Item 1. Business
Guaranty Federal Bancshares, Inc.
Guaranty Federal Bancshares, Inc. (hereinafter referred to as “we,” “us,” “our,” or the “Company”) is a Delaware-chartered corporation that was formed in September 1997. The Company became a unitary savings and loan holding company for Guaranty Federal Savings Bank, a federal savings bank (the "Bank") on December 30, 1997, in connection with a plan of conversion and reorganization involving the Bank and its then existing mutual holding company. The mutual holding company structure had been created in April 1995 at which time more than a majority of the shares of the Bank were issued to the mutual holding company and the remaining shares were sold in a public offering. In connection with the conversion and reorganization on December 30, 1997, the shares of the Bank held by the mutual holding company were extinguished along with the mutual holding company, and the shares of the Bank held by the public were exchanged for shares of the Company. All of the shares of the Bank which remained outstanding after the conversion are owned by the Company.
On June 27, 2003, the Bank converted from a federal savings bank to a state-chartered trust company with banking powers in Missouri, and the Company became a bank holding company. On this date, the name of the Bank was changed from Guaranty Federal Savings Bank to Guaranty Bank. The primary activity of the Company is to oversee its investment in the Bank. The Company engages in few other activities. For this reason, unless otherwise specified, references to the Company include operations of the Bank. Further, information in a chart or table based on Bank only data is identical to or immaterially different from information that would be provided on a consolidated basis. In addition to the Bank, the Company owns Guaranty Statutory Trust I and Guaranty Statutory Trust II, both Delaware statutory trusts.
On April 2, 2018, the company completed the acquisition of Carthage, Missouri-based Hometown Bancshares, Inc. (“Hometown”) including its wholly owned bank subsidiary, Hometown Bank, National Association and Hometown Bancshares Statutory Trust I, a Delaware statutory trust. Under the terms of the Agreement and Plan of Merger, each share of Hometown common stock was exchanged for $20.00 in cash and the transaction was valued at approximately $4.6 million. Hometown’s subsidiary bank, Hometown Bank, National Association, was merged into Guaranty Bank on June 8, 2018. Including the effects of acquisition method accounting adjustments, the Company acquired approximately $178.8 million in assets, including approximately $143.9 million in loans (inclusive of loan discounts) and approximately $161.2 million in deposits. Goodwill of $1.4 million was also recorded as a result of this transaction. The acquisition strengthened the Company’s position in Southwest Missouri and the Company believes it will be able to achieve cost savings by integrating the two companies and combining accounting, data processing and other administrative functions all of which gave rise to the goodwill recorded.
At December 31, 2018, the Company’s consolidated assets were $965.1 million, net loans were $779.8 million, deposits were $749.6 million and total stockholders’ equity was $80.5 million. See Item 6 “Selected Financial Data” for further details regarding the Company’s financial position and results of operations for the previous five fiscal years.
Guaranty Bank
The Bank's principal business has been, and continues to be, attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, in commercial real estate loans, multi-family residential mortgage loans, construction loans, permanent one- to four-family residential mortgage loans, business, consumer and other loans. The Bank also invests in mortgage-backed securities, U.S. Government and federal agency securities and other marketable securities. The Bank's revenues are derived principally from interest on its loans and other investments and fees charged for services provided, and gains generated from sales of loans and investment securities, and 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 primary sources of funds are: deposits; borrowings; amortization and prepayments of loan principal; and amortizations, prepayments and maturities of investment securities.
The Bank is regulated by the Missouri Division of Finance (“MDF”) and its deposits are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC"). See discussion under section captioned “Supervision and Regulation” in this Item 1. The Bank is a member of the FHLB of Des Moines, which is one of 11 regional Federal Home Loan Banks (“FHLB”).
Internet Website
The Company’s internet website address is www.gbankmo.com. The information contained on that website is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company makes available through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to these reports as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission. These materials are also available free of charge (other than a user's regular internet access charges) on the Securities and Exchange Commission's website at www.sec.gov.
Market Area
The Bank's primary market areas are Greene, Christian, Jasper, and Newton Counties, which are in the southwestern corner of Missouri and includes the cities of Springfield, Nixa, Ozark, Joplin, Carthage and Neosho, Missouri (our “Market Area”). The major components of the Market Area’s economy are service industries, education, retail, light manufacturing and health care. There is a significant regional health care presence with three large regional hospitals. There also are four accredited colleges and two major universities. Part of the area’s growth can be attributed to its proximity to Branson, Missouri, which has developed a strong tourism industry related to country music and entertainment. Branson is located 30 miles south of Springfield, and attracts between five and six million tourists each year, many of whom pass through Springfield. The Bank also has one Loan Production Office in Webster County, Missouri.
Lending Activities
Like many commercial banks in our market, our loan portfolio is comprised of different types of industries. However, real estate lending is a significant portion of our business and accounted for more than 81% of our loan portfolio by value as of December 31, 2018. Set forth below is selected data relating to the composition of the Bank’s loan portfolio at the dates indicated:
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As of December 31,
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2018
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2017
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2016
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2015
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2014
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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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$
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|
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%
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$
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|
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%
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(Dollars in Thousands)
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Mortgage loans (includes loans held for sale):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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One to four family
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$
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133,928
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|
|
17
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%
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$
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108,223
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17
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%
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$
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108,594
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|
|
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20
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%
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$
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100,160
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|
|
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20
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%
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$
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99,116
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|
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20
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%
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Multi-family
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90,548
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12
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%
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85,225
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13
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%
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48,483
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9
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%
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41,604
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8
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%
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33,786
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7
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%
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Construction
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88,554
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11
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%
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64,744
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10
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%
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40,912
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7
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%
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45,463
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9
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%
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36,785
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7
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%
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Commercial real estate
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322,921
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41
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%
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261,866
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41
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%
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249,581
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46
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%
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208,824
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42
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%
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215,605
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|
|
44
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%
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Total mortgage loans
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635,951
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81
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%
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520,058
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81
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%
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447,570
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|
82
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%
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396,051
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|
79
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%
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385,292
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|
78
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%
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Commercial business loans
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119,369
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15
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%
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94,523
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15
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%
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75,405
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|
14
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%
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81,007
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16
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%
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92,114
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19
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%
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Consumer loans
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33,091
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4
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%
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24,716
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4
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%
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23,606
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|
|
4
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%
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21,992
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4
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%
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17,246
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3
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%
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Total consumer and other loans
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152,460
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19
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%
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119,239
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19
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%
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99,011
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18
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%
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102,999
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|
21
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%
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109,360
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|
|
22
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%
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Total loans
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788,411
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|
|
100
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%
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639,297
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100
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%
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546,581
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|
|
|
100
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%
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499,050
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|
|
100
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%
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494,652
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|
|
100
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%
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Less:
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Deferred loan fees/costs, net
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600
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663
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|
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|
|
382
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|
|
|
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|
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333
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|
|
|
|
|
|
|
262
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|
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Allowance for loan losses
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7,996
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7,107
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|
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5,742
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|
|
|
|
|
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5,812
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|
|
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6,589
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Total Loans, net
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$
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779,815
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$
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631,527
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$
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540,457
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$
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492,905
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|
|
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$
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487,801
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|
|
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The following table sets forth the maturity of the Bank's loan portfolio as of December 31, 2018. The table shows loans that have adjustable rates as due in the period during which they contractually mature. The table does not include prepayments or scheduled principal amortization.
12/31/2018
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Loan Maturities
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Due in One
Year or Less
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Due After
One Through
Five Years
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Due After
Five Years
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Total
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(Dollars in thousands)
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One to four family
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$
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13,732
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|
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$
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73,109
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$
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47,087
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$
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133,928
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Multi-family
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9,419
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|
68,933
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|
|
|
12,196
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90,548
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Construction
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44,949
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33,014
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10,591
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88,554
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Commercial real estate
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15,507
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201,658
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105,756
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322,921
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Commercial loans
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34,799
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57,964
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26,606
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119,369
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Consumer loans
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4,600
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13,446
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15,045
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33,091
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Total loans (1)
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$
|
123,006
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$
|
448,124
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$
|
217,281
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$
|
788,411
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Less:
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|
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|
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|
|
|
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|
|
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Deferred loan fees/costs
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|
|
|
|
|
|
|
|
|
|
|
|
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|
600
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|
Allowance for loan losses
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|
|
|
|
|
|
|
|
|
|
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7,996
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Loans receivable net
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$
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779,815
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(1) Includes mortgage loans held for sale of $1,517
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The following table sets forth the dollar amount of all loans due after December 2019, before deductions for unearned discounts, deferred loan fees/costs and allowance for loan losses, which have pre-determined interest rates and those which have adjustable interest rates.
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Fixed Rates
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Adjustable
Rates
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Total
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%
Adjustable
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(Dollars in Thousands)
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|
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|
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One to four family
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$
|
79,035
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|
|
$
|
41,160
|
|
|
$
|
120,195
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|
34
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%
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Multi-family
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|
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60,743
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|
|
|
20,386
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|
|
|
81,129
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|
|
|
25
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%
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Construction
|
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14,959
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|
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28,646
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|
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43,605
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|
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|
66
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%
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Commercial real estate
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190,885
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|
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116,530
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|
|
|
307,415
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|
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|
38
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%
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Commercial loans
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44,820
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|
|
|
39,751
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|
|
|
84,571
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|
|
|
47
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%
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Consumer loans
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|
|
7,045
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|
|
|
21,446
|
|
|
|
28,491
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|
|
|
75
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%
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Total loans (1)
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|
$
|
397,487
|
|
|
$
|
267,919
|
|
|
$
|
665,406
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|
|
|
40
|
%
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(1) Before deductions for unearned discounts, deferred loan fees/costs and allowances for loan losses.
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Commercial Real Estate Loans.
As of December 31, 2018, the Bank had commercial real estate loans totaling $322.9 million or 41% of the Bank's total loan portfolio. Commercial real estate loans are generally originated in amounts up to 80% of the appraised value of the mortgaged property. The majority of the Bank’s commercial real estate loans have been originated with adjustable rates of interest, the majority of which are quoted at a spread to the Wall Street Prime rate for the initial fixed rate period with subsequent adjustments at a spread to the Wall Street Prime rate. The Bank's commercial real estate loans are generally permanent loans secured by improved property such as office buildings, retail stores, small shopping centers, medical offices, motels, churches and other non-residential buildings.
To originate commercial real estate loans, the Bank generally requires a mortgage and security interest in the subject real estate, personal guarantees of the principals, a security interest in the related personal property, and a standby assignment of rents and leases. The Bank has established its loan-to-one borrower limitation, which was $28.3 million as of December 31, 2018, as its maximum commercial real estate loan amount.
Loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate are often dependent on successful operation or management of the properties, repayment of such loans may be subject, to a greater extent, to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by careful underwriting, requiring personal guarantees, lending only to established customers and borrowers otherwise known by the Bank, and generally restricting such loans to its primary Market Area.
As of December 31, 2018, the Bank’s commercial real estate loan portfolio included approximately $13.6 million, or 1.7% in loans to develop land into residential lots. The Bank utilizes its knowledge of the local market conditions and appraisals to evaluate the development cost and estimate projected lot prices and absorption rates to assess loans on residential subdivisions. The Bank typically loans up to 75% of the appraised value over terms up to two years. Development loans generally involve a greater degree of risk than residential mortgage loans because (1) the funds are advanced upon the security of the land which has a materially lower value prior to completion of the infrastructure required of a subdivision, (2) the cash flow available for debt repayment is a function of the sale of the individual lots, and (3) the amount of interest required to service the debt is a function of the time required to complete the development and sell the lots.
Commercial Business Loans.
As of December 31, 2018, the Bank had commercial business loans totaling $119.4 million or 15% of the Bank's total loan portfolio. Commercial business loans are generally secured by business assets, such as accounts receivable, equipment and inventory. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. The Bank expects to continue to expand its commercial business lending as opportunities present themselves.
One- to Four-Family Mortgage Loans.
The Bank offers fixed- and adjustable-rate (“ARM”) first mortgage loans secured by one- to four-family residences in the Bank's primary lending area. Typically, such residences are single family homes that serve as the primary residence of the owner. However, there are a number of loans originated by the Bank which are secured by non-owner occupied properties. Loan originations are generally obtained from existing or past customers, members of the local community, attorney referrals, established builders and realtors within our Market Area. Originated mortgage loans in the Bank's portfolio include due-on-sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent.
As of December 31, 2018, $133.9 million or 17% of the Bank’s total loan portfolio consisted of one- to four-family residential loans. The Bank currently offers ARM and balloon loans that have fixed interest rate periods of one to seven years. Generally, ARM loans provide for limits on the maximum interest rate adjustment ("caps") that can be made at the end of each applicable period and throughout the duration of the loan. ARM loans are originated for a term of up to 30 years on owner-occupied properties and generally up to 25 years on non-owner occupied properties. Typically, interest rate adjustments are calculated based on U.S. treasury securities adjusted to a constant maturity of one year (CMT), plus a 2.50% to 2.75% margin. Interest rates charged on fixed-rate loans are competitively priced based on market conditions and the cost of funds existing at the time the loan is committed. The Bank's fixed-rate mortgage loans are made for terms of 15 to 30 years which are currently being sold on the secondary market.
Generally, ARM loans pose credit risks different from the risks inherent in fixed-rate loans, primarily because as interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. The Bank does not originate ARM loans that provide for negative amortization.
The Bank generally originates both owner occupied and non-owner occupied one- to four-family residential mortgage loans in amounts up to 80% of the appraised value or the selling price of the mortgaged property, whichever is lower. The Bank on occasion may make loans up to 95% of appraised value or the selling price of the mortgage property, whichever is lower. However, the Bank typically requires private mortgage insurance for the excess amount over 80% for mortgage loans with loan to value percentages greater than 80%.
Multi-Family Mortgage Loans.
The Bank originates multi-family mortgage loans in its primary lending area. As of December 31, 2018, $90.5 million or 12% of the Bank's total loan portfolio consisted of multi-family residential real estate loans. With regard to multi-family mortgage loans, the Bank generally requires personal guarantees of the principals as well as a security interest in the real estate. Multi-family mortgage loans are generally originated in amounts of up to 80% of the appraised value of the property. A portion of the Bank’s multi-family mortgage loans have been originated with adjustable rates of interest which are quoted at a spread to the FHLB advance rate for the initial fixed rate period with subsequent adjustments based on the Wall Street prime rate. The loan-to-one-borrower limitation, $28.3 million as of December 31, 2018, is the maximum the Bank will lend on a multi-family residential real estate loan.
Loans secured by multi-family residential real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired.
Construction Loans.
As of December 31, 2018, construction loans totaled $88.6 million or 11% of the Bank's total loan portfolio. Construction loans originated by the Bank are generally secured by permanent mortgage loans for the construction of owner-occupied residential real estate or to finance speculative construction secured by residential real estate or owner-operated commercial real estate. This portion of the Bank’s loan portfolio consists of speculative loans, i.e.,
loans to builders who are speculating that they will be able to locate a purchaser for the underlying property prior to or shortly after the time construction has been completed.
Construction loans are made to contractors who have sufficient financial strength and a proven track record, for the purpose of resale, as well as on a "pre-sold" basis. Construction loans made for the purpose of resale generally provide for interest only payments at floating rates and have terms of six months to fifteen months. Construction loans for speculative purposes, models, and commercial properties typically have loan to value ratios of up to 80%. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant.
Construction lending by its nature entails significant additional risks as compared with one-to four-family mortgage lending, attributable primarily to the fact that funds are advanced upon the security of the project under construction prior to its completion. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower or guarantor to repay the loan. Because of these factors, the analysis of the prospective construction loan projects requires an expertise that is different in significant respects from that which is required for residential mortgage lending. The Bank attempts to address these risks through its underwriting and construction monitoring procedures.
Consumer and Other
Loans
.
The Bank also offers consumer loans, primarily consisting of loans secured by certificates of deposit, automobiles, boats and home equity loans. As of December 31, 2018, the Bank has such loans totaling $33.1 million or 4% of the Bank’s total loan portfolio. The Bank expects to continue to expand its consumer lending as opportunities present themselves.
Director and Insider Loans.
Management believes that loans to Directors and Officers are prudent and within the normal course of business. These loans reflect normal credit terms and represent no more collection risk than any other loan in the portfolio.
Delinquencies
, Non-Performing
and Problem Assets.
Delinquent Loans
. As of December 31, 2018, the Bank has ten loans 90 days or more past due with a principal balance of $2,234,471 and 34 loans between 30 and 89 days past due with an aggregate principal balance of $8,318,686. The Bank generally does not accrue interest on loans past due more than 90 days.
The following table sets forth the Bank's loans that were accounted for on a non-accrual basis or 90 days or more delinquent at the dates indicated.
Delinquency Summary
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Dollars in Thousands)
|
|
Loans accounted for on a non-accrual basis
or contractually past due 90 days or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
4,136
|
|
|
$
|
4,423
|
|
|
$
|
2,060
|
|
|
$
|
2,272
|
|
|
$
|
911
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction
|
|
|
4,088
|
|
|
|
4,452
|
|
|
|
5,447
|
|
|
|
8,080
|
|
|
|
2,893
|
|
Commercial real estate
|
|
|
3,593
|
|
|
|
162
|
|
|
|
162
|
|
|
|
1,241
|
|
|
|
460
|
|
|
|
|
11,817
|
|
|
|
9,037
|
|
|
|
7,669
|
|
|
|
11,593
|
|
|
|
4,264
|
|
Non-mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
1,263
|
|
|
|
803
|
|
|
|
925
|
|
|
|
2,149
|
|
|
|
1,027
|
|
Consumer and other loans
|
|
|
2
|
|
|
|
122
|
|
|
|
38
|
|
|
|
13
|
|
|
|
-
|
|
|
|
|
1,265
|
|
|
|
925
|
|
|
|
963
|
|
|
|
2,162
|
|
|
|
1,027
|
|
Total non-accrual loans
|
|
|
13,082
|
|
|
|
9,962
|
|
|
|
8,632
|
|
|
|
13,755
|
|
|
|
5,291
|
|
Accruing loans which are contractually past
maturity or past due 90 days or more:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total past maturity or past due accruing loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total accounted for on a non-accrual basis or contractually past maturity or 90 days or more past due
|
|
$
|
13,082
|
|
|
$
|
9,962
|
|
|
$
|
8,632
|
|
|
$
|
13,755
|
|
|
$
|
5,291
|
|
Total accounted for on a non-accrual basis or contractually past maturity or 90 days or more past due as a percentage of net loans
|
|
|
1.68
|
%
|
|
|
1.58
|
%
|
|
|
1.60
|
%
|
|
|
2.79
|
%
|
|
|
1.08
|
%
|
Total accounted for on a non-accrual basis or contractually past maturity or 90 days or more past due as a percentage of total assets
|
|
|
1.36
|
%
|
|
|
1.24
|
%
|
|
|
1.25
|
%
|
|
|
2.11
|
%
|
|
|
0.84
|
%
|
Non-Performing Assets
. Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of all interest at contractual rates becomes doubtful. As part of such review, mortgage loans are placed on non-accrual status generally when either principal or interest is more than 90 days past due, or when other circumstances indicate the collection of principal or interest is in doubt. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.
Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is deemed a foreclosed asset held for sale until such time as it is sold. When a foreclosed asset held for sale is acquired it is recorded at its estimated fair value, less estimated selling expenses. Valuations of such foreclosed assets are periodically performed by management, and any subsequent decline in estimated fair value is charged to operations.
The following table shows the principal amount of non-performing loans (i.e. loans that are not performing under regulatory guidelines) and all foreclosed assets, including assets acquired in settlement of loans and the resulting impact on interest income for the periods then ended.
Non-Performing Assets
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Non-accrual loans:
|
|
(Dollars in Thousands)
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
$
|
4,136
|
|
|
$
|
4,423
|
|
|
$
|
2,060
|
|
|
$
|
2,272
|
|
|
$
|
911
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction
|
|
|
4,088
|
|
|
|
4,452
|
|
|
|
5,447
|
|
|
|
8,080
|
|
|
|
2,893
|
|
Commercial real estate
|
|
|
3,593
|
|
|
|
162
|
|
|
|
162
|
|
|
|
1,241
|
|
|
|
460
|
|
|
|
|
11,817
|
|
|
|
9,037
|
|
|
|
7,669
|
|
|
|
11,593
|
|
|
|
4,264
|
|
Non-mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
1,263
|
|
|
|
803
|
|
|
|
925
|
|
|
|
2,149
|
|
|
|
1,027
|
|
Consumer and other loans
|
|
|
2
|
|
|
|
122
|
|
|
|
38
|
|
|
|
13
|
|
|
|
-
|
|
|
|
|
1,265
|
|
|
|
925
|
|
|
|
963
|
|
|
|
2,162
|
|
|
|
1,027
|
|
Total non-accrual loans
|
|
|
13,082
|
|
|
|
9,962
|
|
|
|
8,632
|
|
|
|
13,755
|
|
|
|
5,291
|
|
Real estate and other assets acquired in settlement of loans
|
|
|
1,127
|
|
|
|
283
|
|
|
|
2,682
|
|
|
|
2,392
|
|
|
|
3,165
|
|
Total non-performing assets
|
|
$
|
14,209
|
|
|
$
|
10,245
|
|
|
$
|
11,314
|
|
|
$
|
16,147
|
|
|
$
|
8,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans as a percentage of net loans
|
|
|
1.68
|
%
|
|
|
1.58
|
%
|
|
|
1.60
|
%
|
|
|
2.79
|
%
|
|
|
1.08
|
%
|
Total non-performing assets as a percentage of total assets
|
|
|
1.47
|
%
|
|
|
1.28
|
%
|
|
|
1.64
|
%
|
|
|
2.47
|
%
|
|
|
1.35
|
%
|
Impact on interest income for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income that would have been recorded on non-accruing loans
|
|
$
|
299
|
|
|
$
|
95
|
|
|
$
|
90
|
|
|
$
|
573
|
|
|
$
|
337
|
|
Problem Assets.
Federal regulations require that the Bank review and classify its assets on a regular basis to determine those assets considered to be of lesser quality. In addition, in connection with examinations of insured institutions, bank examiners have authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. "Substandard assets" must have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. "Doubtful assets" have the weaknesses of substandard assets 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. An asset classified "loss" is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations have also created a “special mention” category, described as assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving management's close attention. Federal regulations require the Bank to establish general allowances for loan losses from assets classified as substandard or doubtful. If an asset or portion thereof is classified as loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss or charge off such amount. A portion of general loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital.
For management purposes, the Bank also designates certain loans for additional attention. Such loans are called “Special Mention” and have identified weaknesses, that if the situation deteriorates, the loans would merit a substandard classification.
The following table shows the aggregate amounts of the Bank's classified assets as of December 31, 2018.
|
|
Special Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
(Dollars in Thousands)
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
2
|
|
|
$
|
372
|
|
|
|
39
|
|
|
$
|
5,453
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
41
|
|
|
$
|
5,825
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
5,952
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
5,952
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
4,179
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
4,179
|
|
Commercial real estate
|
|
|
3
|
|
|
|
5,524
|
|
|
|
28
|
|
|
|
6,911
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
12,435
|
|
Commercial
|
|
|
10
|
|
|
|
3,031
|
|
|
|
25
|
|
|
|
1,814
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
4,845
|
|
Consumer and Other
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
405
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
405
|
|
Total loans
|
|
|
15
|
|
|
|
8,927
|
|
|
|
106
|
|
|
|
24,714
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121
|
|
|
|
33,641
|
|
Foreclosed assets held-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Land and other assets
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
1,127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
1,127
|
|
Total foreclosed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
1,127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
1,127
|
|
Total
|
|
|
15
|
|
|
$
|
8,927
|
|
|
|
113
|
|
|
$
|
25,841
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
128
|
|
|
$
|
34,768
|
|
Allowance for Loan Losses
and Provision for Loan Losses
The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and the general economy. Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience, and other factors that warrant recognition in providing for an adequate loan loss allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and valuation of foreclosed assets held for sale. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
As of December 31, 2018, the Bank's total allowance for loan losses was $8.0 million or 1.02% of gross loans outstanding (excluding mortgage loans held for sale), an increase of $888,151 from December 31, 2017. The Bank experienced loan charge offs in excess of recoveries as management charged off specific loans that had been previously identified and classified as impaired. This allowance reflects not only management's determination to maintain an allowance for loan losses consistent with regulatory expectations for non-performing or problem assets, but also reflects the regional economy and the Bank's policy of evaluating the risks inherent in its loan portfolio.
Management records a provision for loan losses to bring the total allowance for loan losses to a level considered adequate based on the Bank’s internal analysis and methodology. During 2018, the Bank recorded a provision for loan loss expense, as shown in the table below. Management anticipates the need to continue adding to the allowance through charges to provision for loan losses as growth in the loan portfolio or other circumstances warrant.
In accordance with generally accepted accounting principles 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 $2.45 million at December 31, 2018.
The following tables set forth certain information concerning the Bank's allowance for loan losses for the periods indicated.
Allowance for Loan Losses
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Dollars in Thousands)
|
|
Beginning balance
|
|
$
|
7,107
|
|
|
$
|
5,742
|
|
|
$
|
5,812
|
|
|
$
|
6,589
|
|
|
$
|
7,802
|
|
Gross loan charge offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
(8
|
)
|
|
|
(11
|
)
|
|
|
(47
|
)
|
|
|
(99
|
)
|
|
|
(127
|
)
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,222
|
)
|
|
|
(1,233
|
)
|
|
|
(411
|
)
|
Commercial real estate
|
|
|
(37
|
)
|
|
|
(72
|
)
|
|
|
(69
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
|
(45
|
)
|
|
|
(83
|
)
|
|
|
(1,338
|
)
|
|
|
(1,332
|
)
|
|
|
(547
|
)
|
Non-mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
(110
|
)
|
|
|
(240
|
)
|
|
|
(171
|
)
|
|
|
-
|
|
|
|
(2,018
|
)
|
Consumer and other loans
|
|
|
(382
|
)
|
|
|
(213
|
)
|
|
|
(190
|
)
|
|
|
(119
|
)
|
|
|
(150
|
)
|
|
|
|
(492
|
)
|
|
|
(453
|
)
|
|
|
(361
|
)
|
|
|
(119
|
)
|
|
|
(2,168
|
)
|
Total charge offs
|
|
|
(537
|
)
|
|
|
(536
|
)
|
|
|
(1,699
|
)
|
|
|
(1,451
|
)
|
|
|
(2,715
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One to four family
|
|
|
32
|
|
|
|
19
|
|
|
|
34
|
|
|
|
20
|
|
|
|
9
|
|
Multi-family
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Construction
|
|
|
97
|
|
|
|
74
|
|
|
|
91
|
|
|
|
10
|
|
|
|
5
|
|
Commercial real estate
|
|
|
2
|
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
99
|
|
|
|
|
131
|
|
|
|
93
|
|
|
|
157
|
|
|
|
30
|
|
|
|
113
|
|
Non-mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
17
|
|
|
|
12
|
|
|
|
8
|
|
|
|
4
|
|
|
|
65
|
|
Consumer and other loans
|
|
|
53
|
|
|
|
46
|
|
|
|
89
|
|
|
|
40
|
|
|
|
49
|
|
|
|
|
70
|
|
|
|
58
|
|
|
|
97
|
|
|
|
44
|
|
|
|
114
|
|
Total recoveries
|
|
|
201
|
|
|
|
151
|
|
|
|
254
|
|
|
|
74
|
|
|
|
227
|
|
Net loan charge-offs
|
|
|
(336
|
)
|
|
|
(385
|
)
|
|
|
(1,445
|
)
|
|
|
(1,377
|
)
|
|
|
(2,488
|
)
|
Provision charged to expense
|
|
|
1,225
|
|
|
|
1,750
|
|
|
|
1,375
|
|
|
|
600
|
|
|
|
1,275
|
|
Ending balance
|
|
$
|
7,996
|
|
|
$
|
7,107
|
|
|
$
|
5,742
|
|
|
$
|
5,812
|
|
|
$
|
6,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans, net
|
|
|
0.04
|
%
|
|
|
0.06
|
%
|
|
|
0.28
|
%
|
|
|
0.27
|
%
|
|
|
0.53
|
%
|
Allowance for loan losses as a percentage of average loans, net
|
|
|
1.03
|
%
|
|
|
1.17
|
%
|
|
|
1.12
|
%
|
|
|
1.16
|
%
|
|
|
1.41
|
%
|
Allowance for loan losses as a percentage of total non-performing loans
|
|
|
61
|
%
|
|
|
71
|
%
|
|
|
67
|
%
|
|
|
42
|
%
|
|
|
125
|
%
|
Allocation of Allowance for Loan Losses
The following table shows the amount of the allowance allocated to the mortgage and non-mortgage loan categories and the respective percent of that loan category to total loans.
|
|
As of
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(Dollars in thousands)
|
|
Mortgage Loans
|
|
$
|
6,337
|
|
|
|
79
|
%
|
|
$
|
4,577
|
|
|
|
64
|
%
|
|
$
|
4,126
|
|
|
|
72
|
%
|
|
$
|
3,770
|
|
|
|
65
|
%
|
|
$
|
4,349
|
|
|
|
66
|
%
|
Non-Mortgage Loans
|
|
|
1,659
|
|
|
|
21
|
%
|
|
|
2,530
|
|
|
|
36
|
%
|
|
|
1,616
|
|
|
|
28
|
%
|
|
|
2,042
|
|
|
|
35
|
%
|
|
|
2,240
|
|
|
|
34
|
%
|
Total
|
|
$
|
7,996
|
|
|
|
100
|
%
|
|
$
|
7,107
|
|
|
|
100
|
%
|
|
$
|
5,742
|
|
|
|
100
|
%
|
|
$
|
5,812
|
|
|
|
100
|
%
|
|
$
|
6,589
|
|
|
|
100
|
%
|
Investment Activities
The investment policy of the Company, which is established by the Company’s Board of Directors and reviewed by the Asset/Liability Committee of the Company’s Board of Directors, is designed primarily to provide and maintain liquidity, to generate a favorable return on investments, to help mitigate interest rate and credit risk, and to complement the Bank's lending activities. The policy currently provides for held-to-maturity and available-for-sale investment security portfolios. The Company does not currently engage in trading investment securities and does not anticipate doing so in the future. As of December 31, 2018, the Company has investment securities with an amortized cost of $88.1 million and an estimated fair value of $86.3 million. See Note 1 of the “Notes to Consolidated Financial Statements” for description of the accounting policy for investments. Based on the carrying value of these securities, $86.3 million, or 99.9%, of the Company’s investment securities portfolio are available-for-sale.
From time to time, the Company will sell a security to change its interest rate risk profile or restructure the portfolio and its cash flows. In 2018, the Company sold $15.0 million in securities and recognized $8,091 of losses.
The Company has the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, corporate securities, trust preferred securities, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements, and sale of federal funds.
Composition of Investment Securities Portfolio
The following tables set forth the amortized cost and approximate fair market values of the available-for-sale securities and held-to-maturity securities.
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Approximate
Fair Value
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
|
$
|
3,000,000
|
|
|
$
|
18,927
|
|
|
$
|
-
|
|
|
$
|
3,018,927
|
|
Municipals
|
|
|
34,470,648
|
|
|
|
10,581
|
|
|
|
(710,709
|
)
|
|
|
33,770,520
|
|
Government sponsored mortgage-backed securities and SBA loan pools
|
|
|
50,632,011
|
|
|
|
81,999
|
|
|
|
(1,237,260
|
)
|
|
|
49,476,750
|
|
HELD-TO-MATURITY SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored mortgage-backed securities
|
|
|
11,794
|
|
|
|
136
|
|
|
|
(80
|
)
|
|
|
11,850
|
|
|
|
$
|
88,114,453
|
|
|
$
|
111,643
|
|
|
$
|
(1,948,049
|
)
|
|
$
|
86,278,047
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Approximate
Fair Value
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
|
$
|
3,000,000
|
|
|
$
|
65,000
|
|
|
$
|
-
|
|
|
$
|
3,065,000
|
|
Municipals
|
|
|
33,908,207
|
|
|
|
253,872
|
|
|
|
(263,621
|
)
|
|
|
33,898,458
|
|
Government sponsored mortgage-backed securities and SBA loan pools
|
|
|
45,414,845
|
|
|
|
9,283
|
|
|
|
(908,913
|
)
|
|
|
44,515,215
|
|
HELD-TO-MATURITY SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored mortgage-backed securities
|
|
|
16,457
|
|
|
|
327
|
|
|
|
(55
|
)
|
|
|
16,729
|
|
|
|
$
|
82,339,509
|
|
|
$
|
328,482
|
|
|
$
|
(1,172,589
|
)
|
|
$
|
81,495,402
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
(Losses)
|
|
|
Approximate
Fair Value
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVAILABLE-FOR-SALE SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
|
$
|
7,003,986
|
|
|
$
|
54,050
|
|
|
$
|
(4,514
|
)
|
|
$
|
7,053,522
|
|
Municipals
|
|
|
39,357,506
|
|
|
|
65,673
|
|
|
|
(1,085,654
|
)
|
|
|
38,337,525
|
|
Government sponsored mortgage-backed securities and SBA loan pools
|
|
|
48,115,793
|
|
|
|
19,432
|
|
|
|
(1,127,037
|
)
|
|
|
47,008,188
|
|
HELD-TO-MATURITY SECURITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored mortgage-backed securities
|
|
|
27,528
|
|
|
|
625
|
|
|
|
-
|
|
|
|
28,153
|
|
|
|
$
|
94,504,813
|
|
|
$
|
139,780
|
|
|
$
|
(2,217,205
|
)
|
|
$
|
92,427,388
|
|
The following tables set forth certain information regarding the weighted average yields and maturities of the Bank's investment securities portfolio as of December 31, 2018.
Investment Portfolio Maturities and Average Weighted Yields
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Approximate
Fair Value
|
|
Due in one to five years
|
|
|
428,963
|
|
|
|
2.15
|
%
|
|
|
430,802
|
|
Due in five to ten years
|
|
|
11,905,343
|
|
|
|
2.86
|
%
|
|
|
11,738,780
|
|
Due after ten years
|
|
|
25,136,342
|
|
|
|
2.55
|
%
|
|
|
24,619,865
|
|
Government sponsored mortgage-backed securities and SBA loan pools not due on a single maturity date
|
|
|
50,643,805
|
|
|
|
2.54
|
%
|
|
|
49,488,600
|
|
|
|
$
|
88,114,453
|
|
|
|
2.53
|
%
|
|
$
|
86,278,047
|
|
|
|
After One
Through Five
Years
|
|
|
After Five
Through Ten
Years
|
|
|
After Ten
Years
|
|
|
Securities
Not Due on a
Single
Maturity Date
|
|
|
Total
|
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
|
$
|
-
|
|
|
$
|
3,018,927
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,018,927
|
|
Municipals
|
|
|
430,802
|
|
|
|
8,719,853
|
|
|
|
24,619,865
|
|
|
|
-
|
|
|
|
33,770,520
|
|
Government sponsored mortgage-backed securities and SBA loan pools
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,488,600
|
|
|
|
49,488,600
|
|
|
|
$
|
430,802
|
|
|
$
|
11,738,780
|
|
|
$
|
24,619,865
|
|
|
$
|
49,488,600
|
|
|
$
|
86,278,047
|
|
Sources of Funds
General
. The Company's primary sources of funds are retail and commercial deposits, FHLB borrowings, amortization and prepayments of loans and amortization, prepayments and maturities of investment securities. Secondary sources of funds are brokered deposits, internet deposits and federal funds lines of credit from correspondent banks.
Deposits.
The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank has concentrated on a diverse deposit mix, such that transaction accounts make a greater percent of funding than in the past. The Bank offers various checking accounts, money markets, savings, fixed-term certificates of deposit and individual retirement accounts.
The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, local competition and competition from non-bank financial service providers. The Company closely monitors its deposit position and mix to manage interest rate risk and net interest margin. The Bank's deposits are typically obtained from the areas in which its offices are located. The Bank relies primarily on experienced customer service, long-term relationships with customers and convenient banking center locations to attract and retain a high level of core deposits.
Deposit Account Types
The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated (dollars in thousands).
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Average
|
|
|
|
|
|
|
Percent
|
|
|
Average
|
|
|
|
|
|
|
Percent
|
|
|
Average
|
|
|
|
|
|
|
Percent
|
|
|
|
Interest
|
|
|
|
|
|
|
of Total
|
|
|
Interest
|
|
|
|
|
|
|
of Total
|
|
|
Interest
|
|
|
|
|
|
|
of Total
|
|
|
|
Rate
|
|
|
Amount
|
|
|
Deposits
|
|
|
Rate
|
|
|
Amount
|
|
|
Deposits
|
|
|
Rate
|
|
|
Amount
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
|
1.09
|
%
|
|
$
|
165,581
|
|
|
|
22
|
%
|
|
|
0.35
|
%
|
|
$
|
139,458
|
|
|
|
23
|
%
|
|
|
0.30
|
%
|
|
$
|
129,138
|
|
|
|
26
|
%
|
Savings
|
|
|
0.30
|
%
|
|
|
39,664
|
|
|
|
5
|
%
|
|
|
0.19
|
%
|
|
|
30,848
|
|
|
|
5
|
%
|
|
|
0.20
|
%
|
|
|
28,095
|
|
|
|
6
|
%
|
Money Market
|
|
|
0.90
|
%
|
|
|
168,845
|
|
|
|
23
|
%
|
|
|
0.73
|
%
|
|
|
187,064
|
|
|
|
31
|
%
|
|
|
0.45
|
%
|
|
|
155,530
|
|
|
|
31
|
%
|
Non-interest bearing demand
|
|
|
0.82
|
%
|
|
|
142,997
|
|
|
|
19
|
%
|
|
|
0.00
|
%
|
|
|
94,728
|
|
|
|
16
|
%
|
|
|
0.00
|
%
|
|
|
80,911
|
|
|
|
15
|
%
|
Total
|
|
|
|
|
|
|
517,087
|
|
|
|
69
|
%
|
|
|
|
|
|
|
452,098
|
|
|
|
74
|
%
|
|
|
|
|
|
|
393,674
|
|
|
|
78
|
%
|
Certificates of Deposit: (fixed-rate, fixed-term)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-11 months
|
|
|
0.91
|
%
|
|
|
139,255
|
|
|
|
19
|
%
|
|
|
0.71
|
%
|
|
|
92,349
|
|
|
|
15
|
%
|
|
|
0.75
|
%
|
|
|
65,802
|
|
|
|
13
|
%
|
12-23 months
|
|
|
1.49
|
%
|
|
|
53,954
|
|
|
|
7
|
%
|
|
|
0.99
|
%
|
|
|
39,930
|
|
|
|
7
|
%
|
|
|
0.89
|
%
|
|
|
22,328
|
|
|
|
4
|
%
|
24-35 months
|
|
|
1.95
|
%
|
|
|
34,246
|
|
|
|
4
|
%
|
|
|
1.42
|
%
|
|
|
12,472
|
|
|
|
2
|
%
|
|
|
1.24
|
%
|
|
|
12,882
|
|
|
|
3
|
%
|
36-47 months
|
|
|
2.00
|
%
|
|
|
4,172
|
|
|
|
1
|
%
|
|
|
1.49
|
%
|
|
|
6,420
|
|
|
|
1
|
%
|
|
|
1.40
|
%
|
|
|
5,106
|
|
|
|
1
|
%
|
48-59 months
|
|
|
1.39
|
%
|
|
|
843
|
|
|
|
0
|
%
|
|
|
1.46
|
%
|
|
|
3,753
|
|
|
|
1
|
%
|
|
|
1.47
|
%
|
|
|
3,655
|
|
|
|
1
|
%
|
60-71 months
|
|
|
2.05
|
%
|
|
|
58
|
|
|
|
0
|
%
|
|
|
1.34
|
%
|
|
|
339
|
|
|
|
0
|
%
|
|
|
1.37
|
%
|
|
|
1,874
|
|
|
|
0
|
%
|
72-95 months
|
|
|
1.59
|
%
|
|
|
4
|
|
|
|
0
|
%
|
|
|
1.34
|
%
|
|
|
3
|
|
|
|
0
|
%
|
|
|
1.34
|
%
|
|
|
42
|
|
|
|
0
|
%
|
Total
|
|
|
|
|
|
|
232,532
|
|
|
|
31
|
%
|
|
|
|
|
|
|
155,266
|
|
|
|
26
|
%
|
|
|
|
|
|
|
111,689
|
|
|
|
22
|
%
|
Total Deposits
|
|
|
|
|
|
$
|
749,619
|
|
|
|
100
|
%
|
|
|
|
|
|
$
|
607,364
|
|
|
|
100
|
%
|
|
|
|
|
|
$
|
505,363
|
|
|
|
100
|
%
|
Maturities of Certificates of Deposit of $100,000 or More
|
|
|
(Dollars in thousands)
|
|
|
|
As of December 31, 2018
|
|
Three months or less
|
|
$
|
44,337
|
|
Over three through six months
|
|
|
25,375
|
|
Over six through twelve months
|
|
|
43,808
|
|
Over twelve months
|
|
|
41,437
|
|
Total
|
|
$
|
154,957
|
|
Borrowings
The Company’s borrowings at December 31, 2018 consist of FHLB advances, a note payable at another financial institution and issuances of junior subordinated debentures. Other borrowings available to the Company include borrowings from the Federal Reserve Bank and Securities Sold Under Agreements to Repurchase.
Deposits are the primary source of funds for the Bank's lending activities and other general business purposes. However, during periods when the supply of lendable funds cannot meet the demand for such loans, the FHLB System, of which the Bank is a member, makes available, subject to compliance with eligibility standards, a portion of the funds necessary through loans (advances) to its members. Use of FHLB advances is a common practice, allowing the Bank to provide funding to its customers at a time when significant liquidity is not present, or at a rate advantageous relative to current market deposit rates. FHLB advances, due to their structure, allow the Bank to better manage its interest rate and liquidity risk. The following table presents certain data for FHLB advances as of the dates indicated.
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in Thousands)
|
|
Remaining maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year
|
|
$
|
105,300
|
|
|
$
|
92,200
|
|
|
$
|
43,600
|
|
One to two years
|
|
|
-
|
|
|
|
2,100
|
|
|
|
50,000
|
|
Two to three years
|
|
|
-
|
|
|
|
-
|
|
|
|
2,100
|
|
Total
|
|
$
|
105,300
|
|
|
$
|
94,300
|
|
|
$
|
95,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average rate at end of period
|
|
|
2.69
|
%
|
|
|
1.97
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average outstanding balance
|
|
$
|
96,957
|
|
|
$
|
93,942
|
|
|
$
|
71,200
|
|
Weighted average interest rate
|
|
|
2.29
|
%
|
|
|
1.78
|
%
|
|
|
1.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding as of any month end
|
|
$
|
112,800
|
|
|
$
|
116,700
|
|
|
$
|
95,700
|
|
Junior Subordinated Debentures:
On December 15, 2005, the Company completed an offering of $15 million of “Trust Preferred Securities” (defined hereinafter). The Company formed two wholly-owned subsidiaries, Guaranty Statutory Trust I (“Trust I”) and Guaranty Statutory Trust II (“Trust II”) each a Delaware statutory trust (each a “Trust”, and collectively, the “Trusts”), for the purpose of issuing the $15 million of Trust Preferred Securities. The proceeds of the sale of Trust Preferred Securities, together with the proceeds of the Trusts’ sale of their common securities to the Company, were used by each Trust to purchase certain debentures from the Company. The Company issued 30-year junior subordinated deferrable interest debentures to the Trusts in the principal amount of $5,155,000 (“Trust I Debentures”) and $10,310,000 (“Trust II Debentures”, and together with the Trust I Debentures, the “Debentures”) pursuant to the terms of Indentures dated December 15, 2005 by and between the Company and Wilmington Trust Company, as trustee. The Trust I Debentures bear interest at a fixed rate of 6.92%, payable quarterly. The Trust II Debentures bear interest at a fixed rate of 6.47% for 5 years, payable quarterly, after issuance and thereafter at a floating rate equal to the three month LIBOR plus 1.45%. The interest payments by the Company to the Trusts will be used to pay the dividends payable by the Trusts to the holders of the Trust Preferred Securities.
The Debentures mature on February 23, 2036. Subject to prior approval by the Federal Reserve Board, the Debentures and the Trust Preferred Securities are each callable by the Company or the Trusts, respectively and as applicable, at its option after five years from issuance, and sooner in the case of a special redemption at a special redemption price ranging up to 103.2% of the principal amount thereof, and upon the occurrence of certain events, such as a change in the regulatory capital treatment of the Trust Preferred Securities, either Trust being deemed an investment company or the occurrence of certain adverse tax events. In addition, the Company and the Trusts may defer interest and dividend payments, respectively, for up to five consecutive years without resulting in a default. An event of default may occur if the Company declares bankruptcy, fails to make the required payments within 30 days or breaches certain covenants within the Debentures. The Debentures are subordinated to the prior payment of any other indebtedness of the Company.
Pursuant to two guarantee agreements by and between the Company and Wilmington Trust Company, the Company issued a limited, irrevocable guarantee of the obligations of each Trust under the Trust Preferred Securities whereby the Company has guaranteed any and all payment obligations of the Trusts related to the Trust Preferred Securities including distributions on, and the liquidation or redemption price of, the Trust Preferred Securities to the extent each Trust does not have funds available.
On April 2, 2018 the Company acquired Carthage, Missouri-based Hometown Bancshares. Pursuant to a Second Supplemental Indenture dated April 2, 2018 by and among the Company, Hometown and Wilmington Trust Company, as Trustee, the Company assumed Hometown’s rights, duties and obligations under the original Indenture of a wholly owned subsidiary, Hometown Bancshares Capital Trust I, a Delaware statutory trust formed on October 29, 2002. This Trust was formed for the purposes of issuing $6.0 million of Trust Preferred Securities. Hometown issued 30-year junior subordinated deferrable interest debentures to the Trust in the principal amount of $6,186,000 (“Hometown Trust I Debentures”) pursuant to the terms of Indentures dated October 29, 2002 by and between the Company and Wilmington Trust Company, as trustee. These debentures bear interest at a floating rate equal to the three-month LIBOR plus 5.00%, payable quarterly, until May 2019. The rate from May 2019 until maturity in 2032 is a floating rate equal to the three-month LIBOR plus 6.00%, payable quarterly, with a maximum interest rate of 12.5%. The interest payments by the Company to the Trust will be used to pay the dividends payable by the Trust to the holders of the Trust Preferred Securities.
The Hometown Debentures mature on November 7, 2032. Subject to prior approval by the Federal Reserve Board, the Debentures and the Trust Preferred Securities are each callable by the Company or the Trust, respectively and as applicable, at its option after five years from issuance at 100% of principal amount plus any accrued interest. Also, upon the occurrence of certain events, such as a change in the regulatory capital treatment of the Trust Preferred Securities, the Trust being deemed an investment company or the occurrence of certain adverse tax events the Debentures and Securities are callable. In addition, the Company and the Trust may defer interest and dividend payments, respectively, for up to five consecutive years without resulting in a default. An event of default may occur if the Company declares bankruptcy, fails to make the required payments within 30 days or breaches certain covenants within the Debentures. The Debentures are subordinated to the prior payment of any other indebtedness of the Company.
Pursuant to a guarantee agreement by and between the Company and Wilmington Trust Company, the Company issued a limited, irrevocable guarantee of the obligations of each Trust under the Trust Preferred Securities whereby the Company has guaranteed any and all payment obligations of the Trusts related to the Trust Preferred Securities including distributions on, and the liquidation or redemption price of, the Trust Preferred Securities to the extent each Trust does not have funds available.
The following table sets forth certain information as to the Company's subordinated debentures issued to the Trusts at the dates indicated.
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debentures
|
|
$
|
21,761
|
|
|
$
|
15,465
|
|
|
$
|
15,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate of subordinated debentures
|
|
|
4.72
|
%
|
|
|
4.08
|
%
|
|
|
3.75
|
%
|
Note Payable to Bank
During 2018, The Company established a note payable of $5,000,000 with another financial institution. The Bank has borrowed $5.0 million on this note as of December 31, 2018. The funds were used to provide additional capital for funding Bank asset growth. The note carries a variable interest rate tied to three-month LIBOR and matures on June 28, 2020.
Federal Reserve Bank Borrowings
During 2008, the Bank established a borrowing line with Federal Reserve Bank. The Bank had the ability to borrow $53.7 million as of December 31, 2018. The Federal Reserve Bank requires the Bank to maintain collateral in relation to borrowings outstanding. The Bank had no borrowings on this line as of December 31, 2018 and 2017.
Subsidiary Activity
and Segment Information
The Company has four wholly-owned subsidiaries: (i) the Bank, the Company’s principal subsidiary and a state-chartered bank with trust powers in Missouri; (ii) Trust I; (iii) Trust II; and (iv) Hometown Trust I. As discussed in more detail above, Trust I and Trust II were formed in December 2005 for the exclusive purpose of issuing trust preferred securities to acquire junior subordinated debentures issued by the Company. Hometown Trust I was acquired in 2018 with its purpose to issue trust preferred securities to acquire junior subordinated debentures issued by Hometown Bancshares in October 2002. Those debentures are the sole assets of the Trusts. The interest payments by the Company on the debentures are the sole revenues of the Trusts and are used by the Trusts to pay the dividends to the holders of the trust preferred securities. The Company has guaranteed any and all payment obligations of the Trusts related to the trust preferred securities. Under generally accepted accounting principles, the Trusts are not consolidated with the Company.
The Bank has one service corporation subsidiary, Guaranty Financial Services of Springfield, Inc., a Missouri corporation. This service corporation, which has been inactive since February 1, 2003, had agreements with third party providers for the sale of securities and casualty insurance products.
The Company’s banking operation conducted through its principal subsidiary, the Bank, is the Company’s only reportable segment. Other information about the Company’s business segment is contained in the section captioned “Segment Information” in Note 1 to the Notes of the Consolidated Financial Statements in this report.
Return on Equity and Assets
The following table sets forth certain dividend, equity and asset ratios of the Company for the periods indicated.
|
|
Year ended
|
|
|
Year ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Dividend Payout Ratio
|
|
|
30
|
%
|
|
|
36
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Assets
|
|
|
0.77
|
%
|
|
|
0.69
|
%
|
|
|
0.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on Average Equity
|
|
|
9.35
|
%
|
|
|
6.97
|
%
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity to Assets
|
|
|
8.34
|
%
|
|
|
9.43
|
%
|
|
|
10.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS Diluted
|
|
$
|
1.64
|
|
|
$
|
1.16
|
|
|
$
|
1.27
|
|
Dividends on Common Shares
|
|
$
|
0.49
|
|
|
$
|
0.42
|
|
|
$
|
0.34
|
|
Employees
As of December 31, 2018, the Bank had 202 full-time employees and 24 part-time employees. As of December 31, 2018, the Company had no employees. None of the Bank's employees are represented by a collective bargaining group.
Competition
The Bank experiences substantial competition both in attracting and retaining deposit accounts and in the origination of loans. The Bank's primary competition consists of commercial banks, credit unions, and savings institutions.
Direct competition for deposit accounts comes from other commercial banks, credit unions, regional bank and thrift holding companies, and savings institutions located in the remainder of our Market Area. Significant competition for the Bank's other deposit products and services come from money market mutual funds, brokerage firms, insurance companies, and retail stores. Recently, online firms have offered attractive financial service products to consumers, irrespective of location. The primary factors in competing for loans are interest rates and loan origination fees and the range of services offered by various financial institutions. Our larger competitors have a greater ability to finance wide-ranging advertising campaigns through their greater capital resources. Our marketing efforts depend heavily upon referrals from officers, directors and shareholders, selective advertising in local media and direct mail solicitations. The Bank believes it is able to compete effectively in its primary Market Area by offering competitive interest rates and loan fees, and a variety of deposit products, and by emphasizing personal customer service.
Supervision and
Regulation
General
The Company and the Bank are subject to an extensive regulatory framework under federal and state law. Consequently, the Company’s growth and earnings performance may be affected by the requirements of federal and state statutes and by regulations and policies of various bank regulatory authorities, including the:
|
●
|
Board of Governors of the Federal Reserve System (“FRB”);
|
|
●
|
Missouri Division of Finance; (“MDF”);
|
|
●
|
Federal Deposit Insurance Corporation; and
|
|
●
|
Consumer Financial Protection Bureau (“CFPB”).
|
Additionally, the Company’s business may be impacted by assorted laws and rules, including:
|
●
|
anti-money laundering laws enforced by the U.S. Department of Treasury (Treasury);
|
|
●
|
taxation laws administered by the Internal Revenue Service (IRS) and state taxing authorities;
|
|
●
|
accounting rules developed by the Financial Accounting Standards Board (FASB); and
|
|
●
|
securities laws administered by the Securities and Exchange Commission (SEC) and state securities authorities.
|
Regulatory agencies often have significant discretion regarding their supervisory and enforcement activities. This comprehensive supervisory and regulatory framework significantly impacts the Company’s operations and results. Additionally, new legislation is introduced from time to time that could impact the Company and the Bank in substantial ways and the nature, extent, or impact of new statutes or regulations on the Company’s or the Bank’s operations or financial conditions cannot be predicted with any certainty.
Set forth below is a brief summary of certain material laws and regulations applicable to the Company and the Bank. These laws and regulations are primarily intended for the protection of the Bank’s customers and depositors and not for the benefit of the stockholders or creditors of the Company. The following description does not purport to be complete and is qualified in its entirety by reference to the full text of the statutes and regulations described below.
Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or “Dodd-Frank”) significantly changed the regulatory framework for financial institutions and their holding companies. Among other provisions, the Dodd-Frank Act:
|
●
|
created the CFPB, which is responsible for implementing, supervising, and enforcing compliance with consumer financial protection laws;
|
|
●
|
increased the deposit insurance coverage limit and changed the assessment base for calculating a bank’s deposit insurance assessments;
|
|
●
|
repealed the prohibition on payment of interest on demand deposits;
|
|
●
|
provided for new disclosures related to executive compensation and corporate governance and prohibited compensation arrangements that encourage inappropriate risks or that could provide excessive compensation;
|
|
●
|
imposed new capital requirements on banking institutions (see “New Capital Rules” below);
|
|
●
|
enhanced the authority of the Federal Reserve Board to examine the Company and its non-bank subsidiaries; and
|
|
●
|
imposed new requirements and restrictions on consumer mortgage banking.
|
The Dodd-Frank Act contains numerous provisions scheduled to be implemented through rulemakings by various federal regulatory agencies over a period of several years. Many, but not all, of the regulations have been issued and full implementation of the Dodd-Frank Act is still not complete. This law will continue to significantly influence the regulatory environment in which the Bank and the Company operate. As a result, the Company cannot predict the Dodd-Frank Act’s ultimate impact on the Company or the Bank at this time. Certain rules proposed or adopted under the Dodd-Frank Act are discussed throughout this section.
Minimum Capital Requirements
In July 2013, the U.S. federal banking agencies approved a final rule to comprehensively revise the regulatory capital framework for the U.S. banking sector, implementing many aspects of the framework agreed to by the International Basel Committee on Bank Supervision and incorporating changes required by the Dodd-Frank Act (the “Basel III Rule”). The capital requirements apply to all banks and savings associations, bank holding companies with more than $3 billion in assets and savings and loan holding companies (other than certain savings and loan holding companies engaged in insurance underwriting and grandfathered diversified holding companies). The Basel III Rule establishes new higher capital ratio requirements, tightens the definition of “capital,” imposes new operating restrictions on banking organizations with insufficient capital buffers, and increases the risk-weighting of certain assets. Cumulatively, these changes result in substantially more demanding capital standards for U.S. banking organizations.
The Basel III Rule distinguishes between banking organizations subject to the “advanced approaches” method of computing risk-based regulatory capital, which are those with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures, and other banking organizations that successfully opt-in (“Advanced Banks”) and other banking organizations, such as the Company and the Bank, which operate under the “standardized approach” (“Standardized Banks”). The new rules became effective for the Company and the Bank on January 1, 2015, with certain requirements to be phased-in between January 2016 and January 2019.
The Basel III Rule, among other features:
|
●
|
Introduces a new capital measure, Common Equity Tier 1 (“CET1” or “Tier 1 Common”), which is defined as common stock instruments, related surplus (net of Treasury stock), and retained earnings, subject to certain regulatory adjustments; and
|
|
●
|
Requires banking institutions to maintain:
|
|
o
|
a new minimum ratio of CET1 to risk-weighted assets of at least 4.5% (plus a capital conservation buffer);
|
|
o
|
a minimum amount of Tier 1 capital (the sum of CET1 and Additional Tier 1 capital) to risk-weighted assets of at least 6%, which is an increase from 4% (plus a capital conservation buffer);
|
|
o
|
a total capital (the sum of Tier 1 and Tier 2 capital) ratio of at least 8% of risk-weighted assets (plus a capital conservation buffer); and
|
|
o
|
a minimum leverage ratio of Tier 1 capital of 4%. Proposed CBLR to likely add new ratios/will discuss with HUSCH regarding proposal if necessary to discuss here
|
In addition, the Basel III Rule requires that banking organizations maintain a “capital conservation buffer” comprised of CET1 in order to avoid restrictions on the ability to make capital distributions (including dividends and stock purchases) and pay discretionary bonuses to executive officers. The capital conservation buffer is equal to 2.5% of risk-weighted assets, in addition to the minimum CET1, Tier 1, and total capital ratios. The capital conservation buffer will be phased-in beginning at 0.625% of risk-weighted assets on January 1, 2016, and increasing each subsequent year by an additional 0.625%, to reach the final level of 2.5% of risk-weighted assets on January 1, 2019. Accordingly, factoring in the capital conservation buffer, the minimum ratios noted above increase to 7% for CET1, 8.5% for Tier 1 capital, and 10.5% for total capital.
Furthermore, the Basel III Rule includes more restrictive definitions for the components of capital. For example, cumulative perpetual preferred stock and trust preferred securities have been phased-out of Tier 1 capital. However, for smaller entities with less than $15 billion in assets as of December 31, 2009, such as the Bank, the final rule permanently grandfathers as Tier 1 capital trust preferred securities and similar instruments issued by such entities prior to May 19, 2010, until such entity exceeds $15 billion in assets. The final Basel III Rule provides entities such as the Company and the Bank with a one time “opt-out” right to continue excluding accumulated other comprehensive income (“AOCI”) from CET1 capital. This opt-out was required to be made in the first quarter of 2015 and the Company and Bank made this election. Accordingly, the Bank and the Company need not include AOCI in CET1 capital going forward. The rule also requires that goodwill and certain other intangible assets, other than mortgage servicing assets, net of associated deferred tax liabilities, be deducted from CET1 capital. Additionally, certain deferred tax assets and mortgage servicing assets must be deducted from CET1 capital if such assets exceed a certain percentage of an institution’s CET1 capital. Generally, greater deductions from CET1 reduce an institution’s capital base.
Moreover, the Basel III Rule changes the risk-weightings for certain assets that are used to calculate capital ratios. All else being equal, a higher risk weight results in a higher risk-weighted asset amount which, in turn, gives rise to a lower risk-based capital ratio. The final rule assigns a higher risk-weighting of 150% (up from 100%) for exposures that are more than 90 days past due and assigns a higher risk-weighting of 150% (up from 100%) for high-volatility commercial real estate loans, which are credit facilities that, prior to conversion to permanent financing, finance or have financed the acquisition, development, or construction of real property, subject to certain exclusions. Although initially contemplated, there was no change to the risk-weighting treatment of residential mortgage loans in the final Basel III Rule.
Although the Basel III Rule is more stringent than previous capital rules, the Basel III Rule has had minimal impact on the Company and the Bank, to date. The Company and the Bank have a strong capital base and currently maintain adequate capital to meet the new standards.
A proposed rule issued on February 8, 2019 by federal banking regulators may provide a simpler method of measuring adequate capital ratios for community banking organizations. The proposal applies to depository institutions and companies holding less than $10 billion in combined assets: (i) meeting risk-based qualifying criteria; and (ii) maintaining a community banking leverage ratio (“CBLR”) of greater than 9 percent. Under the proposed CBLR rule, qualifying institutions would be eligible to opt into the CBLR framework. Opting in would mean the institution would need to maintain a ratio of greater than 9 percent and regulators would deem the institution well capitalized under the agencies’ capital rule. It is unclear if the federal banking regulators will issue a final rule and, even if they do, the final rule may not apply to us and provide relief from federal banking capital requirements.
Nonetheless, federal banking guidelines provide that financial institutions experiencing significant growth could be expected to maintain capital levels above the minimum requirements without significant reliance on intangible assets. Additionally, higher capital levels could be required under certain circumstances, such as situations involving interest rate risk, risk from concentrations of credit, or nontraditional activities. Accordingly, the Company and the Bank could be required to maintain higher capital levels in the future even if the federal banking regulators issue a final CBLR rule.
Regulation of the Bank
General
. The Bank, as a Missouri-chartered non-member depository trust company, is primarily regulated by the MDF and FDIC. The Bank is subject to extensive federal and state regulatory oversight in all areas of banking operations, including, but not limited to, lending activities, investments, loans, deposits, interest rates payable on deposits, establishment of branches, corporate restructuring, and capital adequacy. The Bank is also subject to certain reserve requirements promulgated by the FRB.
The MDF, in conjunction with the FDIC, regularly examines the Bank and reports to the Bank's Board of Directors on any deficiencies that are found in the Bank's operations. The Bank must also file reports with the MDF and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other banks or savings institutions. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities and examination policies. Regulation by these agencies is designed to protect the Bank’s depositors and not the Company’s shareholders.
Insurance of Deposit Accounts and Assessments.
The deposit accounts held by the Bank are insured by the DIF, as part of the FDIC. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250,000 per insured depositor, retroactive to January 1, 2009. The Dodd-Frank Act also increased the minimum ratio of net worth to insured deposits of the DIF from 1.15% to 1.35%.
A bank's insurance assessment is determined quarterly by multiplying its assessment rate by its assessment base. Per FDIC rules, a bank’s assessment base is the institution’s average consolidated total assets minus its average tangible equity. The FDIC has adopted a risk-based system for assessment rates. For banks with less than $10 billion in assets, such as the Bank, the risk classification is based on the Bank’s capital levels and level of supervisory risk. Assessment rates are subject to adjustment and (1) decrease for issuance of long-term unsecured debt (including senior unsecured debt and subordinated debt); (2) increase for holdings of long-term unsecured or subordinated debt issued by other insured banks; and (3) for banks that are not well-rated or not well-capitalized, increase for significant holdings of brokered deposits.
The FDIC may terminate a bank’s deposit insurance if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Regulatory Capital Requirements and Prompt Corrective
Action.
The FDIC is required to take prompt corrective action if an insured depository institution, such as the Bank, does not meet its minimum capital requirements. The FDIC has established five capital tiers: “well-capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”. A depository institution’s capital tier depends upon its capital levels in relation to various relevant capital measures, which, among others, include a Tier 1 and total risk-based capital measure and a leverage ratio capital measure. The Prompt Corrective Action rules were amended effective January 1, 2015 to incorporate changes under the Basel III Rule, including the CET1 requirements, and to raise capital requirements for certain categories. An insured financial institution is considered:
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“Well-capitalized” if it has a Tier 1 leverage ratio of 5% or greater, a CET1 to risk-based capital ratio of 6.5% or greater, a Tier 1 to risk-based capital ratio of 8% or greater, a total risk-based capital ratio of 10% or greater and is not subject to any written agreement, order, capital directive, or prompt corrective action directive;
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“Adequately capitalized” if it has it has a Tier 1 leverage ratio of 4% or greater, a CET1 to risk-based capital ratio of 4.5% or greater, a Tier 1 to risk-based capital ratio of 6% or greater, and a total risk-based capital ratio of 8% or greater;
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“Undercapitalized” if it has a Tier 1 leverage ratio of less than 4%, a CET1 to risk-based capital ratio of less than 4.5%, a Tier 1 to risk-based capital ratio of less than 6% and a total risk-based capital ratio of less than 8%;
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“Significantly undercapitalized” if it has a Tier 1 leverage ratio of less than 3%, a CET1 to risk-based capital ratio of less than 3%, a Tier 1 to risk-based capital ratio of less than 4%, and a total risk-based capital ratio of less than 6%; and
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“Critically undercapitalized” if it has a tangible equity capital to total assets ratio equal to or less than 2%.
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The FDIC may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. It is also permitted to require an adequately capitalized or undercapitalized institution to comply with supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution. An institution may be reclassified if the FDIC determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
Federal banking agencies are required to take prompt corrective action to resolve capital deficiencies at insured depository institutions. Failure to meet the capital guidelines could subject a bank to a variety of enforcement actions, including the issuance of a capital directive, prohibition on paying dividends or management fees, prohibition on accepting brokered deposits, and restrictions on paying bonuses or increasing compensation for executive officers. For critically undercapitalized institutions, a receiver may be appointed.
The Bank met its minimum capital adequacy guidelines, and the Bank was categorized as “well-capitalized”, as of December 31, 2018. Applicable capital and ratio information is contained under the section titled “Regulatory Matters” in Note 1 to the “Notes of the Consolidated Financial Statements” in this report.
Safety and Soundness Standards
. The federal bank regulators have adopted guidelines to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest-rate-risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits and other operational and managerial standards. The guidelines provide standards in each area and an institution must establish its own procedures to achieve such goals.
If an institution fails to meet a standard, a regulator may require the institution to submit an acceptable plan to achieve compliance with the standard. If an institution fails to submit an acceptable plan or fails to implement an accepted plan, an agency must, by order, require the institution to correct the deficiency. The agency may, and in some cases must, take other supervisory actions until the deficiency has been corrected.
Federal Home Loan Bank System.
The Bank is a member of the FHLB of Des Moines, which is one of 11 regional FHLBs. The FHLB system’s primary purpose is to provide stable funding to member institutions that such institutions in turn use to make loans to families, farms and businesses. The FHLBs are overseen by the Federal Housing Finance Agency (“FHFA”). As a member, the Bank is required to purchase and maintain a minimum investment in the stock of the FHLB. As of December 31, 2018, the Bank was in compliance with this requirement.
Dividend Limitations
. The amount of dividends that the Bank may pay is subject to various regulatory limitations. Under federal law, an FDIC-insured institution may not pay dividends if it is undercapitalized or if payment would cause it to be undercapitalized. If the FDIC believes that a bank is engaged in, or about to engage in, an unsafe or unsound practice, the FDIC may require, after notice and hearing, that the bank cease and desist from that practice. In addition, under Missouri law, the Bank may pay dividends to the Company only from a portion of its undivided profits and may not pay dividends if its capital is impaired. Additionally, under Missouri statute, dividends paid by the Bank are restricted by a statutory formula, which provides for the maintenance of a surplus fund and prohibits the payment of dividends which would impair the surplus fund.
Anti-Money Laundering and Anti-Terrorism Regulation.
The Bank Secrecy Act (“BSA”) establishes the framework for anti-money laundering (“AML”) obligations imposed on U.S. financial institutions. The purpose of the BSA is to prevent banks and other financial services providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, drug trafficking, money laundering, and other crimes. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) amended the BSA and imposes a number of obligations on banks, including the requirement to implement policies, procedures and controls reasonably designed to detect and report instances of money laundering and terrorism financing. The USA Patriot Act also requires financial institutions to develop written customer identification programs. In addition, the U.S. Department of Treasury’s Office of Foreign Asset Controls (“OFAC”) administers and enforces economic and trade sanctions based on U.S. foreign policy and national security against entities such as targeted foreign countries and terrorists.
Consumer Protection Laws.
In connection with its banking activities, the Bank is subject to a number of federal and state laws designed to protect consumers in their transactions with banks. These laws include, but are not limited to, the Equal Credit Opportunity Act (“ECOA”), Fair Credit Reporting Act (“FCRA”), Fair and Accurate Credit Transaction Act of 2003 (“FACTA”), Gramm-Leach-Bliley Act (“GLBA”), Electronic Funds Transfer Act (“EFTA”), Home Mortgage Disclosure Act (“HMDA”), Real Estate Settlement Procedures Act (“RESPA”), and Truth in Lending Act (“TILA”), and their various state counterparts. In addition, the Dodd-Frank Act prohibits unfair, deceptive, or abusive acts or practices (“UDAAP”). Moreover, several federal laws, including GLBA, FCRA, and FACTA, regulate consumer financial privacy and restrict the sharing of consumer financial information. The Bank also must comply with various state statutes related to maintaining the security of consumer financial information and take steps to prevent and report data breaches if they arise.
Transactions with Affiliates and Insiders.
Federal law imposes certain limitations on the ability of a bank to engage in “covered transactions” with affiliates. The Company is an affiliate of the Bank for purposes of these restrictions. The definition of “covered transactions,” which was expanded under the Dodd-Frank Act, includes extensions of credit to affiliates, investments in stock or other securities of affiliates, and acceptance of the stock or other securities of an affiliate as collateral for loans. Additionally, federal law prohibits institutions from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same as, or at least as favorable to the Bank as, those prevailing at the time for comparable transactions with non-affiliated companies. Federal law also restricts the Bank’s ability to extend credit to its executive officers, directors, principal shareholders, and their related interests, including that such credit extensions must be made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated third parties, and not involve more than the normal risk of repayment or present other unfavorable features.
Trans
action
Account Reserve Requirements.
The FRB requires insured depository institutions to maintain reserves against specified deposit liabilities. Reservable liabilities consist of net transaction accounts, non-personal time deposits, and Eurocurrency liabilities. For 2018, the first $16.0 million of otherwise reservable balances are exempt from the reserve requirements; the reserve requirement is 3% for net transaction accounts between $16.0 million and $122.3 million; and the reserve requirement is 10% for net transaction accounts in excess of $122.3 million. These reserve requirements are subject to annual adjustment.
Commercial Real Estate Lending.
The Bank may be subject to greater scrutiny from federal banking regulators based on its concentration of commercial real estate (“CRE”) loans. Federal regulators have issued guidance to address concerns about CRE concentrations and to provide expectations for managing a concentrated portfolio. The guidance includes development and construction loans for which repayment is dependent upon the sale of the property, as well as properties for which repayment is dependent upon rental income.
Per the guidance, institutions that may have significant CRE concentration risk are those that have experienced rapid growth in CRE lending, have notable exposures to a specific type of CRE, or are approaching or exceed the following supervisory criteria: (i) total loans for construction, land development, and other land represent 100% or more of the institution’s total capital; or (ii) total CRE loans represent 300% or more of the institution’s total capital, and the outstanding balance of the institution’s CRE loan portfolio has increased by 50% or more during the prior 36 months. If a bank’s portfolio goes outside of these general guidelines, the bank must engage in heightened risk management practices.
Residential Real Estate Lending.
The CFPB has issued rules implementing several Dodd-Frank requirements regarding residential mortgage lending. Lenders must assess a borrower’s ability to repay the mortgage-related obligation and must consider certain underwriting factors. Lenders also receive certain protections from liability if they make “qualified mortgages.” Additionally, new rules prohibit certain loan features, such as negative amortization, interest-only payment, balloon payments, and restrict points and fees paid by a borrower and prepayment penalties.” CFPB also issued servicing standards applying to mortgage servicers generally but in particular with defaulted loans.
Volcker Rule.
The Volcker Rule, issued by the federal banking and securities regulators pursuant to the Dodd-Frank Act, generally prohibits insured depository institutions and their affiliated companies from: (i) short-term proprietary trading in securities and other financial instruments; and (ii) sponsoring or acquiring or retaining an ownership interest in private equity and hedge funds, subject to certain exceptions.
Community Reinvestment Act.
Under the Community Reinvestment Act of 1977 (“CRA”), the Bank has a continuing and affirmative obligation, consistent with safe and sound operation, to help meet the credit needs of its communities, including low- and moderate-income neighborhoods. As part of its examinations, the FDIC evaluates the Bank’s record in meeting these obligations. CRA ratings are also taken into account by regulators in evaluating applications for mergers, acquisitions, or to open a new branch or facility. Based on its most recent CRA compliance examinations, the Bank has received a “Satisfactory” CRA rating.
Regulation of the Company
General.
The Company is a registered bank holding company subject to regulation and supervision by the FRB under the Bank Holding Company Act of 1956 (“BHCA”). The Company is required to file periodic reports of its operations with the FRB. Additionally, the Company is legally obligated to act as a source of strength to the Bank and to commit resources to support the Bank.
Restrictions on Dividends and Stock Repurchases
.
The Company’s source of funds (including cash flow to pay dividends to stockholders) is dividends paid to it by the Bank. The right of the Company to receive dividends or other distributions from the Bank is subject to the prior claims of creditors of the Bank, including depositors, and applicable regulatory restrictions, including prior approval in certain situations.
The amount of dividends that the Company may pay is subject to various regulatory limitations, including the requirement to maintain adequate capital. Financial institutions are generally prohibited from paying dividends if, following payment of dividends, the institution would be considered undercapitalized. Additionally, under the Basel III Rule, institutions seeking to pay dividends must maintain the required capital conservation buffer. Also, the FRB strongly encourages financial institutions to consult with the agency prior to paying dividends. The FRB has indicated that a board of directors should “eliminate, defer, or severely limit” dividends if:
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the bank holding company’s net income available to shareholders for the past four quarters, net of dividends paid during that period, is not sufficient to fully fund the dividends;
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the bank holding company’s rate of earnings retention is inconsistent with capital needs and overall macroeconomic outlook; or
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the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
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Banking regulators also have the authority to prohibit banks and bank holding companies from paying a dividend if such payment would be an unsafe or unsound practice.
Generally, a bank holding company must notify the FRB prior to the purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid for all such purchases during the preceding twelve months is equal to 10% or more of the bank holding company’s consolidated net worth. Prior approval may not be required if the bank holding company, among other things, will meet or exceed “well capitalized” thresholds both before and after the repurchase, is considered “well managed,” and is not subject to any unresolved supervisory issues. Additionally, bank holding companies are expected to consult with the FRB before redeeming or repurchasing stock if:
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the bank holding company is at “significant risk” of developing a financial weakness;
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the bank holding company is considering expansion (either acquisition or new activities); and
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if such redemption or repurchase will cause a net reduction in capital from the beginning of the quarter in which the redemption or repurchase occurs.
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The FRB may disapprove of the purchase or redemption if it determines, among other things, that the proposal would constitute an unsafe or unsound business practice.
Support of Banking Subsidiaries.
Under FRB policy, the Company is expected to act as a source of financial strength to the Bank and, where required, to commit resources to support the Bank. Financial support from the Company may be required even when the Company might not otherwise be inclined to provide it. Moreover, if the Bank should become undercapitalized, the Company would be required to guarantee the Bank's compliance with its capital restoration plan in order for such plan to be accepted by the FDIC.
Acquisitions, Activities, and Changes in Control
. Under the BHCA, the Company must obtain the prior approval of the FRB before the Company may: (i) acquire substantially all the assets of a bank; (ii) acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank; or (iii) or merge or consolidate with any other bank holding company. The BHCA also restricts the Company’s ability to acquire direct or indirect ownership or control of 5% or more of any class of voting shares of any nonbanking corporation. The FRB is required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. Consideration of financial resources generally focuses on capital adequacy. Consideration of convenience and needs includes the involved institutions’ performance under the CRA. The FRB may not approve a transaction if it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade, unless the anti-competitive effects are clearly outweighed by the public interest in meeting the needs and convenience of the community to be served.
Additionally, FRB approval is required prior to any person or company acquiring “control” of a bank holding company. “Control” is conclusively presumed to exist if a person or company acquires 25% or more of the outstanding voting shares of a bank holding company. There is a rebuttable presumption of control if a person or company acquires more than 10% but less than 25% of any class of voting securities.
Moreover, bank holding companies are generally prohibited from engaging in any business other than that of banking, managing, and controlling banks or furnishing services to banks and their subsidiaries, although bank holding companies are permitted to engage in activities that are determined to be “closely related to banking” and “a proper incident thereto.”
Transactions with Affiliates.
As discussed above, federal regulations restrict the extent to which the Company and its officers and directors may engage in certain “covered transactions” with the Bank, including borrowing or otherwise obtaining credit from or selling assets or securities to the Bank. Additionally, any transactions that are “covered transactions” with the Bank must be on nonpreferential terms.
Federal Securities Regulation and Corporate Governance.
The Company’s stock is registered with the SEC and, therefore, the Company is subject to SEC restrictions and requirements, including rules regarding information sharing, proxy solicitation, and insider trading.
The Sarbanes-Oxley Act of 2002 (“SOX”) addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Per SOX, the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are required to certify that the quarterly and annual reports do not contain any untrue statement of a material fact. The SEC’s rules regarding CEO and CFO certifications require these officers to certify, among others, that: (i) they are responsible for establishing, maintaining and regularly evaluating the effectiveness of internal controls over financial reporting; (ii) they have made certain disclosures to auditors and the audit committee of the board of directors; and (iii) they have included information in quarterly and annual reports about their evaluation and whether there have been changes in internal controls over financial reporting or in other factors that could materially affect internal control over financial reporting.
The Dodd-Frank Act provides other investor protections, corporate governance, and executive compensation requirements that affect U.S. publicly traded companies. For example, the Dodd-Frank Act requires companies to give shareholders a non-binding vote approving executive compensation and “golden parachute” payments. Pursuant to the Dodd Frank Act, in July 2015, the SEC proposed a rule that companies whose securities are listed on national securities exchanges and associations (including the Company whose securities are listed on the NASDAQ Global Market) would be required to develop and enforce recovery policies that, in the event of an accounting restatement, would “claw back” from current and former executive officers incentive-based compensation they should not have received based on the restatement. Recovery would be required without regard to fault and without regard to whether any misconduct occurred in connection with or an executive officer’s responsibility for the erroneous misstatement. The proposed rules would also require disclosure of listed companies’ recovery policies, and their actions under those policies. The proposed rules are not yet final.
Tax Reform.
In the fourth quarter of 2017 the Company re-measured its deferred tax assets and liabilities as a result of the enactment of the new tax law "H.R.1," originally known as the "Tax Cuts and Jobs Act" (the "Tax Reform Legislation"). The enactment occurred on December 22, 2017. The Tax Reform Legislation became effective January 1, 2018 and modifies the tax law in many ways. The centerpiece of the Tax Reform Legislation is the reduction of the federal corporate income tax rate from 35% to 21%. All deferred tax items as of December 22, 2017 needed to be re-valued using the new federal corporate income tax rate of 21%. As a result, income tax expense recorded in 2017 included a $1.0 million reduction to deferred tax assets. The impact of the Tax Reform Legislation on the Company’s 2017 financial results are not necessarily indicative of the results to be achieved in any future periods.
Executive Officers of the Registrant
Set forth below is information concerning the executive officers of the Company. Each executive officer is annually elected to a one-year term by the Board of Directors of the Company.
Shaun A. Burke
joined the Bank in March 2004 as President and Chief Executive Officer and was appointed President and Chief Executive Officer of the Company on February 28, 2005. He has over 35 years of banking experience. Mr. Burke received a Bachelor of Science Degree in Finance from Missouri State University and is a graduate of the Graduate School of Banking of Colorado. Mr. Burke currently serves as Chairman of the Board of the Missouri Bankers Association and previously served as Chairman of the Legislative Affairs Committee and Chairman of the Audit Committee. In March 2016, he was appointed to the Federal Reserve Bank of St. Louis’ Community Depository Institutions Advisory Council and served a three-year term ending in 2018. From 2014 to 2017, he served on the Community Bankers Council of the American Bankers Association. From 2012 to 2014, he was a Board Member of the Springfield Area Chamber of Commerce serving as Vice Chairman of Economic Development in 2014. From 2009 through 2014, he was a Board Member of the Springfield Business Development Corporation, the economic development subsidiary of the Springfield Area Chamber of Commerce serving as President in 2012. He is also a past Member of the United Way Allocations and Agency Relations Executive Committee, Salvation Army Board, and Big Brothers Big Sisters Board.
Carter Peters
is Executive Vice President and Chief Financial Officer of the Bank and the Company. Mr. Peters has over 26 years of experience in the financial services and public accounting industries. Prior to joining the Company in August 2005, Mr. Peters served as the Chief Financial Officer of Southern Missouri Bank for approximately two years and was employed by BKD, LLP, a certified public accounting and advisory firm, for eleven years. He is a Certified Public Accountant with a Bachelor of Science Degree in Accounting from Missouri State University. He is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants. Mr. Peters has been recognized by the Springfield Business Journal as a “40 Under 40” honoree. He has served several not-for-profit organizations, including past Chairman of the Southwest Missouri Regional Board of the Make-A-Wish Foundation of Missouri, as well as the Missouri Bankers Association.
Sheri Biser
is Executive Vice President and Chief Credit Officer of the Bank. She joined the Bank in February 2009. Ms. Biser has over 30 years of banking experience. Prior to joining the Bank, Ms. Biser served as Chief Credit Officer of Metropolitan National Bank for nearly eight years and worked in credit administration for fourteen years at another financial institution. She received a Bachelor of Science Degree in Accounting from Fort Hays State University.
Robin E. Robeson
is Executive Vice President and Chief Operating Officer of the Bank. She joined the Bank in July 2012. Ms. Robeson has over 30 years of experience in the financial services industry and 3 years of executive management experience in the technology industry. She has a Bachelor of Art Degree in Communication from the University of Missouri and a Master of Business Administration Degree from Drury University. In addition, Ms. Robeson was awarded the Certified Trust & Financial Advisor (CTFA) professional designation from the Institute of Certified Bankers. She serves as a Board Member for CoxHealth and the Springfield Convention and Visitors Bureau and is Chair-Elect for the Springfield Area Chamber of Commerce. She previously served as board Vice Chairman for City Utilities of Springfield, as Past President of the Big Brothers/Big Sisters of the Ozarks and Rotary Club of Springfield boards and as a member of the Ozarks Transportation Organization board. She is a graduate of Leadership Springfield Class XIII, and has been recognized by the Springfield Business Journal as one of the “20 Most Influential Women in Business” and been named a “40 Under 40” honoree.
As of December 31, 2018, the age of these individuals was 55 for Mr. Burke, 49 for Mr. Peters, 55 for Ms. Biser and 52 for Ms. Robeson.
Item 1A. Risk Factors
Our business and operations are subject to, and may be adversely affected by, certain risks and uncertainties. An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included and incorporated by reference in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.
Acquisitions may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties and dilution to existing shareholder value.
We have acquired, and in the future may continue to acquire, other financial institutions or parts of those institutions in the future, We may also consider and enter into new lines of business or offer new products or services.
We may incur substantial costs to expand, and we can give no assurances such expansion will result in the levels of profits we seek. There can be no assurances that integration efforts for any mergers of acquisitions will be successful. Also, we may issue equity securities in connection with acquisitions, which could cause ownership and economic dilution to our current shareholders. There is no assurance that, following any mergers or acquisitions, our integration efforts will achieve profits comparable to, or better than, our historical experience.
Acquisitions and mergers involve a number of expenses and risks, including:
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the time and costs associated with identifying potential new markets, as well as acquisition and merger targets;
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the accuracy of the estimates and judgements used to evaluate credit, operations, management and market risk with respect to the target institution;
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the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and generation of sufficient assets and deposits to support the costs of expansion;
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our ability to finance an acquisition and possible dilution to our existing shareholders;
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the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combined businesses;
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entry in to markets where we lack experience;
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the introduction of new products and services into our business;
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the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse shirt-term effects on our results of operations;
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closing delays and increased expenses related to the resolution of lawsuits filed by shareholders of targets; and
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the risk of loss of key employees and customers.
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Generally, the Company must receive federal regulatory approval before it can acquire a bank or bank holding company. We cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. The sale of branches as a condition of receiving regulatory approval may be required.
Future acquisitions could be material to the Company’s financial statements. Additional shares of stock may be issued to pay for acquisitions, which would dilute current shareholders’ ownership interests.
Our business is concentrated in and largely dependent upon the continued growth and welfare of the general geographical markets in which we operate.
Our operations are heavily concentrated in the Greene, Christian, Jasper and Newton Counties, which are in the southwestern corner of Missouri, including the cities of Springfield, Nixa, Ozark, Joplin, Carthage and Neosho, Missouri (our “Market Area”). Our success depends to a significant extent upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers' business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us, affect the value of collateral underlying loans and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
Our loan/lease portfolio possesses increased risk due to our relatively high concentration of real estate loans, which involve risks specific to real estate values.
Real estate lending comprises a significant portion of our lending business. Real estate loans were $635.3 million, or approximately 81% of our total loan/lease portfolio, as of December 31, 2018. The market value of real estate securing our real estate loans can fluctuate significantly in a short period of time as a result of market conditions in our Market Area which is where most of the real estate on which our real estate loans are made is located. Adverse developments affecting real estate values in our Market Area could increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of our control or that of our borrowers could negatively impact the future cash flow and market values of the affected properties impairing the ability of our borrowers to repay their loans which could materially and adversely affect the Bank’s financial condition and results of operations depending on the severity of the economic downturn or the nature of the regulatory changes.
Deterioration in asset quality could have an adverse impact on our business.
A significant source of risk for us arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of diverse real and personal property that may be affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, environmental contamination (as discussed in more detail below) and other external events. In addition, decreases in real estate values due to the nature of the Bank’s loan portfolio (discussed above) could affect the ability of customers to repay their loans. The Bank’s loan policies and procedures may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operation or liquidity.
We are subject to environmental liability risk associated with real estate collateral securing our loans.
A significant portion of our loan portfolio is secured by real property. Under certain circumstances, we may take title to the real property collateral through foreclosure or other means. As the titleholder of the property, we may be responsible for environmental risks, such as hazardous materials, which attach to the property. For these reasons, prior to extending credit, we conduct an environmental review to identify any known environmental risks associated with the real property that will secure our loans.
In addition, we routinely inspect properties prior to foreclosing. If environmental risks are found, environmental laws and regulations may prescribe our approach to remediation. As a result, while we have ownership of a property, we may incur substantial expense and bear potential liability for any damages caused. The environmental risks may also materially reduce the property’s value or limit our ability to use or sell the property. We also cannot guarantee that our environmental review will detect all environmental issues relating to a property, which could subject us to additional liability.
Our loan portfolio possesses increased risk due to the percentage of commercial real estate loans and commercial business loans.
Our loan portfolio includes a significant amount of commercial real estate loans and commercial business loans. The credit risk related to these types of loans is considered to be greater than the risk related to owner-occupied residential real estate loans or consumer loans because commercial loans often have larger balances, and repayment usually depends on the borrowers’ successful business operations. The underlying commercial real estate values, customer cash flow and payment expectations on such loans can be more easily influenced by adverse conditions in the related industries, the real estate market or in the economy in general. Any significant deterioration in the credit quality of the commercial loan portfolio or underlying collateral values would have a material adverse effect on our financial condition and results of operation.
Management’s analysis of the necessary funding for the allowance for loan loss account may be incorrect or may suddenly change resulting in lower earnings.
The funding of the allowance for loan loss account is the most significant estimate made by management in its financial reporting to stockholders and regulators. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which are subject to material changes.
Although management believes that the allowance for loan/lease losses as of December 31, 2018 was adequate to absorb losses on any existing loans/leases that may become uncollectible, we cannot predict loan losses with certainty, and we cannot assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the future, particularly if economic conditions are more difficult than management currently expects. If negative changes to the performance of our loan portfolio were to occur, management may find it necessary to or be required to fund the allowance for loan loss account through additional charges to our provision for loan loss expense. These changes may occur suddenly and be dramatic in nature. Additional provisions to the allowance for loan losses and loan losses in excess of said allowance may adversely affect our business, financial condition and results of operations.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face competition in attracting and retaining deposits, making loans, and providing other financial services throughout our market area. Our competitors include other community banks, regional and super-regional banking institutions, national banking institutions, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies, brokerage companies, and other non-bank businesses. Many of these competitors have substantially greater resources than we do and some are not subject to the same regulatory restrictions as we are. Many of our competitors compete across geographic boundaries and are able to provide customers with a feasible alternative to traditional banking services.
As we try to meet our competitors’ terms and pricing, increased competition in our markets may result in:
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interest rate changes to various types of accounts;
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a decrease in the amounts of our loans and deposits;
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reduced spreads between loan rates and deposit rates; or
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loan terms that are more favorable to the borrower and less favorable to the Bank.
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Any of these results could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted.
Our operations are concentrated in one subsidiary bank; an event or a series of events having a material adverse impact on the financial condition and results of operations of the Bank would have a material adverse impact on our financial condition and results of operation and, accordingly, on your investment in us.
As a holding company with only one subsidiary bank, our investment risk is concentrated in just one primary operating asset in a relatively small geographic location. A substantial portion of our cash flow comes from dividends paid directly to us by the Bank. If and to the extent our Bank is not successful or an event were to occur that prevents it or hinders it from operating effectively, our financial condition and results of operation could be materially and adversely impacted. Larger bank holding companies with more subsidiary banks or bank facilities and which are more geographically dispersed are not as susceptible to the concentrated risks we are if one of their subsidiary banks or facilities was not able to operate effectively.
Cybersecurity threats and data breaches could adversely impact our financial condition as well as cause legal or reputational harm.
Our operations are heavily dependent on the secure processing, transmission, and storage of confidential and other information in our computer systems and networks. Cybersecurity risks for banking organizations have significantly increased in recent years due to the proliferation of new technologies, the increased use of the internet to conduct financial transactions, and the increased sophistication of attackers, such as hackers. In addition, customers may use personal mobile or computing devices to access our products or services that are outside of our network environment and are subject to their own cybersecurity risks
A cyberattack, security breach, or a technology failure could adversely affect our ability to conduct our business, result in the disclosure or misuse of confidential information, cause us to spend significant resources to investigate and remediate exposures, and adversely impact our operations and liquidity. We may also be subject to litigation and financial losses and we could suffer reputational harm and a loss of confidence in our systems and products.
Although we have established policies and procedures to prevent or limit the impact of data incidents, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, or other cyberattacks. Security compromises could include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized collection, monitoring, release, use, loss or destruction of confidential, proprietary and other information of ours, our customers or third parties, damages to systems.
We rely on our employees and third parties in our day-to-day and ongoing operations, who may, as a result of human error, misconduct, malfeasance or failure, or breach of systems or infrastructure, expose us to risk. We have taken measures to implement safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact or upon whom we rely.
As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. There can be no reassurance that we will not be subject to a data breach and our security measures may not detect all cyberattacks. A cyberattack or other information or security breach could result in a material loss or have material consequences on our business.”
We depend upon third-party vendors for a significant portion of our operations.
We rely on third-party service providers for a substantial portion of our operations, including communication, record retention, and financial control systems technology. While we endeavor to select reliable and competent vendors, we cannot control our vendors or their actions. The potential for operational risk exposure exists because of our interactions with, and reliance on, third parties in our daily and ongoing operations. Any problems caused by or suffered by a third-party vendor, including a vendor’s failure to provide contracted services, poor performance by a vendor, disruption of a vendor’s business operations, or otherwise, could materially and adversely affect our ability to serve our customers or to conduct our business efficiently and effectively. Replacing a vendor could entail significant delay and expense.
Our third-party vendors are also subject to the cybersecurity risks discussed above. A cyberattack, information or security breach, or a technology failure of a third-party vendor could have a material adverse effect on our business. Although we review the security practices of third-parties before contracting with them, we cannot control their systems or security. If our data or the data of our customers is improperly accessed, used, transmitted, or otherwise obtained because of, or due in part to, actions or inactions caused by our third-party vendors, we could face significant operational harm, legal and financial exposure, and reputational damage.”
We continually encounter technological change, and we cannot predict how changes in technology will affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
Changes in consumer use of banks and changes in consumer spending and savings habit could adversely affect our financial results.
Technology and other changes now allow many customers to complete financial transactions without using banks. For example, consumers can pay bills and transfer funds directly without going through a bank. This process of eliminating banks as intermediaries could result in loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, changes in consumer spending and saving habits could adversely impact our operations, and we may be unable to timely develop competitive new products and services in response to these changes.
Rapidly changing interest rate environments could r
educe our net interest margin and otherwise negatively impact our results of operations.
Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a large part of our net income. Interest rates are the key drivers of our net interest margin and are subject to many factors beyond the control of management. As interest rates change, our net interest income is affected. Rapid increases in interest rates in the future could result in our interest expense increasing faster than interest income because of mismatches in the maturities of our assets and liabilities. Furthermore, substantially higher rates generally reduce loan demand and may result in slower loan growth for us. Decreases or increases in interest rates could have a negative effect on the spreads between our interest rates earned on assets and our rates of interest paid on liabilities, and therefore decrease our net interest income, which would have a material adverse effect on our financial condition and results of operation.
Interest rate changes may affect borrowers’ repayment schedules, negatively impacting our financial condition.
Interest rate increases often result in larger payment requirements for our borrowers, which increase the potential for default. At the same time, the marketability of underlying collateral may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on certain of our loans as borrowers refinance at lower rates. Fluctuation in interest rates may therefore change borrowers’ timing of repayment of, or ability to repay loans, which could have a material adverse impact on our financial condition.
Changes in interest rates could negatively impact our nonperforming assets, decreasing net interest income.
Changes in interest rates also can affect the value of loans. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in our nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets resulting from changes in interest rates would have an adverse impact on net interest income, which could have a material adverse effect on our financial condition and results of operation.
The replacement of LIBOR could adversely affect our revenue or expenses and the value of those assets or obligations.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.
If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reason, interest rates on our floating rate obligations, derivatives, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, derivatives, and other financial instruments tied to LIBOR rates.
The financial condition of the Bank’s customers and borrowers could adversely affect the Bank’s liquidity.
Two of the Bank’s primary sources of funds are customer deposits and loan repayments. Customer deposit levels may also be affected by a number of factors, including the competitive interest rate environment in both the national market and our Market Area, local and national economic conditions, natural disasters and other various events. Though scheduled loan repayments are a relatively stable source of liquidity, they are subject to the borrowers’ ability to repay their loans. The ability of the borrowers to repay their loans can be adversely affected by a number of factors, including changes in the economic conditions, adverse trends or events affecting the business environment, natural disasters and various other factors. The inability of borrowers to repay their loans or a decline in customer deposits would, depending on the extent of the loan defaults or decline in customer deposits, materially and adversely affect our liquidity and financial condition.
Liquidity needs could adversely affect our results of operations and financial condition.
Adequate liquidity is critical in our ability to meet the needs of our customers. An inability to access funding through customer deposits, available borrowings, sales of loans or investments could have an adverse effect on our liquidity. Furthermore, regional and community banks, including the Bank, generally have less access to the capital markets, than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any significant decline in available funding could adversely impact our ability in the future to originate loans, invest in securities, meet our expenses, pay dividends to our stockholders, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
A decrease in cash flows from our investment portfolio may adversely affect our liquidity.
Another primary source of liquidity for the Bank is cash flows from investment securities. Cash flows from the investment portfolio may be affected by changes in interest rates, resulting in excessive levels of cash flow during periods of declining interest rates and lower levels of cash flow during periods of rising interest rates. These changes may be beyond our control and could significantly influence our available cash.
If we are required to rely on secondary sources of liquidity, those sources may not be immediately available.
We may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include the FHLB advances, brokered deposits and federal funds lines of credit from correspondent banks. Our ability to borrow could be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative publicity about the financial services industry as a whole. We may also be required to pledge investments as collateral to borrow money from third parties. In certain cases, we may be required to sell investment instruments for sizable losses to meet liquidity needs, thereby reducing interest income and resultantly net income. While we believe that we are currently sufficiently liquid, there can be no assurance we will not in the future be required to turn to these secondary sources of liquidity which may not be available or only at costs that could materially and adversely affect our financial condition and results of operation.
Inability to hire or retain certain key professionals, management and staff could adversely affect our revenues, net income and growth plans.
Our performance is largely dependent on the talents and efforts of highly skilled individuals and their ability to attract and retain customer relationships in a community bank environment. We rely on key personnel to manage and operate our business, including major revenue generating functions such as our loan and deposit portfolios. Certain key management team members and loan officers are not subject to employment contracts with us. Such employees are at-will and thus are not restricted from terminating their employment. The lack of employment contracts with key employees could have a material adverse impact on our ability to retain such employees. The loss of key management or our key loan officers with their contacts in the business communities within our Market Area may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively affect our revenues.
If we do struggle with employee retention, our success may also be impacted if we are unable to recruit replacement management and key employees in a reasonable amount of time. There is intense competition in the financial services industry for qualified employees. In addition, loss of key personnel could result in increased recruiting, hiring, and training expenses, resulting in lower net income.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud.
Employee errors and employee and customer misconduct could subject us to financial losses, regulatory sanctions, lawsuits and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers, or improper use of confidential information. We maintain a system of internal controls and insurance coverage to mitigate against operational risks. However, if our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, such failures could have a material adverse effect on our business, financial condition and results of operations.
We are subject to extensive regulation that may significantly affect our operations or earnings.
We are subject to significant federal and state regulation and supervision, as discussed in more detail below, which is primarily for the benefit and protection of the Bank’s customers and not for the benefit of investors. As a result, various statutory provisions restrict the amount of dividends our Bank subsidiary can pay to us without regulatory approval. Our regulatory compliance is costly. We are subject to examination, supervision, and comprehensive regulation by various agencies, including the FRB, the MDF and FDIC. These regulators have broad discretion in their supervisory and enforcement activities. We are also subject to capitalization guidelines established by our regulators, as discussed below, which require that we and the Bank maintain adequate capital to support our growth and the Bank’s growth. To the extent our activities and/or the Bank’s activities are restricted or limited by regulation or regulators’ supervisory authority, our future profitability may be adversely affected.
An uncertain regulatory environment could impact our business, financial performance, and results of operations.
Many aspects of the Dodd-Frank Act are subject to continued rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. The U.S. Congress continues to propose new legislation that could increase or change regulation of the financial services industry and impact the operations of the Bank or Company.
On February 3, 2017, President Trump signed Executive Order 13772 announcing new “Core Principles” for regulating the U.S. financial system. Among other things, the President directed the Secretary of the Treasury, in consultation with federal regulatory agencies, to review existing laws and regulations and report on the extent to which they were consistent with the Core Principles. The Trump administration has also indicated in public statements that the Dodd-Frank Act will be under scrutiny and that some of its provisions and the rules promulgated thereunder may be revised, repealed or amended. It is not clear when, or if, changes to existing statutory or regulatory requirements may be implemented.
The implementation, amendment, or repeal of federal financial services laws or regulations may impact our profitability, limit our business opportunities, impose additional costs, or otherwise adversely affect our business. Any changes may also require us to invest management attention and resources to achieve compliance. In addition, any proposed legislative or regulatory changes that could benefit our business may not occur in the timeframe proposed, may appear different in final form than proposed, or may not occur at all.
Changes in federal or state regulation may increase our costs.
The laws, regulations, policies, and interpretations that govern our industry are constantly evolving and may change significantly over time. The Dodd-Frank Act reshaped regulation of banking institutions and the numerous requirements stemming from the Dodd-Frank Act have resulted in increased compliance costs for institutions both large and small, including us and the Bank. As these regulations continue to be implemented, interpreted, and enforced, our compliance must evolve as well. The CFPB has shown that it is a proactive agency and we anticipate that the CFPB will continue to expand its supervisory and enforcement authority into new areas and to issue new rules and guidance.
We cannot predict the nature or effect of current or proposed legislative or regulatory changes on us or the Bank with any certainty. Changes in laws or regulations could impact our business practices and profitability. We also cannot predict the cost of new compliance that may be required to keep pace with industry regulatory changes.
Decreases in capital and changes to the formulas for calculating adequate capital may negatively impact us or result in increased regulatory supervision.
Federal rules require banking institutions to maintain an adequate level of regulatory capital (net assets available to absorb losses). Due to the risks associated with the industry, banking institutions are generally required to hold more capital than other businesses. Revised minimum capital adequacy requirements under the Basel III Rule became effective for us and the Bank on January 1, 2015, with additional requirements, such as the capital conservation buffer (discussed below), to be phased in over the next few years. These requirements change the definition of capital, increase minimum required risk-based capital ratios, and increase the risk-weights for certain assets. Cumulatively, the Basel III Rule is more stringent than prior requirements and requires financial institutions to hold more and better capital against their assets, decreasing the size of their balance sheets. Although the impact on us has been minimal to date, we cannot guarantee that will continue.
Financial institutions must maintain a 2.5% capital conservation buffer comprised of CET1 Capital above the minimum risk-based capital requirements. The buffer must be maintained in order to avoid limitations on capital distributions and discretionary bonus payments to executive officers. If we or the Bank dip below the capital conservation buffer, we or the Bank could be subject to increasingly strict limitations on capital distributions and bonus payments.
Federal law provides regulators with broad powers to take "prompt corrective action" to resolve capital deficiencies at insured depository institutions that do not meet minimum capital requirements. There are five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." As an institution’s capital levels deteriorates and it falls below the “well capitalized” threshold, such institution faces increasing penalties. Regulator’s corrective powers include, but are not limited to:
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requiring a waiver to accept brokered deposits;
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requiring submission of a capital plan;
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limiting growth or restricting activities;
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requiring the issuance of additional capital stock;
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restricting transactions with affiliates;
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prohibiting executive bonuses or raises;
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prohibiting the payment of subordinated debt; and
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A proposed rule issued on February 8, 2019 by federal banking regulators may provide a simpler method of measuring adequate capital ratios for community banking organizations. The proposal applies to depository institutions and companies holding less than $10 billion in combined assets: (i) meeting risk-based qualifying criteria; and (ii) maintaining a community banking leverage ratio (“CBLR”) of greater than 9 percent. Under the proposed CBLR rule, qualifying institutions would be eligible to opt into the CBLR framework. Opting in would mean the institution would need to maintain a ratio of greater than 9 percent and regulators would deem the institution well capitalized under the agencies’ capital rule. It is unclear if the federal banking regulators will issue a final rule and, even if they do, the final rule may not apply to us and provide relief from federal banking capital requirements.
Accordingly, we and the Bank could be subject to regulatory penalties and restrictions if capital falls below certain minimum thresholds and the thresholds may change if the federal banking regulators finalize the proposed CBLR rule.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, including economic conditions specifically in our Market Area, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The effects of the monetary policies and regulations of the Federal Reserve upon our business, financial condition and results of operations in the future cannot be predicted, but have had a significant effect on the operating results of commercial banks, including our Bank, in the past.
Changes in the federal or state tax laws may negatively impact our financial performance.
We are subject to tax law changes that could increase the effective tax rate payable to the state or federal government. These changes may be retroactive to previous periods and as a result, could negatively affect our current and future financial performance. On December 22, 2017, President Trump signed into law The Tax Cuts and Jobs Act (“Tax Act”), which among other actions reduced the federal corporate tax rate to 21% from 35% effective January 1, 2018, which has had a favorable impact on the Company’s net income in 2018. Income tax expense recorded in 2017 included a $1.0 million reduction to deferred tax assets. The Company’s customers are likely to experience varying effects from both the individual and business tax provisions of the Tax Act, which could adversely impact demand for the Company’s products and services.
Anti-takeover provisions could negatively impact our stockholders.
Provisions in our governing documents, the General Corporation Law of the State of Delaware (the “DGCL”) and federal regulations could delay or prevent a third party from acquiring us, despite the possible benefit to our stockholders. These provisions include, but are not limited to:
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a prohibition on voting shares of common stock beneficially owned in excess of 10% of total shares outstanding without prior Board approval;
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supermajority voting requirements for certain business combinations with any person who beneficially owns 10% or more of our outstanding common stock;
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the election of directors to staggered terms of three years;
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advance notice requirements for director nominations and for proposing matters that stockholders may act on at stockholder meetings;
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a requirement that only directors may fill a vacancy in our Board of Directors; and
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supermajority voting requirements to remove any of our directors.
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In addition, because we are a bank holding company, purchasers of 10% or more of our common stock may be required to obtain approvals under the Change in Bank Control Act of 1978, as amended, or the Bank Holding Company Act of 1956, as amended (the “BHCA”), and in certain cases such approvals may be required at a lesser percentage of ownership.
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our Board of Directors.
There are restrictions on our ability to pay dividends on and repurchase our common stock.
Holders of our common stock are entitled to receive dividends only when, as and if declared by our Board of Directors. Our ability to pay dividends is limited by Delaware law, as well as regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of the Bank to pay dividends to us is limited by its obligation to maintain sufficient capital and liquidity and by other general restrictions on dividends that are applicable to the Bank. If current or any future regulatory requirements are not met, the Bank will not be able to pay dividends to us, and we may be unable to pay dividends on our common stock.
The DGCL provides that dividends by a Delaware corporation may be paid only from: (1) “surplus” determined in the manner described in the DGCL, or (2) in case there is no “surplus,” net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Dividends paid from the second source may not be paid unless the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets at current market value is intact.
Moreover, as a bank holding company, our ability to declare and pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends. The Federal Reserve guidelines generally require us to review the effects of the cash payment of dividends on common stock and other Tier 1 capital instruments (i.e., perpetual preferred stock and trust preferred debt) in light of our earnings, capital adequacy and financial condition. As a general matter, the Federal Reserve indicates that the Board of Directors of a bank holding company should eliminate, defer or significantly reduce the dividends if:
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the company’s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
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the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or
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the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
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In the future, if we default on certain of our outstanding debts, we will be prohibited from making dividend payments on our common stock until such payments have been brought current.
Failure to pay interest on our debt may adversely impact our ability to pay common stock dividends.
As of December 31, 2018
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we had $21.65 million of junior subordinated debentures held by three Trusts. Interest payments on the Company’s existing debentures, which totaled $1,018,000 for 2018, must be paid before the Company can pay dividends on its capital stock, including its common stock. The Company has the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if it elects to defer interest payments, all deferred interest must be paid before the Company can pay dividends on its capital stock.
Although the Company expects to be able to pay all required interest on the junior subordinated debentures, there is no guarantee that it will be able to do so.
There is a limited trading market for our common stock, and you may not be able to resell your shares at or above the price you paid for them.
Although our common stock is listed for trading on the NASDAQ Global Market, it has a low average daily trading volume relative to many other stocks whose shares are also quoted on the NASDAQ Global Market. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot assure you that the volume of trading in our common stock will increase in the future.
Additionally, general market forces may have a negative effect on our stock price, independent of factors affecting our stock specifically. Factors beyond our control, including price and trading fluctuation, can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These conditions may result in (i) volatility in the level of, and fluctuations in, the market prices of stocks generally and, in turn, our common stock and (ii) sales of substantial amounts of our common stock in the market, in each case that could be unrelated or disproportionate to changes in our operating performance. These broad market fluctuations may adversely affect the market value of our common stock.
Specifically, the following factors may cause the market price of our shares to fluctuate:
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announcements of developments related to our business model;
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economic conditions in our market area;
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fluctuations in our results from operations;
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a shortfall or excess in revenues or earnings compared to analyst’ expectations;
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changes in analysts’ recommendations or projections;
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announcements of new acquisitions or projects.
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The soundness of other financial institutions could negatively affect our business.
Our ability to engage in routine funding and other transactions could be negatively affected by the actions and commercial soundness of other financial institutions. Financial services institutions, including the Bank, are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of the difficulties or failures of other banks, which would increase the capital we need to support our growth. There can be no assurance that we could raise the necessary capital to support our growth or on terms satisfactory to us.
We face legal risks, both from regulatory investigations and proceedings and from private actions brought against us.
We could in the future become subject to lawsuits or regulatory proceedings challenging the legality of our lending or business practices. Future actions against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us. As a participant in the financial services industry, we are exposed to a high level of potential litigation related to our businesses and operations. Although we maintain insurance, the scope of this coverage may not provide us with full, or even partial, coverage in any particular case.
Our businesses and operations are also subject to increasing regulatory oversight and scrutiny, which may lead to additional regulatory investigations or enforcement actions. These and other initiatives from federal and state officials may subject us to further judgments, settlements, fines or penalties, or cause us to be required to restructure our operations and activities, all of which could lead to reputational issues, or higher operational costs, thereby reducing our revenue.
Our reputation could be damaged by negative publicity.
Reputational risk, or the risk to us from negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, unethical behavior of our employees, and from actions taken by regulators, ratings agencies and others as a result of that conduct. Damage to our reputation could impact our ability to attract new or maintain existing loan and deposit customers, employees and business relationships.
The preparation of our consolidated financial statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles and general reporting practices within the U.S. financial services industry, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies, such as those pertaining to our allowance for loan losses, require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions. If actual results vary significantly, there may be a material adverse effect on our financial condition or results of operations in subsequent periods.