|
171
|
|
|
$
|
7,009
|
|
Three months ended
September 30, 2016
|
|
Construction
|
|
|
Commercial
Real Estate
|
|
|
One to four family
|
|
|
Multi-family
|
|
|
Commercial
|
|
|
Consumer
and Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,668
|
|
|
$
|
1,613
|
|
|
$
|
862
|
|
|
$
|
157
|
|
|
$
|
1,366
|
|
|
$
|
288
|
|
|
$
|
227
|
|
|
$
|
6,181
|
|
Provision charged to expense
|
|
|
282
|
|
|
|
86
|
|
|
|
6
|
|
|
|
6
|
|
|
|
(40
|
)
|
|
|
33
|
|
|
|
(173
|
)
|
|
$
|
200
|
|
Losses charged off
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
(58
|
)
|
|
|
-
|
|
|
$
|
(69
|
)
|
Recoveries
|
|
|
46
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
8
|
|
|
|
14
|
|
|
|
-
|
|
|
$
|
85
|
|
Balance, end of period
|
|
$
|
1,996
|
|
|
$
|
1,699
|
|
|
$
|
885
|
|
|
$
|
163
|
|
|
$
|
1,323
|
|
|
$
|
277
|
|
|
$
|
54
|
|
|
$
|
6,397
|
|
Nine months ended
September 30, 2016
|
|
Construction
|
|
|
Commercial
Real Estate
|
|
|
One to four family
|
|
|
Multi-family
|
|
|
Commercial
|
|
|
Consumer
and Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
1,246
|
|
|
$
|
1,526
|
|
|
$
|
821
|
|
|
$
|
177
|
|
|
$
|
1,382
|
|
|
$
|
223
|
|
|
$
|
437
|
|
|
$
|
5,812
|
|
Provision charged to expense
|
|
|
922
|
|
|
|
141
|
|
|
|
80
|
|
|
|
(14
|
)
|
|
|
102
|
|
|
|
102
|
|
|
|
(383
|
)
|
|
$
|
950
|
|
Losses charged off
|
|
|
(252
|
)
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
(170
|
)
|
|
|
(132
|
)
|
|
|
-
|
|
|
$
|
(601
|
)
|
Recoveries
|
|
|
80
|
|
|
|
32
|
|
|
|
31
|
|
|
|
-
|
|
|
|
9
|
|
|
|
84
|
|
|
|
-
|
|
|
$
|
236
|
|
Balance, end of period
|
|
$
|
1,996
|
|
|
$
|
1,699
|
|
|
$
|
885
|
|
|
$
|
163
|
|
|
$
|
1,323
|
|
|
$
|
277
|
|
|
$
|
54
|
|
|
$
|
6,397
|
|
The following tables present the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2017 and December 31, 2016:
As of September 30, 2017
|
|
Construction
|
|
|
Commercial
Real Estate
|
|
|
One to four family
|
|
|
Multi-family
|
|
|
Commercial
|
|
|
Consumer
and Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
830
|
|
|
$
|
-
|
|
|
$
|
56
|
|
|
$
|
-
|
|
|
$
|
310
|
|
|
$
|
130
|
|
|
$
|
-
|
|
|
$
|
1,326
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
1,449
|
|
|
$
|
1,767
|
|
|
$
|
800
|
|
|
$
|
375
|
|
|
$
|
824
|
|
|
$
|
297
|
|
|
$
|
171
|
|
|
$
|
5,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
5,310
|
|
|
$
|
161
|
|
|
$
|
2,274
|
|
|
$
|
-
|
|
|
$
|
931
|
|
|
$
|
187
|
|
|
$
|
-
|
|
|
$
|
8,863
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
56,737
|
|
|
$
|
266,131
|
|
|
$
|
105,477
|
|
|
$
|
74,653
|
|
|
$
|
89,256
|
|
|
$
|
23,475
|
|
|
$
|
-
|
|
|
$
|
615,729
|
|
December 31, 2016
|
|
Construction
|
|
|
Commercial
Real Estate
|
|
|
One to four family
|
|
|
Multi-family
|
|
|
Commercial
|
|
|
Consumer
and Other
|
|
|
Unallocated
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
302
|
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
-
|
|
|
$
|
241
|
|
|
$
|
45
|
|
|
$
|
-
|
|
|
$
|
602
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
1,075
|
|
|
$
|
1,687
|
|
|
$
|
842
|
|
|
$
|
206
|
|
|
$
|
927
|
|
|
$
|
292
|
|
|
$
|
111
|
|
|
$
|
5,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
5,447
|
|
|
$
|
161
|
|
|
$
|
2,060
|
|
|
$
|
-
|
|
|
$
|
925
|
|
|
$
|
106
|
|
|
$
|
-
|
|
|
$
|
8,699
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
35,465
|
|
|
$
|
249,420
|
|
|
$
|
104,351
|
|
|
$
|
48,483
|
|
|
$
|
74,480
|
|
|
$
|
23,500
|
|
|
$
|
-
|
|
|
$
|
535,699
|
|
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollect
ability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management
’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank
’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower
’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group
’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.
The following table summarizes the recorded investment in impaired loans at September 30, 2017 and December 31, 2016:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Recorded
Balance
|
|
|
Unpaid
Principal
Balance
|
|
|
Specific
Allowance
|
|
|
Recorded
Balance
|
|
|
Unpaid
Principal
Balance
|
|
|
Specific
Allowance
|
|
|
|
(In Thousands)
|
|
Loans without a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
1,815
|
|
|
$
|
1,815
|
|
|
$
|
-
|
|
|
$
|
2,006
|
|
|
$
|
2,006
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
2,937
|
|
|
|
2,937
|
|
|
|
-
|
|
|
|
3,017
|
|
|
|
3,017
|
|
|
|
-
|
|
Real estate -
commercial
|
|
|
161
|
|
|
|
161
|
|
|
|
-
|
|
|
|
161
|
|
|
|
161
|
|
|
|
-
|
|
Commercial loans
|
|
|
500
|
|
|
|
500
|
|
|
|
-
|
|
|
|
622
|
|
|
|
622
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
Loans with a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
459
|
|
|
$
|
459
|
|
|
$
|
56
|
|
|
$
|
54
|
|
|
$
|
54
|
|
|
$
|
14
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
2,373
|
|
|
|
3,606
|
|
|
|
830
|
|
|
|
2,430
|
|
|
|
3,663
|
|
|
|
302
|
|
Real estate -
commercial
|
|
|
-
|
|
|
|
72
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
431
|
|
|
|
932
|
|
|
|
310
|
|
|
|
303
|
|
|
|
755
|
|
|
|
241
|
|
Consumer and other loans
|
|
|
183
|
|
|
|
183
|
|
|
|
130
|
|
|
|
103
|
|
|
|
103
|
|
|
|
45
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
2,274
|
|
|
$
|
2,274
|
|
|
|
56
|
|
|
$
|
2,060
|
|
|
$
|
2,060
|
|
|
$
|
14
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
5,310
|
|
|
|
6,543
|
|
|
|
830
|
|
|
|
5,447
|
|
|
|
6,680
|
|
|
|
302
|
|
Real estate -
commercial
|
|
|
161
|
|
|
|
233
|
|
|
|
-
|
|
|
|
161
|
|
|
|
161
|
|
|
|
-
|
|
Commercial loans
|
|
|
931
|
|
|
|
1,432
|
|
|
|
310
|
|
|
|
925
|
|
|
|
1,377
|
|
|
|
241
|
|
Consumer and other loans
|
|
|
187
|
|
|
|
187
|
|
|
|
130
|
|
|
|
106
|
|
|
|
106
|
|
|
|
45
|
|
Total
|
|
$
|
8,863
|
|
|
$
|
10,669
|
|
|
$
|
1,326
|
|
|
$
|
8,699
|
|
|
$
|
10,384
|
|
|
$
|
602
|
|
The following table summarizes average impaired loans and related interest recognized on impaired loans for the three and nine months ended September 30, 2017 and 2016:
|
|
For the Three Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Average
Investment
in Impaired
Loans
|
|
|
Interest
Income
Recognized
|
|
|
Average
Investment
in Impaired
Loans
|
|
|
Interest
Income
Recognized
|
|
|
|
(In Thousands)
|
|
Loans without a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
1,946
|
|
|
$
|
-
|
|
|
$
|
2,153
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
2,937
|
|
|
|
-
|
|
|
|
5,597
|
|
|
|
-
|
|
Real estate -
commercial
|
|
|
161
|
|
|
|
-
|
|
|
|
244
|
|
|
|
-
|
|
Commercial loans
|
|
|
504
|
|
|
|
-
|
|
|
|
657
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
2
|
|
|
|
-
|
|
|
|
185
|
|
|
|
-
|
|
Loans with a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
183
|
|
|
$
|
-
|
|
|
$
|
28
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
2,373
|
|
|
|
-
|
|
|
|
2,051
|
|
|
|
-
|
|
Real estate -
commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
278
|
|
|
|
-
|
|
Commercial loans
|
|
|
431
|
|
|
|
-
|
|
|
|
375
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
123
|
|
|
|
-
|
|
|
|
110
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
2,129
|
|
|
$
|
-
|
|
|
$
|
2,181
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
5,310
|
|
|
|
-
|
|
|
|
7,648
|
|
|
|
-
|
|
Real estate -
commercial
|
|
|
161
|
|
|
|
-
|
|
|
|
522
|
|
|
|
-
|
|
Commercial loans
|
|
|
935
|
|
|
|
-
|
|
|
|
1,032
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
125
|
|
|
|
-
|
|
|
|
295
|
|
|
|
-
|
|
Total
|
|
$
|
8,660
|
|
|
$
|
-
|
|
|
$
|
11,678
|
|
|
$
|
-
|
|
|
|
For the Nine Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
|
Average
Investment
in Impaired
Loans
|
|
|
Interest
Income
Recognized
|
|
|
Average
Investment
in Impaired
Loans
|
|
|
Interest
Income
Recognized
|
|
|
|
(In Thousands)
|
|
Loans without a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
1,886
|
|
|
$
|
-
|
|
|
$
|
2,200
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
2,964
|
|
|
|
-
|
|
|
|
5,661
|
|
|
|
-
|
|
Real estate -
commercial
|
|
|
360
|
|
|
|
-
|
|
|
|
657
|
|
|
|
-
|
|
Commercial loans
|
|
|
557
|
|
|
|
-
|
|
|
|
960
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
8
|
|
|
|
-
|
|
|
|
114
|
|
|
|
1
|
|
Loans with a specific valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
90
|
|
|
$
|
-
|
|
|
$
|
23
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
2,395
|
|
|
|
-
|
|
|
|
2,222
|
|
|
|
-
|
|
Real estate -
commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
Commercial loans
|
|
|
481
|
|
|
|
-
|
|
|
|
489
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
94
|
|
|
|
-
|
|
|
|
105
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
1,976
|
|
|
$
|
-
|
|
|
$
|
2,223
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
5,359
|
|
|
|
-
|
|
|
|
7,883
|
|
|
|
-
|
|
Real estate -
commercial
|
|
|
360
|
|
|
|
-
|
|
|
|
750
|
|
|
|
-
|
|
Commercial loans
|
|
|
1,038
|
|
|
|
-
|
|
|
|
1,449
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
102
|
|
|
|
-
|
|
|
|
219
|
|
|
|
1
|
|
Total
|
|
$
|
8,835
|
|
|
$
|
-
|
|
|
$
|
12,524
|
|
|
$
|
1
|
|
At September 30, 2017, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.
In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.
The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.
The following table summarizes, by class, loans that were newly classified as TDRs for the three months ended September 30, 2017:
|
|
Number
of Loans
|
|
|
Pre-Modification
Outstanding
Recorded Balance
|
|
|
Post-Modification
Outstanding
Recorded Balance
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
1
|
|
|
|
119,459
|
|
|
|
119,459
|
|
Total
|
|
|
1
|
|
|
$
|
119,459
|
|
|
$
|
119,459
|
|
The following table summarizes, by type of concession, loans that were newly classified as TDRs for the three months ended September 30, 2017:
|
|
Interest Rate
|
|
|
Term
|
|
|
Combination
|
|
|
Total Modification
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate - commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
119,459
|
|
|
|
-
|
|
|
|
119,459
|
|
Total
|
|
$
|
-
|
|
|
$
|
119,459
|
|
|
$
|
-
|
|
|
$
|
119,459
|
|
The following table presents the carrying balance of TDRs as of September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Real estate - residential mortgage:
|
|
|
|
|
|
|
|
|
One to four family units
|
|
$
|
1,313,598
|
|
|
$
|
1,564,468
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
Real estate - construction
|
|
|
5,309,728
|
|
|
|
5,446,895
|
|
Real estate - commercial
|
|
|
5,701,518
|
|
|
|
5,736,849
|
|
Commercial loans
|
|
|
246,150
|
|
|
|
401,403
|
|
Consumer and other loans
|
|
|
119,717
|
|
|
|
-
|
|
Total
|
|
$
|
12,690,711
|
|
|
$
|
13,149,615
|
|
The Bank has allocated $947,843 and $329,734 of specific reserves to customers whose loan terms have been modified in TDR as of September 30, 2017 and December 31, 2016, respectively.
There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ending September 30, 2017 and 2016. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
As part of the on-going monitoring of the credit quality of the Bank
’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:
Pass
: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.
Special mention
: This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.
Substandard
: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.
Doubtful
: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Risk characteristics applicable to each segment of the loan portfolio are described as follows.
Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank
’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank
’s market areas.
Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank
’s market areas.
Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower
’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.
Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower
’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.
The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of September 30, 2017 and December 31, 2016:
September 30, 2017
|
|
Construction
|
|
|
Commercial
Real Estate
|
|
|
One to four family
|
|
|
Multi-family
|
|
|
Commercial
|
|
|
Consumer
and Other
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
56,737
|
|
|
$
|
259,020
|
|
|
$
|
97,921
|
|
|
$
|
73,870
|
|
|
$
|
88,441
|
|
|
$
|
23,475
|
|
|
$
|
599,464
|
|
Special Mention
|
|
|
-
|
|
|
|
5,615
|
|
|
|
6,190
|
|
|
|
783
|
|
|
|
200
|
|
|
|
-
|
|
|
|
12,788
|
|
Substandard
|
|
|
5,310
|
|
|
|
1,657
|
|
|
|
3,640
|
|
|
|
-
|
|
|
|
862
|
|
|
|
187
|
|
|
|
11,656
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
684
|
|
|
|
-
|
|
|
|
684
|
|
Total
|
|
$
|
62,047
|
|
|
$
|
266,292
|
|
|
$
|
107,751
|
|
|
$
|
74,653
|
|
|
$
|
90,187
|
|
|
$
|
23,662
|
|
|
$
|
624,592
|
|
December 31, 2016
|
|
Construction
|
|
|
Commercial
Real Estate
|
|
|
One to four family
|
|
|
Multi-family
|
|
|
Commercial
|
|
|
Consumer
and Other
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
35,465
|
|
|
$
|
242,200
|
|
|
$
|
100,367
|
|
|
$
|
48,483
|
|
|
$
|
69,093
|
|
|
$
|
23,380
|
|
|
$
|
518,988
|
|
Special Mention
|
|
|
-
|
|
|
|
5,922
|
|
|
|
2,591
|
|
|
|
-
|
|
|
|
4,503
|
|
|
|
-
|
|
|
|
13,016
|
|
Substandard
|
|
|
5,447
|
|
|
|
1,459
|
|
|
|
3,453
|
|
|
|
-
|
|
|
|
1,225
|
|
|
|
226
|
|
|
|
11,810
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
584
|
|
|
|
-
|
|
|
|
584
|
|
Total
|
|
$
|
40,912
|
|
|
$
|
249,581
|
|
|
$
|
106,411
|
|
|
$
|
48,483
|
|
|
$
|
75,405
|
|
|
$
|
23,606
|
|
|
$
|
544,398
|
|
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the
loan is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Note
5: Benefit Plans
The Company has
stock-based employee compensation plans, which are described in the Company’s 2016 Annual Report.
The following tables below summarize transactions under the Company’s equity plans for the nine months ended September 30, 2017:
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
Incentive
Stock
Option
|
|
|
Non-
Incentive
Stock
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding as of January 1, 2017
|
|
|
60,000
|
|
|
|
52,500
|
|
|
$
|
20.15
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(11,000
|
)
|
|
|
(25,000
|
)
|
|
|
29.48
|
|
Balance outstanding as of September 30, 2017
|
|
|
49,000
|
|
|
|
27,500
|
|
|
$
|
15.75
|
|
Options exercisable as of September 30, 2017
|
|
|
49,000
|
|
|
|
27,500
|
|
|
$
|
15.75
|
|
The total intrinsic value of stock options exercised for the
nine months ended September 30, 2017 and 2016 was $0 and $169,103, respectively. The total intrinsic value of outstanding stock options (including exercisable) was $669,800 and $438,800 at September 30, 2017 and 2016, respectively.
Restricted Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant-
Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Balance of shares non-vested as of January 1, 2017
|
|
|
60,955
|
|
|
$
|
13.62
|
|
Granted
|
|
|
13,386
|
|
|
|
20.33
|
|
Vested
|
|
|
(27,291
|
)
|
|
|
12.25
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance of shares non-vested as of September 30, 2017
|
|
|
47,050
|
|
|
$
|
16.33
|
|
In February 2017, the Company granted 6,960 shares of restricted stock to directors pursuant to the 2015 Equity Plan of which 6,195 have a cliff vesting at the end of one year and thus, expensed over that same period and 765 shares have a cliff vesting at the end of three years, and thus, expensed over that same period. These shares had a grant date market price of $20.35 per share. The total amount of expense for restricted stock grants to directors (including all previous years grants) during the nine months ended September 30, 2017 and 2016 was $101,099 and $94,136, respectively.
For the nine months ended September 30, 2017 and 2016, the Company granted 6,426 and 15,343 shares, respectively, of restricted stock to officers that have a cliff vesting at the end of three years. The expense is being recognized over the applicable vesting period. The total amount of expense for restricted stock grants to officers (including all previous years grants) during the nine months ended September 30, 2017 and 2016 was $159,413 and $209,430, respectively.
Performance Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Stock Units
|
|
|
Weighted
Average Grant-
Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
Balance of shares non-vested as of January 1, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
55,823
|
|
|
|
20.48
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance of shares non-vested as of September 30, 2017
|
|
|
55,823
|
|
|
$
|
20.48
|
|
On March 29, 2017, the Company granted restricted stock units representing 55,823 hypothetical shares of common stock to officers. There are three possible levels of incentive awards: threshold (25%); target (50%); and maximum (100%). The restricted stock units vest based on two financial performance factors over the period from March 29, 2017 to December 31, 2019 (the “Performance Period”). The two performance measurements of the Company (and the weight given to each measurement) applicable to each award level are as follows: (i) Total Assets (50%) and (ii) Return on Average Assets (50%). In determining compensation expense, the fair value of the restricted stock unit awards was determined based on the closing price of the Company’s common stock on the date of grant, which was $20.48 per share. The expense is being recognized over the applicable vesting period. Due to the fact that the measurements cannot be determined at the time of the grant, the Company estimated that the most likely outcome is the achievement of the target level. If during the Performance Period, additional information becomes available to lead the Company to believe a different level will be achieved for the Performance Period, the Company will reassess the number of units that will vest for the grant and adjust its compensation expense accordingly on a prospective basis. The total amount of expense for restricted stock units during the nine months ended September 30, 2017 was $102,529.
Total stock-based compensation expense recognized for the three months ended September 30, 2017 and 2016 was $136,263 and $100,594, respectively. Total stock-based compensation expense recognized for the nine months ended September 30, 2017 and 2016 was $363,041 and $313,855, respectively. As of September 30, 2017, there was $768,224 of unrecognized compensation expense related to nonvested restricted stock awards, which will be recognized over the remaining vesting period.
Note 6: Income Per Common Share
|
|
For three months ended September 30, 2017
|
|
|
For nine months ended September 30, 2017
|
|
|
|
Income
Available to Common Shareholders
|
|
|
Average
Common
Shares
Outstanding
|
|
|
Per
Common
Share
|
|
|
Income
Available to Common Shareholders
|
|
|
Average
Common
Shares
Outstanding
|
|
|
Per
Common
Share
|
|
Basic Income Per Common Share
|
|
$
|
1,717,383
|
|
|
|
4,374,725
|
|
|
$
|
0.39
|
|
|
$
|
4,739,197
|
|
|
|
4,370,877
|
|
|
$
|
1.08
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
72,841
|
|
|
|
|
|
|
|
|
|
|
|
64,815
|
|
|
|
|
|
Diluted Income Per Common Share
|
|
$
|
1,717,383
|
|
|
|
4,447,566
|
|
|
$
|
0.39
|
|
|
$
|
4,739,197
|
|
|
|
4,435,692
|
|
|
$
|
1.07
|
|
|
|
For three months ended September 30, 2016
|
|
|
For nine months ended September 30, 2016
|
|
|
|
Income
Available to Common Shareholders
|
|
|
Average
Common
Shares
Outstanding
|
|
|
Per
Common
Share
|
|
|
Income
Available to Common Shareholders
|
|
|
Average
Common
Shares
Outstanding
|
|
|
Per
Common
Share
|
|
Basic Income Per Common Share
|
|
$
|
1,541,907
|
|
|
|
4,370,700
|
|
|
$
|
0.35
|
|
|
$
|
4,074,664
|
|
|
|
4,365,835
|
|
|
$
|
0.93
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
56,853
|
|
|
|
|
|
|
|
|
|
|
|
53,553
|
|
|
|
|
|
Diluted Income Per Common Share
|
|
$
|
1,541,907
|
|
|
|
4,427,553
|
|
|
$
|
0.35
|
|
|
$
|
4,074,664
|
|
|
|
4,419,388
|
|
|
$
|
0.92
|
|
Stock options to purchase 32,500 shares of common stock were outstanding during the three and nine months ended September 30, 2017 and stock options to purchase 73,500 shares of common stock were outstanding during the three and nine months ended September 30, 2016 but were not included in the computation of diluted income per common share because their exercise price was greater than the average market price of the common shares.
Note
7: New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, (Topic 606):
Revenue from Contracts with Customers
(“ASU 2014-09”). The scope of the guidance applies to revenue arising from contracts with customers, except for the following: lease contracts, insurance contracts, contractual rights and obligations within the scope of other guidance and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration that the entity receives or expects to receive. ASU 2014-09 is not expected to significantly impact the timing or approach to revenue recognition for financial institutions. Initially, the amendments were effective for public entities for annual reporting periods beginning after December 15, 2016, however, the FASB issued ASU 2015-14
Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date
” which deferred the effective date of ASU 2014-09 by one year to annual and interim periods beginning after December 15, 2017. The guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under GAAP, which comprises a significant portion of our revenue stream. As the Company plans to adopt the new guidance in the first quarter of 2018, it is currently evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements, but at this time do not believe the standard will have a significant impact on the financial statements, other than the required new disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments- Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). ASU 2016-01 simplifies the impairment assessment of equity investments, clarifies reporting disclosure requirements for financial instruments measured at amortized cost, and requires the exit price notion be disclosed when measuring fair value of financial instruments. ASU 2016-01 details the required separate presentation in other comprehensive income for the change in fair value of a liability related to change in instrument specific credit risk and details the required separate presentation of financial assets and liabilities by measurement category, and clarifies the guidance for a valuation allowance on deferred tax assets related to available-for-sale securities. ASU 2016-01 is effective for annual and interim reporting periods beginning after December 15, 2017. Adoption of ASU 2016-01 is not expected to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
(“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
The Company is currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements in relation to the Company
’s new leased headquarters that will be put into place during the fourth quarter of 2017. The Company expects to record a right of use asset and related liability for the present value of the lease payments.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
. The purpose of the update was to simplify the accounting for share-based payment transactions, including the income tax consequences of such transactions. Under the provisions of the update the income tax consequences of excess tax benefits and deficiencies are to be recognized in income tax expense in the reporting period in which the awards vest. Previously, excess tax benefits or deficiencies impact stockholders’ equity directly to the extent there was a cumulative excess tax benefit. In the event that a tax deficiency had occurred during the reporting period and a cumulative excess tax benefit did not exist, the tax deficiency was recognized in income tax expense under previous GAAP. The update also provided that entities may continue to estimate forfeitures in accounting for stock based compensation or recognize them as they occur. The provisions of this update became effective for interim and annual periods beginning after December 15, 2016. The adoption of this amendment did not have a material impact on the Company’s financial position, results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments
. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with later effective dates for non-SEC registrant public companies and other organizations. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s consolidated financial statements, and it is too early at this time to determine the impact on the financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments.
The update is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows with respect to eight types of cash flows. This new accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2017. Adoption of ASU 2016-15 is not expected to have a material impact on our consolidated financial statements.
In March 2017,
the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic) 310-20):
Premium Amortization of Purchased Callable Debt Securities
.
The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendment will be effective for interim and annual reporting periods beginning after December 15, 2018. The Company elected to early adopt ASU 2017-08 during 2017 and it did not have a significant effect on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Subtopic 718):
Scope of Modification Accounting.
ASU 2017-09 clarifies when changes to terms or conditions of a share-based payment award must be accounted for as a modification. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as either an equity or liability instrument. ASU 2017-09 is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance requires companies to apply the requirements prospectively to awards modified on or after the adoption date. ASU 2017-09 is not expected to have a significant impact on our consolidated financial statements.
In July 2017, the FAS
B issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815):
(Part 1) Accounting for certain financial instruments with down round features and (Part II), Replacement of the indefinite deferral for mandatory redeemable financial instruments of certain nonpublic entities and certain mandatory redeemable non-controlling interests with a scope exception
. Part I of the update addresses the complexity of accounting for certain financial instruments with down round features such as warrants or convertible instruments and will be effective for interim and annual reporting periods beginning after December 15, 2019.
The Company is currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements, but at this time do not believe the standard will have a significant impact on the financial statements.
In August 2017, the FASB
issued ASU 2017-12, Derivatives and Hedging (Topic 815):
Targeted improvements to accounting for hedging activities
.
The purpose
of this updated guidance is to better align financial reporting for hedging activities with the economic objectives of those activities. The amendments in this update are effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The standard requires the modified retrospective transition approach as of the date of adoption. The Company is currently evaluating the impact that this standard will have on its Consolidated Financial Statements.
Note
8
:
Derivative Financial Instruments
The Company records all derivative financial instruments at fair value in the financial statements. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.
When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as 1) a hedge of fair value of a recognized asset or liability (fair value hedge) or 2) a hedge of a forecasted transaction, such as, the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective.
In June 2017, the Company entered into a forward start interest rate swap agreement totaling $50 million notional amount to hedge against interest rate risk on FHLB advances. As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. At September 30, 2017, the Company reported a $95,395 unrealized gain, net of a $56,025 tax effect, in other comprehensive income related to this cash flow hedge. The Company documents, both at inception and periodically over the life of the hedge, its analysis of actual and expected hedge effectiveness. To the extent that the hedge of future cash flows is deemed ineffective, changes in the fair value of the derivative are recognized in earnings as a component of other noninterest expense. For the quarter ended September 30, 2017, there was no ineffectiveness attributable to the cash flow hedge.
A summary of the Company’s derivative financial instruments at September 30, 2017 is shown in the following table:
Forward Start
|
|
Termination
|
|
Derivative
|
|
Notional
|
|
|
Rate
|
|
|
Rate
|
|
Estimated Fair Value
|
|
Inception Date
|
|
Date
|
|
Type
|
|
Amount
|
|
|
Paid
|
|
|
Hedged
|
|
at September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/28/2018
|
|
2/28/2025
|
|
Interest rate swap
|
|
$
|
50,000,000
|
|
|
|
2.12
|
%
|
|
3 month LIBOR Floating
|
|
$
|
151,420
|
|
Note
9: 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; and
Level 3
: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
The following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying
condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.
Available-for-sale securities:
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. For these investments, the inputs used by the pricing service to determine fair value may include one or a combination of observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bid offers and reference data market research publications and are classified within Level 2 of the valuation hierarchy. Level 2 securities include U.S. government agencies, municipal securities and government sponsored mortgage-backed securities. The Company has no Level 3 securities.
Derivative Financial Instruments
:
Derivatives are recorded at fair value on a recurring basis utilizing Level 2 inputs. The Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, live trading levels, among other things.
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 September 30, 2017 and December 31, 2016 (dollar amounts in thousands):
9/30/2017
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Financial assets:
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Level 1 inputs
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Level 2 inputs
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Level 3 inputs
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Total fair value
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Debt securities:
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Municipals
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$
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-
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$
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33,893
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$
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-
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$
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33,893
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Corporates
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-
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3,070
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-
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3,070
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Government sponsored mortgage-backed
securities and SBA loan pools
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-
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46,242
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-
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46,242
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Available-for-sale securities
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$
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-
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$
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83,205
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$
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-
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$
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83,205
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Level 1 inputs
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Level 2 inputs
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Level 3 inputs
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Total fair value
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Interest rate swaps
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$
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-
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$
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151
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$
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-
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$
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151
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12/31/2016
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Financial assets:
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Level 1 inputs
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Level 2 inputs
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Level 3 inputs
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Total fair value
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Debt securities:
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Municipals
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$
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-
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$
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38,338
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$
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-
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$
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38,338
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Corporates
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-
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7,053
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-
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7,053
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Government sponsored mortgage-backed
securities and SBA loan pools
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-
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47,008
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-
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47,008
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Available-for-sale securities
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$
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-
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$
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92,399
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$
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-
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$
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92,399
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The following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying
statements of financial condition, as well as the general classification of such assets pursuant to the valuation hierarchy.
Foreclosed Assets Held for Sale
:
Fair value is estimated using recent appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for selling costs and discounts based on management’s assessment of the condition and marketability of the collateral. Foreclosed assets held for sale are classified within Level 3 of the valuation hierarchy.
Impaired loans
(Collateral Dependent)
:
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2017 and December 31, 2016 (dollar amounts in thousands):
Impaired loans:
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Level 1 inputs
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Level 2 inputs
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Level 3 inputs
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Total fair value
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September 30, 2017
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$
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-
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$
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-
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$
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1,474
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$
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1,474
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December 31, 2016
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$
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-
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$
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-
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$
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1,006
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$
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1,006
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Foreclosed assets held for sale:
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Level 1 inputs
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Level 2 inputs
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Level 3 inputs
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Total fair value
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September 30, 2017
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$
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-
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$
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-
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$
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-
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$
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-
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December 31, 2016
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$
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-
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$
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-
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$
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149
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$
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149
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There were no transfers between valuation levels for any asset during the
nine months ended September 30, 2017 or 2016. If valuation techniques are deemed necessary, the Company considers those transfers to occur at the end of the period when the assets are valued.
The following table presents quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurement (dollar amounts in thousands):
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Fair Value
September 30, 2017
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Valuation
Technique
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Unobservable
Input
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Range
(Weighted Average)
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Impaired loans (collateral dependent)
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$
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1,474
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Market Comparable
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Discount to reflect
realizable value
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0%
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-
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100%
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(15%)
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Foreclosed assets held for sale
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$
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-
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Market Comparable
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Discount to reflect
realizable value
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0%
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Fair Value
December 31, 2016
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Valuation
Technique
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Unobservable
Input
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Range
(Weighted Average)
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Impaired loans (collateral dependent)
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$
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1,006
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Market Comparable
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Discount to reflect
realizable value
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0%
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-
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100%
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(7%)
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Foreclosed assets held for sale
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$
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149
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Market Comparable
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Discount to reflect
realizable value
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10%
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The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying
condensed consolidated balance sheets at amounts other than fair value.
Cash and cash equivalents, interest-bearing deposits and Federal Home Loan Bank stock
The carrying amounts reported in the
condensed consolidated balance sheets approximate those assets' fair value.
Held-to-maturity securities
Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans
The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.
Deposits
Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank advances
The fair value of advances is estimated by using rates on debt with similar terms and remaining maturities.
Subordinated debentures
For these variable rate instruments, the carrying amount is a reasonable estimate of fair value. There is currently a limited market for similar debt instruments and the Company has the option to call the subordinated debentures at an amount close to its par value.
Interest payable
The carrying amount approximates fair value.
Commitments to originate loans, letters of credit and lines of credit
The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The following table
s present estimated fair values of the Company’s financial instruments at September 30, 2017 and December 31, 2016.
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September 30, 2017
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Carrying Amount
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Fair Value
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Hierarchy
Level
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Financial assets:
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Cash and cash equivalents
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$
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10,721,184
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$
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10,721,184
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1
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Held-to-maturity securities
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18,424
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18,582
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2
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Federal Home Loan Bank stock
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4,137,500
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4,137,500
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2
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Mortgage loans held for sale
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2,516,520
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2,516,520
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2
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Loans, net
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616,884,052
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613,749,211
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3
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Interest receivable
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2,164,278
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2,164,278
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2
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Financial liabilities:
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Deposits
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584,088,617
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583,406,521
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2
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Federal Home Loan Bank advances
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82,800,000
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83,002,996
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2
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Subordinated debentures
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15,465,000
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15,465,000
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3
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Interest payable
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253,045
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253,045
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2
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Unrecognized financial instruments
(net of contractual value):
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Commitments to extend credit
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-
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-
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-
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Unused lines of credit
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-
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-
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-
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December 31, 2016
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Carrying Amount
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Fair Value
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Hierarchy
Level
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Financial assets:
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Cash and cash equivalents
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$
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9,088,441
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$
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9,088,441
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1
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Held-to-maturity securities
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27,528
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28,153
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2
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Federal Home Loan Bank stock
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4,611,000
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4,611,000
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2
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Mortgage loans held for sale
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2,183,633
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2,183,633
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2
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Loans, net
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538,273,640
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537,645,692
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3
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Interest receivable
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1,947,063
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1,947,063
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2
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Financial liabilities:
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Deposits
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505,362,750
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504,829,161
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2
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Federal Home Loan Bank advances
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95,700,000
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95,764,840
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2
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Subordinated debentures
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15,465,000
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15,465,000
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3
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Interest payable
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207,833
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207,833
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2
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Unrecognized financial instruments
(net of contractual value):
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Commitments to extend credit
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-
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-
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-
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Unused lines of credit
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-
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-
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-
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