Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The primary function of the Company is to monitor and oversee its investment in the Bank. The Company engages in few other activities, and the Company has no significant assets other than its investment in the Bank. As a result, the results of operations of the Company are derived primarily from operations of the Bank. The Bank’s results of operations are primarily dependent on net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Bank’s income is also affected by the level of its noninterest expenses, such as employee salaries and benefits, occupancy expenses and other expenses. The following discussion reviews material changes in the Company’s financial condition as of March 31, 2019, and the results of operations for the three months ended March 31, 2019 and 2018.
The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management’s perception thereof as of the date of this Form 10-Q. When used in this Form 10-Q, words such as “anticipates,” “estimates,” “believes,” “expects,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. Actual results of the Company’s operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to: changes in demand for banking services; changes in portfolio composition; changes in management strategy; increased competition from both bank and non-bank companies; changes in the general level of interest rates; changes in general or local economic conditions; changes in federal or state regulations and legislation governing the operations of the Company or the Bank; and other factors set forth in reports and other documents filed by the Company with the SEC from time to time, including the risk factors described under Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Financial Condition
The Company’s total assets increased $16,330,974 (2%) from $965,137,870 as of December 31, 2018, to $981,468,844 as of March 31, 2019.
Available-for-sale securities increased $12,527,461 (15%) from $86,266,197 as of December 31, 2018, to $98,793,658 as of March 31, 2019. The Company had purchases of $17,536,729 and a decrease in unrealized losses of $1,603,615 offset by sales and principal payments of $6,490,761 when compared to December 31, 2018.
Net loans receivable decreased by $17,752,962 (2%) from $778,298,606 as of December 31, 2018 to $760,545,644 as of March 31, 2019. For the quarter, permanent multi-family loans increased $1,497,231 (2%), construction loans increased $1,051,235 (1%), commercial loans decreased $1,074,213 (1%), commercial real estate loans decreased $12,545,392 (4%), one-to-four family mortgage loans decreased $5,078,619 (4%) and consumer and other loans decreased $1,779,483 (5%). The Company continues to focus its lending efforts in the commercial, owner occupied real estate and small business lending categories, however, during the quarter unexpected loan payoffs outpaced loan originations.
Allowance for loan losses decreased $148,947 (2%) from $7,995,569 as of December 31, 2018 to $7,846,622 as of March 31, 2019. No additions to the provision for loan losses were recorded by the Company for the quarter ended March 31, 2019, charge-offs of specific loans (classified as nonperforming at December 31, 2018) exceeded loan recoveries by $148,947. The allowance for loan losses, as a percentage of gross loans outstanding (excluding mortgage loans held for sale), as of March 31, 2019 and December 31, 2018 was 1.02% and 1.02%, respectively. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of March 31, 2019 and December 31, 2018 was 63.6% and 61.1%, respectively. Management believes the allowance for loan losses is at a level to be sufficient in providing for potential loan losses in the Bank’s existing loan portfolio.
In accordance with generally accepted accounting principles (GAAP) for acquisition accounting, the loans acquired through the Hometown acquisition were recorded at fair value; therefore, there was no allowance associated with these loans. Management continues to evaluate the allowance need on the acquired loans factoring in the net remaining discount of $2.1 million at March 31, 2019.
Prepaid expenses and other assets increased $4,028,078 (64%) from $6,261,159 as of December 31, 2018 to $9,835,752 as of March 31, 2019. This increase is primarily due the Company purchasing an interest in a partnership for the purpose of gaining low income housing tax credits for $3,168,435 and financing leases of $453,485 added due to new accounting standard implementation.
Right-of-use asset and liabilities increased $9,473,587 (100%) and $9,490,385 (100%), respectively, during the first quarter of 2019 compared to none recorded as of December 31, 2018. These amounts were recognized due to the Company’s implementation of new lease accounting standards for operating leases further described in Note 8 and Note 11 of the Condensed Consolidated Financial Statements. The recorded assets and liabilities will be amortized over the life of the lease term.
Deposits increased $57,212,514 (8%) from $749,618,822 as of December 31, 2018, to $806,831,336 as of March 31, 2019. For the three months ended March 31, 2019, checking and savings accounts increased by $48,453,425 and certificates of deposit increased by $8,790,226. The increase in checking and savings accounts was due to the Bank’s continued focus to increase core transaction deposits, including retail, commercial and public funds. See also the discussion under Item 3 - “Quantitative and Qualitative Disclosure about Market Risk – Asset/Liability Management.”
Federal Home Loan Bank advances decreased $53,200,000 (51%) from $105,300,000 as of December 31, 2018 to $52,100,000 as of March 31, 2019 due to principal reductions from excess funds generated from the deposit growth noted above.
Stockholders’ equity (including net unrealized gains and losses on available-for-sale securities and interest rate swaps) increased $2,139,338 (3%) from $80,478,592 as of December 31, 2018, to $82,617,930 as of March 31, 2019. The Company’s net income during this period exceeded dividends paid or declared by $1,537,547. On a per common share basis, stockholders’ equity increased from $18.18 as of December 31, 2018 to $18.55 as of March 31, 2019.
Average Balances, Interest and Average Yields
The Company’s profitability is primarily dependent upon net interest income, which represents the difference between interest and fees earned on loans and debt and equity securities, and the cost of deposits and borrowings. Net interest income is dependent on the difference between the average balances and rates earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities. Non-interest income, non-interest expense, and income taxes also impact net income.
The following table sets forth certain information relating to the Company’s average consolidated statements of financial condition and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense annualized by the average balance of assets or liabilities, respectively, for the periods shown. Average balances were derived from average daily balances. The average balance of loans includes loans on which the Company has discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields. All dollar amounts are in thousands.
|
|
Three months ended 3/31/2019
|
|
|
Three months ended 3/31/2018
|
|
|
|
Average Balance
|
|
|
Interest
|
|
|
Yield /
Cost
|
|
|
Average Balance
|
|
|
Interest
|
|
|
Yield /
Cost
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
779,764
|
|
|
$
|
10,303
|
|
|
|
5.36
|
%
|
|
$
|
642,346
|
|
|
$
|
7,378
|
|
|
|
4.66
|
%
|
Investment securities
|
|
|
90,061
|
|
|
|
598
|
|
|
|
2.69
|
%
|
|
|
80,400
|
|
|
|
495
|
|
|
|
2.50
|
%
|
Other assets
|
|
|
30,906
|
|
|
|
196
|
|
|
|
2.57
|
%
|
|
|
23,478
|
|
|
|
83
|
|
|
|
1.43
|
%
|
Total interest-earning
|
|
|
900,731
|
|
|
|
11,097
|
|
|
|
5.00
|
%
|
|
|
746,224
|
|
|
|
7,956
|
|
|
|
4.32
|
%
|
Noninterest-earning
|
|
|
59,405
|
|
|
|
|
|
|
|
|
|
|
|
37,801
|
|
|
|
|
|
|
|
|
|
|
|
$
|
960,136
|
|
|
|
|
|
|
|
|
|
|
$
|
784,025
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
39,897
|
|
|
|
30
|
|
|
|
0.30
|
%
|
|
$
|
31,320
|
|
|
|
21
|
|
|
|
0.27
|
%
|
Transaction accounts
|
|
|
410,061
|
|
|
|
1,475
|
|
|
|
1.46
|
%
|
|
|
369,135
|
|
|
|
930
|
|
|
|
1.02
|
%
|
Certificates of deposit
|
|
|
239,248
|
|
|
|
1,101
|
|
|
|
1.87
|
%
|
|
|
155,525
|
|
|
|
472
|
|
|
|
1.23
|
%
|
FHLB advances
|
|
|
60,204
|
|
|
|
357
|
|
|
|
2.40
|
%
|
|
|
65,252
|
|
|
|
333
|
|
|
|
2.07
|
%
|
Subordinated debentures
|
|
|
21,753
|
|
|
|
291
|
|
|
|
5.43
|
%
|
|
|
15,465
|
|
|
|
169
|
|
|
|
4.43
|
%
|
Other borrowed funds
|
|
|
5,000
|
|
|
|
68
|
|
|
|
5.52
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total interest-bearing
|
|
|
776,163
|
|
|
|
3,322
|
|
|
|
1.74
|
%
|
|
|
636,697
|
|
|
|
1,925
|
|
|
|
1.23
|
%
|
Noninterest-bearing
|
|
|
101,813
|
|
|
|
|
|
|
|
|
|
|
|
71,472
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
877,976
|
|
|
|
|
|
|
|
|
|
|
|
708,169
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
82,160
|
|
|
|
|
|
|
|
|
|
|
|
75,856
|
|
|
|
|
|
|
|
|
|
|
|
$
|
960,136
|
|
|
|
|
|
|
|
|
|
|
$
|
784,025
|
|
|
|
|
|
|
|
|
|
Net earning balance
|
|
$
|
124,568
|
|
|
|
|
|
|
|
|
|
|
$
|
109,527
|
|
|
|
|
|
|
|
|
|
Earning yield less costing rate
|
|
|
|
|
|
|
|
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
Net interest income, and net yield spread on interest earning assets
|
|
|
|
|
|
$
|
7,775
|
|
|
|
3.50
|
%
|
|
|
|
|
|
$
|
6,031
|
|
|
|
3.28
|
%
|
Ratio of interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
|
116
|
%
|
|
|
|
|
|
|
|
|
|
|
117
|
%
|
|
|
|
|
Results of Operations - Comparison of Three Month Periods Ended March 31, 2019 and 2018
Net income for the three months ended March 31, 2019 and 2018 was $2,120,364 and $1,355,745, respectively, which represents an increase in earnings of $764,619 (56%).
Interest Income
Total interest income for the three months ended March 31, 2019 increased $3,140,120 (39%) as compared to the three months ended March 31, 2018. For the three month period ended March 31, 2019 compared to the same period in 2018, the average yield on interest earning assets increased 68 basis points to 5.00%, while the average balance of interest earning assets increased approximately $154,507,000. The increase is primarily due to higher loan balances as a result of the Hometown acquisition and higher loan yields compared to the same quarter in 2018. The average balance of loans increased $137,418,000 compared to March 30, 2018. The yield on loans increased 70 basis points to 5.36% and $373,000 in loan accretion was recognized on loans acquired from Hometown compared to none in the same quarter of 2018.
Interest Expense
Total interest expense for the three months ended March 31, 2019 increased $1,396,654 (73%) when compared to the three months ended March 31, 2018. For the three month period ended March 31, 2019, the average cost of interest bearing liabilities increased 51 basis points to 1.74%, and the average balance of interest bearing liabilities increased approximately $139,466,000 when compared to the same period in 2018. The increases are primarily due to the liabilities acquired from Hometown and higher offering rates on all deposit products due to significant competitive pressures. The Company will continue to utilize a cost-effective mix of retail and commercial deposits along with non-core, wholesale funding.
Net Interest Income
Net interest income for the three months ended March 31, 2019 increased $1,743,466 (29%) when compared to the same period in 2018. The average balance of interest earning assets increased by approximately $15,041,000 more than the average balance of interest-bearing liabilities increased when comparing the three month period ended March 31, 2019 to the same period in 2018 primarily due to the Hometown acquisition. For the three month period ended March 31, 2019, the net interest margin increased 22 basis points to 3.50% when compared to the same period in 2018.
Provision for Loan Losses
Provisions for loan losses are charged or credited to earnings to bring the total allowance for loan losses to a level considered adequate by the Company to provide for potential loan losses in the existing loan portfolio. When making its assessment, the Company considers prior loss experience, volume and type of lending, local banking trends and impaired and past due loans in the Company’s loan portfolio. In addition, the Company considers general economic conditions and other factors related to collectability of the Company’s loan portfolio.
Based on its internal analysis and methodology, management did not record a provision for loan losses for the three months ended March 31, 2019, compared to $225,000 for the same period in 2018. The decision to not fund the provision for the quarter was primarily due to the decline in overall loan balances and a slight reduction in the number of problem credits. The Bank will continue to monitor its allowance for loan losses and make future additions based on economic and regulatory conditions. Management may need to increase the allowance for loan losses through charges to the provision for loan losses if anticipated growth in the Bank’s loan portfolio increases or other circumstances warrant.
In accordance with GAAP for acquisition accounting, the loans acquired through the acquisition of Hometown were recorded at fair value; therefore, there was no allowance associated with Hometown’s loans at acquisition. Management continues to evaluate the allowance needed on the acquired Hometown loans factoring in the net remaining discount of $2.1 million at March 31, 2019.
Although the Bank maintains its allowance for loan losses at a level which it considers to be sufficient to provide for potential loan losses in its existing loan portfolio, there can be no assurance that future loan losses will not exceed internal estimates. In addition, the amount of the allowance for loan losses is subject to review by regulatory agencies which can order the establishment of additional loan loss provisions.
Non
-I
nterest Income
Non-interest income increased $245,296 (19%) for the three months ended March 31, 2019 when compared to the three months ended March 31, 2018. This was primarily due to the Company’s increased income from sales of Small Business Administration (“SBA”) loans and increased service charges on deposit accounts and debit card interchange income. For the first quarter of 2019, gains on sales of SBA loans increased $79,257, service charges on deposit accounts increased $84,666 and debit card interchange income increased $90,400. These increases are all primarily due to the Hometown acquisition.
Non
-I
nterest Expense
Non-interest expenses increased $1,367,704 (25%) for the three months ended March 31, 2019 when compared to the three months ended March 31, 2018. Generally, the Company’s expansion efforts have resulted in an increase in both compensation and occupancy expense.
Salaries and employee benefits increased $785,896 for the quarter. The increase is primarily attributable to the addition of Hometown employees and continued expansion in the Joplin, Missouri market. Additional staffing in areas such as operations and information technology to support expansion efforts also contributed to the increase.
Occupancy expenses and data processing increased $362,956 and $86,412, respectively, for the quarter primarily due to the expenses related to additional Hometown facilities, equipment and increased transactions.
Core deposit intangible amortization increase for the quarter was $119,250 (100%) when compared to March 31, 2018. These amounts are due to the Hometown acquisition and are further discussed in Note 7 to the Condensed Consolidated Financial Statements.
Merger expenses related to the Hometown acquisition for the quarter decreased $211,404 (93%) when compared to the same quarter in 2018.
Other expense increased $184,607 when compared to the same quarter in 2018 primarily due to an increase of $80,000 for professional fees due to the Company now being considered an accelerated filer pursuant to rules adopted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and additional work performed on implementation of new accounting standards. Moderate increases in marketing, postage and loan expenses were due to the Hometown acquisition.
Provision for Income Taxes
The provision for income taxes increased by $81,439 (28%) for the three months ended March 31, 2019 when compared to the three months ended March 31, 2018. The increase in the provision for income taxes for the quarter is primarily due to increased taxable income.
Nonperforming Assets
The allowance for loan losses is calculated based upon an evaluation of pertinent factors underlying the various types and quality of the Bank’s existing loan portfolio. When making such evaluation, management considers such factors as the repayment status of its loans, the estimated net realizable value of the underlying collateral, borrowers’ intent (to the extent known by the Bank) and ability to repay the loan, local economic conditions and the Bank’s historical loss ratios. The allowance for loan losses, as a percentage of nonperforming loans outstanding, as of March 31, 2019 and December 31, 2018 was 63.6% and 61.1%, respectively. Total loans classified as substandard, doubtful or loss as of March 31, 2019, were $23,819,000 or 2.43% of total assets as compared to $24,714,000 or 2.56% of total assets at December 31, 2018. Management considered nonperforming and total classified loans in evaluating the adequacy of the Bank’s allowance for loan losses.
The ratio of nonperforming assets to total assets is another useful tool in evaluating exposure to credit risk. Nonperforming assets of the Bank are comprised of nonperforming loans (including troubled debt restructurings) and assets which have been acquired as a result of foreclosure or deed-in-lieu of foreclosure. All dollar amounts are in thousands.
|
|
3/31/2019
|
|
|
12/31/2018
|
|
|
12/31/2017
|
|
Nonperforming loans
|
|
$
|
12,341
|
|
|
$
|
13,082
|
|
|
$
|
9,961
|
|
Real estate acquired in settlement of loans
|
|
|
1,179
|
|
|
|
1,127
|
|
|
|
283
|
|
Total nonperforming assets
|
|
$
|
13,520
|
|
|
$
|
14,209
|
|
|
$
|
10,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a percentage of total assets
|
|
|
1.38
|
%
|
|
|
1.47
|
%
|
|
|
1.29
|
%
|
Allowance for loan losses
|
|
$
|
7,847
|
|
|
$
|
7,996
|
|
|
$
|
7,107
|
|
Allowance for loan losses as a percentage of gross loans
|
|
|
1.02
|
%
|
|
|
1.02
|
%
|
|
|
1.12
|
%
|
Liquidity and Capital Resources
Liquidity refers to the ability to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company’s primary sources of liquidity include cash and cash equivalents, customer deposits and FHLB borrowings. The Company also has established secured borrowing lines available from the Federal Reserve Bank which is considered a secondary source of funds.
The Company’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, and certificates of deposit with other financial institutions that have an original maturity of three months or less. The levels of such assets are dependent on the Bank’s operating, financing, and investment activities at any given time. The Company’s cash and cash equivalents totaled $43,049,261 as of March 31, 2019 and $34,121,642 as of December 31, 2018, representing an increase of $8,927,619. The variations in levels of cash and cash equivalents are influenced by many factors but primarily loan originations and payments and deposit fluctuations.
In July 2013, the Federal Reserve issued a final rule that revised its risk-based and leverage capital requirements for banking organizations to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act (“Basel III Rule”). The Basel III Rule implemented a revised definition of regulatory capital, a new common equity tier 1 (“CET1”) minimum capital requirement, and a higher minimum tier1 capital requirement. The final rules also made changes to the prompt corrective action framework for depository institutions by incorporating the new minimum capital ratios into the framework, introducing the CET1 capital measure, and aligning the definition of tangible equity for purposes of the critically undercapitalized prompt corrective action category with the definition of tier 1 capital. Under the Basel III Rule, the following three components comprise a banking organization’s “regulatory capital”: (i) “CET1 capital,” which is predominantly comprised of retained earnings and common stock instruments that meet certain criteria and related surplus (net of any treasury stock), AOCI (for organizations that do not make opt-out elections), and CET1 minority interest, which are subject to certain restrictions; (ii) “Additional Tier 1 Capital,” which consists of non-cumulative perpetual preferred stock and similar instruments meeting specified eligibility criteria and related surplus, Tier 1 minority interests not included in CET1 capital, and “TARP” preferred stock and other instruments issued under the Emergency Economic Stabilization Act of 2008; and (iii) “Tier 2 Capital,” which includes instruments such as subordinated debt that has a minimum original maturity of at least five years and is subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 capital and limited amounts of a banking organization’s allowance for loan and lease losses (ALLL), less applicable regulatory adjustments and deductions.
As of January 1, 2019, the Basel III Rule is fully phased-in and requires the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation); (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
Beginning January 1, 2016, the capital conservation buffer requirement was phased in at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
The Bank is classified as “well capitalized” under current regulatory guidelines. As of March 31, 2019, the Bank’s common equity Tier 1 ratio was 11.55%, the Bank’s Tier 1 leverage ratio was 11.55%, its Tier 1 risk-based capital ratio was 10.50% and the Bank’s total risk-based capital ratio was 12.45% - all exceeding the minimums of 7.0%, 6.0%, 8.5% and 10.5%, respectively, as of March 31, 2019. A proposed Community Bank Leverage ratio (“CBLR”) rule issued on February 8, 2019 by federal banking regulators may change how the Bank is classified. At this point, it is unclear whether federal banking regulators will issue a final rule and, even if they do, the final rule may not provide relief from federal banking capital requirements.