Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The primary function of the Company is to monitor and oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews material changes in the Company’s financial condition as of June 30, 2019, and the results of operations for the three and six months ended June 30, 2019 and 2018.
The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company’s operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; changes in general or local economic conditions; changes in federal or state regulations and legislation governing the operations of the Company or the Bank; and other factors set forth in reports and other documents filed by the Company with the SEC from time to time, including the risk factors described under Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
On August 7, 2019, the Company redeemed $6,186,000 aggregate principal amount of Floating Rate Junior Subordinated Debentures (the "Debentures") originally issued by Hometown Bancshares Capital Trust I in 2002. These Debentures were assumed by the Company in connection with the 2018 acquisition of Hometown (See Note 3: "Acquisition" for additional information). The redemption price was 100% of the principal amount of the Debentures, plus accrued and unpaid interest. Proceeds from a note payable with another financial institution were utilized to redeem these Debentures. The Company received all necessary regulatory approvals for the redemption of the Debentures. See Note 14: "Subsequent Event" for additional information on the redemption.
Financial Condition
The Company’s total assets increased $12,305,938 (1%) from $965,137,870 as of December 31, 2018, to $977,443,808 as of June 30, 2019.
Available-for-sale securities increased $8,765,024 (10%) from $86,266,197 as of December 31, 2018, to $95,031,221 as of June 30, 2019. The Company had purchases of $38,383,889 and an increase in unrealized gains of $2,671,778 offset by sales and principal payments of $32,149,144 when compared to December 31, 2018.
Net loans receivable decreased by $27,107,784 (3%) from $778,298,606 as of December 31, 2018 to $751,190,822 as of June 30, 2019. Year-to-date, construction loans increased $11,807,630 (13%), permanent multi-family loans decreased $2,092,594 (2%), consumer and other loans decreased $1,661,342 (5%), commercial loans decreased $5,382,342 (5%), one-to-four family mortgage loans decreased $7,568,338 (6%) and commercial real estate loans decreased $22,547,861 (7%). The Company continues to focus its lending efforts in the commercial, owner occupied real estate and small business lending categories, however, during the quarter loan principal paydowns and significant unexpected payoffs outpaced loan originations.
Allowance for loan losses decreased $324,903 (4%) from $7,995,569 as of December 31, 2018 to $7,670,666 as of June 30, 2019. In addition to the provision for loan losses of $100,000 recorded by the Company for the six months ended June 30, 2019, charge-offs of specific loans (classified as nonperforming at December 31, 2018) exceeded loan recoveries by $424,903. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of June 30, 2019 and December 31, 2018 was 1.01% and 1.02%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2019 and December 31, 2018 was 69.3% and 61.1%, respectively. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio.
In accordance with GAAP for acquisition accounting, the loans acquired through the Hometown acquisition were recorded at fair value; therefore, there was no allowance associated with these loans. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount of $1.6 million at June 30, 2019.
Prepaid expenses and other assets increased $4,488,723 (72%) from $6,261,159 as of December 31, 2018 to $10,749,882 as of June 30, 2019. This increase is primarily due to the Company purchasing an additional interest in a partnership for the purpose of gaining low income housing tax credits for $3,168,435 and the net impact of cash collateral held by our swap counterparty increasing by $1,278,462 due to fluctuations in interest rates.
Operating lease right-of-use assets increased $9,334,911 (100%), during the first half of 2019 compared to none recorded as of December 31, 2018. These amounts were recognized due to the Company’s implementation of new lease accounting standards for operating leases further described in Note 8 and Note 11 of the Condensed Consolidated Financial Statements. The recorded assets and liabilities will be amortized over the life of the lease term.
Deposits increased $52,858,717 (7%) from $749,618,822 as of December 31, 2018, to $802,477,539 as of June 30, 2019. For the six months ended June 30, 2019, checking and savings accounts increased by $52,638,121 and certificates of deposit increased by $251,733. The increase in checking and savings accounts was due to the Bank’s continued focus to increase core transaction deposits, including retail, commercial and public funds. See also the discussion under Item 3 - “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”
Federal Home Loan Bank advances decreased $55,300,000 (53%) from $105,300,000 as of December 31, 2018 to $50,000,000 as of June 30, 2019 due to principal reductions from excess funds generated from the deposit growth noted above.
Stockholders’ equity (including net unrealized gains and losses on available-for-sale securities and interest rate swaps) increased $3,259,680 from $80,478,592 as of December 31, 2018, to $83,738,272 as of June 30, 2019. The Company’s net income during this period exceeded dividends paid or declared by $3,385,025. During the quarter, 13,608 shares of the Company’s common stock was repurchased at an average price of $22.99 under an existing repurchase plan. These are the first repurchases made by the Company since November 2016. Additional information on the repurchase plan can be found below in Part II, Item 2. On a per common share basis, stockholders’ equity increased from $18.18 as of December 31, 2018 to $18.85 as of June 30, 2019.
Average Balances, Interest and Average Yields
The Company’s profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Non-interest income, non-interest expense, and income taxes also impact net income.
The following table sets forth certain information relating to the Company’s average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields. All dollar amounts are in thousands.
|
|
Three months ended 6/30/2019
|
|
|
Three months ended 6/30/2018
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield /
Cost
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield /
Cost
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
768,176
|
|
|
$
|
10,395
|
|
|
|
5.43
|
%
|
|
$
|
797,034
|
|
|
$
|
9,819
|
|
|
|
4.94
|
%
|
Investment securities
|
|
|
96,422
|
|
|
|
681
|
|
|
|
2.83
|
%
|
|
|
88,755
|
|
|
|
493
|
|
|
|
2.23
|
%
|
Other assets
|
|
|
37,253
|
|
|
|
224
|
|
|
|
2.41
|
%
|
|
|
16,725
|
|
|
|
67
|
|
|
|
1.61
|
%
|
Total interest-earning
|
|
|
901,851
|
|
|
|
11,300
|
|
|
|
5.03
|
%
|
|
|
902,514
|
|
|
|
10,379
|
|
|
|
4.61
|
%
|
Noninterest-earning
|
|
|
68,080
|
|
|
|
|
|
|
|
|
|
|
|
64,965
|
|
|
|
|
|
|
|
|
|
|
|
$
|
969,931
|
|
|
|
|
|
|
|
|
|
|
$
|
967,479
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
40,598
|
|
|
|
32
|
|
|
|
0.32
|
%
|
|
$
|
43,012
|
|
|
|
26
|
|
|
|
0.24
|
%
|
Transaction accounts
|
|
|
417,536
|
|
|
|
1,551
|
|
|
|
1.49
|
%
|
|
|
425,153
|
|
|
|
1,126
|
|
|
|
1.06
|
%
|
Certificates of deposit
|
|
|
234,515
|
|
|
|
1,216
|
|
|
|
2.08
|
%
|
|
|
211,246
|
|
|
|
568
|
|
|
|
1.08
|
%
|
FHLB advances
|
|
|
51,677
|
|
|
|
289
|
|
|
|
2.24
|
%
|
|
|
77,991
|
|
|
|
406
|
|
|
|
2.09
|
%
|
Other borrowed funds
|
|
|
5,000
|
|
|
|
64
|
|
|
|
5.13
|
%
|
|
|
1,109
|
|
|
|
4
|
|
|
|
0.00
|
%
|
Subordinated debentures
|
|
|
21,731
|
|
|
|
297
|
|
|
|
5.48
|
%
|
|
|
21,651
|
|
|
|
277
|
|
|
|
5.13
|
%
|
Total interest-bearing
|
|
|
771,057
|
|
|
|
3,449
|
|
|
|
1.79
|
%
|
|
|
780,162
|
|
|
|
2,407
|
|
|
|
1.24
|
%
|
Noninterest-bearing
|
|
|
115,033
|
|
|
|
|
|
|
|
|
|
|
|
94,344
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
886,090
|
|
|
|
|
|
|
|
|
|
|
|
874,506
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
83,841
|
|
|
|
|
|
|
|
|
|
|
|
92,973
|
|
|
|
|
|
|
|
|
|
|
|
$
|
969,931
|
|
|
|
|
|
|
|
|
|
|
$
|
967,479
|
|
|
|
|
|
|
|
|
|
Net earning balance
|
|
$
|
130,794
|
|
|
|
|
|
|
|
|
|
|
$
|
122,352
|
|
|
|
|
|
|
|
|
|
Earning yield less costing rate
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.38
|
%
|
Net interest income, and net yield spread on interest earning assets
|
|
|
|
|
|
$
|
7,851
|
|
|
|
3.49
|
%
|
|
|
|
|
|
$
|
7,972
|
|
|
|
3.54
|
%
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
117
|
%
|
|
|
|
|
|
|
|
|
|
|
116
|
%
|
|
|
|
|
|
|
Six months ended 6/30/2019
|
|
|
Six months ended 6/30/2018
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield /
Cost
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield /
Cost
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
774,227
|
|
|
$
|
20,698
|
|
|
|
5.39
|
%
|
|
$
|
719,690
|
|
|
$
|
17,197
|
|
|
|
4.82
|
%
|
Investment securities
|
|
|
93,259
|
|
|
|
1,279
|
|
|
|
2.77
|
%
|
|
|
84,577
|
|
|
|
943
|
|
|
|
2.25
|
%
|
Other assets
|
|
|
34,098
|
|
|
|
419
|
|
|
|
2.48
|
%
|
|
|
20,101
|
|
|
|
196
|
|
|
|
1.97
|
%
|
Total interest-earning
|
|
|
901,584
|
|
|
|
22,396
|
|
|
|
5.01
|
%
|
|
|
824,368
|
|
|
|
18,336
|
|
|
|
4.49
|
%
|
Noninterest-earning
|
|
|
63,477
|
|
|
|
|
|
|
|
|
|
|
|
51,384
|
|
|
|
|
|
|
|
|
|
|
|
$
|
965,061
|
|
|
|
|
|
|
|
|
|
|
$
|
875,752
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
40,250
|
|
|
|
62
|
|
|
|
0.31
|
%
|
|
$
|
37,166
|
|
|
|
47
|
|
|
|
0.26
|
%
|
Transaction accounts
|
|
|
414,440
|
|
|
|
3,027
|
|
|
|
1.47
|
%
|
|
|
397,144
|
|
|
|
2,056
|
|
|
|
1.04
|
%
|
Certificates of deposit
|
|
|
236,868
|
|
|
|
2,317
|
|
|
|
1.97
|
%
|
|
|
183,385
|
|
|
|
1,039
|
|
|
|
1.14
|
%
|
FHLB advances
|
|
|
55,917
|
|
|
|
645
|
|
|
|
2.33
|
%
|
|
|
71,622
|
|
|
|
739
|
|
|
|
2.08
|
%
|
Other borrowed funds
|
|
|
5,000
|
|
|
|
132
|
|
|
|
5.32
|
%
|
|
|
555
|
|
|
|
4
|
|
|
|
0.00
|
%
|
Subordinated debentures
|
|
|
21,742
|
|
|
|
588
|
|
|
|
5.45
|
%
|
|
|
18,558
|
|
|
|
447
|
|
|
|
4.86
|
%
|
Total interest-bearing
|
|
|
774,217
|
|
|
|
6,771
|
|
|
|
1.76
|
%
|
|
|
708,430
|
|
|
|
4,332
|
|
|
|
1.23
|
%
|
Noninterest-bearing
|
|
|
107,839
|
|
|
|
|
|
|
|
|
|
|
|
82,908
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
882,056
|
|
|
|
|
|
|
|
|
|
|
|
791,338
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
83,005
|
|
|
|
|
|
|
|
|
|
|
|
84,414
|
|
|
|
|
|
|
|
|
|
|
|
$
|
965,061
|
|
|
|
|
|
|
|
|
|
|
$
|
875,752
|
|
|
|
|
|
|
|
|
|
Net earning balance
|
|
$
|
127,367
|
|
|
|
|
|
|
|
|
|
|
$
|
115,938
|
|
|
|
|
|
|
|
|
|
Earning yield less costing rate
|
|
|
|
|
|
|
|
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
|
|
|
3.25
|
%
|
Net interest income, and net yield spread on interest earning assets
|
|
|
|
|
|
$
|
15,625
|
|
|
|
3.50
|
%
|
|
|
|
|
|
$
|
14,004
|
|
|
|
3.43
|
%
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
116
|
%
|
|
|
|
|
|
|
|
|
|
|
116
|
%
|
|
|
|
|
Results of Operations - Comparison of Three and Six Month Periods Ended June 30, 2019 and 2018
Net income (loss) for the three and six months ended June 30, 2019 was $2,428,499 and $4,548,863, respectively, compared to ($342,984) and $1,012,761 for the three and six months ended June 30, 2018, respectively, which represents an increase in earnings of $2,771,483 (808%) and $3,536,102 (349%) for the three and six month periods, respectively. Generally, earnings were positively impacted by higher interest earning balances and the absence of one-time merger costs incurred in 2018 due to the Hometown acquisition.
Net Interest Income
Net interest income for the three and six months ended June 30, 2019 decreased $121,912 (2%) and increased $1,621,554 (12%), respectively, when compared to the same periods in 2018. For the three and six month periods ended June 30, 2019, the average balance of net interest earning assets increased by approximately $8,442,000 and $11,429,000, respectively, more than the average balance of interest-bearing liabilities increased during the same periods in 2018. For the three and six month periods ended June 30, 2019, the net interest margin decreased five basis points to 3.49% and increased seven basis points to 3.50%, respectively, when compared to the same periods in 2018.
Interest Income
Total interest income for the three and six months ended June 30, 2019 increased $920,382 (9%) and $4,060,502 (22%), respectively, when compared to the same periods in 2018. For the three and six month periods ended June 30, 2019 compared to the same periods in 2018, the average yield on interest earning assets increased 42 basis points to 5.03% and increased 52 basis points to 5.01%, while the average balance of interest earning assets decreased approximately $663,000 for the three month period and increased approximately $77,216,000 for the six month period, respectively. The increase in the year-to-date amounts is primarily due to loan and investment balances gained from the Hometown acquisition and higher yields in each asset class compared to the same periods in 2018. For the three-month periods, the yield on loans increased 49 basis points to 5.43% and $452,000 in loan accretion was recognized on loans acquired from Hometown compared to $361,000 in the same quarter of 2018.
Interest Expense
Total interest expense for the three and six months ended June 30, 2019 increased $1,042,294 (43%) and $2,438,948 (56%), respectively, when compared to the three and six months ended June 30, 2018. For the three and six months period ended June 30, 2019 compared to the same periods in 2018, the average cost of interest bearing liabilities increased 55 basis points to 1.79% and increased 53 basis points to 1.76%, while the average balance of interest bearing liabilities decreased approximately $9,105,000 for the three month period and increased approximately $65,787,000 for the six month period. The annual increase is primarily due to the liabilities acquired from Hometown and higher offering rates on all deposit products due to significant competitive pressures. Partially offsetting the increases noted above, is reduced interest expense on FHLB borrowings from a reduction in balances in 2019. The Company intends to continue to utilize a cost-effective mix of retail and commercial deposits along with non-core, wholesale funding.
Provision for Loan Losses
Provisions for loan losses are charged or credited to earnings to bring the total allowance for loan losses to a level considered adequate by the Company to provide for potential loan losses in the existing loan portfolio. When making its assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and impaired and past due loans in the Company’s loan portfolio. In addition, the Company considers general economic conditions and other factors related to collectability of the Company’s loan portfolio.
Based on its internal analysis and methodology, management recorded a provision for loan loss expense of $100,000 for both the three and six months ended June 30, 2019, respectively, compared to $500,000 and $725,000 for the same periods in 2018. The need to record a provision for the quarter was primarily due to the charge-off of one relationship consisting of several rental properties and increased reserves on a few problem credits. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management may need to increase the allowance for loan losses through charges to the provision for loan losses if anticipated growth in the Bank’s loan portfolio increases or other circumstances warrant.
In accordance with GAAP for acquisition accounting, the loans acquired through the acquisition of Hometown were recorded at fair value; therefore, there was no allowance associated with Hometown’s loans at acquisition. Management continues to evaluate the allowance needed on the acquired Hometown loans factoring in the net remaining discount of $1.6 million at June 30, 2019.
Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.
Non
-I
nterest Income
Non-interest income decreased $20,474 (1%) and increased $224,822 (7%) for the three and six months ended June 30, 2019 when compared to the three and six months ended June 30, 2018. For the periods, the Company increased income from sales of Small Business Administration (“SBA”) loans of $22,078 (10%) and $101,335 (26%), debit card and interchange related income increased by $108,172 (43%) and $198,571 (43%) and realized gains on the sale of investment securities increased by $89,299 (860%) and $55,468 (770%) compared to the same three and six month periods in 2018. Offsetting the increases, were reduced gains on the sale of foreclosed assets of $36,558 (48%) and $99,946 (83%), reduced income recognized from the sale of mortgage loans of $54,996 (9%) and $8,555 (1%) and decreased service charge revenue of $133,073 (24%) and $48,407 (6%), respectively, when compared to the same three and six month periods in 2018.
Non
-I
nterest Expense
Non-interest expenses decreased $3,396,154 (33%) and $2,028,450 (13%) for the three and six months ended June 30, 2019 when compared to the same periods in 2018. One-time merger costs of $3,192,050 and $3,420,050 were incurred during the three and six months ended June 30, 2018, which is the primary reason for the increased expenses for the periods in 2018. Additionally, many of the year-to-date comparisons noted below show significant variances due to the merger occurring on April 2, 2018. Thus, 2019 has six months of recurring expenses whereas 2018 only has three months of such expenses. Significant categories of non-interest expense are as follows:
Salaries and employee benefits decreased $148,871 (4%) and increased $637,025 (9%) when compared to the same three and six month periods in 2018. The three-month decrease is due to staffing efficiencies gained from the acquisition coupled with unfilled positions from the retirements of a few employees. The six-month increase is due to the merger timing in which only three-months expense would be included in the 2018 year-to date figures.
Occupancy expenses increased $69,147 (7%) and $432,103 (24%), respectively, when compared to the prior year periods. This is primarily due to the expenses related to additional leasehold improvement expenses and facility upgrades incurred after the Hometown acquisition.
Core deposit intangible amortization decreased $100,750 (46%) and increased $18,500 (8%), respectively, for the three and six months ended June 30, 2019 compared to 2018. These amounts are related to purchase accounting adjustments made as a part of the Hometown acquisition.
Provision for Income Taxes
The provision for income taxes increased by $882,285 (195%) and $963,724 (603%) for the three and six months ended June 30, 2019 when compared to the same periods of 2018. The increase in the provision for income taxes for the quarter is primarily due to increased taxable income.
Nonperforming Assets
The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank’s existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers’ intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of June 30, 2019 and December 31, 2018 was 69.3% and 61.1%, respectively. Total loans classified as substandard, doubtful or loss as of June 30, 2019, were $22,202,000 or 2.27% of total assets as compared to $24,714,000 or 2.56% of total assets at December 31, 2018. Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank’s allowance for loan losses.
The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk. Nonperforming assets of the Bank are comprised of nonperforming loans (including troubled debt restructurings) and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.
|
|
6/30/2019
|
|
|
12/31/2018
|
|
|
12/31/2017
|
|
Nonperforming loans
|
|
$
|
11,076
|
|
|
$
|
13,082
|
|
|
$
|
9,961
|
|
Real estate acquired in settlement of loans
|
|
|
1,399
|
|
|
|
1,127
|
|
|
|
283
|
|
Total nonperforming assets
|
|
$
|
12,475
|
|
|
$
|
14,209
|
|
|
$
|
10,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a percentage of total assets
|
|
|
1.28
|
%
|
|
|
1.47
|
%
|
|
|
1.29
|
%
|
Allowance for loan losses
|
|
$
|
7,671
|
|
|
$
|
7,996
|
|
|
$
|
7,107
|
|
Allowance for loan losses as a percentage of gross loans
|
|
|
1.01
|
%
|
|
|
1.02
|
%
|
|
|
1.12
|
%
|
Liquidity and Capital Resources
Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company’s primary sources of liquidity include cash and cash equivalents, customer deposits and FHLB borrowings. The Company also has established secured borrowing lines available from the Federal Reserve Bank which is considered a secondary source of funds.
The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $53,025,771 as of June 30, 2019 and $34,121,642 as of December 31, 2018, representing an increase of $18,904,129. The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments and deposit fluctuations.
In July 2013, the Federal Reserve issued a final rule that revised its risk-based and leverage capital requirements for banking organizations to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act (“Basel III Rule”). The Basel III Rule implemented a revised definition of regulatory capital, a new common equity tier 1 (“CET1”) minimum capital requirement, and a higher minimum tier1 capital requirement. The final rules also made changes to the prompt corrective action framework for depository institutions by incorporating the new minimum capital ratios into the framework, introducing the CET1 capital measure, and aligning the definition of tangible equity for purposes of the critically undercapitalized prompt corrective action category with the definition of tier 1 capital. Under the Basel III Rule, the following three components comprise a banking organization’s “regulatory capital”: (i) “CET1 capital,” which is predominantly comprised of retained earnings and common stock instruments that meet certain criteria and related surplus (net of any treasury stock), AOCI (for organizations that do not make opt-out elections), and CET1 minority interest, which are subject to certain restrictions; (ii) “Additional Tier 1 Capital,” which consists of non-cumulative perpetual preferred stock and similar instruments meeting specified eligibility criteria and related surplus, Tier 1 minority interests not included in CET1 capital, and “TARP” preferred stock and other instruments issued under the Emergency Economic Stabilization Act of 2008; and (iii) “Tier 2 Capital,” which includes instruments such as subordinated debt that has a minimum original maturity of at least five years and is subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 capital and limited amounts of a banking organization’s allowance for loan and lease losses (ALLL), less applicable regulatory adjustments and deductions.
As of January 1, 2019, the Basel III Rule is fully phased-in and requires the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
Beginning January 1, 2016, the capital conservation buffer requirement was phased in at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
The Bank is classified as “well capitalized” under current regulatory guidelines. As of June 30, 2019, the Bank’s common equity Tier 1 ratio was 11.66%, the Bank’s Tier 1 leverage ratio was 10.57%, its Tier 1 risk-based capital ratio was 11.66% and the Bank’s total risk-based capital ratio was 12.54% - all exceeding the minimums of 7.0%, 6.0%, 8.5% and 10.5%, respectively, as of June 30, 2019.
On July 9, 2019, federal banking regulators issued a final ruling that reduces the regulatory burden on financial institutions with less than $250 billion in total consolidated assets and limited foreign exposure. The combined agencies of the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC) and the Comptroller of the Currency, approved these standards to simplify and clarify a number of complex aspects of current regulatory capital rules. Specifically, the capital treatment of mortgage servicing assets, certain tax deferred assets, investments in the capital instruments of unconsolidated financial institutions and minority interest. Additionally, this would allow bank holding companies to redeem common stock without prior approval unless otherwise required. The capital rule provisions are effective April 1, 2020 whereas the pre-approval requirements for the redemption of common stock will be effective October 1, 2019.