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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)       ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission file number 0-23325

GFED20210331_10QIMG001.GIF


Guaranty Federal Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

43-1792717

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

   

2144 E Republic Rd, Suite F200

 

Springfield, Missouri

65804

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number: 1-833-875-2492

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.10 per share

GFED

NASDAQ Global Market

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period of complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding as of April 30, 2021

Common Stock, Par Value $0.10 per share

4,385,031 Shares

 

 

 

GUARANTY FEDERAL BANCSHARES, INC.

 
 

TABLE OF CONTENTS

 

Page

PART I. FINANCIAL INFORMATION

   

Item 1. Financial Statements

 
Condensed Consolidated Financial Statements (Unaudited):  

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Income

4

Condensed Consolidated Statements of Comprehensive Income

5

Condensed Consolidated Statements of Stockholders’ Equity

6

Condensed Consolidated Statements of Cash Flows

8

Notes to Condensed Consolidated Financial Statements

9

   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

36

   

Item 4. Controls and Procedures

37

   

PART II. OTHER INFORMATION

   

Item 1. Legal Proceedings

37

   

Item 1A. Risk factors

37

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

38

   

Item 3. Defaults Upon Senior Securities

38

   

Item 4. Mine Safety Disclosures

38

   

Item 5. Other Information

38

   

Item 6. Exhibits

38

   

Signatures

39

 

2

 

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

 

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2021 (UNAUDITED) AND DECEMBER 31, 2020

 

   

3/31/2021

   

12/31/2020

 
ASSETS                

Cash and due from banks

  $ 6,895,339     $ 6,366,370  

Interest-bearing demand deposits in other financial institutions

    213,342,950       142,056,538  

Cash and cash equivalents

    220,238,289       148,422,908  

Interest-bearing time deposits at other financial institutions

    2,455,000       4,760,089  

Available-for-sale securities

    179,334,565       164,120,869  

Stock in Federal Home Loan Bank, at cost

    4,088,700       3,896,900  

Mortgage loans held for sale

    7,990,141       11,359,174  

Loans receivable, net of allowance for loan losses of March 31, 2021 - $9,887,939 and December 31, 2020 - $9,617,024, respectively

    743,220,776       742,149,271  

Accrued interest receivable

    4,043,621       4,060,795  

Prepaid expenses and other assets

    7,851,713       7,741,903  

Goodwill

    1,434,982       1,434,982  

Core deposit intangible

    1,907,660       2,026,910  

Foreclosed assets held for sale

    745,007       546,450  

Premises and equipment, net

    17,740,621       17,898,409  

Operating lease right-of-use asset

    8,320,050       8,469,661  

Bank owned life insurance

    25,426,934       25,294,780  

Deferred and receivable income taxes

    4,237,449       4,069,838  
    $ 1,229,035,508     $ 1,146,252,939  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

LIABILITIES

               

Deposits

  $ 1,023,136,682     $ 938,672,541  

Federal Home Loan Bank advances

    66,000,000       66,000,000  

Subordinated debentures issued to Capital Trusts

    15,465,000       15,465,000  

Subordinated notes, net

    19,575,492       19,564,131  

Advances from borrowers for taxes and insurance

    331,917       218,846  

Accrued expenses and other liabilities

    6,214,491       7,870,991  

Operating lease liabilities

    8,420,949       8,560,892  

Accrued interest payable

    564,439       932,172  
      1,139,708,970       1,057,284,573  
                 

COMMITMENTS AND CONTINGENCIES

    -       -  
                 

STOCKHOLDERS' EQUITY

               

Capital Stock:

               

Common stock, $0.10 par value; authorized 10,000,000 shares; issued March 31, 2021 and December 31, 2020 - 6,919,503 shares

    691,950       691,950  

Additional paid-in capital

    51,141,548       51,337,219  

Retained earnings, substantially restricted

    78,634,969       77,073,707  

Accumulated other comprehensive loss

    (1,364,854 )     (53,378 )
      129,103,613       129,049,498  

Treasury stock, at cost; March 31, 2021 and December 31, 2020 - 2,534,472 and 2,553,851 shares, respectively

    (39,777,075 )     (40,081,132 )
      89,326,538       88,968,366  
    $ 1,229,035,508     $ 1,146,252,939  

 

See Notes to Consolidated Financial Statements

 

3

 

 

GUARANTY FEDERAL BANCSHARES, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

   

3/31/2021

   

3/31/2020

 
                 

Interest Income

               

Loans

  $ 8,817,093     $ 9,553,381  

Investment securities

    1,024,902       884,428  

Other

    134,609       361,048  
      9,976,604       10,798,857  

Interest Expense

               

Deposits

    1,301,695       2,494,302  

FHLB advances

    310,640       273,596  

Subordinated debentures issued to Capital Trusts

    194,602       195,772  

Subordinated notes, net

    262,500       -  

Other

    1,696       122,855  
      2,071,133       3,086,525  

Net Interest Income

    7,905,471       7,712,332  

Provision for Loan Losses

    400,000       500,000  

Net Interest Income After Provision for Loan Losses

    7,505,471       7,212,332  

Noninterest Income

               

Service charges

    364,062       409,204  

Net gain on sale of investment securities

    72,213       27,899  

Gain on sale of mortgage loans held for sale

    1,071,812       543,411  

Gain on sale of Small Business Administration loans

    423,539       -  

Commercial loan referral income

    -       555,490  

Net loss on foreclosed assets

    (1,149 )     (6,926 )

Other income

    685,005       570,054  
      2,615,482       2,099,132  

Noninterest Expense

               

Salaries and employee benefits

    4,366,379       3,949,614  

Occupancy

    1,128,648       1,151,089  

FDIC deposit insurance premiums

    143,206       -  

Data processing

    613,536       597,614  

Advertising

    122,250       122,250  

Amortization of core deposit intangible

    119,250       119,250  

Other expense

    961,814       858,812  
      7,455,083       6,798,629  

Income Before Income Taxes

    2,665,870       2,512,835  

Provision for Income Taxes

    449,854       407,990  

Net Income Available to Common Shareholders

  $ 2,216,016     $ 2,104,845  
                 

Basic Income Per Common Share

  $ 0.51     $ 0.49  

Diluted Income Per Common Share

  $ 0.51     $ 0.49  

 

See Notes to Consolidated Financial Statements

 

4

 

 

GUARANTY FEDERAL BANCSHARES, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

   

3/31/2021

   

3/31/2020

 

NET INCOME

  $ 2,216,016     $ 2,104,845  

OTHER ITEMS OF COMPREHENSIVE INCOME:

               

Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes

    (3,065,386 )     1,017,554  

Change in unrealized gain (loss) on interest rate swaps, before income taxes

    1,411,973       (3,602,643 )

Less: Reclassification adjustment for realized gains on investment securities included in net income, before income taxes

    (72,213 )     (27,899 )

Total other items of comprehensive loss

    (1,725,626 )     (2,612,988 )

Income tax benefit related to other items of comprehensive income

    (414,150 )     (627,129 )

Other comprehensive loss

    (1,311,476 )     (1,985,859 )

TOTAL COMPREHENSIVE INCOME

  $ 904,540     $ 118,986  

 

See Notes to Condensed Consolidated Financial Statements

 

5

 

 

GUARANTY FEDERAL BANCSHARES, INC.

 CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 THREE MONTHS ENDED MARCH 31, 2021 (UNAUDITED)

 

   

Common

Stock

   

Additional Paid-

In Capital

   

Treasury

Stock

   

Retained

Earnings

   

Accumulated Other

Comprehensive Loss

   

Total

 

Balance, January 1, 2021

  $ 691,950     $ 51,337,219     $ (40,081,132 )   $ 77,073,707     $ (53,378 )   $ 88,968,366  

Net income

    -       -       -       2,216,016       -       2,216,016  

Other comprehensive loss

    -       -       -       -       (1,311,476 )     (1,311,476 )

Dividends on common stock ($0.15 per share)

    -       -       -       (654,754 )     -       (654,754 )

Stock award plans

    -       (195,671 )     304,057       -       -       108,386  

Balance, March 31, 2021

  $ 691,950     $ 51,141,548     $ (39,777,075 )   $ 78,634,969     $ (1,364,854 )   $ 89,326,538  

 

See Notes to Consolidated Financial Statements

 

6

         

GUARANTY FEDERAL BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

QUARTERLY AND TWELVE MONTHS ENDED DECEMBER 31, 2020

 

 
   

Common

Stock

   

Additional Paid-

In Capital

   

Treasury

Stock

   

Retained

Earnings

   

Accumulated Other

Comprehensive

Income (Loss)

   

Total

 

Balance, January 1, 2020

  $ 691,950     $ 51,908,867     $ (40,398,650 )   $ 72,860,750     $ (431,035 )   $ 84,631,882  

Net income

    -       -       -       2,104,845       -       2,104,845  

Other comprehensive loss

    -       -       -       -       (1,985,859 )     (1,985,859 )

Dividends on common stock ($0.15 per share)

    -       -       -       (654,735 )     -       (654,735 )

Treasury stock purchased

    -       -       (390,268 )     -       -       (390,268 )

Stock award plans

    -       (636,438 )     693,787       -       -       57,349  

Balance, March 31, 2020

    691,950       51,272,429       (40,095,131 )     74,310,860       (2,416,894 )     83,763,214  

Net income

    -       -       -       1,883,383       -       1,883,383  

Other comprehensive income

    -       -       -       -       846,436       846,436  

Dividends on common stock ($0.15 per share)

    -       -       -       (655,127 )     -       (655,127 )

Stock award plans

    -       (83,844 )     26,343       -       -       (57,501 )

Balance, June 30, 2020

    691,950       51,188,585       (40,068,788 )     75,539,116       (1,570,458 )     85,780,405  

Net income

    -       -       -       1,897,776       -       1,897,776  

Other comprehensive income

    -       -       -       -       701,706       701,706  

Dividends on common stock ($0.15 per share)

    -       -       -       (654,547 )     -       (654,547 )

Stock award plans

    -       117,252       (35,879 )     -       -       81,373  

Balance, September 30, 2020

    691,950       51,305,837       (40,104,667 )     76,782,345       (868,752 )     87,806,713  

Net income

    -       -       -       946,210       -       946,210  

Other comprehensive income

    -       -       -       -       815,374       815,374  

Dividends on common stock ($0.15 per share)

    -       -       -       (654,848 )     -       (654,848 )

Stock award plans

    -       31,382       23,535       -       -       54,917  

Balance, December 31, 2020

  $ 691,950     $ 51,337,219     $ (40,081,132 )   $ 77,073,707     $ (53,378 )   $ 88,968,366  

 

See Notes to Consolidated Financial Statements

 

7

 

 

GUARANTY FEDERAL BANCSHARES, INC.

  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (UNAUDITED)

 

   

3/31/2021

   

3/31/2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 2,216,016     $ 2,104,845  

Items not requiring (providing) cash:

               

Deferred income taxes

    444,597       (122,539 )

Depreciation and amortization

    487,761       507,396  

Provision for loan losses

    400,000       500,000  

Gain on sale of Small Business Administration loans

    (423,539 )     -  

Gain on sale of mortgage loans held for sale and investment securities

    (1,144,025 )     (571,310 )

Loss on sale of foreclosed assets

    -       84,106  

Amortization of deferred income, premiums and discounts, net

    1,487,090       213,234  

Amortization of intangible assets

    119,250       119,250  

Amortization of subordinated notes issuance cost

    11,361       -  

Stock award plan expense

    108,386       57,349  

Accretion of purchase accounting adjustments

    (61,021 )     (209,557 )

Origination of loans held for sale

    (38,178,343 )     (18,621,836 )

Proceeds from sale of loans held for sale

    42,619,188       19,970,915  

Increase in cash surrender value of bank owned life insurance

    (132,154 )     (150,754 )

Changes in:

               

Accrued interest receivable

    17,174       (21,981 )

Prepaid expenses and other assets

    (138,109 )     166,840  

Accounts payable and accrued expenses

    (583,868 )     (454,273 )

Income taxes receivable/payable

    (198,058 )     295,870  

Net cash provided by operating activities

    7,051,706       3,867,555  

CASH FLOWS FROM INVESTING ACTIVITIES

               

Net change in loans

    (5,522,960 )     (857,319 )

Proceeds from sale of loans

    3,002,367       -  

Principal payments on available-for-sale securities

    7,392,729       4,050,696  

Proceeds from maturities of available-for-sale securities

    155,096       1,450,000  

Purchase of premises and equipment

    (320,305 )     (131,773 )

Purchase of available-for-sale securities

    (30,918,248 )     (35,896,426 )

Proceeds from sale of available-for-sale securities

    4,965,989       6,263,367  

Proceeds from maturities of interest-bearing deposits

    2,305,000       -  

Redemption (purchase) of FHLB stock

    (191,800 )     545,400  

Capitalized costs on foreclosed assets held for sale

    (26,557 )     -  

Proceeds from sale of foreclosed assets held for sale

    -       162,793  

Net cash used in investing activities

    (19,158,689 )     (24,413,262 )

CASH FLOWS FROM FINANCING ACTIVITIES

               

Net increase in demand deposits, NOW accounts and savings accounts

    98,753,934       38,327,551  

Net decrease in certificates of deposit

    (14,289,793 )     (10,198,142 )

Proceeds from FHLB advances

    50,000,000       10,000,000  

Repayments of FHLB advances

    (50,000,000 )     (25,000,000 )

Proceeds from issuance of notes payable

    -       1,000,000  

Repayments of notes payable

    -       (1,000,000 )

Advances from borrowers for taxes and insurance

    113,071       129,206  

Cash dividends paid

    (654,848 )     (650,619 )

Treasury stock purchased

    -       (390,268 )

Net cash provided by financing activities

    83,922,364       12,217,728  

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    71,815,381       (8,327,979 )

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

    148,422,908       92,671,909  

CASH AND CASH EQUIVALENTS, END OF PERIOD

  $ 220,238,289     $ 84,343,930  

 

See Notes to Consolidated Financial Statements

 

8

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1:

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Guaranty Federal Bancshares, Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”). The results of operations for the periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2020, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted.

 

 

Note 2:

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Guaranty Bank (the “Bank”). All significant intercompany transactions and balances have been eliminated in consolidation.

 

 

Note 3:

Securities

 

The amortized cost and approximate fair values of securities classified as available-for-sale were as follows:

 

   

Amortized Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

(Losses)

   

Approximate

Fair Value

 

As of March 31, 2021

                               

Debt Securities:

                               

U. S. government agencies

  $ 7,277,937     $ -     $ (293,249 )   $ 6,984,688  

Municipals

    66,051,714       2,157,557       (743,209 )     67,466,062  

Corporates

    34,682,597       345,845       (394,092 )     34,634,350  

Mortgage-backed securities - private label - commercial

    6,406,588       76,714       (8,576 )     6,474,726  

Mortgage-backed securities - private label - consumer

    9,418,436       208,602       (95,228 )     9,531,810  

Government sponsored asset-backed securities and SBA loan pools

    53,763,840       1,054,204       (575,115 )     54,242,929  
    $ 177,601,112     $ 3,842,922     $ (2,109,469 )   $ 179,334,565  

 

   

Amortized Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

(Losses)

   

Approximate

Fair Value

 

As of December 31, 2020

                               

Debt Securities:

                               

U. S. government agencies

  $ 6,282,000     $ 6,519     $ (4,885 )   $ 6,283,634  

Municipals

    58,754,912       3,241,133       (26,991 )     61,969,054  

Corporates

    30,510,893       261,740       (171,811 )     30,600,822  

Mortgage-backed securities - private label - commercial

    5,399,385       55,712       (10,650 )     5,444,447  

Mortgage-backed securities - private label - consumer

    9,249,375       228,469       (25,747 )     9,452,097  

Government sponsored asset-backed securities and SBA loan pools

    49,053,252       1,391,728       (74,165 )     50,370,815  
    $ 159,249,817     $ 5,185,301     $ (314,249 )   $ 164,120,869  

 

9

 

Maturities of available-for-sale debt securities as of March 31, 2021:

 

   

Amortized Cost

   

Approximate

Fair Value

 

1-5 years

  $ 1,000,000     $ 999,531  

6-10 years

    39,772,344       39,833,474  

After 10 years

    67,239,904       68,252,095  

Mortgage-backed securities - private label - commercial not due on a single maturity date

    6,406,588       6,474,726  

Mortgage-backed securities - private label - consumer not due on a single maturity date

    9,418,436       9,531,810  

Government sponsored asset-backed securities and SBA loan pools not due on a single maturity date

    53,763,840       54,242,929  
    $ 177,601,112     $ 179,334,565  

 

The book value of securities pledged as collateral, to secure public deposits and for other purposes, amounted to $16,128,452 and $8,294,321 as of March 31, 2021 and December 31, 2020, respectively. The approximate fair value of pledged securities amounted to $16,624,795 and $8,749,409 as of March 31, 2021 and December 31, 2020, respectively.

 

Realized gains and losses are recorded as net securities gains. Gains and losses on sales of securities are determined on the specific identification method. Gross gains of $89,055 and $58,587 and gross losses of $16,842 and $30,688 for the three months ended March 31, 2021 and March 31, 2020, respectively, were realized from the sale of available-for-sale securities. The tax effect of these net gains and losses was $15,165 and $5,859 for the three months ended March 31, 2021 and March 31, 2020, respectively.

 

The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. Certain investment securities are valued at less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. It is management’s intent to hold the debt securities to maturity or until recovery of the unrealized loss. Should the impairment of any of these debt securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified, to the extent the loss is related to credit issues, and to other comprehensive income to the extent the decline on debt securities is related to other factors and the Company does not intend to sell the security prior to recovery of the unrealized loss.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2021 and December 31, 2020, was $68,784,026 and $30,049,473 respectively, which is approximately 38% and 18% of the Company’s investment portfolio.

 

10

 

The following table shows gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2021 and December 31, 2020.

 

As of March 31, 2021

 

Less than 12 Months

   

12 Months or More

   

Total

 

Description of Securities

 

Fair Value

   

Unrealized

Losses

   

Fair Value

   

Unrealized

Losses

   

Fair Value

   

Unrealized

Losses

 
                                                 

U.S. government agencies

  $ 6,984,688     $ (293,249 )   $ -     $ -     $ 6,984,688     $ (293,249 )

Municipals

    19,726,646       (665,287 )     940,820       (77,922 )     20,667,466       (743,209 )

Corporates

    15,201,566       (390,164 )     1,002,423       (3,928 )     16,203,989       (394,092 )

Mortgage-backed securities - private label - commercial

    1,007,242       (109 )     1,484,550       (8,467 )     2,491,792       (8,576 )

Mortgage-backed securities - private label - consumer

    3,092,306       (95,228 )     -       -       3,092,306       (95,228 )

Government sponsored mortgage-backed securities and SBA loan pools

    19,343,785       (575,115 )     -       -       19,343,785       (575,115 )
    $ 65,356,233     $ (2,019,152 )   $ 3,427,793     $ (90,317 )   $ 68,784,026     $ (2,109,469 )

 

As of December 31, 2020

 

Less than 12 Months

   

12 Months or More

   

Total

 

Description of Securities

 

Fair Value

   

Unrealized

Losses

   

Fair Value

   

Unrealized

Losses

   

Fair Value

   

Unrealized

Losses

 
                                                 

U.S. government agencies

  $ 1,495,116     $ (4,885 )   $ -     $ -     $ 1,495,116     $ (4,885 )

Municipals

    4,011,492       (26,991 )     -       -       4,011,492       (26,991 )

Corporates

    14,869,853       (171,811 )     -       -       14,869,853       (171,811 )

Mortgage-backed securities - private label - commercial

    1,481,805       (10,650 )     -       -       1,481,805       (10,650 )

Mortgage-backed securities - private label - consumer

    2,391,511       (25,747 )     -       -       2,391,511       (25,747 )

Government sponsored mortgage-backed securities and SBA loan pools

    5,799,696       (74,165 )     -       -       5,799,696       (74,165 )
    $ 30,049,473     $ (314,249 )   $ -     $ -     $ 30,049,473     $ (314,249 )

 

 

Note 4:

Loans and Allowance for Loan Losses

 

Categories of loans at March 31, 2021 and December 31, 2020 include:

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 

Real estate - residential mortgage:

               

One to four family units

  $ 114,706,270     $ 115,799,200  

Multi-family

    88,353,385       90,028,775  

Real estate - construction

    85,711,951       70,847,330  

Real estate - commercial

    308,660,565       305,673,212  

Commercial loans

    133,076,722       144,326,350  

Consumer and other loans

    24,643,935       26,733,546  

Total loans

    755,152,828       753,408,413  

Less:

               

Allowance for loan losses

    (9,887,939 )     (9,617,024 )

Deferred loan fees/costs, net

    (2,044,113 )     (1,642,118 )

Net loans

  $ 743,220,776     $ 742,149,271  

 

11

 

Classes of loans by aging at March 31, 2021 and December 31, 2020 were as follows:

 

As of March 31, 2021

                                                       
   

30-59 Days
Past Due

   

60-89 Days
Past Due

   

Greater Than
90 Days

   

Total Past
Due

   

Current

   

Total Loans
Receivable

   

Total Loans >
90 Days and
Accruing

 
   

(In Thousands)

 

Real estate - residential mortgage:

                                                 

One to four family units

  $ 529     $ 237     $ 2,239     $ 3,005     $ 111,701     $ 114,706     $ -  

Multi-family

    -       -       -       -       88,353       88,353       -  

Real estate - construction

    133       -       5,109       5,242       80,470       85,712       -  

Real estate - commercial

    17       -       501       518       308,143       308,661       -  

Commercial loans

    55       -       4,784       4,839       128,238       133,077       -  

Consumer and other loans

    32       124       20       176       24,468       24,644       -  

Total

  $ 766     $ 361     $ 12,653     $ 13,780     $ 741,373     $ 755,153     $ -  

 

As of December 31, 2020

                                                       
   

30-59 Days
Past Due

   

60-89 Days
Past Due

   

Greater Than
90 Days

   

Total Past
Due

   

Current

   

Total Loans
Receivable

   

Total Loans >
90 Days and
Accruing

 
   

(In Thousands)

 

Real estate - residential mortgage:

                                                 

One to four family units

  $ 623     $ 1,058     $ 1,071     $ 2,752     $ 113,047     $ 115,799     $ -  

Multi-family

    -       -       -       -       90,029       90,029       -  

Real estate - construction

    1,239       -       4,189       5,428       65,419       70,847       -  

Real estate - commercial

    264       76       161       501       305,172       305,673       -  

Commercial loans

    6       1       4,784       4,791       139,535       144,326       -  

Consumer and other loans

    10       1       21       32       26,702       26,734       -  

Total

  $ 2,142     $ 1,136     $ 10,226     $ 13,504     $ 739,904     $ 753,408     $ -  

 

Non-accruing loans are summarized as follows:

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 

Real estate - residential mortgage:

               

One to four family units

  $ 2,620,669     $ 3,086,159  

Multi-family

    -       -  

Real estate - construction

    5,948,672       6,239,326  

Real estate - commercial

    3,849,156       3,932,241  

Commercial loans

    5,236,161       5,249,782  

Consumer and other loans

    125,090       121,090  

Total

  $ 17,779,748     $ 18,628,598  

 

12

 

 

The following tables present the activity in the allowance for loan losses based on portfolio segment for the three months ended March 31, 2021 and 2020:

 

Three months ended         Commercial     One to four                 Consumer              

March 31, 2021

 

Construction

   

Real Estate

   

family

   

Multi-family

   

Commercial

   

and Other

   

Unallocated

   

Total

 
    (In Thousands)  

Allowance for loan losses:

 

 

 

Balance, beginning of period

  $ 1,132     $ 3,624     $ 1,445     $ 1,058     $ 1,129     $ 571     $ 658     $ 9,617  

Provision charged to expense

    363       206       (23 )     (60 )     122       (158 )     (50 )   $ 400  

Losses charged off

    (121 )     -       -       -       -       (37 )     -     $ (158 )

Recoveries

    -       1       4       -       6       18       -     $ 29  

Balance, end of period

  $ 1,374     $ 3,831     $ 1,426     $ 998     $ 1,257     $ 394     $ 608     $ 9,888  

 

Three months ended         Commercial     One to four                 Consumer              

March 31, 2020

 

Construction

   

Real Estate

   

family

   

Multi-family

   

Commercial

   

and Other

   

Unallocated

   

Total

 
    (In Thousands)  

Allowance for loan losses:

 

 

 

Balance, beginning of period

  $ 1,749     $ 2,267     $ 1,001     $ 746     $ 1,129     $ 443     $ 273     $ 7,608  

Provision charged to expense

    (120 )     304       152       9       237       55       (137 )   $ 500  

Losses charged off

    -       -       -       -       (32 )     (62 )     -     $ (94 )

Recoveries

    -       6       1       -       15       13       -     $ 35  

Balance, end of period

  $ 1,629     $ 2,577     $ 1,154     $ 755     $ 1,349     $ 449     $ 136     $ 8,049  

 

The following tables present the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2021 and December 31, 2020:

 

As of March 31, 2021

 

Construction

   

Commercial
Real Estate

   

One to four family

   

Multi-family

   

Commercial

   

Consumer
and Other

   

Unallocated

   

Total

 
    (In Thousands)  

Allowance for loan losses:

 

 

 

Ending balance: individually evaluated for impairment

  $ 109     $ 107     $ 64     $ -     $ 61     $ 13     $ -     $ 354  

Ending balance: collectively evaluated for impairment

  $ 1,265     $ 3,724     $ 1,362     $ 998     $ 1,196     $ 381     $ 608     $ 9,534  

Ending balance: loans acquired with deteriorated credit quality

  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  

Loans:

                                                               

Ending balance: individually evaluated for impairment

  $ 5,948     $ 1,797     $ 2,621     $ -     $ 5,105     $ 191     $ -     $ 15,662  

Ending balance: collectively evaluated for impairment

  $ 79,764     $ 304,530     $ 112,085     $ 88,353     $ 127,850     $ 24,453     $ -     $ 737,035  

Ending balance: loans acquired with deteriorated credit quality

  $ -     $ 2,334     $ -     $ -     $ 122     $ -     $ -     $ 2,456  

 

13

 

As of December 31, 2020

 

Construction

   

Commercial
Real Estate

   

One to four

family

   

Multi-family

   

Commercial

   

Consumer
and Other

   

Unallocated

   

Total

 
    (In Thousands)  

Allowance for loan losses:

 

 

 

Ending balance: individually evaluated for impairment

  $ 114     $ 117     $ 112     $ -     $ 62     $ 15     $ -     $ 420  

Ending balance: collectively evaluated for impairment

  $ 1,018     $ 3,507     $ 1,333     $ 1,058     $ 1,066     $ 556     $ 658     $ 9,196  

Ending balance: loans acquired with deteriorated credit quality

  $ -     $ -     $ -     $ -     $ 1     $ -     $ -     $ 1  

Loans:

                                                               

Ending balance: individually evaluated for impairment

  $ 6,239     $ 1,810     $ 3,110     $ -     $ 5,111     $ 202     $ -     $ 16,472  

Ending balance: collectively evaluated for impairment

  $ 64,608     $ 301,453     $ 112,689     $ 90,029     $ 139,083     $ 26,532     $ -     $ 734,394  

Ending balance: loans acquired with deteriorated credit quality

  $ -     $ 2,410     $ -     $ -     $ 132     $ -     $ -     $ 2,542  

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

 

Included in the Company’s loan portfolio are certain loans acquired in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans were written down at acquisition to an amount estimated to be collectible. As a result, certain ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s current credit quality to prior periods. The ratios particularly affected by accounting under ASC 310-30 include the allowance for loan losses as a percentage of loans, nonaccrual loans, and performing assets, and nonaccrual loans and nonperforming loans as a percentage of total loans.

 

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

 

14

 

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

 

The following table summarizes the recorded investment in impaired loans at March 31, 2021 and December 31, 2020:

 

   

March 31, 2021

   

December 31, 2020

 
   

Recorded
Balance

   

Unpaid
Principal
Balance

   

Specific
Allowance

   

Recorded
Balance

   

Unpaid
Principal
Balance

   

Specific
Allowance

 
   

(In Thousands)

 

Loans without a specific valuation allowance

                                         

Real estate - residential mortgage:

                                               

One to four family units

  $ 2,457     $ 2,457     $ -     $ 2,780     $ 2,780     $ -  

Multi-family

    -       -       -       -       -       -  

Real estate - construction

    5,081       5,081       -       5,081       5,081       -  

Real estate - commercial

    3,340       3,340       -       3,419       3,419       -  

Commercial loans

    4,905       4,905       -       4,902       4,902       -  

Consumer and other loans

    117       117       -       100       100       -  

Loans with a specific valuation allowance

                                         

Real estate - residential mortgage:

                                               

One to four family units

  $ 164     $ 164     $ 64     $ 330     $ 330     $ 112  

Multi-family

    -       -       -       -       -       -  

Real estate - construction

    867       2,838       109       1,158       3,129       114  

Real estate - commercial

    791       791       107       801       801       117  

Commercial loans

    322       322       61       341       341       63  

Consumer and other loans

    74       74       13       102       102       15  

Total

                                               

Real estate - residential mortgage:

                                               

One to four family units

  $ 2,621     $ 2,621     $ 64     $ 3,110     $ 3,110     $ 112  

Multi-family

    -       -       -       -       -       -  

Real estate - construction

    5,948       7,919       109       6,239       8,210       114  

Real estate - commercial

    4,131       4,131       107       4,220       4,220       117  

Commercial loans

    5,227       5,227       61       5,243       5,243       63  

Consumer and other loans

    191       191       13       202       202       15  

Total

  $ 18,118     $ 20,089     $ 354     $ 19,014     $ 20,985     $ 421  

 

15

 

The following table summarizes average impaired loans and related interest recognized on impaired loans for the three months ended March 31, 2021 and 2020:

 

   

For the Three Months Ended

   

For the Three Months Ended

 
   

March 31, 2021

   

March 31, 2020

 
   

Average
Investment
in Impaired
Loans

   

Interest
Income
Recognized

   

Average
Investment
in Impaired
Loans

   

Interest
Income
Recognized

 
   

(In Thousands)

 

Loans without a specific valuation allowance

                         

Real estate - residential mortgage:

                               

One to four family units

  $ 2,680     $ -     $ 1,091     $ -  

Multi-family

    -       -       -       -  

Real estate - construction

    5,081       -       -       -  

Real estate - commercial

    3,391       2       2,765       -  

Commercial loans

    4,904       -       19       -  

Consumer and other loans

    105       3       99       2  

Loans with a specific valuation allowance

                         

Real estate - residential mortgage:

                               

One to four family units

  $ 221     $ -     $ 1,173     $ -  

Multi-family

    -       -       -       -  

Real estate - construction

    965       -       3,939       -  

Real estate - commercial

    795       -       281       -  

Commercial loans

    328       -       904       -  

Consumer and other loans

    106       -       169       -  

Total

                               

Real estate - residential mortgage:

                               

One to four family units

  $ 2,901     $ -     $ 2,264     $ -  

Multi-family

    -       -       -       -  

Real estate - construction

    6,046       -       3,939       -  

Real estate - commercial

    4,186       2       3,046       -  

Commercial loans

    5,232       -       923       -  

Consumer and other loans

    211       3       268       2  

Total

  $ 18,576     $ 5     $ 10,440     $ 2  

 

At March 31, 2021, the Bank’s impaired loans shown in the table above included loans that were classified as troubled debt restructurings (“TDR”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

 

In assessing whether or not a borrower is experiencing financial difficulties, the Bank considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy and (iv) the debtor’s projected cash flow is sufficient to satisfy the contractual payments due under the original terms of the loan without a modification.

 

The Bank considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Bank include the debtor’s ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by the Bank generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a reduction on the face amount or maturity amount of the debt as stated in the original loan, (iv) a temporary period of interest-only payments, (v) a reduction in accrued interest, and (vi) an extension of amortization.

 

16

 

In March 2020, our regulators issued a statement titled “Interagency Statement on Loan Modifications and Reporting for Financial institutions with Customers Affected by the Coronavirus” that encouraged financial institutions to work prudently with borrowers who were expected to have difficulty in meeting payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further clarifies that qualified loan modifications are exempt by law from being classified as a TDR as defined by GAAP from March 1, 2020 until December 31, 2020. In December 2020, the Economic Aid to Hard Hit Small Businesses, Non-Profits and Ventures Act was enacted, which extended the CARES Act provisions until January 1, 2022. The Bank continues to work with impacted entities in the form of modifications, payment deferrals, extensions of repayment terms and/or other delays in payments, as necessary.

 

Due to the before mentioned regulatory changes, there were no troubled debt restructuring charge offs or increases to the allowance for loan losses related to TDRs during 2021 or 2020.

 

The following table presents the carrying balance of TDRs as of March 31, 2021 and December 31, 2020:

 

   

March 31, 2021

   

December 31, 2020

 

Real estate - residential mortgage:

               

One to four family units

  $ 1,178,475     $ 1,178,876  

Multi-family

    -       -  

Real estate - construction

    3,728,165       3,700,084  

Real estate - commercial

    892,242       893,992  

Commercial loans

    363,539       368,310  

Total

  $ 6,162,421     $ 6,141,262  

 

The Bank has allocated $168,881 and $142,393 of specific reserves to customers whose loan terms have been modified as a TDR as of March 31, 2021 and December 31, 2020, respectively.

 

As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks loans by an internal rating system. All loans are assigned an internal credit quality rating based on an analysis of the borrower’s financial condition. The criteria used to assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses are primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the Bank’s safety and soundness. The following are the internally assigned ratings:

 

Pass: This rating represents loans that have strong asset quality and liquidity along with a multi-year track record of profitability.

 

Special mention: This rating represents loans that are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

 

Substandard: This rating represents loans that show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

 

Doubtful: This rating represents loans that have all the weaknesses of substandard classified loans with the additional characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

17

 

Risk characteristics applicable to each segment of the loan portfolio are described as follows.

 

Real estate-Residential 1-4 family: The residential 1-4 family real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Bank’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

Real estate-Multi-Family: 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. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

 

Real estate-Construction: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

 

Real estate-Commercial: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Bank’s market areas.

 

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

 

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Bank’s market area) and the creditworthiness of a borrower.

 

18

 

The following tables provide information about the credit quality of the loan portfolio using the Bank’s internal rating system as of March 31, 2021 and December 31, 2020:

 

March 31, 2021

 

Construction

   

Commercial
Real Estate

   

One to four

family

   

Multi-family

   

Commercial

   

Consumer
and Other

   

Total

 
   

(In Thousands)

 

Rating:

                                                       

Pass

  $ 79,581     $ 264,614     $ 110,881     $ 86,924     $ 120,230     $ 24,453     $ 686,683  

Special Mention

    -       4,490       729       1,429       5,012       -       11,660  

Substandard

    6,131       39,557       3,096       -       7,835       191       56,810  

Doubtful

    -       -       -       -       -       -       -  

Total

  $ 85,712     $ 308,661     $ 114,706     $ 88,353     $ 133,077     $ 24,644     $ 755,153  

 

December 31, 2020

 

Construction

   

Commercial
Real Estate

   

One to four

family

   

Multi-family

   

Commercial

   

Consumer
and Other

   

Total

 
   

(In Thousands)

 

Rating:

                                                       

Pass

  $ 64,531     $ 262,771     $ 110,615     $ 90,029     $ 130,874     $ 26,532     $ 685,352  

Special Mention

    -       4,442       -       -       123       -       4,565  

Substandard

    6,316       38,460       5,184       -       13,329       202       63,491  

Doubtful

    -       -       -       -       -       -       -  

Total

  $ 70,847     $ 305,673     $ 115,799     $ 90,029     $ 144,326     $ 26,734     $ 753,408  

 

The above amounts include purchased credit impaired loans. At March 31, 2021, purchased credit impaired loans comprised of $2.5 million were rated “Substandard”.

 

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan.

 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

 

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Commercial Loan Referral Income: In certain circumstances, the Company enters into variable-rate loan agreements (Assumable Rate Conversion “ARC” Master Servicing Agreements) with commercial loan customers, and the customer simultaneously enters into an interest swap agreement directly with a third-party (the “counterparty”).  This allows the loan customer to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement.  The Company is required to enter into a transaction agreement as part of each loan.  The agreement results in the assumption of credit and market risk equivalent by the Bank.  The agreement states that in an event of default by the loan customer, the Bank must pay a termination amount to the extent it is positive.  The termination value is defined by the Master Agreement, which is in essence the fair value of the derivative on the event date. The counterparty pays a fee to the Company for brokering the transaction and for servicing the loan/swap agreement between the customer and the counterparty.  Fee income related to these agreements was $0 and $555,490 for the three months ended March 31, 2021 and 2020, respectively.

 

19

 

 

Note 5: Intangible Assets

 

The Company recorded $1.4 million of goodwill as a result of its 2018 Hometown acquisition. Goodwill is tested annually, or more often if circumstances warrant, for impairment. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated, and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill impairment was neither indicated nor recorded during the three months ended March 31, 2021. Goodwill amounts are not deductible for tax purposes.

 

Additionally, as part of the Hometown acquisition, core deposit premiums of $3.5 million were recorded. Core deposit premiums are amortized over a seven year period and are periodically evaluated, at least annually, as to the recoverability of their carrying value.

 

The Company’s goodwill and other intangibles (carrying basis and accumulated amortization) at March 31, 2021 and December 31, 2020 were as follows:

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 
   

(in Thousands)

   

(in Thousands)

 

Goodwill

  $ 1,435     $ 1,435  

Core deposit intangible

               

Gross carrying amount

    3,520       3,520  

Accumulated amortization

    (1,612 )     (1,493 )

Core deposit intangible, net

    1,908       2,027  

Remaining balance

  $ 3,343     $ 3,462  

 

The Company’s estimated remaining amortization expense on intangibles as of March 31, 2021 is as follows:

 

 

Amortization Expense

 
 

(in Thousands)

 
           

Remainder of:

2021

  $ 358  
 

2022

    477  
 

2023

    477  
 

2024

    477  
 

2025

    119  
 

Thereafter

    -  
 

Total

  $ 1,908  

 

 

Note 6: Leases

 

As of March 31, 2021, the Company has recorded operating Right of Use (“ROU”) assets of $8,320,050 and corresponding operating ROU liabilities of $8,420,949. At December 31, 2020, operating ROU assets were $8,469,661 with corresponding liabilities of $8,560,892. Additionally, as of March 31, 2021, the Company had financing ROU assets and liabilities of $538,825 compared to balances of $510,526 as of December 31, 2020. We maintain operating leases on land and buildings for certain branch facilities and our headquarters. Financing leases are primarily for equipment used at banking facilities. Most leases include options to renew, with renewal terms extending between one to twenty years. The exercise of renewal options is based on judgement of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether or not the renewal option is reasonably certain to be exercised include, but are not limited to, the value of the leasehold improvements, the value of the renewal rate compared to market rates and the presence of factors that would cause significant economic penalty to the Company if the option is not exercised.

 

20

 

Expenses for finance leases are included in other interest expense and occupancy expense line items, whereas operating leases are expensed entirely in the occupancy expense line item. Leases with a term of less than twelve months are not recorded on the balance sheet and are expensed on a straight-line basis over the lease term. Discount rates used for the purpose of valuing the leases were based on rates available to the Company on fixed rate borrowings for similar lease terms.

 

The components of lease expense and their impact on the statement of income for the three months ended March 31, 2021 and 2020 are as follows:

 

   

Three months ended

 
   

March 31,

   

March 31,

 
   

2021

   

2020

 
   

(In Thousands)

 

Finance lease cost:

               

Amortization of right-of-use assets

  $ 44,657     $ 30,977  

Interest on lease liabilities

    1,696       2,096  

Operating lease cost

    272,545       272,335  

Sublease income

    (6,300 )     (12,300 )
                 

Total lease costs

  $ 312,598     $ 293,108  
                 

Additional lease information:

               
Weighted-average remaining lease term - financing leases (in years)     3.4       3.3  
Weighted-average remaining lease term - operating leases (in years)     14.2       14.9  

Weighted-average discount rate - financing leases

    1.20 %     1.96 %

Weighted-average discount rate - operating leases

    5.70 %     5.62 %

 

The following table sets forth, as of March 31, 2021, the future minimum lease cash payments and a reconciliation of the undiscounted cash flows to the lease liability:

 

     

Financing

   

Operating

   

Total

 
             

(In Thousands)

         

Remainder of:

2021

  $ 143     $ 759     $ 902  
 

2022

    184       1,011       1,195  
 

2023

    111       1,014       1,125  
 

2024

    68       856       924  
 

2025

    40       752       792  
 

Thereafter

    1       8,228       8,229  
 

Total undiscounted future minimum lease cash payments

  $ 547     $ 12,620     $ 13,167  
 

Present value discount

    (8 )     (4,199 )     (4,207 )
 

Lease liability

  $ 539     $ 8,421     $ 8,960  

 

 

Note 7: Subordinated Debentures Issued to Capital Trusts

 

During 2005, the Company formed two wholly owned grantor trust subsidiaries, Guaranty Statutory Trust I and Guaranty Statutory Trust II, to issue preferred securities representing undivided beneficial interests in the assets of the trusts and to invest the gross proceeds of the preferred securities in notes of the Company. Trust I issued $5,000,000 of preferred securities and Trust II issued $10,000,000 of preferred securities. The sole assets of Trust I were originally $5,155,000 aggregate principal amount of the Company’s fixed rate subordinated debenture notes due 2036, which were redeemable beginning in 2011. The sole assets of Trust II were originally $10,310,000 aggregate principal amount of the Company’s fixed/variable rate subordinated debenture notes due 2036, which were redeemable beginning in 2011. Trust II subordinated debenture notes bear interest at a fixed rate for five years and thereafter at a floating rate based on LIBOR. The preferred securities qualify as either Tier I or Tier II capital for regulatory purposes, subject to certain limitations. See Note 14: “Subsequent Events” for additional information regarding the full redemption of the $5,155,000 Trust I assets which will occur in May 2021.

 

21

 

 

Note 8: Subordinated Notes

 

On July 29, 2020, the Company completed a private offering of $20.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2030 (the “Notes”). The Notes were issued by the Company to the purchasers at a price equal to 100% of their face amount. Costs related to the issuance of $454,445 reduced the proceeds received by the Company and will be amortized over the life of the notes. The Notes are intended to qualify as Tier 2 capital for regulatory purposes. The Notes have a stated maturity of September 30, 2030, are redeemable by the Company at its option, in whole or in part, on or after September 30, 2025, and at any time upon the occurrences of certain events. Prior to September 30, 2025, the Company may redeem the Notes, in whole but not in part, only under certain limited circumstances set forth in the Note. On or after September 30, 2025, the Company may redeem the Notes, in whole or in part, at its option, on any interest payment date. Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the Notes being redeemed, together with any accrued and unpaid interest on the Notes being redeemed to but excluding the date of redemption. The Notes are not subject to redemption at the option of the holder. The Notes will bear interest at a fixed rate of 5.25% per year until September 30, 2025 or earlier redemption date. After  October 1, 2025, but excluding the maturity date or earlier redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 519 basis points. Principal and interest on the Notes are subject to acceleration only in limited circumstances. The Notes are unsecured, subordinated obligations of the Company, are not obligations of, and are not guaranteed by, any subsidiary of the Company, and rank junior in right of payment to the Company’s current and future senior indebtedness.

 

 

Note 9: Benefit Plans

 

The Company has stock-based employee compensation plans, which are described in the Company’s 2020 Annual Report. The following tables below summarize transactions under the Company’s equity plans for the three months ended March 31, 2021:

 

Restricted Stock

 

Number of

Shares

   

Weighted

Average Grant-

Date Fair Value

 
                 

Balance of shares non-vested as of January 1, 2021

    28,037     $ 21.80  

Granted

    20,126       18.35  

Vested

    (9,599 )     22.20  

Forfeited

    -       -  

Balance of shares non-vested as of March 31, 2021

    38,564     $ 19.90  

 

In February 2021, the Company granted 6,979 shares of restricted stock to directors pursuant to the 2015 Equity Plan that have a cliff vesting at the end of one year and thus, expensed over that same period. These shares had a grant date market price of $18.79 per share. The total amount of expense for restricted stock grants to directors (including all previous year’s grants) during the three months March 31, 2021 and 2020 was $33,000 and $36,869, respectively.

 

22

 

For the three months ended March 31, 2021 and 2020, the Company granted 13,147 and 8,787 shares, respectively, of restricted stock to officers that have a cliff vesting at the end of three years. The expense is being recognized over the applicable vesting period. The total amount of expense for restricted stock grants to officers (including all previous year’s grants) during the three months ended March 31, 2021 and 2020 was $75,904 and $47,471, respectively.

 

Performance Stock Units

 

Performance

Stock Units

   

Weighted

Average Grant

Date Fair Value

 
                 

Balance of shares non-vested as of January 1, 2021

    53,075     $ 15.40  

Granted

    -       -  

Vested

    -       -  

Forfeited

    -       -  

Balance of shares non-vested as of March 31, 2021

    53,075     $ 15.40  

 

During 2020, the Company has granted restricted stock units representing 53,075 hypothetical shares of common stock to officers. There are three possible levels of incentive awards: threshold (25%); target (50%); and maximum (100%). The restricted stock units vest based on two financial performance factors over the period from grant date to December 31, 2022 (the “Performance Period”). The two performance measurements of the Company (and the weight given to each measurement) applicable to each award level are as follows: (i) Earnings Per Share (50%) and (ii) Return on Average Assets (50%). In determining compensation expense, the fair value of the restricted stock unit awards was determined based on the closing price of the Company’s common stock on the date of grant, which averaged $15.40 per share. The expense is being recognized over the applicable vesting period. Due to the fact that the measurements cannot be determined at the time of the grant, the Company currently estimates that the most likely outcome is the achievement between the threshold and target levels. If during the Performance Period, additional information becomes available to lead the Company to believe a different level will be achieved for the Performance Period, the Company will reassess the number of units that will vest for the grant and adjust its compensation expense accordingly on a prospective basis. The total amount of expense for restricted stock units during the three months ended March 31, 2021 and 2020 was $12,573 and $0, respectively. The 2020 year-to-date figure includes credit amounts from prior year reversals of certain accruals related to final performance agreement payouts under previous grants and the reduction of stock price for valuing compensation expense in the current year.

 

Total stock-based compensation expense recognized for the three months ended March 31, 2021 and 2020 was $121,477 and $84,340, respectively. As of March 31, 2021, there was $677,220 of unrecognized compensation expense related to non-vested restricted stock awards to be recognized over the remaining vesting period.

 

 

Note 10: Income Per Common Share

 

   

For three months ended March 31, 2021

 
   

Income Available

to Common

Stockholders

   

Weighted Average

Common Shares

Outstanding

   

Per

Common Share

 

Basic Income per Common Share

  $ 2,216,016       4,337,870     $ 0.51  

Effect of Dilutive Securities

            12,226          

Diluted Income per Common Share

  $ 2,216,016       4,350,096     $ 0.51  

 

   

For three months ended March 31, 2020

 
   

Income Available

to Common

Stockholders

   

Weighted Average

Common Shares

Outstanding

   

Per

Common Share

 

Basic Income per Common Share

  $ 2,104,845       4,309,441     $ 0.49  

Effect of Dilutive Securities

            26,861          

Diluted Income per Common Share

  $ 2,104,845       4,336,302     $ 0.49  

 

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Note 11: New Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Codification Improvements to Topic 326, Financial Instruments – Credit Losses, have been released in November 2018 (2018-19), November 2019 (2019-10 and 2019-11) and a January 2020 Update (2020-02) that provided additional guidance on this Topic. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For SEC filers meeting certain criteria, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For SEC filers that meet the criteria of a smaller reporting company (including this Company) and for non-SEC registrant public companies and other organizations, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company has formed a committee that is assessing our data and evaluating the impact of adopting ASU 2016-13. The Company has also selected a third-party vendor to assist in generating loan level cash flows and disclosures. Based on the results from larger SEC filers and preliminary internal calculations there is likely a significant financial impact of adopting this standard. Estimated amounts and decisions pertaining to implementation of this standard will be evaluated over the next several quarters.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.  To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test.  The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.  An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  In addition, the income tax effects of tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the quantitative assessment for a reporting unit to determine if the qualitative impairment test is necessary.  The amendments should be applied on a prospective basis.  The nature of and reason for the change in accounting principle should be disclosed upon transition.  This standard was adopted during the second quarter of 2020 with no impact on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU applies to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. Disclosures removed by this ASU are the amount and reasons for transfers between Level 1 and Level 2, the policy for timing of transfers between levels and the valuation process for Level 3 measurements. This ASU modifies disclosures relating to investments in certain entities that calculate net asset value. Additional disclosures require by the ASU include: 1) change in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and 2) range and weighted average of significant observable inputs used to develop Level 3 measurements. The prospective method of transition is required for the new disclosure requirements. The other amendments should be applied retrospectively. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years or January 1, 2020 for the Company. The Company adopted this standard during the first quarter of 2020 with no significant impact on the financial statements.

 

24

 

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). This ASU provides guidance and timelines for the future transition from London Interbank Offered Rate (LIBOR) to alternative reference rates that are more observable or transaction based and less susceptible to manipulation. For financial institutions this will likely impact contracts already in place that reference LIBOR as the variable rate component. Items likely to be impacted are interest rate swaps, subordinated debt offerings, certain adjustable-rate loan contracts, certain variable rate investment instruments as well as other variable rate contracts. Current guidance has the use of LIBOR reference rates to end by December 31, 2021. In the meantime, institutions are to identify contracts that reference LIBOR, prepare their current systems for a transition to a new reference rate and to communicate any changes to impacted parties. The Company has identified existing items that reference LIBOR and is in the process of evaluating fall back language in each situation along with working with system providers and other third parties to ensure a successful adoption of new reference rates. The financial impact of adopting this standard is being evaluated with estimated amounts and decisions pertaining to implementation of this standard to be evaluated over the next several quarters.

 

 

Note 12: Derivative Financial Instruments

 

The Company records all derivative financial instruments at fair value in the financial statements. Derivatives are used as a risk management tool to hedge the exposure to changes in interest rates or other identified market risks.

 

When a derivative is intended to be a qualifying hedged instrument, the Company prepares written hedge documentation that designates the derivative as 1) a hedge of fair value of a recognized asset or liability (fair value hedge) or 2) a hedge of a forecasted transaction, such as, the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). The written documentation includes identification of, among other items, the risk management objective, hedging instrument, hedged item, and methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly effective.

 

In June 2017, the Company entered into a forward start interest rate swap agreement totaling $50 million notional amount to hedge against interest rate risk on FHLB advances. The swap rate paid is 2.12% and is hedged against three-month floating LIBOR with a termination date of February 2025. As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. At March 31, 2021, the Company reported a $2,053,389 unrealized loss, net of a $648,438 tax effect, in other comprehensive income related to this cash flow hedge.

 

In March 2019, the Company entered into a forward start interest rate swap agreement totaling $10.3 million notional amount to hedge against interest rate risk on variable rate subordinated debentures. The swap rate paid is 4.09% and is hedged against three-month floating LIBOR plus 145 basis points with a termination date of February 2026. As a cash flow hedge, the portion of the change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. At March 31, 2021, the Company reported a $628,821 unrealized loss, net of a $198,575 tax effect, in other comprehensive income related to this cash flow hedge.

 

The Company documents, both at inception and periodically over the life of the hedges, its analysis of actual and expected hedge effectiveness.

 

As of March 31, 2021, based on current fair values, the Company pledged cash collateral of $4.1 million to its counterparty for the swaps, included on the balance sheet in interest-bearing demand deposits in other financial institutions. As of December 31, 2020, based on then current fair values, the Company had pledged cash collateral of $5.1 million to the counterparty.

 

25

 

The following table presents the notional amounts and fair values of derivatives designated as hedging instruments on the consolidated balance sheets at March 31, 2021 and December 31, 2020: