ITEM
1. FINANCIAL STATEMENTS
LANDMARK
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Dollars in thousands, except per share amounts)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,782
|
|
|
$
|
13,694
|
|
Investment securities available-for-sale, at fair value
|
|
|
314,489
|
|
|
|
362,998
|
|
Bank stocks, at cost
|
|
|
3,344
|
|
|
|
3,109
|
|
Loans, net of allowance for loans losses of $7,479 at March 31, 2020 and $6,467 at December 31, 2019
|
|
|
553,736
|
|
|
|
532,180
|
|
Loans held for sale, at fair value
|
|
|
9,753
|
|
|
|
8,497
|
|
Premises and equipment, net
|
|
|
20,991
|
|
|
|
21,133
|
|
Bank owned life insurance
|
|
|
24,963
|
|
|
|
24,809
|
|
Goodwill
|
|
|
17,532
|
|
|
|
17,532
|
|
Other intangible assets, net
|
|
|
2,764
|
|
|
|
2,829
|
|
Real estate owned, net
|
|
|
570
|
|
|
|
290
|
|
Accrued interest and other assets
|
|
|
12,150
|
|
|
|
11,394
|
|
Total assets
|
|
$
|
989,074
|
|
|
$
|
998,465
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand
|
|
$
|
204,147
|
|
|
$
|
182,717
|
|
Money market and checking
|
|
|
386,167
|
|
|
|
405,746
|
|
Savings
|
|
|
106,003
|
|
|
|
99,522
|
|
Time
|
|
|
134,163
|
|
|
|
147,063
|
|
Total deposits
|
|
|
830,480
|
|
|
|
835,048
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank borrowings
|
|
|
-
|
|
|
|
3,000
|
|
Subordinated debentures
|
|
|
21,651
|
|
|
|
21,651
|
|
Other borrowings
|
|
|
9,202
|
|
|
|
17,548
|
|
Accrued interest, taxes, and other liabilities
|
|
|
16,607
|
|
|
|
12,611
|
|
Total liabilities
|
|
|
877,940
|
|
|
|
889,858
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value per share, 200,000 shares authorized; none issued
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.01 par value per share, 7,500,000 shares authorized; 4,600,532 and 4,597,396
shares issued at March 31, 2020 and December 31, 2019, respectively
|
|
|
46
|
|
|
|
46
|
|
Additional paid-in capital
|
|
|
69,147
|
|
|
|
69,029
|
|
Retained earnings
|
|
|
36,736
|
|
|
|
34,293
|
|
Treasury stock, at cost: 91,137 and 0 shares at March 31, 2020 and December 31,2019, respectively
|
|
|
(2,023
|
)
|
|
|
-
|
|
Accumulated other comprehensive income
|
|
|
7,228
|
|
|
|
5,239
|
|
Total stockholders’ equity
|
|
|
111,134
|
|
|
|
108,607
|
|
Total liabilities and stockholders’ equity
|
|
$
|
989,074
|
|
|
$
|
998,465
|
|
See
accompanying notes to consolidated financial statements.
LANDMARK
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EARNINGS
(Unaudited)
|
|
Three months ended
|
|
(Dollars in thousands, except per share amounts)
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Interest income:
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
7,102
|
|
|
$
|
6,435
|
|
Tax-exempt
|
|
|
24
|
|
|
|
26
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,344
|
|
|
|
1,493
|
|
Tax-exempt
|
|
|
848
|
|
|
|
930
|
|
Total interest income
|
|
|
9,318
|
|
|
|
8,884
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
983
|
|
|
|
1,331
|
|
Borrowings
|
|
|
233
|
|
|
|
357
|
|
Total interest expense
|
|
|
1,216
|
|
|
|
1,688
|
|
Net interest income
|
|
|
8,102
|
|
|
|
7,196
|
|
Provision for loan losses
|
|
|
1,200
|
|
|
|
200
|
|
Net interest income after provision for loan losses
|
|
|
6,902
|
|
|
|
6,996
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
Fees and service charges
|
|
|
1,962
|
|
|
|
1,689
|
|
Gains on sales of loans, net
|
|
|
1,193
|
|
|
|
1,120
|
|
Bank owned life insurance
|
|
|
154
|
|
|
|
159
|
|
Gains on sales of investment securities, net
|
|
|
1,770
|
|
|
|
-
|
|
Other
|
|
|
274
|
|
|
|
288
|
|
Total non-interest income
|
|
|
5,353
|
|
|
|
3,256
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
4,582
|
|
|
|
4,143
|
|
Occupancy and equipment
|
|
|
1,079
|
|
|
|
1,062
|
|
Data processing
|
|
|
425
|
|
|
|
414
|
|
Amortization of intangibles
|
|
|
277
|
|
|
|
264
|
|
Professional fees
|
|
|
363
|
|
|
|
396
|
|
Advertising
|
|
|
150
|
|
|
|
166
|
|
Federal deposit insurance premiums
|
|
|
38
|
|
|
|
68
|
|
Foreclosure and real estate owned expense
|
|
|
25
|
|
|
|
41
|
|
Other
|
|
|
1,168
|
|
|
|
1,174
|
|
Total non-interest expense
|
|
|
8,107
|
|
|
|
7,728
|
|
Earnings before income taxes
|
|
|
4,148
|
|
|
|
2,524
|
|
Income tax expense
|
|
|
785
|
|
|
|
341
|
|
Net earnings
|
|
$
|
3,363
|
|
|
$
|
2,183
|
|
Earnings per share (1):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.73
|
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
0.47
|
|
Dividends per share
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
(1)
|
Per share amounts for the period ended March 31, 2019
have been adjusted to give effect to the 5% stock dividend paid during December 2019.
|
See
accompanying notes to consolidated financial statements.
LANDMARK
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
Three months ended
|
|
(Dollars in thousands)
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,363
|
|
|
$
|
2,183
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains on available-for-sale securities
|
|
|
4,405
|
|
|
|
4,727
|
|
Less reclassification adjustment for net gains included in earnings
|
|
|
(1,770
|
)
|
|
|
-
|
|
Net unrealized gains
|
|
|
2,635
|
|
|
|
4,727
|
|
Income tax effect on net gains included in earnings
|
|
|
434
|
|
|
|
-
|
|
Income tax effect on net unrealized holding gains
|
|
|
(1,080
|
)
|
|
|
(1,158
|
)
|
Other comprehensive income
|
|
|
1,989
|
|
|
|
3,569
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
5,352
|
|
|
$
|
5,752
|
|
See
accompanying notes to consolidated financial statements.
LANDMARK
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)
|
|
Common stock
|
|
|
Additional paid-in capital
|
|
|
Retained earnings
|
|
|
Treasury stock
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
44
|
|
|
$
|
63,775
|
|
|
$
|
32,073
|
|
|
$
|
-
|
|
|
$
|
(3,991
|
)
|
|
$
|
91,901
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
2,183
|
|
|
|
|
|
|
|
-
|
|
|
|
2,183
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,569
|
|
|
|
3,569
|
|
Dividends paid ($0.19 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(875
|
)
|
|
|
|
|
|
|
-
|
|
|
|
(875
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
69
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
69
|
|
Balance at March 31, 2019
|
|
$
|
44
|
|
|
$
|
63,844
|
|
|
$
|
33,381
|
|
|
$
|
-
|
|
|
$
|
(422
|
)
|
|
$
|
96,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
46
|
|
|
$
|
69,029
|
|
|
$
|
34,293
|
|
|
$
|
-
|
|
|
$
|
5,239
|
|
|
$
|
108,607
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
3,363
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,363
|
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,989
|
|
|
|
1,989
|
|
Dividends paid ($0.20 per share)
|
|
|
-
|
|
|
|
-
|
|
|
|
(920
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(920
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
Exercise of stock options, 3,136 shares
|
|
|
-
|
|
|
|
33
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33
|
|
Purchase of 91,137 treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,023
|
)
|
|
|
-
|
|
|
|
(2,023
|
)
|
Balance at March 31, 2020
|
|
$
|
46
|
|
|
$
|
69,147
|
|
|
$
|
36,736
|
|
|
$
|
(2,023
|
)
|
|
$
|
7,228
|
|
|
$
|
111,134
|
|
See
accompanying notes to consolidated financial statements.
LANDMARK
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three months ended
|
|
(Dollars in thousands)
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,363
|
|
|
$
|
2,183
|
|
Adjustments to reconcile net earnings to net cash provided by (used by) operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
1,200
|
|
|
|
200
|
|
Amortization of investment security premiums, net
|
|
|
366
|
|
|
|
440
|
|
Amortization of purchase accounting adjustment on loans
|
|
|
(5
|
)
|
|
|
(34
|
)
|
Amortization of intangibles
|
|
|
277
|
|
|
|
264
|
|
Depreciation
|
|
|
250
|
|
|
|
246
|
|
Increase in cash surrender value of bank owned life insurance
|
|
|
(154
|
)
|
|
|
(159
|
)
|
Stock-based compensation
|
|
|
85
|
|
|
|
69
|
|
Deferred income taxes
|
|
|
403
|
|
|
|
(339
|
)
|
Net gains on sales of investment securities
|
|
|
(1,770
|
)
|
|
|
-
|
|
Net losses on sales of foreclosed assets
|
|
|
1
|
|
|
|
-
|
|
Net gains on sales of loans
|
|
|
(1,193
|
)
|
|
|
(1,120
|
)
|
Proceeds from sales of loans
|
|
|
45,830
|
|
|
|
25,395
|
|
Origination of loans held for sale
|
|
|
(45,893
|
)
|
|
|
(26,139
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued interest and other assets
|
|
|
(928
|
)
|
|
|
(430
|
)
|
Accrued expenses, taxes, and other liabilities
|
|
|
2,948
|
|
|
|
(1,605
|
)
|
Net cash provided by (used in) operating activities
|
|
|
4,780
|
|
|
|
(1,029
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Net increase in loans
|
|
|
(23,105
|
)
|
|
|
(1,548
|
)
|
Maturities and prepayments of investment securities
|
|
|
18,948
|
|
|
|
14,833
|
|
Purchases of investment securities
|
|
|
(10,909
|
)
|
|
|
(7,735
|
)
|
Proceeds from sales of investment securities
|
|
|
44,508
|
|
|
|
-
|
|
Redemption of bank stocks
|
|
|
680
|
|
|
|
4,254
|
|
Purchase of bank stocks
|
|
|
(915
|
)
|
|
|
(2,472
|
)
|
Proceeds from sales of premises and equipment and foreclosed assets
|
|
|
45
|
|
|
|
14
|
|
Purchases of premises and equipment, net
|
|
|
(120
|
)
|
|
|
(243
|
)
|
Net cash provided by investing activities
|
|
|
29,132
|
|
|
|
7,103
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net decrease in deposits
|
|
|
(4,568
|
)
|
|
|
(1,847
|
)
|
Federal Home Loan Bank advance borrowings
|
|
|
101,768
|
|
|
|
101,786
|
|
Federal Home Loan Bank advance repayments
|
|
|
(104,768
|
)
|
|
|
(111,486
|
)
|
Proceeds from other borrowings
|
|
|
1,000
|
|
|
|
1,567
|
|
Repayments on other borrowings
|
|
|
(9,346
|
)
|
|
|
-
|
|
Proceeds from exercise of stock options
|
|
|
33
|
|
|
|
-
|
|
Payment of dividends
|
|
|
(920
|
)
|
|
|
(875
|
)
|
Purchase of treasury stock
|
|
|
(2,023
|
)
|
|
|
-
|
|
Net cash used in financing activities
|
|
|
(18,824
|
)
|
|
|
(10,855
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
15,088
|
|
|
|
(4,781
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
13,694
|
|
|
|
19,114
|
|
Cash and cash equivalents at end of period
|
|
$
|
28,782
|
|
|
$
|
14,333
|
|
(Continued)
LANDMARK
BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
|
|
Three months ended
|
|
(Dollars in thousands)
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,258
|
|
|
$
|
1,685
|
|
Cash paid for operating leases
|
|
|
44
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Transfer of loans to real estate owned
|
|
|
314
|
|
|
|
20
|
|
Investment securities purchases not yet settled
|
|
|
-
|
|
|
|
(1,858
|
)
|
Operating lease asset and related lease liability recorded
|
|
|
-
|
|
|
|
353
|
|
See
accompanying notes to consolidated financial statements.
LANDMARK
BANCORP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Interim
Financial Statements
|
The
unaudited consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and its wholly owned subsidiaries,
Landmark National Bank (the “Bank”) and Landmark Risk Management Inc., have been prepared in accordance with the instructions
to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting
principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s most
recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 12, 2020, containing the latest
audited consolidated financial statements and notes thereto. The consolidated financial statements in this report have not been
audited by an independent registered public accounting firm, but in the opinion of management, all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein. The
results of the three-month interim period ended March 31, 2020 are not necessarily indicative of the results expected for the
year ending December 31, 2020 or any other future time period. The Company has evaluated subsequent events for recognition and
disclosure up to the date the financial statements were issued.
A
summary of investment securities available-for-sale is as follows:
|
|
As of March 31, 2020
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Estimated
|
|
(Dollars in thousands)
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. treasury securities
|
|
$
|
2,000
|
|
|
$
|
57
|
|
|
$
|
-
|
|
|
$
|
2,057
|
|
U. S. federal agency obligations
|
|
|
2,015
|
|
|
|
148
|
|
|
|
-
|
|
|
|
2,163
|
|
Municipal obligations, tax exempt
|
|
|
138,118
|
|
|
|
3,626
|
|
|
|
(61
|
)
|
|
|
141,683
|
|
Municipal obligations, taxable
|
|
|
48,307
|
|
|
|
1,822
|
|
|
|
(72
|
)
|
|
|
50,057
|
|
Agency mortgage-backed securities
|
|
|
112,570
|
|
|
|
4,054
|
|
|
|
-
|
|
|
|
116,624
|
|
Certificates of deposit
|
|
|
1,905
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,905
|
|
Total available-for-sale
|
|
$
|
304,915
|
|
|
$
|
9,707
|
|
|
$
|
(133
|
)
|
|
$
|
314,489
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Estimated
|
|
(Dollars in thousands)
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. treasury securities
|
|
$
|
2,300
|
|
|
$
|
16
|
|
|
$
|
-
|
|
|
$
|
2,316
|
|
U. S. federal agency obligations
|
|
|
4,015
|
|
|
|
91
|
|
|
|
-
|
|
|
|
4,106
|
|
Municipal obligations, tax exempt
|
|
|
142,391
|
|
|
|
3,513
|
|
|
|
(42
|
)
|
|
|
145,862
|
|
Municipal obligations, taxable
|
|
|
45,541
|
|
|
|
1,293
|
|
|
|
(55
|
)
|
|
|
46,779
|
|
Agency mortgage-backed securities
|
|
|
159,908
|
|
|
|
2,353
|
|
|
|
(230
|
)
|
|
|
162,031
|
|
Certificates of deposit
|
|
|
1,904
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,904
|
|
Total available-for-sale
|
|
$
|
356,059
|
|
|
$
|
7,266
|
|
|
$
|
(327
|
)
|
|
$
|
362,998
|
|
The
tables above show that some of the securities in the available-for-sale investment portfolio had unrealized losses, or were temporarily
impaired, as of March 31, 2020 and December 31, 2019. This temporary impairment represents the estimated amount of loss that would
be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along
with the length of time in a continuous unrealized loss position.
|
|
|
|
|
As of March 31, 2020
|
|
(Dollars in thousands)
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
No. of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
securities
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
Municipal obligations, tax exempt
|
|
|
19
|
|
|
|
5,220
|
|
|
|
(60
|
)
|
|
|
436
|
|
|
|
(1
|
)
|
|
|
5,656
|
|
|
|
(61
|
)
|
Municipal obligations, taxable
|
|
|
6
|
|
|
|
3,307
|
|
|
|
(72
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,307
|
|
|
|
(72
|
)
|
Total
|
|
|
25
|
|
|
$
|
8,527
|
|
|
$
|
(132
|
)
|
|
$
|
436
|
|
|
$
|
(1
|
)
|
|
$
|
8,963
|
|
|
$
|
(133
|
)
|
|
|
|
|
|
As of December 31, 2019
|
|
(Dollars in thousands)
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
No. of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
securities
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
Municipal obligations, tax exempt
|
|
|
23
|
|
|
|
5,676
|
|
|
|
(16
|
)
|
|
|
3,473
|
|
|
|
(26
|
)
|
|
|
9,149
|
|
|
|
(42
|
)
|
Municipal obligations, taxable
|
|
|
4
|
|
|
|
2,563
|
|
|
|
(55
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,563
|
|
|
|
(55
|
)
|
Agency mortgage-backed securities
|
|
|
21
|
|
|
|
15,735
|
|
|
|
(43
|
)
|
|
|
17,137
|
|
|
|
(187
|
)
|
|
|
32,872
|
|
|
|
(230
|
)
|
Total
|
|
|
48
|
|
|
$
|
23,974
|
|
|
$
|
(114
|
)
|
|
$
|
20,610
|
|
|
$
|
(213
|
)
|
|
$
|
44,584
|
|
|
$
|
(327
|
)
|
The
Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued
by various municipalities. As of March 31, 2020, the Company did not intend to sell and it is more likely than not that the Company
will not be required to sell its municipal obligations in an unrealized loss position until the recovery of its cost. Due to the
issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and the
expectation that they will continue to do so, the evaluation of the fundamentals of the issuers’ financial condition and
other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily
impaired as of March 31, 2020 and December 31, 2019.
The
Company’s agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed
by the government-sponsored agencies of FHLMC, FNMA and the Government National Mortgage Association. The receipt of principal,
at par, and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor,
such that the Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses.
Based on these factors, along with the Company’s intent to not sell the securities and the Company’s belief that it
was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the
Company believed that the agency mortgage-backed securities identified in the tables above were temporarily impaired as of December
31, 2019.
The
table below sets forth amortized cost and fair value of investment securities at March 31, 2020. The table includes scheduled
principal payments and estimated prepayments, based on observable market inputs, for agency mortgage-backed securities. Actual
maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment
penalties.
(Dollars in thousands)
|
|
Amortized
|
|
|
Estimated
|
|
|
|
cost
|
|
|
fair value
|
|
Due in less than one year
|
|
$
|
8,256
|
|
|
$
|
8,286
|
|
Due after one year but within five years
|
|
|
139,382
|
|
|
|
143,620
|
|
Due after five years but within ten years
|
|
|
81,323
|
|
|
|
84,067
|
|
Due after ten years
|
|
|
75,954
|
|
|
|
78,516
|
|
Total
|
|
$
|
304,915
|
|
|
$
|
314,489
|
|
Sales
proceeds and gross realized gains and losses on sales of available-for-sale securities were as follows for the periods indicated:
(Dollars in thousands)
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Sales proceeds
|
|
$
|
44,508
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Realized gains
|
|
$
|
1,772
|
|
|
$
|
-
|
|
Realized losses
|
|
|
(2
|
)
|
|
|
-
|
|
Net realized gains
|
|
$
|
1,770
|
|
|
$
|
-
|
|
Securities
with carrying values of $204.2 million and $240.0 million were pledged to secure public funds on deposit, repurchase agreements
and as collateral for borrowings at March 31, 2020 and December 31, 2019, respectively. Except for U.S. federal agency obligations,
no investment in a single issuer exceeded 10% of consolidated stockholders’ equity.
3.
|
Loans
and Allowance for Loan Losses
|
Loans
consisted of the following as of the dates indicated below:
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
148,994
|
|
|
$
|
146,505
|
|
Construction and land
|
|
|
24,657
|
|
|
|
22,459
|
|
Commercial real estate
|
|
|
141,712
|
|
|
|
133,501
|
|
Commercial
|
|
|
121,271
|
|
|
|
109,612
|
|
Agriculture
|
|
|
96,120
|
|
|
|
98,558
|
|
Municipal
|
|
|
2,628
|
|
|
|
2,656
|
|
Consumer
|
|
|
25,662
|
|
|
|
25,101
|
|
Total gross loans
|
|
|
561,044
|
|
|
|
538,392
|
|
Net deferred loan costs and loans in process
|
|
|
171
|
|
|
|
255
|
|
Allowance for loan losses
|
|
|
(7,479
|
)
|
|
|
(6,467
|
)
|
Loans, net
|
|
$
|
553,736
|
|
|
$
|
532,180
|
|
The
following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology:
|
|
Three months ended
March 31, 2020
|
|
(Dollars
in thousands)
|
|
One-to-four family
residential real estate
|
|
|
Construction and
land
|
|
|
Commercial real
estate
|
|
|
Commercial
|
|
|
Agriculture
|
|
|
Municipal
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
501
|
|
|
$
|
271
|
|
|
$
|
1,386
|
|
|
$
|
1,815
|
|
|
$
|
2,347
|
|
|
$
|
7
|
|
|
$
|
140
|
|
|
$
|
6,467
|
|
Charge-offs
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(87
|
)
|
|
|
(220
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
6
|
|
|
|
25
|
|
|
|
32
|
|
Provision for loan losses
|
|
|
152
|
|
|
|
54
|
|
|
|
242
|
|
|
|
642
|
|
|
|
34
|
|
|
|
(6
|
)
|
|
|
82
|
|
|
|
1,200
|
|
Balance at March 31, 2020
|
|
$
|
653
|
|
|
$
|
225
|
|
|
$
|
1,628
|
|
|
$
|
2,425
|
|
|
$
|
2,381
|
|
|
$
|
7
|
|
|
$
|
160
|
|
|
$
|
7,479
|
|
|
|
Three months ended
March 31, 2019
|
|
(Dollars
in thousands)
|
|
One-to-four family
residential real estate
|
|
|
Construction and
land
|
|
|
Commercial real
estate
|
|
|
Commercial
|
|
|
Agriculture
|
|
|
Municipal
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
$
|
449
|
|
|
$
|
168
|
|
|
$
|
1,686
|
|
|
$
|
1,051
|
|
|
$
|
2,238
|
|
|
$
|
7
|
|
|
$
|
166
|
|
|
$
|
5,765
|
|
Charge-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(49
|
)
|
|
|
(49
|
)
|
Recoveries
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
6
|
|
|
|
14
|
|
|
|
22
|
|
Provision for loan losses
|
|
|
24
|
|
|
|
(12
|
)
|
|
|
185
|
|
|
|
113
|
|
|
|
(110
|
)
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
200
|
|
Balance at March 31, 2019
|
|
$
|
474
|
|
|
$
|
156
|
|
|
$
|
1,871
|
|
|
$
|
1,165
|
|
|
$
|
2,128
|
|
|
$
|
7
|
|
|
$
|
137
|
|
|
$
|
5,938
|
|
|
|
As of March 31,
2020
|
|
(Dollars in thousands)
|
|
One-to-four family
residential real estate
|
|
|
Construction and
land
|
|
|
Commercial real
estate
|
|
|
Commercial
|
|
|
Agriculture
|
|
|
Municipal
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for loss
|
|
$
|
129
|
|
|
$
|
91
|
|
|
$
|
52
|
|
|
$
|
235
|
|
|
$
|
36
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
543
|
|
Collectively evaluated
for loss
|
|
|
524
|
|
|
|
134
|
|
|
|
1,576
|
|
|
|
2,190
|
|
|
|
2,345
|
|
|
|
7
|
|
|
|
160
|
|
|
|
6,936
|
|
Total
|
|
$
|
653
|
|
|
$
|
225
|
|
|
$
|
1,628
|
|
|
$
|
2,425
|
|
|
$
|
2,381
|
|
|
$
|
7
|
|
|
$
|
160
|
|
|
$
|
7,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for loss
|
|
$
|
1,436
|
|
|
$
|
1,319
|
|
|
$
|
5,504
|
|
|
$
|
1,576
|
|
|
$
|
690
|
|
|
$
|
58
|
|
|
$
|
15
|
|
|
$
|
10,598
|
|
Collectively evaluated
for loss
|
|
|
147,558
|
|
|
|
23,338
|
|
|
|
136,208
|
|
|
|
119,695
|
|
|
|
95,430
|
|
|
|
2,570
|
|
|
|
25,647
|
|
|
|
550,446
|
|
Total
|
|
$
|
148,994
|
|
|
$
|
24,657
|
|
|
$
|
141,712
|
|
|
$
|
121,271
|
|
|
$
|
96,120
|
|
|
$
|
2,628
|
|
|
$
|
25,662
|
|
|
$
|
561,044
|
|
|
|
As of December
31, 2019
|
|
(Dollars in thousands)
|
|
One-to-four family
residential real estate
|
|
|
Construction and
land
|
|
|
Commercial real
estate
|
|
|
Commercial
|
|
|
Agriculture
|
|
|
Municipal
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for loss
|
|
$
|
129
|
|
|
$
|
191
|
|
|
$
|
103
|
|
|
$
|
204
|
|
|
$
|
106
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
733
|
|
Collectively evaluated for loss
|
|
|
372
|
|
|
|
80
|
|
|
|
1,283
|
|
|
|
1,611
|
|
|
|
2,241
|
|
|
|
7
|
|
|
|
140
|
|
|
|
5,734
|
|
Total
|
|
$
|
501
|
|
|
$
|
271
|
|
|
$
|
1,386
|
|
|
$
|
1,815
|
|
|
$
|
2,347
|
|
|
$
|
7
|
|
|
$
|
140
|
|
|
$
|
6,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for loss
|
|
$
|
1,256
|
|
|
$
|
1,479
|
|
|
$
|
3,461
|
|
|
$
|
1,298
|
|
|
$
|
1,124
|
|
|
$
|
58
|
|
|
$
|
4
|
|
|
$
|
8,680
|
|
Collectively evaluated for loss
|
|
|
145,249
|
|
|
|
20,980
|
|
|
|
130,040
|
|
|
|
108,314
|
|
|
|
97,434
|
|
|
|
2,598
|
|
|
|
25,097
|
|
|
|
529,712
|
|
Total
|
|
$
|
146,505
|
|
|
$
|
22,459
|
|
|
$
|
133,501
|
|
|
$
|
109,612
|
|
|
$
|
98,558
|
|
|
$
|
2,656
|
|
|
$
|
25,101
|
|
|
$
|
538,392
|
|
The
Company recorded net loan charge-offs of $188,000 during the first quarter of 2020 compared to net loan charge-offs of $27,000
during the first quarter of 2019.
The
Company’s impaired loans increased from $8.7 million at December 31, 2019 to $10.6 million at March 31, 2020. The difference
between the unpaid contractual principal and the impaired loan balance is a result of charge-offs recorded against impaired loans.
The difference in the Company’s non-accrual loan balances and impaired loan balances at March 31, 2020 and December 31,
2019, was related to troubled debt restructurings (“TDR”) that are current and accruing interest, but still classified
as impaired. Interest income recognized on a cash basis was immaterial during the three months ended March 31, 2020 and 2019.
The following tables present information on impaired loans:
(Dollars in thousands)
|
|
As of March 31,
2020
|
|
|
|
Unpaid contractual
principal
|
|
|
Impaired loan balance
|
|
|
Impaired loans
without an allowance
|
|
|
Impaired loans with
an allowance
|
|
|
Related allowance
recorded
|
|
|
Year-to-date average
loan balance
|
|
|
Year-to-date interest
income recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
1,477
|
|
|
$
|
1,436
|
|
|
$
|
1,067
|
|
|
$
|
369
|
|
|
$
|
129
|
|
|
$
|
1,442
|
|
|
$
|
2
|
|
Construction and land
|
|
|
3,154
|
|
|
|
1,319
|
|
|
|
1,228
|
|
|
|
91
|
|
|
|
91
|
|
|
|
1,353
|
|
|
|
7
|
|
Commercial real estate
|
|
|
5,504
|
|
|
|
5,504
|
|
|
|
5,308
|
|
|
|
196
|
|
|
|
52
|
|
|
|
5,510
|
|
|
|
118
|
|
Commercial
|
|
|
1,710
|
|
|
|
1,576
|
|
|
|
680
|
|
|
|
896
|
|
|
|
235
|
|
|
|
1,578
|
|
|
|
1
|
|
Agriculture
|
|
|
905
|
|
|
|
690
|
|
|
|
514
|
|
|
|
176
|
|
|
|
36
|
|
|
|
733
|
|
|
|
13
|
|
Municipal
|
|
|
58
|
|
|
|
58
|
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
-
|
|
Consumer
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
-
|
|
Total impaired loans
|
|
$
|
12,823
|
|
|
$
|
10,598
|
|
|
$
|
8,870
|
|
|
$
|
1,728
|
|
|
$
|
543
|
|
|
$
|
10,689
|
|
|
$
|
141
|
|
(Dollars in thousands)
|
|
As of December
31, 2019
|
|
|
|
Unpaid contractual
principal
|
|
|
Impaired loan balance
|
|
|
Impaired
loans
without an allowance
|
|
|
Impaired loans with
an allowance
|
|
|
Related allowance
recorded
|
|
|
Year-to-date average
loan balance
|
|
|
Year-to-date interest
income recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
1,297
|
|
|
$
|
1,256
|
|
|
$
|
887
|
|
|
$
|
369
|
|
|
$
|
129
|
|
|
$
|
1,291
|
|
|
$
|
10
|
|
Construction and land
|
|
|
3,214
|
|
|
|
1,479
|
|
|
|
1,288
|
|
|
|
191
|
|
|
|
191
|
|
|
|
1,631
|
|
|
|
36
|
|
Commercial real estate
|
|
|
3,461
|
|
|
|
3,461
|
|
|
|
3,258
|
|
|
|
203
|
|
|
|
103
|
|
|
|
3,489
|
|
|
|
478
|
|
Commercial
|
|
|
1,427
|
|
|
|
1,298
|
|
|
|
416
|
|
|
|
882
|
|
|
|
204
|
|
|
|
1,464
|
|
|
|
11
|
|
Agriculture
|
|
|
1,339
|
|
|
|
1,124
|
|
|
|
613
|
|
|
|
511
|
|
|
|
106
|
|
|
|
1,166
|
|
|
|
48
|
|
Municipal
|
|
|
58
|
|
|
|
58
|
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
1
|
|
Consumer
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Total impaired loans
|
|
$
|
10,800
|
|
|
$
|
8,680
|
|
|
$
|
6,524
|
|
|
$
|
2,156
|
|
|
$
|
733
|
|
|
$
|
9,104
|
|
|
$
|
584
|
|
The
Company’s key credit quality indicator is a loan’s performance status, defined as accruing or non-accruing. Performing
loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have a higher risk of
loss. The accrual of interest on non-performing loans is discontinued at the time the loan is 90 days delinquent, unless the credit
is well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection
of principal or interest is considered doubtful. There were no loans 90 days or more delinquent and accruing interest at March
31, 2020 or December 31, 2019.
The
following tables present information on the Company’s past due and non-accrual loans by loan class:
(Dollars in thousands)
|
|
As of March 31,
2020
|
|
|
|
30-59 days delinquent
and accruing
|
|
|
60-89 days delinquent
and accruing
|
|
|
90 days or more
delinquent and accruing
|
|
|
Total past due loans
accruing
|
|
|
Non-accrual loans
|
|
|
Total past due and
non-accrual loans
|
|
|
Total loans not
past due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
67
|
|
|
$
|
221
|
|
|
$
|
-
|
|
|
$
|
288
|
|
|
$
|
1,271
|
|
|
$
|
1,559
|
|
|
$
|
147,435
|
|
Construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
796
|
|
|
|
796
|
|
|
|
23,861
|
|
Commercial real estate
|
|
|
265
|
|
|
|
64
|
|
|
|
-
|
|
|
|
329
|
|
|
|
3,483
|
|
|
|
3,812
|
|
|
|
137,900
|
|
Commercial
|
|
|
201
|
|
|
|
127
|
|
|
|
-
|
|
|
|
328
|
|
|
|
1,548
|
|
|
|
1,876
|
|
|
|
119,395
|
|
Agriculture
|
|
|
456
|
|
|
|
1,262
|
|
|
|
-
|
|
|
|
1,718
|
|
|
|
447
|
|
|
|
2,165
|
|
|
|
93,955
|
|
Municipal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,628
|
|
Consumer
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
15
|
|
|
|
26
|
|
|
|
25,636
|
|
Total
|
|
$
|
1,000
|
|
|
$
|
1,674
|
|
|
$
|
-
|
|
|
$
|
2,674
|
|
|
$
|
7,560
|
|
|
$
|
10,234
|
|
|
$
|
550,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of gross loans
|
|
|
0.18
|
%
|
|
|
0.30
|
%
|
|
|
0.00
|
%
|
|
|
0.48
|
%
|
|
|
1.35
|
%
|
|
|
1.83
|
%
|
|
|
98.17
|
%
|
(Dollars in thousands)
|
|
As of December
31, 2019
|
|
|
|
30-59 days delinquent
and accruing
|
|
|
60-89 days delinquent
and accruing
|
|
|
90 days or more
delinquent and accruing
|
|
|
Total past due loans
accruing
|
|
|
Non-accrual loans
|
|
|
Total past due and
non-accrual loans
|
|
|
Total loans not
past due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$79
|
|
|
$593
|
|
|
$-
|
|
|
$672
|
|
|
$1,088
|
|
|
$1,760
|
|
|
$144,745
|
|
Construction and land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
898
|
|
|
|
898
|
|
|
|
21,561
|
|
Commercial real estate
|
|
|
1,137
|
|
|
|
707
|
|
|
|
-
|
|
|
|
1,844
|
|
|
|
1,440
|
|
|
|
3,284
|
|
|
|
130,217
|
|
Commercial
|
|
|
510
|
|
|
|
68
|
|
|
|
-
|
|
|
|
578
|
|
|
|
1,270
|
|
|
|
1,848
|
|
|
|
107,764
|
|
Agriculture
|
|
|
316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316
|
|
|
|
846
|
|
|
|
1,162
|
|
|
|
97,396
|
|
Municipal
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,656
|
|
Consumer
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
4
|
|
|
|
31
|
|
|
|
25,070
|
|
Total
|
|
$
|
2,069
|
|
|
$
|
1,368
|
|
|
$
|
-
|
|
|
$
|
3,437
|
|
|
$
|
5,546
|
|
|
$
|
8,983
|
|
|
$
|
529,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of gross loans
|
|
|
0.39
|
%
|
|
|
0.25
|
%
|
|
|
0.00
|
%
|
|
|
0.64
|
%
|
|
|
1.03
|
%
|
|
|
1.67
|
%
|
|
|
98.33
|
%
|
Under
the original terms of the Company’s non-accrual loans, interest earned on such loans for the three months ended March 31,
2020 and 2019 would have increased interest income by $120,000 and $124,000, respectively. No interest income related to non-accrual
loans was included in interest income for the three months ended March 31, 2020 and 2019.
The
Company also categorizes loans into risk categories based on relevant information about the ability of the borrowers to service
their debt, such as current financial information, historical payment experience, credit documentation, public information and
current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk.
This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid
in accordance with contractual loan terms. Classified loans are those that are assigned a special mention, substandard or doubtful
risk rating using the following definitions:
Special
Mention: Loans are currently protected by the current net worth and paying capacity of the obligor or of the collateral pledged
but such protection is potentially weak. These loans constitute an undue and unwarranted credit risk, but not to the point of
justifying a classification of substandard. The credit risk may be relatively minor, yet constitutes an unwarranted risk in light
of the circumstances surrounding a specific asset.
Substandard:
Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans
have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct
possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful:
Loans classified doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable
and improbable.
The
following table provides information on the Company’s risk categories by loan class:
|
|
As of March 31, 2020
|
|
|
As of December 31, 2019
|
|
(Dollars in thousands)
|
|
Nonclassified
|
|
|
Classified
|
|
|
Nonclassified
|
|
|
Classified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
147,591
|
|
|
$
|
1,403
|
|
|
$
|
145,311
|
|
|
$
|
1,194
|
|
Construction and land
|
|
|
23,861
|
|
|
|
796
|
|
|
|
21,560
|
|
|
|
899
|
|
Commercial real estate
|
|
|
137,577
|
|
|
|
4,135
|
|
|
|
130,714
|
|
|
|
2,787
|
|
Commercial
|
|
|
113,195
|
|
|
|
8,076
|
|
|
|
101,678
|
|
|
|
7,934
|
|
Agriculture
|
|
|
90,158
|
|
|
|
5,962
|
|
|
|
93,259
|
|
|
|
5,299
|
|
Municipal
|
|
|
2,628
|
|
|
|
-
|
|
|
|
2,656
|
|
|
|
-
|
|
Consumer
|
|
|
25,647
|
|
|
|
15
|
|
|
|
25,097
|
|
|
|
4
|
|
Total
|
|
$
|
540,657
|
|
|
$
|
20,387
|
|
|
$
|
520,275
|
|
|
$
|
18,117
|
|
At
March 31, 2020, the Company had nine loan relationships consisting of thirteen outstanding loans that were classified as TDRs.
There were no loans classified as TDRs during the first three months of 2020 or 2019.
The Company evaluates
each TDR individually and returns the loan to accrual status when a payment history is established after the restructuring and
future payments are reasonably assured. There were no loans modified as TDRs for which there was a payment default within 12 months
of modification as of March 31, 2020 and 2019. The Company did not record any charge-offs against loans classified as TDRs in
the first quarter of 2020 or 2019. A credit provision of $1,000 was recorded in the three months ended March 31, 2020 compared
to no provision related to TDRs recorded in the three months ended March 31, 2019. The Company allocated $9,000 of the
allowance for loan losses recorded against loans classified as TDRs at March 31, 2020 and December 31, 2019.
The
following table presents information on loans that are classified as TDRs:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
As of December 31, 2019
|
|
|
|
Number of loans
|
|
|
Non-accrual balance
|
|
|
Accruing balance
|
|
|
Number of loans
|
|
|
Non-accrual balance
|
|
|
Accruing balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
165
|
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
168
|
|
Construction and land
|
|
|
4
|
|
|
|
508
|
|
|
|
523
|
|
|
|
4
|
|
|
|
510
|
|
|
|
581
|
|
Commercial real estate
|
|
|
1
|
|
|
|
-
|
|
|
|
2,021
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2,021
|
|
Commercial
|
|
|
1
|
|
|
|
-
|
|
|
|
28
|
|
|
|
1
|
|
|
|
-
|
|
|
|
28
|
|
Agriculture
|
|
|
4
|
|
|
|
-
|
|
|
|
243
|
|
|
|
4
|
|
|
|
-
|
|
|
|
278
|
|
Municipal
|
|
|
1
|
|
|
|
-
|
|
|
|
58
|
|
|
|
1
|
|
|
|
-
|
|
|
|
58
|
|
Total troubled debt restructurings
|
|
|
13
|
|
|
$
|
508
|
|
|
$
|
3,038
|
|
|
|
13
|
|
|
$
|
510
|
|
|
$
|
3,134
|
|
As
of March 31, 2020, the Company had 12 loan modifications on outstanding loan balances of $8.4 million in connection with the Coronavirus
Disease 2019 (COVID-19) pandemic. These modifications consisted of payment deferrals that were less than 180 days and consisted
of either the full loan payment or just the principal component. Consistent with regulatory guidance, the Company also entered
into short-term forbearance plans or short-term repayment plans on three one-to-four family residential mortgage loans totaling
$682,000 as of March 31, 2020. Based on the Joint Interagency Regulatory Guidance, these loan modifications were not classified
as TDRs and are excluded from the table above.
4.
|
Goodwill
and Other Intangible Assets
|
The Company tests goodwill for impairment annually or more frequently if circumstances
warrant. The Company’s annual step one impairment test as of December 31, 2019 concluded that its goodwill was not impaired.
The Company concluded there was triggering event during the first three months of 2020 that required an interim goodwill impairment
test. The Company’s interim step one impairment test as of March 31, 2020 concluded that its goodwill was not impaired.
Lease
intangible assets are amortized over the life of the lease. Core deposit intangible assets are amortized over the estimated useful
life of ten years on an accelerated basis. Mortgage servicing rights are amortized over the estimated life of the mortgage loan
serviced for others. A summary of the other intangible assets that continue to be subject to amortization was as follows:
(Dollars in thousands)
|
|
As of March 31, 2020
|
|
|
|
Gross carrying amount
|
|
|
Accumulated amortization
|
|
|
Net carrying amount
|
|
Core deposit intangible assets
|
|
$
|
2,018
|
|
|
$
|
(1,742
|
)
|
|
$
|
276
|
|
Lease intangible asset
|
|
|
350
|
|
|
|
(290
|
)
|
|
|
60
|
|
Mortgage servicing rights
|
|
|
7,000
|
|
|
|
(4,572
|
)
|
|
|
2,428
|
|
Total other intangible assets
|
|
$
|
9,368
|
|
|
$
|
(6,604
|
)
|
|
$
|
2,764
|
|
(Dollars in thousands)
|
|
As of December 31, 2019
|
|
|
|
Gross carrying amount
|
|
|
Accumulated amortization
|
|
|
Net carrying amount
|
|
Core deposit intangible assets
|
|
$
|
2,018
|
|
|
$
|
(1,707
|
)
|
|
$
|
311
|
|
Lease intangible asset
|
|
|
350
|
|
|
|
(278
|
)
|
|
|
72
|
|
Mortgage servicing rights
|
|
|
6,910
|
|
|
|
(4,464
|
)
|
|
|
2,446
|
|
Total other intangible assets
|
|
$
|
9,278
|
|
|
$
|
(6,449
|
)
|
|
$
|
2,829
|
|
The
following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2020 and
in successive years ending December 31:
(Dollars in thousands)
|
|
Amortization
|
|
|
|
expense
|
|
Remainder of 2020
|
|
$
|
131
|
|
2021
|
|
|
121
|
|
2022
|
|
|
58
|
|
2023
|
|
|
26
|
|
Total
|
|
$
|
336
|
|
Mortgage
loans serviced for others are not reported as assets. The following table provides information on the principal balances of mortgage
loans serviced for others:
(Dollars in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
FHLMC
|
|
$
|
511,759
|
|
|
$
|
509,101
|
|
FHLB
|
|
|
42,155
|
|
|
|
40,462
|
|
Total
|
|
$
|
553,914
|
|
|
$
|
549,563
|
|
Custodial
escrow balances maintained in connection with serviced loans were $8.2 million and $4.7 million at March 31, 2020 and December
31, 2019, respectively. Gross service fee income related to such loans was $357,000 and $335,000 for the three months ended March
31, 2020 and 2019, respectively, and is included in fees and service charges in the consolidated statements of earnings.
Activity
for mortgage servicing rights was as follows:
|
|
Three months ended
|
|
(Dollars in thousands)
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Mortgage servicing rights:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
2,446
|
|
|
$
|
2,495
|
|
Additions
|
|
|
212
|
|
|
|
97
|
|
Amortization
|
|
|
(230
|
)
|
|
|
(208
|
)
|
Balance at end of period
|
|
$
|
2,428
|
|
|
$
|
2,384
|
|
The
fair value of mortgage servicing rights was $4.3 million and $5.2 million at March 31, 2020 and December 31, 2019, respectively.
Fair value at March 31, 2020 was determined using discount rates ranging from 9.00% to 11.00%; prepayment speeds ranging from
6.00% to 22.91%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate
of 1.42%. Fair value at December 31, 2019 was determined using discount rates ranging from 9.00% to 11.00%, prepayment speeds
ranging from 6.00% to 23.21%, depending on the stratification of the specific mortgage servicing right, and a weighted average
default rate of 1.40%.
The
Company had a mortgage repurchase reserve of $235,000 at both March 31, 2020 and December 31, 2019, which represents the Company’s
best estimate of probable losses that the Company will incur related to the repurchase of one-to-four family residential real
estate loans previously sold or to reimburse investors for credit losses incurred on loans previously sold where a breach of the
contractual representations and warranties occurred. The Company did not incur any losses charged against the reserve or make
any provisions to the reserve during the first three months of 2020 and 2019.
5.
Earnings per Share
Basic
earnings per share have been computed based upon the weighted average number of common shares outstanding during each period.
Diluted earnings per share include the effect of all potential common shares outstanding during each period. The diluted earnings
per share computations for the three months ended March 31, 2020 and 2019 excluded 100,039 and 32,408, respectively, of unexercised
stock options because their inclusion would have been anti-dilutive during such periods. The shares used in the calculation of
basic and diluted earnings per share are shown below:
|
|
Three months ended
|
|
(Dollars in thousands, except per share amounts)
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net earnings
|
|
$
|
3,363
|
|
|
$
|
2,183
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic (1)
|
|
|
4,579,592
|
|
|
|
4,590,722
|
|
Assumed exercise of stock options (1)
|
|
|
18,211
|
|
|
|
14,886
|
|
Weighted average common shares outstanding - diluted (1)
|
|
|
4,597,803
|
|
|
|
4,605,608
|
|
Earnings per share (1):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.73
|
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
0.47
|
|
|
(1)
|
Share
and per share values for the period ended March 31, 2019 have been adjusted to give effect to the 5% stock dividend paid during
December 2019.
|
The
Company has overnight repurchase agreements with certain deposit customers whereby the Company uses investment securities as collateral
for non-insured funds. These balances are accounted for as collateralized financing and included in other borrowings on the balance
sheet.
Repurchase
agreements are comprised of non-insured customer funds, totaling $9.0 million at March 31, 2020 and $17.5 million at December
31, 2019, which were secured by $12.2 million and $20.1 million of the Company’s investment portfolio at the same dates,
respectively.
The
following is a summary of the balances and collateral of the Company’s repurchase agreements:
|
|
As of March 31, 2020
|
|
(dollars in thousands)
|
|
Overnight and
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
Continuous
|
|
|
Up to 30 days
|
|
|
30-90 days
|
|
|
than 90 days
|
|
|
Total
|
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal agency obligations
|
|
$
|
1,503
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,503
|
|
Agency mortgage-backed securities
|
|
|
7,449
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,449
|
|
Total
|
|
$
|
8,952
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,952
|
|
|
|
As of December 31, 2019
|
|
|
|
Overnight and
|
|
|
Up to
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
Continuous
|
|
|
30 days
|
|
|
30-90 days
|
|
|
than 90 days
|
|
|
Total
|
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal treasury obligations
|
|
$
|
789
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
789
|
|
U.S. federal agency obligations
|
|
|
1,978
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,978
|
|
Agency mortgage-backed securities
|
|
|
14,781
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,781
|
|
Total
|
|
$
|
17,548
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,548
|
|
The
investment securities are held by a third party financial institution in the customer’s custodial account. The Company is
required to maintain adequate collateral for each repurchase agreement. Changes in the fair value of the investment securities
impact the amount of collateral required. If the Company were to default, the investment securities would be used to settle the
repurchase agreement with the deposit customer.
7.
|
Revenue
from Contracts with Customers
|
All
of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income.
Items outside the scope of ASC 606 are noted as such.
|
|
Three months ended
|
|
(Dollars in thousands)
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
Service charges on deposits
|
|
|
|
|
|
|
|
|
Overdraft fees
|
|
$
|
873
|
|
|
$
|
777
|
|
Other
|
|
|
146
|
|
|
|
126
|
|
Interchange income
|
|
|
535
|
|
|
|
435
|
|
Loan servicing fees (1)
|
|
|
357
|
|
|
|
335
|
|
Office lease income (1)
|
|
|
162
|
|
|
|
161
|
|
Gains on sales of loans (1)
|
|
|
1,193
|
|
|
|
1,120
|
|
Bank owned life insurance income (1)
|
|
|
154
|
|
|
|
159
|
|
Gains on sales of investment securities (1)
|
|
|
1,770
|
|
|
|
-
|
|
Losses on sales of real estate owned
|
|
|
(1
|
)
|
|
|
-
|
|
Other
|
|
|
164
|
|
|
|
143
|
|
Total non-interest income
|
|
$
|
5,353
|
|
|
$
|
3,256
|
|
|
(1)
|
Not
within the scope of ASC 606.
|
A
description of the Company’s revenue streams under ASC 606 follows:
Service
Charges on Deposit Accounts
The
Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based
fees, which include services such as ATM usage fees, stop payment charges, statement rendering, and ACH fees, are recognized at
the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance
fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period during which
the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.
Service charges on deposits are withdrawn from the customer’s account balance.
Interchange
Income
The
Company earns interchange fees from debit cardholder transactions conducted through the interchange payment network. Interchange
fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently
with the transaction processing services provided to the cardholder.
Gains
(Losses) on Sales of Real Estate Owned
The
Company records a gain or loss from the sale of real estate owned when control of the property transfers to the buyer, which generally
occurs at the time of an executed deed. When the Company finances the sale of real estate owned to the buyer, the Company assesses
whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price
is probable. Once these criteria are met, the real estate owned asset is derecognized and the gain or loss on sale is recorded
upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the
transaction price and related gain (loss) on sale if a significant financing component is present. There were no sales of real
estate owned that were financed by the Company during the first three months of 2020 or 2019.
8.
|
Fair
Value of Financial Instruments and Fair Value Measurements
|
Fair
value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. There are three levels of inputs that may be used to measure fair values:
Level
1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to
access as of the measurement date.
Level
2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data.
Level
3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants
would use in pricing an asset or liability.
Fair
value estimates of the Company’s financial instruments as of March 31, 2020 and December 31, 2019,
including
methods and assumptions utilized, are set forth below:
(Dollars in thousands)
|
|
As of March 31, 2020
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,782
|
|
|
$
|
28,782
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
28,782
|
|
Investment securities available-for-sale
|
|
|
314,489
|
|
|
|
2,057
|
|
|
|
312,432
|
|
|
|
-
|
|
|
|
314,489
|
|
Bank stocks, at cost
|
|
|
3,344
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Loans, net
|
|
|
553,736
|
|
|
|
-
|
|
|
|
-
|
|
|
|
564,022
|
|
|
|
564,022
|
|
Loans held for sale
|
|
|
9,753
|
|
|
|
-
|
|
|
|
9,753
|
|
|
|
-
|
|
|
|
9,753
|
|
Derivative financial instruments
|
|
|
1,576
|
|
|
|
-
|
|
|
|
1,576
|
|
|
|
-
|
|
|
|
1,576
|
|
Accrued interest receivable
|
|
|
4,508
|
|
|
|
10
|
|
|
|
1,716
|
|
|
|
2,782
|
|
|
|
4,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
$
|
(696,317
|
)
|
|
$
|
(696,317
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
(696,317
|
)
|
Time deposits
|
|
|
(134,163
|
)
|
|
|
-
|
|
|
|
(134,491
|
)
|
|
|
-
|
|
|
|
(134,491
|
)
|
FHLB borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated debentures
|
|
|
(21,651
|
)
|
|
|
-
|
|
|
|
(19,232
|
)
|
|
|
-
|
|
|
|
(19,232
|
)
|
Other borrowings
|
|
|
(9,202
|
)
|
|
|
-
|
|
|
|
(9,202
|
)
|
|
|
-
|
|
|
|
(9,202
|
)
|
Accrued interest payable
|
|
|
(362
|
)
|
|
|
-
|
|
|
|
(362
|
)
|
|
|
-
|
|
|
|
(362
|
)
|
Derivative financial instruments
|
|
|
(1,128
|
)
|
|
|
-
|
|
|
|
(1,128
|
)
|
|
|
-
|
|
|
|
(1,128
|
)
|
|
|
As of December 31, 2019
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,694
|
|
|
$
|
13,694
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,694
|
|
Investment securities available-for-sale
|
|
|
362,998
|
|
|
|
2,316
|
|
|
|
360,682
|
|
|
|
-
|
|
|
|
362,998
|
|
Bank stocks, at cost
|
|
|
3,109
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Loans, net
|
|
|
532,180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
538,427
|
|
|
|
538,427
|
|
Loans held for sale
|
|
|
8,497
|
|
|
|
-
|
|
|
|
8,497
|
|
|
|
-
|
|
|
|
8,497
|
|
Derivative financial instruments
|
|
|
532
|
|
|
|
-
|
|
|
|
532
|
|
|
|
-
|
|
|
|
532
|
|
Accrued interest receivable
|
|
|
4,557
|
|
|
|
2
|
|
|
|
1,895
|
|
|
|
2,660
|
|
|
|
4,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
$
|
(687,985
|
)
|
|
$
|
(687,985
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
(687,985
|
)
|
Time deposits
|
|
|
(147,063
|
)
|
|
|
-
|
|
|
|
(146,390
|
)
|
|
|
-
|
|
|
|
(146,390
|
)
|
FHLB borrowings
|
|
|
(3,000
|
)
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
-
|
|
|
|
(3,000
|
)
|
Subordinated debentures
|
|
|
(21,651
|
)
|
|
|
-
|
|
|
|
(19,527
|
)
|
|
|
-
|
|
|
|
(19,527
|
)
|
Other borrowings
|
|
|
(17,548
|
)
|
|
|
-
|
|
|
|
(17,548
|
)
|
|
|
-
|
|
|
|
(17,548
|
)
|
Accrued interest payable
|
|
|
(404
|
)
|
|
|
-
|
|
|
|
(404
|
)
|
|
|
-
|
|
|
|
(404
|
)
|
Derivative financial instruments
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
(50
|
)
|
Transfers
The
Company did not transfer any assets or liabilities among levels during the three months ended March 31, 2020 or during the year
ended December 31, 2019.
Valuation
Methods for Instruments Measured at Fair Value on a Recurring Basis
The
following tables represent the Company’s financial instruments that are measured at fair value on a recurring basis at March
31, 2020 and December 31, 2019, allocated to the appropriate fair value hierarchy:
(Dollars in thousands)
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. treasury securities
|
|
$
|
2,057
|
|
|
$
|
2,057
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U. S. federal agency obligations
|
|
|
2,163
|
|
|
|
-
|
|
|
|
2,163
|
|
|
|
-
|
|
Municipal obligations, tax exempt
|
|
|
141,683
|
|
|
|
-
|
|
|
|
141,683
|
|
|
|
-
|
|
Municipal obligations, taxable
|
|
|
50,057
|
|
|
|
-
|
|
|
|
50,057
|
|
|
|
-
|
|
Agency mortgage-backed securities
|
|
|
116,624
|
|
|
|
-
|
|
|
|
116,624
|
|
|
|
-
|
|
Certificates of deposit
|
|
|
1,905
|
|
|
|
-
|
|
|
|
1,905
|
|
|
|
-
|
|
Loans held for sale
|
|
|
9,753
|
|
|
|
-
|
|
|
|
9,753
|
|
|
|
-
|
|
Derivative financial instruments
|
|
|
1,576
|
|
|
|
-
|
|
|
|
1,576
|
|
|
|
-
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
(1,128
|
)
|
|
|
-
|
|
|
|
(1,128
|
)
|
|
|
-
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. treasury securities
|
|
$
|
2,316
|
|
|
$
|
2,316
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U. S. federal agency obligations
|
|
|
4,106
|
|
|
|
-
|
|
|
|
4,106
|
|
|
|
-
|
|
Municipal obligations, tax exempt
|
|
|
145,862
|
|
|
|
-
|
|
|
|
145,862
|
|
|
|
-
|
|
Municipal obligations, taxable
|
|
|
46,779
|
|
|
|
-
|
|
|
|
46,779
|
|
|
|
-
|
|
Agency mortgage-backed securities
|
|
|
162,031
|
|
|
|
-
|
|
|
|
162,031
|
|
|
|
-
|
|
Certificates of deposit
|
|
|
1,904
|
|
|
|
-
|
|
|
|
1,904
|
|
|
|
-
|
|
Loans held for sale
|
|
|
8,497
|
|
|
|
-
|
|
|
|
8,497
|
|
|
|
-
|
|
Derivative financial instruments
|
|
|
532
|
|
|
|
-
|
|
|
|
532
|
|
|
|
-
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
The
Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal agency obligations,
municipal obligations, agency mortgage-backed securities and certificates of deposits. Quoted exchange prices are available for
the Company’s U.S treasury securities, which are classified as Level 1. U.S. federal agency securities and agency mortgage-backed
securities are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves,
volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying
financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the
marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in
the marketplace. These measurements are classified as Level 2. Municipal obligations are valued using a type of matrix, or grid,
pricing in which securities are benchmarked against U.S. treasury rates based on credit rating. These model and matrix measurements
are classified as Level 2 in the fair value hierarchy.
Changes
in the fair value of available-for-sale securities are included in other comprehensive income to the extent the changes are not
considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on a quarterly basis and any
decline in the fair value of an individual security below its cost that is deemed to be other-than-temporary results in a write-down
of that security’s cost basis.
Mortgage
loans originated and intended for sale in the secondary market are carried at fair value. The mortgage loan valuations are based
on quoted secondary market prices for similar loans and are classified as Level 2. Changes in the fair value of mortgage loans
originated and intended for sale in the secondary market and derivative financial instruments are included in gains on sales of
loans.
The
aggregate fair value, contractual balance (including accrued interest), and gain on loans held for sale were as follows:
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Aggregate fair value
|
|
$
|
9,753
|
|
|
$
|
8,497
|
|
Contractual balance
|
|
|
9,707
|
|
|
|
8,316
|
|
Gain
|
|
$
|
46
|
|
|
$
|
181
|
|
The
Company’s derivative financial instruments consist of interest rate lock commitments and corresponding forward sales contracts
on mortgage loans held for sale. The fair values of these derivatives are based on quoted prices for similar loans in the secondary
market. The market prices are adjusted by a factor, based on the Company’s historical data and its judgment about future
economic trends, which considers the likelihood that a commitment will ultimately result in a closed loan. These instruments are
classified as Level 2. The amounts are included in other assets or other liabilities on the consolidated balance sheets and gains
on sales of loans, net in the consolidated statements of earnings. The total amount of gains from changes in fair value of loans
held for sale included in earnings were as follows:
|
|
Three months ended
|
|
|
|
March 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Interest income
|
|
$
|
56
|
|
|
$
|
51
|
|
Change in fair value
|
|
|
(135
|
)
|
|
|
148
|
|
Total change in fair value
|
|
$
|
(79
|
)
|
|
$
|
199
|
|
Valuation
Methods for Instruments Measured at Fair Value on a Nonrecurring Basis
The
Company does not record its loan portfolio at fair value. Collateral-dependent impaired loans are generally carried at
the lower of cost or fair value of the collateral, less estimated selling costs. Collateral values are determined based on appraisals
performed by qualified licensed appraisers hired by the Company and then further adjusted if warranted based on relevant facts
and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable
sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences
between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification
of the inputs for determining fair value. Impaired loans are reviewed and evaluated at least quarterly for additional impairment
and adjusted accordingly, based on the same factors identified above. The carrying value of the Company’s impaired loans
was $10.6 million and $8.7 million, with an allocated allowance of $543,000 and $733,000, at March 31, 2020 and December 31, 2019,
respectively.
Real
estate owned includes assets acquired through, or in lieu of, foreclosure and land previously acquired for expansion. Real estate
owned is initially recorded at the fair value of the collateral less estimated selling costs. Subsequent valuations are updated
periodically and are based upon independent appraisals, third party price opinions or internal pricing models. The appraisals
may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments
are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining
fair value. Real estate owned is reviewed and evaluated at least annually for additional impairment and adjusted accordingly,
based on the same factors identified above.
The
following tables represent the Company’s financial instruments that are measured at fair value on a non-recurring basis
as of March 31, 2020 and December 31, 2019 allocated to the appropriate fair value hierarchy:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
Total
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
(losses)/
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
gains
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
240
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
240
|
|
|
$
|
1
|
|
Commercial real estate
|
|
|
144
|
|
|
|
-
|
|
|
|
-
|
|
|
|
144
|
|
|
|
51
|
|
Commercial
|
|
|
661
|
|
|
|
-
|
|
|
|
-
|
|
|
|
661
|
|
|
|
(31
|
)
|
Agriculture
|
|
|
140
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140
|
|
|
|
70
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
Total
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
(losses)/
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
gains
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
240
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
240
|
|
|
$
|
(15
|
)
|
Commercial real estate
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
(103
|
)
|
Commercial
|
|
|
678
|
|
|
|
-
|
|
|
|
-
|
|
|
|
678
|
|
|
|
(177
|
)
|
Agriculture
|
|
|
405
|
|
|
|
-
|
|
|
|
-
|
|
|
|
405
|
|
|
|
(93
|
)
|
The
following table presents quantitative information about Level 3 fair value measurements measured at fair value on a nonrecurring
basis as of March 31, 2020 and December 31, 2019.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
240
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
0%-25
|
%
|
Commercial real estate
|
|
|
144
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
15
|
%
|
Commercial
|
|
|
661
|
|
|
Sales comparison
|
|
Adjustment to comparable sales
|
|
|
0%-69
|
%
|
Agriculture
|
|
|
140
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
0%-30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
240
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
0%-25
|
%
|
Commercial real estate
|
|
|
100
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
15
|
%
|
Commercial
|
|
|
678
|
|
|
Sales comparison
|
|
Adjustment to comparable sales
|
|
|
0%-75
|
%
|
Agriculture
|
|
|
405
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
0%-30
|
%
|
9.
|
Regulatory
Capital Requirements
|
Banks
and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management
believed that as of March 31, 2020, the Company and the Bank met all capital adequacy requirements to which they were subject
at that time.
Prompt
corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.
If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions
are limited, as is asset growth and expansion, and capital restoration plans are required. The Company and the Bank are subject
to the Basel III Rule, which is applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank
and savings and loan holding companies other than “small bank holding companies” (generally, non-public bank holding
companies with consolidated assets of less than $3.0 billion).
The
Basel III Rule includes a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier
1 capital to risk-weighted assets of 6.0%, a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and a minimum Tier
1 leverage ratio of 4.0%. A capital conservation buffer, equal to 2.5% of common equity Tier 1 capital, is also established above
the regulatory minimum capital requirements. The capital conservation buffer increases the common equity Tier 1 capital ratio,
and Tier 1 capital and total risk based capital ratios.
As
of March 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action then in effect. There are no conditions or events since that notification
that management believes have changed the institution’s category.
The
following is a comparison of the Company’s regulatory capital to minimum capital requirements at March 31, 2020 and December
31, 2019:
(Dollars in thousands)
|
|
|
|
|
|
|
|
For capital
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio (1)
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
107,546
|
|
|
|
11.20
|
%
|
|
$
|
38,402
|
|
|
|
4.0
|
%
|
Common Equity Tier 1 Capital
|
|
|
86,546
|
|
|
|
12.94
|
%
|
|
|
46,835
|
|
|
|
7.0
|
%
|
Tier 1 Capital
|
|
|
107,546
|
|
|
|
16.07
|
%
|
|
|
56,871
|
|
|
|
8.5
|
%
|
Total Risk Based Capital
|
|
|
115,165
|
|
|
|
17.21
|
%
|
|
|
70,253
|
|
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
106,938
|
|
|
|
10.94
|
%
|
|
$
|
39,109
|
|
|
|
4.0
|
%
|
Common Equity Tier 1 Capital
|
|
|
85,938
|
|
|
|
13.09
|
%
|
|
|
45,952
|
|
|
|
7.0
|
%
|
Tier 1 Capital
|
|
|
106,938
|
|
|
|
16.29
|
%
|
|
|
55,799
|
|
|
|
8.5
|
%
|
Total Risk Based Capital
|
|
|
113,545
|
|
|
|
17.30
|
%
|
|
|
68,928
|
|
|
|
10.5
|
%
|
|
(1)
|
The
required ratios for capital adequacy purposes include a capital conservation buffer of 2.5%.
|
The
following is a comparison of the Bank’s regulatory capital to minimum capital requirements at March 31, 2020 and December
31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
For capital
|
|
|
corrective
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
action provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio(1)
|
|
|
Amount
|
|
|
Ratio
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
105,239
|
|
|
|
10.77
|
%
|
|
$
|
39,104
|
|
|
|
4.0
|
%
|
|
$
|
48,880
|
|
|
|
5.0
|
%
|
Common Equity Tier 1 Capital
|
|
|
105,239
|
|
|
|
15.75
|
%
|
|
|
46,763
|
|
|
|
7.0
|
%
|
|
|
43,423
|
|
|
|
6.5
|
%
|
Tier 1 Capital
|
|
|
105,239
|
|
|
|
15.75
|
%
|
|
|
567,884
|
|
|
|
8.5
|
%
|
|
|
53,444
|
|
|
|
8.0
|
%
|
Total Risk Based Capital
|
|
|
112,858
|
|
|
|
16.89
|
%
|
|
|
70,145
|
|
|
|
10.5
|
%
|
|
|
66,805
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
104,510
|
|
|
|
10.72
|
%
|
|
$
|
38,984
|
|
|
|
4.0
|
%
|
|
$
|
48,730
|
|
|
|
5.0
|
%
|
Common Equity Tier 1 Capital
|
|
|
104,510
|
|
|
|
15.94
|
%
|
|
|
45,884
|
|
|
|
7.0
|
%
|
|
|
42,607
|
|
|
|
6.5
|
%
|
Tier 1 Capital
|
|
|
104,510
|
|
|
|
15.94
|
%
|
|
|
55,716
|
|
|
|
8.5
|
%
|
|
|
52,439
|
|
|
|
8.0
|
%
|
Total Risk Based Capital
|
|
|
111,117
|
|
|
|
16.95
|
%
|
|
|
68,826
|
|
|
|
10.5
|
%
|
|
|
65,549
|
|
|
|
10.0
|
%
|
(1)
|
The
required ratios for capital adequacy purposes include a capital conservation buffer of 2.5%.
|
10.
|
Impact
of Recent Accounting Pronouncements
|
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), commonly referred to as “CECL.”
The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to
be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect
an organization’s estimate of all expected credit losses over the expected term of the financial asset and thereby require
the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets
carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable
estimate of expected credit losses extends to held to maturity debt securities. Under the provisions of the update, credit losses
recognized on available for sale debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL
will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established
at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to
fair value through a credit discount, and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves
will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable
to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present
the currently required credit quality disclosures disaggregated by the year of origination or vintage. FASB expects that the evaluation
of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage
disclosures. For public entities, the amendments of the update became effective on January 1, 2020. In October 2019, the FASB
approved a change in the effective dates for CECL which delayed the effective date to fiscal years beginning after December 15,
2022 for smaller reporting companies. Because the Company is a smaller reporting company, the proposed delay is applicable to
the Company, and the Company plans to delay the implementation of CECL until January 1, 2023. Management formed an implementation
committee that has implemented a process to collect the data and is utilizing a vendor solution for the new standard. Initial
calculations estimate the effect will be an increase to the allowance for loan losses upon adoption. However, the size of the
overall increase is uncertain at this time. Management will utilize the delay to continue to refine and back test the CECL calculation.
The internal controls over financial reporting specifically related to CECL are in the design stage and are currently being evaluated.
In
April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System, the Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation, issued a revised Interagency Statement on Loan Modifications and
Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers
who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions
generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions
to automatically categorize all COVID-19-related loan modifications as TDRs. The interagency guidance was effective immediately
and is expected to have a material impact on the Company’s financial statements.
The
COVID-19 pandemic in the United States is expected to have a complex and significant adverse impact on the economy, the banking
industry and the Company in future fiscal periods, all subject to a high degree of uncertainty. The COVID-19 pandemic could adversely
impact our customers, employees or vendors which may impact our operations and financial results. The COVID-19 pandemic may cause
economic declines in excess of current projections, or if the pandemic lasts longer than currently projected, the Company’s
provision for loan losses may remain elevated or increase in future periods. The Company expects to see higher loan delinquencies
and defaults in future periods as a result of the COVID-19 pandemic and will continue to monitor our allowance for loan losses
in light of changing economic conditions related to COVID-19. The COVID-19 pandemic may also impact the Company’s deposit
balances and service charge income. In addition, the fair value of certain assets may be adversely impacted by the pandemic and
the economic downturn, including the fair value of goodwill, mortgage servicing rights and other real estate. These declines could
result in impairments in future periods. The pandemic has caused a significant decline in market interest rates which may cause
our net interest margin to decline. At this time, the full impact of the COVID-19 pandemic on the Company’s financial
statements is uncertain.
As
of April 30, 2020, the Company had 111 COVID-19 loan modifications related to deferrals of loan payments on outstanding
loan balances of $43.5 million. Consistent with regulatory guidance, the Company also entered into short-term forbearance plans
or short-term repayment plans on 12 one-to-four family residential mortgage loans totaling $1.6 million as of April 30, 2020.
The Company had originated 739 loans totaling $123.6 million under the Small Business Administration’s paycheck protection
program as of April 30, 2020.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview.
Landmark Bancorp, Inc. is a financial holding company incorporated under the laws of the State of Delaware and is engaged
in the banking business through its wholly owned subsidiary, Landmark National Bank and in the insurance business through its
wholly owned subsidiary, Landmark Risk Management, Inc. References to the “Company,” “we,” “us,”
and “our” refer collectively to Landmark Bancorp, Inc., Landmark National Bank and Landmark Risk Management, Inc.
The Company is listed on the Nasdaq Global Market under the symbol “LARK.” The Bank is dedicated to providing quality
financial and banking services to its local communities. Our strategy includes continuing a tradition of holding and acquiring
quality assets while growing our commercial, commercial real estate and agriculture loan portfolios. We are committed to developing
relationships with our borrowers and providing a total banking service.
The
Bank is principally engaged in the business of attracting deposits from the general public and using such deposits, together with
borrowings and other funds, to originate one-to-four family residential real estate, construction and land, commercial real estate,
commercial, agriculture, municipal and consumer loans. Although not our primary business function, we do invest in certain investment
and mortgage-related securities using deposits and other borrowings as funding sources.
Landmark
Risk Management, Inc., which was formed and began operations on May 31, 2017, is a Nevada-based captive insurance company which
provides property and casualty insurance coverage to the Company and the Bank for which insurance may not be currently available
or economically feasible in today’s insurance marketplace. Landmark Risk Management, Inc. is subject to the regulations
of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. As of May 31, 2019, Landmark Risk
Management, Inc. exited the pool resources relationship of which it was previously a member. Management expects that it
will join a new pool during May 2020 and resume providing insurance to the Company and the Bank at that time.
Our
results of operations depend generally on net interest income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory, economic and competitive
factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the
degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing
liabilities. Our results of operations are also affected by non-interest income, such as service charges, loan fees, gains from
the sale of newly originated loans and gains or losses on investments and certain other non-interest related items. Our principal
operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional
fees, federal deposit insurance costs, data processing expenses and provision for loan losses.
We
are significantly impacted by prevailing economic conditions, including federal monetary and fiscal policies, and federal regulations
of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income
and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing
and the interest rate pricing competition from other lending institutions.
Currently,
our business consists of ownership of the Bank, with its main office in Manhattan, Kansas and twenty- nine additional branch offices
in central, eastern, southeast and southwest Kansas, and our ownership of Landmark Risk Management, Inc.
Significant
Developments – Impact of COVID-19. The COVID-19 pandemic in the United States is expected to have a complex and
significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high
degree of uncertainty.
Effects on Our Market
Areas. Our commercial and consumer banking products and services are offered primarily in Kansas, where individual and governmental
responses to the COVID-19 pandemic have led to a broad curtailment of economic activity beginning in March 2020. In Kansas, the
Governor issued a series of orders, including an order that, subject to limited exceptions, all individuals stay at home and non-essential
businesses cease all activities, which order was effective beginning March 28, 2020. This order remained in effect
through May 3, 2020 with some of the restrictions lifted after May 3, 2020, and some of the restrictions staying in place after
that date. The Bank and its branches have remained open during these orders because banks have been deemed essential businesses.
The Bank has been serving its customers through its digital banking platforms and drive-thru services, while branch lobbies have
been open by appointment only.
Across
the United States, as a result of stay-at-home orders, many states have experienced a dramatic increase in unemployment levels
as a result of the curtailment of business activities. The unemployment rate in Kansas was 3.1 percent in March 2020, but does
not reflect the surge in unemployment claims which have increased to approximately 200,000 as a result of economic impacts of
the COVID-19 pandemic.
To
date, many of the public health and economic effects of COVID-19 have been concentrated in large cities, such as New York City,
but we anticipate that similar effects will occur on a more delayed basis in smaller cities and communities, where our banking
operations are primarily focused.
Policy
and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted and issued a range
of policy responses to the COVID-19 pandemic, including the following:
|
●
|
The
Federal Reserve decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and by another 1.0% on March
16, 2020, reaching a current range of 0.0 – 0.25%.
|
|
|
|
|
●
|
On
March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which
established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance
benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as
the paycheck protection program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors
and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll
in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP.
On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24,
2020, an additional $310 billion in funding for PPP loans was authorized, with such funds available for PPP loans beginning
on April 27, 2020. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements
under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See footnotes 3 and 11 of
the financial statements for additional information.
|
|
|
|
|
●
|
On
April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial
Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may
be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally
do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions
to automatically categorize all COVID-19 related loan modifications as TDRs. See footnotes 3 and 11 of the financial statements
for additional information.
|
|
|
|
|
●
|
On
April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well
as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program,
which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street
New Loan Facility (“MSNLF”), and (2) the Main Street Expanded Loan Facility (“MSELF”). MSNLF loans
are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing
loans originated before April 8, 2020. The combined size of the program will be up to $600 billion. The program is designed
for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that
they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt.
The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses.
Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio. In addition,
the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion
in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The
facility will make short-term financing available to cities with a population of more than one million or counties with a
population of greater than two million. The Federal Reserve expanded both the size and scope of its Primary and Secondary
Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies
that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access
to the facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled
up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized
loan obligations. The size of the facility is $100 billion.
|
Effects
on Our Business. We currently expect that the COVID-19 pandemic and the specific developments referred to above will have
a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in
the retail, restaurant, hospitality and agriculture industries will continue to endure significant economic distress, which may
cause them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is
expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also
expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries,
our one-to-four family residential real estate loan business and loan portfolio, and the value of certain collateral securing
our loans. As a result, we anticipate that our financial condition, capital levels and results of operations will be significantly
adversely affected, as described in further detail below.
Our
Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
|
●
|
We
established a pandemic response team, which has been meeting almost daily since mid-March
to address changes resulting from the COVID-19 pandemic. We have a significant portion
of our associates working from home and for those that remain in our bank facilities
have enhanced safety precautions in place for their safety. We have repositioned associates
to support our customer care – call center to handle increased volumes of customer
requests and to support our customer’s access to our digital banking
platforms.
|
|
|
|
|
●
|
As
a preferred lender with the SBA, we were able and prepared to immediately respond to help existing and new clients access
the PPP authorized by the CARES Act. As of April 30, 2020, we have funded 739 loans totaling approximately $123.6 million.
|
|
|
|
|
●
|
We
have suspended foreclosure proceedings, offered fee waivers and provided relief through loan forbearance and modification
programs, including temporary interest only and payment deferral accommodations.
|
|
|
|
|
●
|
With
the safety and well-being of our customers and associates foremost in mind, we limited access to our bank lobbies while keeping
our drive-through lanes open and encouraging our customers to use our online and mobile banking applications or call our customer
care center.
|
|
|
|
|
●
|
In
May 2020, we declared our 75th consecutive quarterly dividend and we currently have no plans to change our
dividend strategy given our current capital and liquidity position. However, while we have achieved a strong capital base
and expect to continue operating profitably, this is dependent upon the projected length and depth of any economic recession.
In addition, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, we will not be permitted
to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive
officers without restriction if we do not maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation
buffer.
|
Critical
Accounting Policies. Critical accounting policies are those which are both most important to the portrayal of our
financial condition and results of operations and require our management’s most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting
policies relate to the allowance for loan losses, the valuation of investment securities, accounting for goodwill and the accounting
for income taxes, all of which involve significant judgment by our management. Information about our critical accounting policies
is included under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March
12, 2020.
Summary
of Results. During the first quarter of 2020, we recorded net earnings of $3.4 million, which was an increase of $1.2
million from the $2.2 million of net earnings recorded in the first quarter of 2019. The increase in net earnings was primarily
due to $1.8 million of gains on sales of investment securities and higher net interest income, which were partially offset by
a higher provision for loan losses.
The
following table summarizes earnings and key performance measures for the periods presented:
(Dollars in thousands, except per share amounts)
|
|
Three months ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net earnings:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,363
|
|
|
$
|
2,183
|
|
Basic earnings per share (1)
|
|
$
|
0.73
|
|
|
$
|
0.47
|
|
Diluted earnings per share (1)
|
|
$
|
0.73
|
|
|
$
|
0.47
|
|
Earnings ratios:
|
|
|
|
|
|
|
|
|
Return on average assets (2)
|
|
|
1.35
|
%
|
|
|
0.91
|
%
|
Return on average equity (2)
|
|
|
12.21
|
%
|
|
|
9.52
|
%
|
Equity to total assets
|
|
|
11.24
|
%
|
|
|
9.87
|
%
|
Net interest margin (2) (3)
|
|
|
3.67
|
%
|
|
|
3.41
|
%
|
Dividend payout ratio
|
|
|
27.40
|
%
|
|
|
40.00
|
%
|
|
(1)
|
Per
share values for the period ended March 31, 2019 have been adjusted to give effect to the 5% stock dividend
paid during December 2019.
|
|
(2)
|
Ratios
have been annualized and are not necessarily indicative of the results for the entire year.
|
|
(3)
|
Net
interest margin is presented on a fully tax equivalent basis, using a 21% federal tax rate.
|
Interest
Income. Interest income was $9.3 million for the quarter ended March 31, 2020, which was an increase of $434,000 as compared
to the same period of 2019. Interest income on loans increased $665,000, or 10.3%, to $7.1 million for the quarter ended March
31, 2020, compared to the same period of 2019 due primarily to an increase in our average loan balances, which increased from
$491.7 million in the first quarter of 2019 to $546.9 million in the first quarter of 2020. Partially offsetting the higher average
balances were lower yields on loans, which decreased from 5.33% in the first quarter of 2019 to 5.24% in the first quarter
of 2020. The Federal Reserve decreased the target federal funds interest rate by a total of 75 basis points in the second half
of 2019. In addition, in response to the COVID-19 pandemic, the Federal Reserve decreased the target federal funds interest rate
by a total of 150 basis points in March 2020. These decreases impacted yields on loans between 2019 and 2020. We anticipate that
our yield on loans will be adversely affected in future periods as a result of the COVID-19 pandemic. Interest income on investment
securities decreased $231,000, or 9.5%, to $2.2 million for the first quarter of 2020, as compared to $2.4 million in the same
period of 2019. The decrease in interest income on investment securities was the result of lower average balances, which decreased
from $389.4 million in the first quarter of 2019 to $361.3 million in the first quarter of 2020, and lower rates, which decreased
from 2.75% in the first quarter of 2019 to 2.67% in the first quarter of 2020.
Interest
Expense. Interest expense during the quarter ended March 31, 2020 decreased $472,000, or 28.0%, to $1.2 million as compared
to the same period of 2019. Interest expense on interest-bearing deposits decreased $348,000, or 26.2%, to $983,000 for
the quarter ended March 31, 2020, as compared to the quarter ended March 31, 2019. Our total cost of interest-bearing deposits
decreased from 0.83% in the first quarter of 2019 to 0.61% in the first quarter of 2020 as a result of lower rates paid on money
market and checking accounts, as the rates reprice based on market indexes, and lower rates on our certificates of deposits. Also
contributing to lower interest expense was a decrease in average interest-bearing deposit balances, which decreased from $649.0
million in the first quarter of 2019 to $644.8 million in the first quarter of 2020. For the first quarter of 2020, interest expense
on borrowings decreased $124,000, or 34.7%, to $233,000 as compared to the same period of 2019 due to a decrease in our average
outstanding borrowings, which decreased from $47.8 million in the first quarter of 2019 to $41.1 million in the same period of
2020, and lower rates, which decreased from 3.03% in the first quarter of 2019 to 2.28% in the same period of 2020.
Net
Interest Income. Net interest income increased $906,000 or 12.6%, to $8.1 million for the first quarter of 2020 compared
to the same period of 2019. The increase was a result of a 3.3% increase in average interest-earning assets, from $883.0 million
in the first quarter of 2019 to $912.4 million in the first quarter of 2020. The increase in average interest-earning assets was
primarily driven by growth in our loan portfolio, which contributed to an increase in net interest margin, on a tax equivalent
basis, from 3.41% in the first quarter of 2019 to 3.67% in the same period of 2020.
As
a result of the COVID-19 pandemic, we have originated approximately $123.6 million of PPP loans from April 3, 2020 through
April 30, 2020. These loans have an interest rate of 1.00% plus the amortization of the origination fee which will increase the
yield. The maturity date of these loans is two years unless the borrower’s loan is forgiven, in which case the loan
may be repaid sooner. While the cost of our funds is lower than the yield on these loans, the interest rate spread is lower
than we generally have received. As a result of the origination of PPP loans, our net interest income may increase in future
periods, but our net interest margin will likely decline. In addition, the COVID-19 pandemic has slowed our origination
of new loans, excluding PPP loans, which may lead to lower net interest income and net interest margin in future periods. The
decline in market interest rates will also likely adversely impact our net interest income and net interest margin as a result
of lower yields on loans and investment securities exceeding the benefit of a lower cost of funds.
See
the Average Assets/Liabilities and Rate/Volume tables at the end of Item 2 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for additional details on asset yields, liability rates and net interest
margin.
Provision
for Loan Losses. We maintain, and our Board of Directors monitors, an allowance for losses on loans. The allowance is
established based upon management’s periodic evaluation of known and inherent risks in the loan portfolio, review of significant
individual loans and collateral, review of delinquent loans, past loss experience, adverse situations that may affect the borrowers’
ability to repay, current and expected market conditions, and other factors management deems important. Determining the appropriate
level of reserves involves a high degree of management judgment and is based upon historical and projected losses in the loan
portfolio and the collateral value or discounted cash flows of specifically identified impaired loans. Additionally, allowance
policies are subject to periodic review and revision in response to a number of factors, including current market conditions,
actual loss experience and management’s expectations.
During
the first quarter of 2020, we recorded a provision for loan losses of $1.2 million compared to a provision for loan losses of
$200,000 during the first quarter of 2019. We recorded net loan charge-offs of $188,000 during the first quarter of 2020 compared
to $27,000 during the first quarter of 2019. The increase in our provision for loan losses during 2020 was primarily due to the
projected economic impact of the COVID-19 pandemic. If the COVID-19 pandemic causes economic declines in excess of our projections,
or if the pandemic lasts longer than currently projected, our provision for loan losses may remain elevated or increase in future
periods. We expect to see higher loan delinquencies and defaults in future periods as a result of the COVID-19 pandemic. We will
continue to monitor our allowance for loan losses in light of changing economic conditions related to COVID-19.
For
further discussion of the allowance for loan losses, refer to the “Asset Quality and Distribution” section below.
Non-interest
Income. Total non-interest income was $5.4 million in the first quarter of 2020, compared to $3.3 million in the same
period of 2019. The increase in non-interest income was primarily due to $1.8 million of gains on sales of investment securities
due to approximately $44 million of mortgage-backed investment securities sold during the first quarter of 2020. We sold high
coupon mortgage-backed investment securities after comparing the market prices to the risks of accelerating prepayment speeds.
Also contributing to the increase in non-interest income was an increase of $273,000 in fees and service charges, which were primarily
due to higher fee income on deposit accounts. Our gains on sales of loans increased $73,000 in the first quarter of 2020 as our
originations of one-to-four family residential real estate loans increased due to the decline in mortgage interest rates. We anticipate
our origination levels to remain elevated for some time as a result of increased refinancings: however, the impact of the COVID-19
pandemic may slow these volumes if our borrowers are impacted by the economic slowdown.
Non-interest
Expense. Non-interest expense increased $379,000, or 4.9%, to $8.1 million for the first quarter of 2020 compared to the
same period of 2019. The increase in non-interest expense was primarily due to an increase of $439,000 in compensation and benefits
as a result of the addition of bank employees, increased compensation and higher benefit costs. Partially offsetting that increase
was a decrease of $30,000 in federal deposit insurance premiums after the bank utilized its remaining federal deposit insurance
premium credits during the first quarter 2020. Also offsetting the increase was a decrease of $33,000 in professional fees which
was due primarily to a decrease in costs associated with an external audit of our internal controls over financial reporting as
a result of the expectation that the Company will no longer qualify as an accelerated filer for its Form 10-K for the year
ending December 31, 2020 based on the change in the definition of accelerated filer.
Income
Tax Expense. During the first quarter of 2020, we recorded income tax expense of $785,000, compared to $341,000 during
the same period of 2019. The effective tax rate increased from 13.5% in the first quarter of 2019 to 18.9% in the
first quarter of 2020, primarily due to an increase in earnings before income taxes while our tax-exempt income declined over
the comparable periods.
Financial
Condition. Economic conditions in the United States deteriorated during the first quarter of 2020 as the impact of COVID-19
caused portions of the economy to shut down. On March 28, 2020, a stay at home order was issued for the entire state of Kansas,
which expanded previously issued local orders. This stay at home order was lifted on May 3, 2020 with a phased approach to reopening
the Kansas economy. While we believe the State of Kansas is still in the early stages of being affected by the COVID-19 pandemic,
the geographic markets in which the Company operates have been significantly impacted by this pandemic. The Company’s allowance
for loan losses at March 31, 2020 included projections of the economic impact of COVID-19 on our loan portfolio. COVID-19 will
likely cause an increase in our delinquent and non-accrual loans as time passes and the economic slowdown impacts our customers.
However, our loan portfolio is diversified across various types of loans and collateral throughout the markets in which we operate.
Aside from a few problem loans that management is working to resolve, our asset quality has remained strong over the past few
years. While we anticipate an increase in problem assets as a result of COVID-19, management believes its efforts to run a high
quality financial institution with a sound asset base will continue to create a strong foundation for continued growth and profitability
in the future. The tables below show additional information on the diversification of industry types within our commercial
real estate and commercial loan categories:
(dollars in thousands)
|
|
As of April 30, 2020
|
|
|
|
Loan
|
|
|
Number of
|
|
|
|
balance
|
|
|
loans
|
|
Real estate rental and leasing
|
|
$
|
15,476
|
|
|
|
44
|
|
Hospitality and restaurants
|
|
|
8,351
|
|
|
|
11
|
|
Manufacturing
|
|
|
3,652
|
|
|
|
14
|
|
Health care and social assistance
|
|
|
3,145
|
|
|
|
8
|
|
Educational services
|
|
|
3,099
|
|
|
|
3
|
|
Construction and specialty contractors
|
|
|
2,156
|
|
|
|
4
|
|
Other
|
|
|
7,582
|
|
|
|
27
|
|
Total COVID-19 loan restructurings
|
|
$
|
43,461
|
|
|
|
111
|
|
(dollars in thousands)
|
|
As of March 31, 2020
|
|
|
|
Loan
|
|
|
Percent of
|
|
|
|
balance
|
|
|
total loans
|
|
Commercial real estate loans:
|
|
|
|
|
|
|
|
|
Real estate rental and leasing
|
|
$
|
72,521
|
|
|
|
12.9
|
%
|
Hotels
|
|
|
14,339
|
|
|
|
2.6
|
%
|
Retail
|
|
|
8,924
|
|
|
|
1.6
|
%
|
Health care and social assistance
|
|
|
8,136
|
|
|
|
1.5
|
%
|
Restaurants
|
|
|
6,111
|
|
|
|
1.1
|
%
|
Construction and specialty contractors
|
|
|
4,695
|
|
|
|
0.8
|
%
|
Educational services
|
|
|
4,662
|
|
|
|
0.8
|
%
|
Other
|
|
|
22,324
|
|
|
|
4.0
|
%
|
Total commercial real estate loans
|
|
$
|
141,712
|
|
|
|
25.3
|
%
|
Asset
Quality and Distribution. Our primary investing activities are the origination of one-to-four family residential real
estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans and the purchase
of investment securities. Total assets decreased to $989.1 million at March 31, 2020, compared to $998.5 million at December 31,
2019. The decrease in our total assets was primarily the result of the strategic sale of agency mortgage-backed investment securities
during the first quarter of 2020. Investment securities decreased from $363.0 million at December 31, 2019 to $314.5 million at
March 31, 2020. Net loans, excluding loans held for sale, increased to $553.7 million at March 31, 2020 from $532.2 million at
December 31, 2019. We anticipate that loan growth will slow down in the future for our commercial real estate portfolio as a result
of COVID-19 and the related decline in economic conditions in our market areas.
The
allowance for loan losses is established through a provision for loan losses based on our evaluation of the risk inherent in the
loan portfolio and changes in the nature and volume of our loan activity. This evaluation, which includes a review of all loans
with respect to which full collectability may not be reasonably assured, considers the fair value of the underlying collateral,
economic conditions, historical loan loss experience, level of classified loans and other factors that warrant recognition in
providing for an appropriate allowance for loan losses. At March 31, 2020, our allowance for loan losses totaled $7.5 million,
or 1.33% of gross loans outstanding, compared to $6.5 million or 1.20% of gross loans outstanding at December 31, 2019.
As
of March 31, 2020 and December 31, 2019, approximately $20.4 million and $18.1 million, respectively, of loans were considered
classified and assigned a risk rating of special mention, substandard or doubtful. These ratings indicate that these loans were
identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply
with present loan repayment terms. Even though borrowers were experiencing moderate cash flow problems as well as some deterioration
in collateral value, management believed the allowance was sufficient to cover the risks and probable incurred losses related
to such loans at March 31, 2020 and December 31, 2019, respectively.
Loans
past due 30-89 days and still accruing interest totaled $2.7 million, or 0.48% of gross loans, at March 31, 2020 compared to $3.4
million, or 0.64% of gross loans, at December 31, 2019. At March 31, 2020, $7.6 million in loans were on non-accrual status, or
1.35% of gross loans, compared to $5.5 million, or 1.03% of gross loans, at December 31, 2019. Non-accrual loans consist of loans
90 or more days past due and certain impaired loans. There were no loans 90 days delinquent and accruing interest at March 31,
2020 or December 31, 2019. Our impaired loans totaled $10.6 million at March 31, 2020 compared to $8.7 million at December 31,
2019. The difference in the Company’s non-accrual loan balances and impaired loan balances at March 31, 2020 and December
31, 2019 was related to TDRs that were accruing interest but still classified as impaired.
At
March 31, 2020, the Company had nine loan relationships consisting of thirteen outstanding loans that were classified as TDRs.
No loan restructurings were classified as TDRs during the first three months of 2020 and 2019.
At
March 31, 2020, the Company had restructured twelve loans totaling $8.4 million as a result of the impact of the COVID-19 pandemic.
These loans are not classified as TDRs based on regulatory guidance as the modifications were directly related to the impact of
COVID-19. As of April 30, 2020, the Company had restructured 111 loans totaling $43.5 million as a result of the COVID-19 pandemic.
The following table presents additional information on these loan modifications by industry types:
(dollars in thousands)
|
|
As of April 30, 2020
|
|
|
|
Loan
|
|
|
Number of
|
|
|
|
balance
|
|
|
loans
|
|
Real estate rental and leasing
|
|
$
|
15,476
|
|
|
|
44
|
|
Hotels
|
|
|
4,808
|
|
|
|
3
|
|
Manufacturing
|
|
|
3,652
|
|
|
|
14
|
|
Restaurants
|
|
|
3,543
|
|
|
|
8
|
|
Health care and social assistance
|
|
|
3,145
|
|
|
|
8
|
|
Educational services
|
|
|
3,099
|
|
|
|
3
|
|
Construction and specialty contractors
|
|
|
2,156
|
|
|
|
4
|
|
Other
|
|
|
7,582
|
|
|
|
27
|
|
Total COVID-19 loan restructurings
|
|
$
|
43,461
|
|
|
|
111
|
|
As
part of our credit risk management, we continue to manage the loan portfolio to identify problem loans and have placed additional
emphasis on commercial real estate and construction and land relationships. We are working to resolve the remaining problem credits
or move the non-performing credits out of the loan portfolio. At March 31, 2020, we had $570,000 of real estate owned compared
to $290,000 at December 31, 2019. As of March 31, 2020, real estate owned primarily consisted of residential real estate properties
and agriculture land. The Company is currently marketing all of the remaining properties in real estate owned.
Liability
Distribution. Our primary ongoing sources of funds are deposits, FHLB borrowings, proceeds from principal and interest
payments on loans and investment securities and proceeds from the sale of mortgage loans and investment securities. While maturities
and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates and economic conditions. We experienced a decrease of $4.6 million in total deposits during the first
quarter of 2020, to $830.5 million at March 31, 2020, from $835.0 million at December 31, 2019. The decrease in deposits was primarily
due to decreased money market and checking accounts and time deposit accounts. The decrease in time deposits was associated with
brokered certificates of deposits, which decreased $14.5 million from $20.0 million at December 31, 2019 to $5.5 million at March
31, 2020. Our brokered money market and checking deposits also declined from $12.0 million at December 31, 2019 to none at March
31, 2020 as we used proceeds from sales of investment securities to reduce our brokered deposit balances. We believe that deposit
levels will generally decrease in future periods as a result of the distressed economic conditions in our market areas
relating to the COVID-19 pandemic.
Non-interest-bearing
deposits at March 31, 2020, were $204.1 million, or 24.6% of deposits, compared to $182.7 million, or 21.9% of deposits, at December
31, 2019. Money market and checking deposit accounts were 46.5% of our deposit portfolio and totaled $386.2 million at March 31,
2020, compared to $405.7 million, or 48.6% of deposits, at December 31, 2019. Savings accounts increased to $106.0 million, or
12.8% of deposits, at March 31, 2020, from $99.5 million, or 11.9% of deposits, at December 31, 2019. Certificates of deposit
totaled $134.2 million, or 16.2% of deposits, at March 31, 2020, compared to $147.1 million, or 17.6% of deposits, at December
31, 2019.
Certificates
of deposit at March 31, 2020, scheduled to mature in one year or less, totaled $111.7 million. Historically, maturing deposits
have generally remained with the Bank, and we believe that a significant portion of the deposits maturing in one year or less
will remain with us upon maturity in some type of deposit account.
Total
borrowings decreased $11.3 million to $30.9 million at March 31, 2020, from $42.2 million at December 31, 2019. The decrease in
total borrowings was primarily due to a decrease in our FHLB borrowings from $3.0 million at December 31, 2019 to none at March
31, 2020, which was primarily the result of a paying off our line of credit borrowings with proceeds from the sales of investment
securities.
Cash
Flows. During the three months ended March 31, 2020, our cash and cash equivalents increased by $15.1 million. Our operating
activities provided net cash of $4.8 million during the first three months of 2020. Our investing activities provided net
cash of $29.1 million during the first three months of 2020, primarily as a result of the proceeds from the sales of investment
securities. Financing activities used net cash of $18.8 million during the first three months of 2020, primarily as a result of
the repayment of FHLB borrowings and decrease in brokered deposits.
Liquidity.
Our most liquid assets are cash and cash equivalents and investment securities available-for-sale. The levels of these assets
are dependent on the operating, financing, lending and investing activities during any given year. These liquid assets totaled
$343.3 million at March 31, 2020 and $376.7 million at December 31, 2019. During periods in which we are not able to originate
a sufficient amount of loans and/or periods of high principal prepayments, we generally increase our liquid assets by investing
in short-term, high-grade investments.
Liquidity
management is both a daily and long-term function of our strategy. Excess funds are generally invested in short-term investments.
Excess funds are typically generated as a result of increased deposit balances, while uses of excess funds are generally deposit
withdrawals and loan advances. In the event we require funds beyond our ability to generate them internally, additional funds
are generally available through the use of FHLB advances, a line of credit with the FHLB, other borrowings or through sales of
investment securities. At March 31, 2020, we had no borrowings against our line of credit with the FHLB. At March 31, 2020, we
had collateral pledged to the FHLB that would allow us to borrow $71.6 million, subject to FHLB credit requirements and policies.
At March 31, 2020, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal
Reserve was $17.5 million. We also have various other federal funds agreements, both secured and unsecured, with correspondent
banks totaling approximately $30.0 million in available credit under which we had no outstanding borrowings at March 31, 2020.
At March 31, 2020, we had subordinated debentures totaling $21.7 million and $9.0 million of repurchase agreements. At March 31,
2020, the Company had $250,000 borrowed against a $7.5 million line of credit from an unrelated financial institution maturing
on November 1, 2020, with an interest rate that adjusts daily based on the prime rate less 0.25%. This line of credit has covenants
specific to capital and other financial ratios, which the Company was in compliance with at March 31, 2020.
We
increased our liquidity available through the Federal Reserve discount window to $108.0 million as of April 30, 2020 by pledging
additional municipal investment securities as collateral. The current rate on discount window borrowings is 0.25%. We also have
access to the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) through which PPP loans
can be pledged as collateral to the Federal Reserve in order to access liquidity at an interest rate of 0.35%. During April
2020, we borrowed $8.0 million from the FHLB through a special offering to fund PPP loans. As of the date of this filing, a substantial
portion of the PPP loan proceeds to our customers have remained in the Bank as deposits. If our deposits decrease, we have
various options to fund the liquidity requirements through the Federal Reserve, FHLB or brokered deposits.
Off
Balance Sheet Arrangements. As a provider of financial services, we routinely issue financial guarantees in the form of
financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by us generally
to guarantee the payment or performance obligation of a customer to a third party. While these standby letters of credit represent
a potential outlay by us, a significant amount of the commitments may expire without being drawn upon. We have recourse against
the customer for any amount the customer is required to pay to a third party under a standby letter of credit. The letters of
credit are subject to the same credit policies, underwriting standards and approval process as loans made by us. Most of the standby
letters of credit are secured, and in the event of nonperformance by the customers, we have the right to the underlying collateral,
which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities.
The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us,
was $2.1 million at March 31, 2020.
At
March 31, 2020, we had outstanding loan commitments, excluding standby letters of credit, of $124.2 million. We anticipate that
sufficient funds will be available to meet current loan commitments. These commitments consist of unfunded lines of credit and
commitments to finance real estate loans.
Capital.
Current regulatory capital regulations require financial institutions (including banks and bank holding companies) to meet
certain regulatory capital requirements. The Company and the Bank are subject to the Basel III Rules that implemented the Basel
III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank
Wall Street Reform and Consumer Protection Act. The Basel III Rules are applicable to all U.S. banks that are subject to minimum
capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies”
(generally, non-public bank holding companies with consolidated assets of less than $3.0 billion).
The
Basel III Rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a Tier 1 capital to risk-weighted
assets minimum ratio of 6.0%, a Total Capital to risk-weighted assets minimum ratio of 8.0%, and a Tier 1 leverage minimum ratio
of 4.0%. A capital conservation buffer, equal to 2.5% common equity Tier 1 capital, is also established above the regulatory minimum
capital requirements. As of March 31, 2020 and December 31, 2019, the Bank was rated “well capitalized,” which is
the highest rating available under the regulatory capital regulations framework for prompt corrective action. Management believed
that as of March 31, 2020, the Company and the Bank met all capital adequacy requirements to which we are subject.
We
believe the Company has adequate capital to withstand the impact of the COVID-19 pandemic and any economic downturn on our asset
quality and net earnings. The Company performs stress tests on the loan portfolio to measure the impact of severe economic recessions
on its capital levels to ensure we are prepared for events like the COVID-19 pandemic.
Dividends.
During the quarter ended March 31, 2020, we paid a quarterly cash dividend of $0.20 per share to our stockholders.
The
payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital
pursuant to applicable capital adequacy guidelines and regulations. In addition, under the Basel III Rules, financial institutions
have to maintain 2.5% in common equity Tier 1 capital attributable to the capital conservation buffer in order to pay dividends
and make other capital distributions. As described above, the Bank exceeded its minimum capital requirements under applicable
guidelines as of March 31, 2020. The National Bank Act imposes limitations on the amount of dividends that a national bank may
pay without prior regulatory approval. Generally, the amount is limited to the bank’s current year’s net earnings
plus the adjusted retained earnings for the two preceding years. As of March 31, 2020, approximately $15.2 million was available
to be paid as dividends to the Company by the Bank without prior regulatory approval.
Additionally,
our ability to pay dividends is limited by the subordinated debentures that are held by three business trusts that we control.
Interest payments on the debentures must be paid before we pay dividends on our capital stock, including our common stock. We
have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest
payments, all deferred interest must be paid before we may pay dividends on our capital stock.
Average
Assets/Liabilities. The following table reflects the tax-equivalent yields earned on average interest-earning assets and
costs of average interest-bearing liabilities for the periods indicated (derived by dividing income or expense by the monthly
average balance of assets or liabilities, respectively) as well as “net interest margin” (which reflects the effect
of the net earnings balance) for the periods shown:
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
Average balance
|
|
|
Income/ expense
|
|
|
Average yield/cost
|
|
|
Average balance
|
|
|
Income/ expense
|
|
|
Average yield/cost
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits at banks
|
|
$
|
4,232
|
|
|
$
|
11
|
|
|
|
1.05
|
%
|
|
$
|
1,858
|
|
|
$
|
14
|
|
|
|
3.06
|
%
|
Investment securities (1)
|
|
|
361,264
|
|
|
|
2,397
|
|
|
|
2.67
|
%
|
|
|
389,441
|
|
|
|
2,641
|
|
|
|
2.75
|
%
|
Loans receivable, net (2)
|
|
|
546,910
|
|
|
|
7,132
|
|
|
|
5.24
|
%
|
|
|
491,725
|
|
|
|
6,468
|
|
|
|
5.33
|
%
|
Total interest-earning assets
|
|
|
912,406
|
|
|
|
9,540
|
|
|
|
4.21
|
%
|
|
|
883,024
|
|
|
|
9,123
|
|
|
|
4.19
|
%
|
Non-interest-earning assets
|
|
|
92,076
|
|
|
|
|
|
|
|
|
|
|
|
92,753
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,004,482
|
|
|
|
|
|
|
|
|
|
|
$
|
975,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and checking
|
|
$
|
393,028
|
|
|
$
|
514
|
|
|
|
0.53
|
%
|
|
$
|
382,958
|
|
|
$
|
682
|
|
|
|
0.72
|
%
|
Savings accounts
|
|
|
101,738
|
|
|
|
9
|
|
|
|
0.04
|
%
|
|
|
96,149
|
|
|
|
8
|
|
|
|
0.03
|
%
|
Time deposits
|
|
|
150,038
|
|
|
|
460
|
|
|
|
1.23
|
%
|
|
|
169,941
|
|
|
|
641
|
|
|
|
1.53
|
%
|
Total interest-bearing deposits
|
|
|
644,804
|
|
|
|
983
|
|
|
|
0.61
|
%
|
|
|
649,048
|
|
|
|
1,331
|
|
|
|
0.83
|
%
|
FHLB advances and other borrowings
|
|
|
41,140
|
|
|
|
233
|
|
|
|
2.28
|
%
|
|
|
47,803
|
|
|
|
357
|
|
|
|
3.03
|
%
|
Total interest-bearing liabilities
|
|
|
685,944
|
|
|
|
1,216
|
|
|
|
0.71
|
%
|
|
|
696,851
|
|
|
|
1,688
|
|
|
|
0.98
|
%
|
Non-interest-bearing liabilities
|
|
|
207,767
|
|
|
|
|
|
|
|
|
|
|
|
185,897
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
110,771
|
|
|
|
|
|
|
|
|
|
|
|
93,029
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,004,482
|
|
|
|
|
|
|
|
|
|
|
$
|
975,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (3)
|
|
|
|
|
|
|
|
|
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
3.21
|
%
|
Net interest margin (4)
|
|
|
|
|
|
$
|
8,324
|
|
|
|
3.67
|
%
|
|
|
|
|
|
$
|
7,435
|
|
|
|
3.41
|
%
|
Tax-equivalent interest - imputed
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
8,102
|
|
|
|
|
|
|
|
|
|
|
$
|
7,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
133.0
|
%
|
|
|
|
|
|
|
|
|
|
|
126.7
|
%
|
(1)
|
Income
on tax exempt securities is presented on a fully tax-equivalent basis, using a 21% federal tax rate.
|
(2)
|
Includes
loans classified as non-accrual. Income on tax-exempt loans is presented on a fully tax-equivalent basis, using a 21% federal
tax rate.
|
(3)
|
Interest
rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid
on interest-bearing liabilities.
|
(4)
|
Net
interest margin represents annualized, tax-equivalent net interest income divided by average interest-earning assets.
|
Rate/Volume
Table. The following table describes the extent to which changes in tax-equivalent interest income and interest
expense for major components of interest-earning assets and interest-bearing liabilities affected the Company’s interest
income and expense for the periods indicated. The table distinguishes between (i) changes attributable to rate (changes in rate
multiplied by prior volume), (ii) changes attributable to volume (changes in volume multiplied by prior rate), and (iii) net change
(the sum of (i) and (ii)). The net changes attributable to the combined effect of volume and rate that cannot be segregated have
been allocated proportionately to the change due to volume and the change due to rate.
|
|
Three months ended March 31,
|
|
|
|
2020 vs 2019
|
|
|
|
Increase/(decrease) attributable to
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits at banks
|
|
$
|
(6
|
)
|
|
$
|
3
|
|
|
$
|
(3
|
)
|
Investment securities
|
|
|
(174
|
)
|
|
|
(70
|
)
|
|
|
(244
|
)
|
Loans
|
|
|
767
|
|
|
|
(103
|
)
|
|
|
664
|
|
Total
|
|
|
587
|
|
|
|
(170
|
)
|
|
|
417
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(8
|
)
|
|
|
(340
|
)
|
|
|
(348
|
)
|
Other borrowings
|
|
|
(45
|
)
|
|
|
(79
|
)
|
|
|
(124
|
)
|
Total
|
|
|
(53
|
)
|
|
|
(419
|
)
|
|
|
(472
|
)
|
Net interest income
|
|
$
|
640
|
|
|
$
|
249
|
|
|
$
|
889
|
|