Notes
to Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies
Principles
of Consolidation. The accompanying consolidated financial statements include the accounts of Landmark Bancorp, Inc. and
its wholly owned subsidiaries, Landmark National Bank and Landmark Risk Management Inc. All intercompany balances and transactions
have been eliminated in consolidation. The Bank, considered a single operating segment, 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. Landmark Risk Management, Inc. 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.
Use
of Estimates. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting
principles requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business
Combinations. At the date of acquisition, the Company records the net assets acquired and liabilities assumed on the consolidated
balance sheet at their estimated fair values, and goodwill is recognized for the excess purchase price over the estimated fair
value of acquired net assets. The results of operations for acquired companies are included in the Company’s consolidated
statements of earnings beginning at the acquisition date. Expenses arising from the acquisition activities are recorded in the
consolidated statements of earnings during the period incurred.
Reserve
Requirements. Regulations of the Federal Reserve require reserves to be maintained by all banking institutions according
to the types and amounts of certain deposit liabilities. These requirements restrict a portion of the amounts shown as consolidated
cash and due from banks from everyday usage in the operation of banks. As of December 31, 2020 and 2019, the Bank did not have
a minimum reserve requirement.
Cash
Flows. Cash and cash equivalents include cash on hand and amounts due from banks with original maturities of fewer than
90 days, and are carried at cost. Net cash flows are reported for customer loan and deposit transactions.
Investment
Securities. The Company has classified its investment securities portfolio as available-for-sale. Available-for-sale securities
are recorded at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’
equity, net of taxes. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities
are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments
are anticipated. Realized gains and losses on sales of available-for-sale securities are recorded on a trade date basis and are
calculated using the specific identification method.
The
Company performs quarterly reviews of the investment portfolio to evaluate investment for other-than-temporary impairment. The
initial review begins with all securities in an unrealized loss position. The Company’s assessment of other-than-temporary
impairment is based on its judgment of the specific facts and circumstances impacting each individual security at the time such
assessments are made. The Company reviews and considers all factual information, including expected cash flows, the structure
of the security, the credit quality of the underlying assets and the current and anticipated market conditions. Any credit-related
impairment on debt securities is recorded through a charge to earnings. Impairment related to other factors is recognized in other
comprehensive income. However, if the Company intends to sell or it is more likely than not that it will be required to sell a
security in an unrealized loss position before recovery of its amortized costs basis, the entire impairment is recorded through
a charge to earnings.
Bank
Stocks. Bank stocks are investments acquired for regulatory purposes and borrowing availability and are accounted for
at cost. The cost of such investments represents their redemption value as such investments do not have a readily determinable
fair value. The Company evaluates bank stocks for other-than-temporary impairment by analyzing the ultimate recoverability based
on a credit analysis of the issuer.
Acquired
Loans. Acquired loans are recorded at estimated fair value at the time of acquisition and accounted for under ASC 310-20.
The Company’s acquired loans were not acquired with deteriorated credit quality. Estimated fair values of acquired loans
are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral,
the expected timing of cash flows, classification status, fixed or variable interest rate, term of loan and whether or not the
loan is amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates.
Discounts or premiums created when acquired loans are recorded at their estimated fair values are accreted or amortized over the
remaining term of the loan as an adjustment to the related loan’s yield. Similar to originated loans described below, the
accrual of interest income on acquired loans is discontinued when the collection of principal or interest, in whole or in part,
is doubtful.
Loans.
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off
are reported at their outstanding principal balances, net of undisbursed loan proceeds, the allowance for loan losses, and any
deferred fees or costs on originated loans. Origination fees received on loans held in portfolio and the estimated direct costs
of origination are deferred and amortized to interest income using the interest method.
A
loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered
by management in determining if a loan is impaired include payment status, probability of collecting scheduled principal and interest
payments when due and value of collateral for collateral dependent loans. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. In addition, the Company classifies troubled debt restructurings (“TDR”)
as impaired loans. A loan is classified as a TDR if the Company modifies a loan with any concessions, as defined by accounting
guidance, to a borrower experiencing financial difficulty. The allowance recorded on impaired loans is measured on a loan-by-loan
basis for commercial, commercial real estate, agriculture and construction and land loans by either the present value of expected
future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair
value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans with smaller individual balances
are collectively evaluated for impairment. Accordingly, the Company generally does not separately identify individual consumer
and residential loans for impairment disclosures.
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 CARES Act and federal regulatory guidance permit
banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized
as TDRs if the loan meets certain criteria. The CARES Act requires the borrower to be 30 days or less past due at December 31,
2019 and the loan modification be related to the deferral of principal or interest or a change to the interest rate. The federal
regulatory guidance criteria indicates that a loan modification should be short-term and the borrower be less than 30 days past
due at the time of the modification.
The
accrual of interest on non-performing loans is discontinued at the time the loan is ninety 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 the principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual
or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery
method, until qualifying for return to accrual. Loans are evaluated individually and are returned to accrual status when all principal
and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance
for Loan Losses. The Company maintains an allowance for loan losses to absorb probable incurred loan losses in the loan
portfolio. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries).
The evaluation of the allowance for loan losses groups loans by loan class and includes one-to-four family residential real estate,
construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans. Management’s periodic
evaluation of the appropriateness of the allowance is based on the Company’s loan loss experience, adjusted for qualitative
factors. The qualitative factors include changes in lending policies and procedures, including changes in underwriting standards;
changes in international, national, regional, and local economic and business conditions; changes in the nature, volume, and terms
of loans in the portfolio; changes in the lending management and lending staff; changes in the volume and severity of past due
loans, nonaccrual loans, and adversely classified loans; changes in the value of underlying collateral; the existence of and changes
in credit concentrations; and other external factors. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. The allowance is also subject to regulatory examinations
and a determination by the regulatory agencies as to the appropriate level of the allowance.
In
addition to the general component the allowance consists of a specific component. The specific component relates to loans that
are individually classified as impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement.
Loans
Held for Sale. Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The
fair value includes the servicing value of the loans as well as any accrued interest.
Mortgage
loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by
the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the
selling price and the carrying value of the related loan sold.
Mortgage
Servicing Rights. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair
value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable
mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value
of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method
which requires servicing rights to be recorded in amortization of intangibles in proportion to, and over the period of, the estimated
future net servicing income of the underlying loans.
Servicing
rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined
by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor
type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less
than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular
grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are included
in amortization expense on the income statement. The fair values of servicing rights are subject to significant fluctuations as
a result of changes in estimated and actual prepayment speeds, default rates and losses.
Transfers
of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets has been relinquished.
Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred
assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them
before their maturity.
Mortgage
Loan Repurchase Reserve. The Company routinely sells one-to-four family residential mortgage loans to secondary mortgage
market investors. Under standard representations and warranties clauses in the Company’s mortgage sale agreements, the Company
may be required to repurchase mortgage loans sold or reimburse the investors for credit losses incurred on those loans if a breach
of the contractual representations and warranties occurred. The Company establishes a mortgage repurchase liability in an amount
equal to management’s estimate of losses on loans for which the Company could have a repurchase obligation or loss reimbursement.
The estimated liability incorporates the volume of loans sold in previous periods, default expectations, historical investor repurchase
demand and actual loss severity. Provisions to the mortgage repurchase reserve reduce gains on sales of loans.
Premises
and Equipment. Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Major
replacements and betterments are capitalized while maintenance and repairs are charged to expense when incurred. Gains or losses
on dispositions are reflected in earnings as incurred.
Bank
Owned Life Insurance. The Company has purchased life insurance policies on certain key executives. Bank owned life insurance
is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender
value adjusted for other charges or other amounts due that are probable at settlement.
Goodwill
and Intangible Assets. Goodwill is not amortized; however, it is tested for impairment at each calendar year end or more
frequently when events or circumstances dictate. The impairment test compares the carrying value of goodwill to an implied fair
value of the goodwill, which is based on a review of the Company’s market capitalization adjusted for appropriate control
premiums as well as an analysis of valuation multiples of recent, comparable acquisitions. The Company considers the result from
each of these valuation methods in determining the implied fair value of its goodwill. A goodwill impairment would be recorded
for the amount that the carrying value exceeds the implied fair value.
Intangible
assets include core deposit intangibles and lease intangibles. Core deposit intangible assets are amortized over their estimated
useful life of ten years on an accelerated basis. Lease intangible assets are amortized over the life of the lease. When facts
and circumstances indicate potential impairment, the Company will evaluate the recoverability of the intangible asset’s
carrying value, using estimates of undiscounted future cash flows over the remaining asset life. Any impairment loss is measured
by the excess of carrying value over fair value.
Income
Taxes. The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an
entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that
have been recognized in financial statements or tax returns. Uncertain income tax positions will be recognized only if it is more
likely than not that they will be sustained upon examination by taxing authorities, based upon their technical merits. Once that
standard is met, the amount recorded will be the largest amount of benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits as a component
of income tax expense in the consolidated statements of earnings. The Company assesses deferred tax assets to determine if the
items are more likely than not to be realized, and a valuation allowance is established for any amounts that are not more likely
than not to be realized.
Loan
Commitments and Related Financial Instruments. Financial instruments include off-balance sheet credit instruments, such
as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these
items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments
are recorded when they are funded.
Loss
Contingencies. Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on the financial statements.
Comprehensive
Income. Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes
unrealized gains and losses on securities available for sale, net of tax which are also recognized as separate components of equity.
Real
Estate Owned. Assets acquired through, or in lieu of, foreclosure are initially recorded at fair value less costs to sell
when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer
mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in
the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These
assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent
to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Stock-Based
Compensation. The
Company uses the Black-Scholes option pricing model to estimate the grant date fair value of its stock options, which is recognized
as compensation expense over the option vesting period, on a straight-line basis, which is typically four years. The fair
value of restricted common stock is equal to the Company’s stock price on the grant date, which is recognized as compensation
expense on a straight-line basis over the vesting period. The Company accounts for forfeitures as they occur.
Earnings
per Share. Basic earnings per share represent net earnings divided by the weighted average number of common shares outstanding
during the year. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential
common shares had been issued. The diluted earnings per share computation for 2020, 2019 and 2018 excluded 94,632, 105,041 and
34,028, respectively, of unexercised stock options because their inclusion would have been anti-dilutive.
The
shares used in the calculation of basic and diluted earnings per share, which have been adjusted to give effect to the 5% common
stock dividends paid by the Company in December 2020, 2019 and 2018, are shown below:
Schedule of Earnings Per Share, Basic and Diluted
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands, except per share amounts)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net earnings available to common shareholders
|
|
$
|
19,493
|
|
|
$
|
10,662
|
|
|
$
|
10,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
4,749,830
|
|
|
|
4,822,288
|
|
|
|
4,796,615
|
|
Assumed exercise of stock options
|
|
|
4,361
|
|
|
|
14,533
|
|
|
|
16,704
|
|
Weighted average common shares outstanding - diluted
|
|
|
4,754,191
|
|
|
|
4,836,821
|
|
|
|
4,813,319
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.10
|
|
|
$
|
2.21
|
|
|
$
|
2.17
|
|
Diluted
|
|
$
|
4.10
|
|
|
$
|
2.20
|
|
|
$
|
2.17
|
|
Derivative
Financial Instruments. Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and
forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. The fair value
of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the
expected exercise of the commitment before the loan is funded. In order to hedge the change in interest rates resulting from its
commitments to fund the loans, the Company enters into forward commitments for the future delivery of mortgage loans when interest
rate locks are entered into. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates
from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in net gains on
sales of loans.
Dividend
Restriction. Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank
to the holding company or by the holding company to shareholders.
Fair
Value of Financial Instruments. Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Reclassifications.
Some items in the prior year financial statements were reclassified to the current presentation. Reclassifications had
no effect on prior year net income or stockholders’ equity.
(2)
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. Under
prior GAAP, a purchased loan’s contractual balance was adjusted to fair value through a credit discount, and no reserve
was 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 oblige 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. 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 has initiated 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
January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. The amendments in this update simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying
amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting
unit when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirement for any reporting
unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform
Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual or interim goodwill impairment tests
in fiscal years beginning after December 15, 2019. In October 2019, the FASB approved a change in the effective dates for ASU
2017-04 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 ASU 2017-04 until January 1, 2023. Early adoption of the amendments of this ASU is permitted. The adoption of
ASU 2017-04 is not expected to have a material effect on the Company’s operating results or financial condition.
In
May 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting. Reference rate reform relates to the effects undertaken to eliminate certain reference rates such as the
London Interbank Offered Rate (“LIBOR”) and introduce new reference rates that may be based on larger or more liquid
observations and transactions. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging
relationships and other contracts. Generally, ASU 2020-04 would allow entities to consider contract modifications due to reference
rate reform to be a continuation of an existing contract; thus, the Company would not have to determine if the modification is
considered insignificant. The Company is in the process of reviewing loan documentation, along with the transition procedures
it will need in order to implement reference rate reform. While the Company has yet to adopt ASU 2020-04, the standard was effective
upon issuance and terminates December 31, 2022 such that changes made to contracts beginning on or after January 1, 2023 would
not apply. The adoption of ASU 2020-04 is not expected to have a material effect on the Company’s operating results or financial
condition.
(3)
Investment Securities
A
summary of investment securities available-for-sale is as follows:
Schedule of Available-for-sale Securities
(Dollars in thousands)
|
|
As of December 31, 2020
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Estimated
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. treasury securities
|
|
$
|
2,000
|
|
|
$
|
37
|
|
|
$
|
-
|
|
|
$
|
2,037
|
|
U. S. federal agency obligations
|
|
|
18,804
|
|
|
|
138
|
|
|
|
(18
|
)
|
|
|
18,924
|
|
Municipal obligations, tax exempt
|
|
|
136,321
|
|
|
|
6,367
|
|
|
|
(12
|
)
|
|
|
142,676
|
|
Municipal obligations, taxable
|
|
|
46,643
|
|
|
|
2,892
|
|
|
|
-
|
|
|
|
49,535
|
|
Agency mortgage-backed securities
|
|
|
75,530
|
|
|
|
3,108
|
|
|
|
-
|
|
|
|
78,638
|
|
Certificates of deposit
|
|
|
5,460
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,460
|
|
Total
|
|
$
|
284,758
|
|
|
$
|
12,542
|
|
|
$
|
(30
|
)
|
|
$
|
297,270
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Estimated
|
|
|
|
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
|
|
$
|
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 December 31, 2020 and 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.
Schedule of Available for Sale Securities Continuous Unrealized Loss Position Fair Value
(Dollars in thousands)
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
No. of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
securities
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
|
value
|
|
|
losses
|
|
U.S. federal agency obligations
|
|
|
4
|
|
|
$
|
11,772
|
|
|
$
|
(18
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,772
|
|
|
$
|
(18
|
)
|
Municipal obligations, tax exempt
|
|
|
12
|
|
|
|
4,191
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,191
|
|
|
|
(12
|
)
|
Total
|
|
|
16
|
|
|
$
|
15,963
|
|
|
$
|
(30
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,963
|
|
|
$
|
(30
|
)
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
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 U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies of Federal Home
Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and the FHLB. The
receipt of principal and interest on U.S. federal agency obligations is guaranteed by the respective government-sponsored agency
guarantor, such that the Company believes that its U.S. federal agency obligations do not expose the Company to credit-related
losses. Based on these factors, along with the Company’s intent to not sell the securities and its 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 U.S. federal agency obligations identified in the tables above were temporarily impaired.
The
Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued
by various municipalities. As of December 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.
The
table below 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. The amortized cost and fair value of investment securities at December 31, 2020 are as follows:
Schedule of Investments Classified by Contractual Maturity Date
(Dollars in thousands)
|
|
Amortized
|
|
|
Estimated
|
|
|
|
cost
|
|
|
fair value
|
|
Due in less than one year
|
|
$
|
12,481
|
|
|
$
|
12,558
|
|
Due after one year but within five years
|
|
|
148,182
|
|
|
|
153,152
|
|
Due after five years but within ten years
|
|
|
61,972
|
|
|
|
65,783
|
|
Due after ten years
|
|
|
62,123
|
|
|
|
65,777
|
|
Total
|
|
$
|
284,758
|
|
|
$
|
297,270
|
|
Sales
proceeds and gross realized gains and losses on sales of available-for-sale securities are as follows:
Schedule of Realized Gain (loss)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Sales proceeds
|
|
$
|
61,163
|
|
|
$
|
15,318
|
|
|
$
|
21,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains
|
|
$
|
2,449
|
|
|
$
|
2
|
|
|
$
|
84
|
|
Realized losses
|
|
|
(1
|
)
|
|
|
(179
|
)
|
|
|
(64
|
)
|
Net realized gains
|
|
$
|
2,448
|
|
|
$
|
(177
|
)
|
|
$
|
20
|
|
Securities
with carrying values of $282.2 million and $240.0 million were pledged to secure public funds on deposit, repurchase agreements
and as collateral for borrowings at December 31, 2020 and 2019, respectively. Except for U.S. federal agency obligations, no investment
in a single issuer exceeded 10% of consolidated stockholders’ equity.
(4)
Bank Stocks
Bank
stocks primarily consist of restricted investments in FHLB and Federal Reserve Bank (“FRB”) stock. The carrying value
of the FHLB stock at December 31, 2020 was $2.4 million compared to $1.1 million at December 31, 2019. The carrying value of the
FRB stock was $1.9 million at both December 31, 2020 and 2019. These securities are not readily marketable and are required for
regulatory purposes and borrowing availability. Since there are no available market values, these securities are carried at cost.
Redemption of these investments at par value is at the option of the FHLB or FRB, as applicable. Also included in Bank stocks
are other miscellaneous investments in the common stock of various correspondent banks which are held for borrowing purposes and
totaled $111,000 at December 31, 2020 and 2019.
(5)
Loans and Allowance for Loan Losses
Loans
consisted of the following:
Schedule of Loans
|
|
As of December 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate loans
|
|
$
|
157,984
|
|
|
$
|
146,505
|
|
Construction and land loans
|
|
|
26,106
|
|
|
|
22,459
|
|
Commercial real estate loans
|
|
|
172,307
|
|
|
|
133,501
|
|
Commercial loans
|
|
|
134,047
|
|
|
|
109,612
|
|
Paycheck protection program loans
|
|
|
100,084
|
|
|
|
-
|
|
Agriculture loans
|
|
|
96,532
|
|
|
|
98,558
|
|
Municipal loans
|
|
|
2,332
|
|
|
|
2,656
|
|
Consumer loans
|
|
|
24,122
|
|
|
|
25,101
|
|
Total gross loans
|
|
|
713,514
|
|
|
|
538,392
|
|
Net deferred loan (fees) costs and loans in process
|
|
|
(1,957
|
)
|
|
|
255
|
|
Allowance for loan losses
|
|
|
(8,775
|
)
|
|
|
(6,467
|
)
|
Loans, net
|
|
$
|
702,782
|
|
|
$
|
532,180
|
|
The
following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology:
Schedule of Allowance for Credit Losses on Financing Receivables
(Dollars
in thousands)
|
|
|
|
|
|
Year
ended December 31, 2020
|
|
|
|
One-to-four
family residential real estate loans
|
|
|
Construction
and land loans
|
|
|
Commercial
real estate loans
|
|
|
Commercial
loans
|
|
|
Paycheck
protection loans
|
|
|
Agriculture
loans
|
|
|
Municipal
loans
|
|
|
Consumer
loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2020
|
|
$
|
501
|
|
|
$
|
271
|
|
|
$
|
1,386
|
|
|
$
|
1,815
|
|
|
$
|
-
|
|
|
$
|
2,347
|
|
|
$
|
7
|
|
|
$
|
140
|
|
|
$
|
6,467
|
|
Charge-offs
|
|
|
(251
|
)
|
|
|
(191
|
)
|
|
|
(131
|
)
|
|
|
(292
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(248
|
)
|
|
|
(1,116
|
)
|
Recoveries
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
102
|
|
|
|
124
|
|
Provision
for loan losses
|
|
|
609
|
|
|
|
101
|
|
|
|
1,214
|
|
|
|
862
|
|
|
|
-
|
|
|
|
346
|
|
|
|
(7
|
)
|
|
|
175
|
|
|
|
3,300
|
|
Balance
at December 31, 2020
|
|
$
|
859
|
|
|
$
|
181
|
|
|
$
|
2,482
|
|
|
$
|
2,388
|
|
|
$
|
-
|
|
|
$
|
2,690
|
|
|
$
|
6
|
|
|
$
|
169
|
|
|
$
|
8,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for loss
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
177
|
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
67
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
266
|
|
Collectively
evaluated for loss
|
|
|
859
|
|
|
|
181
|
|
|
|
2,305
|
|
|
|
2,366
|
|
|
|
-
|
|
|
|
2,623
|
|
|
|
6
|
|
|
|
169
|
|
|
|
8,509
|
|
Total
|
|
$
|
859
|
|
|
$
|
181
|
|
|
$
|
2,482
|
|
|
$
|
2,388
|
|
|
$
|
-
|
|
|
$
|
2,690
|
|
|
$
|
6
|
|
|
$
|
169
|
|
|
$
|
8,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for loss
|
|
$
|
914
|
|
|
$
|
1,137
|
|
|
$
|
8,119
|
|
|
$
|
1,639
|
|
|
$
|
-
|
|
|
$
|
614
|
|
|
$
|
36
|
|
|
$
|
3
|
|
|
$
|
12,462
|
|
Collectively
evaluated for loss
|
|
|
157,070
|
|
|
|
24,969
|
|
|
|
164,188
|
|
|
|
132,408
|
|
|
|
100,084
|
|
|
|
95,918
|
|
|
|
2,296
|
|
|
|
24,119
|
|
|
|
701,052
|
|
Total
|
|
$
|
157,984
|
|
|
$
|
26,106
|
|
|
$
|
172,307
|
|
|
$
|
134,047
|
|
|
$
|
100,084
|
|
|
$
|
96,532
|
|
|
$
|
2,332
|
|
|
$
|
24,122
|
|
|
$
|
713,514
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Year
ended December 31, 2019
|
|
|
|
One-to-four
family residential real estate
|
|
|
Construction
and land
|
|
|
Commercial
real estate
|
|
|
Commercial
loans
|
|
|
Agriculture
loans
|
|
|
Municipal
loans
|
|
|
Consumer
loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2019
|
|
$
|
449
|
|
|
$
|
168
|
|
|
$
|
1,686
|
|
|
$
|
1,051
|
|
|
$
|
2,238
|
|
|
$
|
7
|
|
|
$
|
166
|
|
|
$
|
5,765
|
|
Charge-offs
|
|
|
(56
|
)
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
(453
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(285
|
)
|
|
|
(825
|
)
|
Recoveries
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
|
|
-
|
|
|
|
6
|
|
|
|
67
|
|
|
|
127
|
|
Provision
for loan losses
|
|
|
107
|
|
|
|
134
|
|
|
|
(300
|
)
|
|
|
1,164
|
|
|
|
109
|
|
|
|
(6
|
)
|
|
|
192
|
|
|
|
1,400
|
|
Balance
at December 31, 2019
|
|
$
|
501
|
|
|
$
|
271
|
|
|
$
|
1,386
|
|
|
$
|
1,815
|
|
|
$
|
2,347
|
|
|
$
|
7
|
|
|
$
|
140
|
|
|
$
|
6,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Year
ended December 31, 2018
|
|
|
|
One-to-four
family residential real estate
|
|
|
Construction
and land
|
|
|
Commercial
real estate
|
|
|
Commercial
loans
|
|
|
Agriculture
loans
|
|
|
Municipal
loans
|
|
|
Consumer
loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2018
|
|
$
|
542
|
|
|
$
|
181
|
|
|
$
|
1,540
|
|
|
$
|
1,226
|
|
|
$
|
1,812
|
|
|
$
|
8
|
|
|
$
|
150
|
|
|
$
|
5,459
|
|
Charge-offs
|
|
|
(32
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(950
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(178
|
)
|
|
|
(1,160
|
)
|
Recoveries
|
|
|
4
|
|
|
|
-
|
|
|
|
1
|
|
|
|
22
|
|
|
|
1
|
|
|
|
2
|
|
|
|
36
|
|
|
|
66
|
|
Provision
for loan losses
|
|
|
(65
|
)
|
|
|
(13
|
)
|
|
|
145
|
|
|
|
753
|
|
|
|
425
|
|
|
|
(3
|
)
|
|
|
158
|
|
|
|
1,400
|
|
Balance
at December 31, 2018
|
|
$
|
449
|
|
|
$
|
168
|
|
|
$
|
1,686
|
|
|
$
|
1,051
|
|
|
$
|
2,238
|
|
|
$
|
7
|
|
|
$
|
166
|
|
|
$
|
5,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for loss
|
|
$
|
100
|
|
|
$
|
103
|
|
|
$
|
67
|
|
|
$
|
27
|
|
|
$
|
13
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
310
|
|
Collectively
evaluated for loss
|
|
|
349
|
|
|
|
65
|
|
|
|
1,619
|
|
|
|
1,024
|
|
|
|
2,225
|
|
|
|
7
|
|
|
|
166
|
|
|
|
5,455
|
|
Total
|
|
$
|
449
|
|
|
$
|
168
|
|
|
$
|
1,686
|
|
|
$
|
1,051
|
|
|
$
|
2,238
|
|
|
$
|
7
|
|
|
$
|
166
|
|
|
|
5,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for loss
|
|
$
|
623
|
|
|
$
|
1,808
|
|
|
$
|
3,912
|
|
|
$
|
1,528
|
|
|
$
|
717
|
|
|
$
|
58
|
|
|
$
|
45
|
|
|
$
|
8,691
|
|
Collectively
evaluated for loss
|
|
|
136,272
|
|
|
|
18,275
|
|
|
|
135,055
|
|
|
|
72,761
|
|
|
|
95,915
|
|
|
|
2,895
|
|
|
|
25,383
|
|
|
|
486,556
|
|
Total
|
|
$
|
136,895
|
|
|
$
|
20,083
|
|
|
$
|
138,967
|
|
|
$
|
74,289
|
|
|
$
|
96,632
|
|
|
$
|
2,953
|
|
|
$
|
25,428
|
|
|
$
|
495,247
|
|
The
Company’s impaired loans increased $3.8 million from $8.7 million at December 31, 2019 to $12.5 million at December 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 December
31, 2020 and December 31, 2019 was related to TDRs that are current and accruing interest, but still classified as impaired. Interest
income recognized on a cash basis for impaired loans was immaterial during the years 2020, 2019 and 2018. The following tables
present information on impaired loans:
Schedule of Impaired Financing Receivables
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 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 loans
|
|
$
|
914
|
|
|
$
|
914
|
|
|
$
|
914
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
925
|
|
|
$
|
3
|
|
Construction and land loans
|
|
|
2,872
|
|
|
|
1,137
|
|
|
|
1,137
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,211
|
|
|
|
26
|
|
Commercial real estate loans
|
|
|
8,119
|
|
|
|
8,119
|
|
|
|
4,302
|
|
|
|
3,817
|
|
|
|
177
|
|
|
|
8,152
|
|
|
|
8
|
|
Commercial loans
|
|
|
1,990
|
|
|
|
1,639
|
|
|
|
1,543
|
|
|
|
96
|
|
|
|
22
|
|
|
|
1,984
|
|
|
|
43
|
|
Agriculture loans
|
|
|
829
|
|
|
|
614
|
|
|
|
538
|
|
|
|
76
|
|
|
|
67
|
|
|
|
618
|
|
|
|
67
|
|
Municipal loans
|
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
1
|
|
Consumer loans
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
Total impaired loans
|
|
$
|
14,763
|
|
|
$
|
12,462
|
|
|
$
|
8,473
|
|
|
$
|
3,989
|
|
|
$
|
266
|
|
|
$
|
12,948
|
|
|
$
|
148
|
|
|
|
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 loans
|
|
$
|
1,297
|
|
|
$
|
1,256
|
|
|
$
|
887
|
|
|
$
|
369
|
|
|
$
|
129
|
|
|
$
|
1,291
|
|
|
$
|
10
|
|
Construction and land loans
|
|
|
3,214
|
|
|
|
1,479
|
|
|
|
1,288
|
|
|
|
191
|
|
|
|
191
|
|
|
|
1,631
|
|
|
|
36
|
|
Commercial real estate loans
|
|
|
3,461
|
|
|
|
3,461
|
|
|
|
3,258
|
|
|
|
203
|
|
|
|
103
|
|
|
|
3,489
|
|
|
|
478
|
|
Commercial loans
|
|
|
1,427
|
|
|
|
1,298
|
|
|
|
416
|
|
|
|
882
|
|
|
|
204
|
|
|
|
1,464
|
|
|
|
11
|
|
Agriculture loans
|
|
|
1,339
|
|
|
|
1,124
|
|
|
|
613
|
|
|
|
511
|
|
|
|
106
|
|
|
|
1,166
|
|
|
|
48
|
|
Municipal loans
|
|
|
58
|
|
|
|
58
|
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
1
|
|
Consumer loans
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Total impaired loans
|
|
$
|
10,800
|
|
|
$
|
8,680
|
|
|
$
|
6,524
|
|
|
$
|
2,156
|
|
|
$
|
733
|
|
|
$
|
9,104
|
|
|
$
|
584
|
|
|
|
As of December 31, 2018
|
|
|
|
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 loans
|
|
$
|
623
|
|
|
$
|
623
|
|
|
$
|
413
|
|
|
$
|
210
|
|
|
$
|
100
|
|
|
$
|
640
|
|
|
$
|
10
|
|
Construction and land loans
|
|
|
3,543
|
|
|
|
1,808
|
|
|
|
1,383
|
|
|
|
425
|
|
|
|
103
|
|
|
|
2,689
|
|
|
|
53
|
|
Commercial real estate loans
|
|
|
3,912
|
|
|
|
3,912
|
|
|
|
2,120
|
|
|
|
1,792
|
|
|
|
67
|
|
|
|
3,928
|
|
|
|
487
|
|
Commercial loans
|
|
|
1,528
|
|
|
|
1,528
|
|
|
|
1,446
|
|
|
|
82
|
|
|
|
27
|
|
|
|
1,537
|
|
|
|
-
|
|
Agriculture loans
|
|
|
932
|
|
|
|
717
|
|
|
|
529
|
|
|
|
188
|
|
|
|
13
|
|
|
|
844
|
|
|
|
52
|
|
Municipal loans
|
|
|
58
|
|
|
|
58
|
|
|
|
58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
1
|
|
Consumer loans
|
|
|
45
|
|
|
|
45
|
|
|
|
45
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
|
|
-
|
|
Total impaired loans
|
|
$
|
10,641
|
|
|
$
|
8,691
|
|
|
$
|
5,994
|
|
|
$
|
2,697
|
|
|
$
|
310
|
|
|
$
|
9,745
|
|
|
$
|
603
|
|
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 ninety 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 ninety days delinquent and accruing interest at
December 31, 2020 or December 31, 2019. The following tables present information on the Company’s past due and non-accrual
loans by loan class:
Schedule of Past Due Financing Receivables
(Dollars in thousands)
|
|
|
|
|
|
As of December 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 loans
|
|
$
|
262
|
|
|
$
|
185
|
|
|
$
|
-
|
|
|
$
|
447
|
|
|
$
|
749
|
|
|
$
|
1,196
|
|
|
$
|
156,788
|
|
Construction and land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
694
|
|
|
|
694
|
|
|
|
25,412
|
|
Commercial real estate loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,119
|
|
|
|
8,119
|
|
|
|
164,188
|
|
Commercial loans
|
|
|
832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
832
|
|
|
|
874
|
|
|
|
1,706
|
|
|
|
132,341
|
|
Paycheck protection program loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,084
|
|
Agriculture loans
|
|
|
206
|
|
|
|
29
|
|
|
|
-
|
|
|
|
235
|
|
|
|
76
|
|
|
|
311
|
|
|
|
96,221
|
|
Municipal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,332
|
|
Consumer loans
|
|
|
15
|
|
|
|
1
|
|
|
|
-
|
|
|
|
16
|
|
|
|
3
|
|
|
|
19
|
|
|
|
24,103
|
|
Total
|
|
$
|
1,315
|
|
|
$
|
215
|
|
|
$
|
-
|
|
|
$
|
1,530
|
|
|
$
|
10,515
|
|
|
$
|
12,045
|
|
|
$
|
701,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of gross loans
|
|
|
0.19
|
%
|
|
|
0.03
|
%
|
|
|
0.00
|
%
|
|
|
0.22
|
%
|
|
|
1.47
|
%
|
|
|
1.69
|
%
|
|
|
98.31
|
%
|
|
|
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 loans
|
|
$
|
79
|
|
|
$
|
593
|
|
|
$
|
-
|
|
|
$
|
672
|
|
|
$
|
1,088
|
|
|
$
|
1,760
|
|
|
$
|
144,745
|
|
Construction and land loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
898
|
|
|
|
898
|
|
|
|
21,561
|
|
Commercial real estate loans
|
|
|
1,137
|
|
|
|
707
|
|
|
|
-
|
|
|
|
1,844
|
|
|
|
1,440
|
|
|
|
3,284
|
|
|
|
130,217
|
|
Commercial loans
|
|
|
510
|
|
|
|
68
|
|
|
|
-
|
|
|
|
578
|
|
|
|
1,270
|
|
|
|
1,848
|
|
|
|
107,764
|
|
Agriculture loans
|
|
|
316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
316
|
|
|
|
846
|
|
|
|
1,162
|
|
|
|
97,396
|
|
Municipal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,656
|
|
Consumer loans
|
|
|
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 years 2020, 2019 and 2018,
would have increased interest income by $380,000, $230,000 and $254,000, respectively. No interest income related to non-accrual
loans was included in interest income for the years ended December 31, 2020, 2019 and 2018.
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. Non-classified 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 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:
Schedule of Risk Categories by Loan Class
|
|
As of December 31, 2020
|
|
|
As of December 31, 2019
|
|
(Dollars in thousands)
|
|
Nonclassified
|
|
|
Classified
|
|
|
Nonclassified
|
|
|
Classified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate loans
|
|
$
|
154,985
|
|
|
$
|
2,999
|
|
|
$
|
145,311
|
|
|
$
|
1,194
|
|
Construction and land loans
|
|
|
25,412
|
|
|
|
694
|
|
|
|
21,560
|
|
|
|
899
|
|
Commercial real estate loans
|
|
|
161,661
|
|
|
|
10,646
|
|
|
|
130,714
|
|
|
|
2,787
|
|
Commercial loans
|
|
|
132,023
|
|
|
|
2,024
|
|
|
|
101,678
|
|
|
|
7,934
|
|
Paycheck protection program loans
|
|
|
100,084
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Agriculture loans
|
|
|
87,662
|
|
|
|
8,870
|
|
|
|
93,259
|
|
|
|
5,299
|
|
Municipal loans
|
|
|
2,332
|
|
|
|
-
|
|
|
|
2,656
|
|
|
|
-
|
|
Consumer loans
|
|
|
24,119
|
|
|
|
3
|
|
|
|
25,097
|
|
|
|
4
|
|
Total
|
|
$
|
688,278
|
|
|
$
|
25,236
|
|
|
$
|
520,275
|
|
|
$
|
18,117
|
|
At
December 31, 2020, the Company had nine loan relationships consisting of 21 outstanding loans totaling $3.9 million that were
classified as TDRs compared to nine relationships consisting of thirteen outstanding loans totaling $3.6 million that were classified
as TDRs at December 31, 2019.
During
2020, the Company modified the payment terms on an agriculture loan totaling $156,000 and classified the restructuring as a TDR.
The loans related to a $1.6 million loan relationship, consisting of two one-to-our family loans, one construction and land loan,
two commercial real estate loans and one commercial loan, were classified as TDRs during 2020 after negotiating restructuring
agreements with the borrowers. The restructuring included a charge-off of $50,000. The loans related to one commercial loan relationship,
with five loans totaling $742,000, were classified as TDRs during 2020, after the payments were modified to interest only. All
of the loans classified as TDRs were experiencing financial difficulties prior to the COVID-19 pandemic. An agriculture loan,
a commercial real estate loan and a one-to-four family residential real estate loan previously classified as TDRs in 2017, 2015
and 2016, respectively, paid off during 2020.
The
Company did not classify any loans as TDRs during 2019. A commercial real estate loan previously classified as a TDR in 2014 paid
off during 2019.
During
2018, the Company classified an agriculture loan totaling $64,000 as a TDR after originating a loan to an existing loan relationship
that was classified as a TDR in 2016. As part of the restructuring the borrower paid off three loans previously classified as
TDRs. Since the agriculture loan relationship was adequately secured, no impairments were recorded against the principal as of
December 31, 2020. The Company also classified a $36,000 commercial loan as a TDR after extending the maturity of the loan during
2018. The commercial loan had a $8,000 impairment recorded against the principal balance as of December 31, 2020. An agriculture
loan relationship consisting of two loans that were originally classified as TDRs during 2015 and a municipal loan that was classified
as a TDR in 2010 were both paid off in 2018.
Subsequently, 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 December 31, 2020,
2019 and 2018. At December 31, 2020, there was a commitment of $10,000
to lend additional funds on one construction
and land loan classified as a TDR. The Company did not record any charge-offs against loans classified as TDRs during 2020
and recorded a credit provision for loan loss of $1,000
against TDRs during 2020. The Company
did not record any charge-offs against loans classified as TDRs during 2019 and recorded a credit provision for loan loss
of $1,000
against TDRs during 2019. The Company
did not record any charge-offs against loans classified as TDRs during 2018 and recorded a credit provision for loan loss of $117,000
against TDRs during 2018. The Company
allocated $8,000
and $9,000
of the allowance for loan losses recorded
against loans classified as TDRs at December 31, 2020 and 2019, respectively.
The
following table presents information on loans that were classified as TDRs:
Schedule of Troubled Debt Restructurings On Financing Receivables
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 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 loans
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
165
|
|
|
|
2
|
|
|
$
|
-
|
|
|
$
|
168
|
|
Construction and land loans
|
|
|
5
|
|
|
|
693
|
|
|
|
443
|
|
|
|
4
|
|
|
|
510
|
|
|
|
581
|
|
Commercial real estate loans
|
|
|
2
|
|
|
|
1,227
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2,021
|
|
Commercial loans
|
|
|
7
|
|
|
|
33
|
|
|
|
765
|
|
|
|
1
|
|
|
|
-
|
|
|
|
28
|
|
Agriculture
|
|
|
4
|
|
|
|
-
|
|
|
|
538
|
|
|
|
4
|
|
|
|
-
|
|
|
|
278
|
|
Municipal loans
|
|
|
1
|
|
|
|
-
|
|
|
|
36
|
|
|
|
1
|
|
|
|
-
|
|
|
|
58
|
|
Total troubled debt restructurings
|
|
|
21
|
|
|
$
|
1,953
|
|
|
$
|
1,947
|
|
|
|
13
|
|
|
$
|
510
|
|
|
$
|
3,134
|
|
As
of December 31, 2020, the Company had 6 loan modifications on outstanding loan balances of $7.2
million in connection with the COVID-19
pandemic that had not yet returned to contractual terms that, per regulatory guidance, are not deemed to be TDRs. These modifications
consisted of payment deferrals that were applied to either the full loan payment or just the principal component. One commercial
real estate loan totaling $3.7
million that was modified was also on
non-accrual status as of December 31, 2020. Consistent with the CARES Act and Joint Interagency Regulatory Guidance, the Company
also entered into short-term forbearance plans and short-term repayment plans on three one-to-four family residential
mortgage loans totaling $366,000
as of December 31, 2020, which were not classified as TDRs.
The
Company had loans and unfunded commitments to directors and officers, and to affiliated parties, at December 31, 2020 and 2019.
A summary of such loans is as follows:
Schedule of Loan to Directors Officers and Affiliated Parties
(Dollars in thousands)
|
|
2020
|
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
14,203
|
|
New loans
|
|
|
12,872
|
|
Repayments
|
|
|
(10,981
|
)
|
Balance at December 31, 2020
|
|
$
|
16,094
|
|
(6)
Loan Commitments
The
Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet customers’
financing needs. These financial instruments consist principally of commitments to extend credit. The Company uses the same credit
policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company’s exposure
to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments.
In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit,
letters of credit, and lines of credit, the balance of which are not recorded in the accompanying consolidated financial statements.
The Company generally requires collateral or other security on unfunded loan commitments and irrevocable letters of credit. Unfunded
commitments to extend credit, excluding standby letters of credit, aggregated to $145.1 million and $125.4 million at December
31, 2020 and 2019, respectively, and are generally at variable interest rates. Standby letters of credit totaled $2.2 million
at December 31, 2020 and $1.9 million at December 31, 2019.
(7)
Goodwill and Intangible Assets
The
Company performed its annual step one impairment test as of December 31, 2020. The fair value of the Company’s single reporting
unit was compared to the carrying value of the single reporting unit at the measurement date to determine if any impairment existed.
Based on the results of the December 31, 2020 step one impairment test, the Company concluded its goodwill was not impaired.
A
summary of the other intangible assets that continue to be subject to amortization is as follows:
Schedule of Other Intangible Assets and Goodwill
(Dollars in thousands)
|
|
As of December 31, 2020
|
|
|
|
Gross carrying amount
|
|
|
Accumulated amortization
|
|
|
Net carrying amount
|
|
Core deposit intangible assets
|
|
$
|
2,018
|
|
|
$
|
(1,838
|
)
|
|
$
|
180
|
|
Lease intangible asset
|
|
|
350
|
|
|
|
(324
|
)
|
|
|
26
|
|
Total other intangible assets
|
|
$
|
2,368
|
|
|
$
|
(2,162
|
)
|
|
$
|
206
|
|
|
|
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
|
|
Total other intangible assets
|
|
$
|
2,368
|
|
|
$
|
(1,985
|
)
|
|
$
|
383
|
|
The
following sets forth estimated amortization expense for core deposit and lease intangible assets for the years ending December
31:
Schedule of Finite-lived Intangible Assets, Future Amortization Expense
(Dollars in thousands)
|
|
Amortization
|
|
|
|
expense
|
|
2021
|
|
|
122
|
|
2022
|
|
|
58
|
|
2023
|
|
|
26
|
|
Total
|
|
$
|
206
|
|
(8)
Mortgage Loan Servicing
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:
Schedule of Participating Mortgage Loans
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
FHLMC
|
|
$
|
639,875
|
|
|
$
|
509,101
|
|
FHLB
|
|
|
28,157
|
|
|
|
40,462
|
|
Custodial
escrow balances maintained in connection with serviced loans were $5.8 million and $4.7 million at December 31, 2020 and 2019,
respectively. Gross service fee income related to such loans was $1.5 million, $1.4 million and $1.4 million for the years ended
December 31, 2020, 2019 and 2018, respectively, and is included in fees and service charges in the consolidated statements of
earnings.
Activity
for mortgage servicing rights and the related valuation allowance follows:
Schedule of Servicing Asset at Amortized Cost
|
|
2020
|
|
|
2019
|
|
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Mortgage servicing rights:
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,446
|
|
|
$
|
2,495
|
|
Additions
|
|
|
2,705
|
|
|
|
943
|
|
Amortization
|
|
|
(1,425
|
)
|
|
|
(992
|
)
|
Balance at end of year
|
|
$
|
3,726
|
|
|
$
|
2,446
|
|
At
December 31, 2020 and 2019, there was no valuation allowance related to mortgage servicing rights.
The
fair value of mortgage servicing rights was $4.4 million and $5.2 million at December 31, 2020 and 2019, respectively. Fair value
at December 31, 2020 was determined using discount rates ranging from 8.78% to 12.00%, prepayment speeds ranging from 7.10% to
29.61%, depending on the stratification of the specific mortgage servicing right, and a weighted average default rate of 1.36%.
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 December 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. As of December 31, 2020, the Company had no outstanding mortgage repurchase
requests.
(9)
Premises and Equipment
Premises
and equipment consisted of the following:
Schedule of Premises and Equipment
Office
Buildings and Improvements [Member]
Furniture
and Equipment [Member]
|
|
useful lives
|
|
2020
|
|
|
2019
|
|
(Dollars in thousands)
|
|
Estimated
|
|
As of December 31,
|
|
|
|
useful lives
|
|
2020
|
|
|
2019
|
|
Land
|
|
Indefinite
|
|
$
|
6,279
|
|
|
$
|
6,279
|
|
Office buildings and improvements
|
|
10 - 50 years
|
|
|
21,058
|
|
|
|
21,047
|
|
Furniture and equipment
|
|
3 - 15 years
|
|
|
8,336
|
|
|
|
8,227
|
|
Automobiles
|
|
2 - 5 years
|
|
|
567
|
|
|
|
651
|
|
Total premises and equipment
|
|
|
|
|
36,240
|
|
|
|
36,204
|
|
Accumulated depreciation
|
|
|
|
|
(15,747
|
)
|
|
|
(15,071
|
)
|
Total premises and equipment, net
|
|
|
|
$
|
20,493
|
|
|
$
|
21,133
|
|
Depreciation
expense totaled $987,000 for the year ended December 31, 2020, and $1.0 million during the years ended 2019 and 2018 and was included
in occupancy and equipment expense on the consolidated statements of earnings.
(10)
Deposits
The
following table presents the maturities of time deposits at December 31, 2020:
Schedule of Maturities of Time Deposit
(Dollars in thousands)
|
|
2020
|
|
Year
|
|
Amount
|
|
2021
|
|
$
|
112,336
|
|
2022
|
|
|
13,784
|
|
2023
|
|
|
3,856
|
|
2024
|
|
|
1,933
|
|
2025
|
|
|
1,838
|
|
Thereafter
|
|
|
3
|
|
Total
|
|
$
|
133,750
|
|
The
aggregate amount of time deposits in denominations of $250,000 or more at
December 31, 2020 and 2019 was $26.3
million and $41.3
million, respectively. As of December
31, 2020, the Company had no
brokered deposits as compared to $32.8
million brokered deposits at December
31, 2019.
The
components of interest expense associated with deposits are as follows:
Schedule of Interest Expense Associated with Deposits
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Time deposits
|
|
$
|
1,166
|
|
|
$
|
2,751
|
|
|
$
|
1,195
|
|
Money market and checking
|
|
|
899
|
|
|
|
2,555
|
|
|
|
1,833
|
|
Savings
|
|
|
40
|
|
|
|
35
|
|
|
|
28
|
|
Total
|
|
$
|
2,105
|
|
|
$
|
5,341
|
|
|
$
|
3,056
|
|
(11)
Federal Home Loan Bank Borrowings
The
Bank has a line of credit, renewable annually each September, with the FHLB under which there were no borrowings at December 31,
2020 compared to $3.0 million of borrowings as of December 31, 2019. Interest on any outstanding balance on the line of credit
accrues at the federal funds rate plus 0.15% (0.35% at December 31, 2020). The Company had issued letters of credit through the
FHLB totaling $66.0 million and $30.0 million at December 31 2020 and 2019, respectively to secure municipal deposits. The Company
did not have any term advances from FHLB at December 31, 2020 and December 31, 2019.
Although
no loans are specifically pledged, the FHLB requires the Bank to maintain eligible collateral (qualifying loans and investment
securities) that has a lending value at least equal to its required collateral. At December 31, 2020 and 2019, there was a blanket
pledge of loans and securities totaling $175.7 million and $155.2 million, respectively. At December 31, 2020 and 2019, the Bank’s
total borrowing capacity with the FHLB was approximately $123.8 million and $113.1 million, respectively. At December 31, 2020
and 2019, the Bank’s available borrowing capacity was $56.4 million and $78.8 million, respectively. The difference between
the Bank’s total borrowing capacity and available borrowing capacity is related to the amount of borrowings outstanding
and letters of credit issued to collateralized public fund deposits. The available borrowing capacity with the FHLB is collateral
based, and the Bank’s ability to borrow is subject to maintaining collateral that meets the eligibility requirements. The
borrowing capacity is not committed and is subject to FHLB credit requirements and policies. In addition, the Bank must maintain
a restricted investment in FHLB stock to maintain access to borrowings.
(12)
Subordinated Debentures
In
2003, the Company issued $8.2 million of subordinated debentures. These debentures, which are due in 2034 and are currently redeemable,
were issued to a wholly owned grantor trust (the “Trust”) formed to issue preferred securities representing undivided
beneficial interests in the assets of the Trust. The Trust then invested the gross proceeds of such preferred securities in the
debentures. The Trust’s preferred securities and the subordinated debentures require quarterly interest payments and have
variable rates, adjustable quarterly. Interest accrues at three month LIBOR plus 2.85%. The interest rate at December 31, 2020
and 2019 was 3.06% and 4.79%, respectively.
In
2005, the Company issued an additional $8.2 million of subordinated debentures. These debentures, which are due in 2036 and are
currently redeemable, were issued to a wholly owned grantor trust (“Trust II”) formed to issue preferred securities
representing undivided beneficial interests in the assets of Trust II. Trust II then invested the gross proceeds of such preferred
securities in the debentures. Trust II’s preferred securities and the subordinated debentures require quarterly interest
payments and have variable rates, adjustable quarterly. Interest accrues at three month LIBOR plus 1.34%. The interest rate at
December 31, 2020 and 2019 was 1.56% and 3.23 %, respectively.
In
2013, the Company assumed an additional $5.2 million of subordinated debentures as part of the Bank’s acquisition of Citizens
Bank. These debentures, which are due in 2036 and are currently redeemable, were issued by Citizens Bank’s former holding
company to a wholly owned grantor trust, First Capital (KS) Statutory Trust (“Trust III”) formed to issue preferred
securities representing undivided beneficial interests in the assets of Trust III. Trust III’s preferred securities and
the subordinated debentures require quarterly interest payments and have variable rates, adjustable quarterly. Interest accrues
at three month LIBOR plus 1.62%. The interest rate at December 31, 2020 and 2019 was 1.86% and 3.55% respectively.
While
these trusts are accounted for as unconsolidated equity investments, a portion of the trust preferred securities issued by the
trusts qualifies as Tier 1 Capital for regulatory purposes.
(13)
Other Borrowings
The
Company has a $7.5 million line of credit from an unrelated financial institution maturing on November 1, 2021, 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 December 31, 2020. As of December 31, 2020 and 2019, the Company did not have
an outstanding balance on the line of credit.
At
December 31, 2020 and 2019, the Bank had no borrowings through the Federal Reserve discount window, while the borrowing capacity
was $103.8 million and $17.4 million, respectively. The Bank also has various other federal funds agreements, both secured and
unsecured, with correspondent banks totaling approximately $30.0 million at December 31, 2020 and 2019. As of December 31, 2020
and 2019, there were no borrowings through these correspondent bank federal funds agreements.
(14)
Repurchase Agreements
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 $6.4 million at December 31, 2020, and $17.5 million at December
31, 2019, which were secured by $8.7 million and $20.1 million of the Bank’s investment portfolio at the same dates, respectively.
The
following is a summary of the balances and collateral of the Company’s repurchase agreements:
Schedule of Repurchase Agreements
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Average daily balance during the year
|
|
$
|
11,066
|
|
|
$
|
15,695
|
|
Average interest rate during the year
|
|
|
0.20
|
%
|
|
|
0.62
|
%
|
Maximum month-end balance during the year
|
|
$
|
17,939
|
|
|
$
|
17,548
|
|
Weighted average interest rate at year-end
|
|
|
0.18
|
%
|
|
|
0.47
|
%
|
|
|
As of December 31, 2020
|
|
|
|
Overnight and
|
|
|
Up to
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
Continuous
|
|
|
30 days
|
|
|
30-90 days
|
|
|
than 90 days
|
|
|
Total
|
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal agency obligations
|
|
$
|
2,412
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,412
|
|
Agency mortgage-backed securities
|
|
|
3,959
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,959
|
|
Total
|
|
$
|
6,371
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,371
|
|
|
|
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.
(15)
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.
Schedule of Revenue from Contracts with Customers Within Non-interest Income
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Overdraft fees
|
|
$
|
2,991
|
|
|
$
|
3,591
|
|
|
$
|
3,321
|
|
Other
|
|
|
644
|
|
|
|
585
|
|
|
|
529
|
|
Interchange income
|
|
|
2,604
|
|
|
|
2,049
|
|
|
|
1,935
|
|
Loan servicing fees (1)
|
|
|
1,534
|
|
|
|
1,367
|
|
|
|
1,350
|
|
Office lease income (1)
|
|
|
652
|
|
|
|
642
|
|
|
|
630
|
|
Gains on sales of loans (1)
|
|
|
15,155
|
|
|
|
6,353
|
|
|
|
5,023
|
|
Bank owned life insurance income (1)
|
|
|
611
|
|
|
|
752
|
|
|
|
644
|
|
Gains (losses) on sales of investment securities (1)
|
|
|
2,448
|
|
|
|
(177
|
)
|
|
|
20
|
|
Gains (losses) on sales of premises and equipment and foreclosed assets
|
|
|
(29
|
)
|
|
|
52
|
|
|
|
(58
|
)
|
Other
|
|
|
748
|
|
|
|
595
|
|
|
|
2,177
|
|
Total non-interest income
|
|
$
|
27,358
|
|
|
$
|
15,809
|
|
|
$
|
15,571
|
|
|
(1)
|
Not
within the scope of ASC 606.
|
A
description of the Company’s revenue streams within the scope of 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 years 2020, 2019 or 2018.
(16)
Income Taxes
Income
tax expense (benefit) attributable to income from operations consisted of the following:
Schedule of Components of Income Tax Expense (Benefit)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,582
|
|
|
$
|
1,805
|
|
|
$
|
396
|
|
State
|
|
|
708
|
|
|
|
(157
|
)
|
|
|
(197
|
)
|
Total current
|
|
|
5,290
|
|
|
|
1,648
|
|
|
|
199
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(442
|
)
|
|
|
(160
|
)
|
|
$
|
875
|
|
State
|
|
|
(8
|
)
|
|
|
22
|
|
|
|
155
|
|
Total deferred
|
|
|
(450
|
)
|
|
|
(138
|
)
|
|
|
1,030
|
|
Deferred tax valuation allowance
|
|
|
(53
|
)
|
|
|
(57
|
)
|
|
|
(146
|
)
|
Deferred tax remeasurement
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
Income tax expense
|
|
$
|
4,787
|
|
|
$
|
1,453
|
|
|
$
|
1,168
|
|
The
reasons for the difference between actual income tax expense (benefit) and expected income tax expense attributable to income
from operations at the statutory federal income tax rate were as follows:
Schedule of Effective Income Tax Rate Reconciliation
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Computed “expected” tax expense
|
|
$
|
5,099
|
|
|
$
|
2,544
|
|
|
$
|
2,435
|
|
(Reduction) increase in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest income, net
|
|
|
(695
|
)
|
|
|
(748
|
)
|
|
|
(850
|
)
|
Deferred tax remeasurement
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
Excess tax benefit from stock option exercise
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
(119
|
)
|
Bank owned life insurance
|
|
|
(137
|
)
|
|
|
(165
|
)
|
|
|
(140
|
)
|
Reversal of unrecognized tax benefits, net
|
|
|
(229
|
)
|
|
|
(558
|
)
|
|
|
(512
|
)
|
State income taxes, net of federal benefit
|
|
|
800
|
|
|
|
407
|
|
|
|
364
|
|
Investment tax credits
|
|
|
(28
|
)
|
|
|
(15
|
)
|
|
|
(24
|
)
|
Other, net
|
|
|
3
|
|
|
|
(12
|
)
|
|
|
(71
|
)
|
Income tax (benefit) expense
|
|
$
|
4,787
|
|
|
$
|
1,453
|
|
|
$
|
1,168
|
|
The
tax effects of temporary differences that give rise to the significant portions of the deferred tax assets and liabilities at
the following dates were as follows:
Schedule of Deferred Tax Assets and Liabilities
|
|
2020
|
|
|
2019
|
|
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loans, including allowance for loan losses
|
|
$
|
2,040
|
|
|
$
|
1,590
|
|
Net operating loss carry forwards
|
|
|
273
|
|
|
|
326
|
|
State taxes
|
|
|
614
|
|
|
|
414
|
|
Net deferred loan fees
|
|
|
432
|
|
|
|
11
|
|
Acquisition costs
|
|
|
161
|
|
|
|
182
|
|
Deferred compensation arrangements
|
|
|
66
|
|
|
|
69
|
|
Investments
|
|
|
54
|
|
|
|
45
|
|
Other, net
|
|
|
158
|
|
|
|
39
|
|
Total deferred tax assets
|
|
|
3,798
|
|
|
|
2,676
|
|
Less valuation allowance
|
|
|
(273
|
)
|
|
|
(326
|
)
|
Total deferred tax assets, net of valuation allowance
|
|
|
3,525
|
|
|
|
2,350
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized gain on investment securities available-for-sale
|
|
|
3,065
|
|
|
|
1,700
|
|
Premises and equipment, net of depreciation
|
|
|
500
|
|
|
|
361
|
|
Mortgage servicing rights
|
|
|
777
|
|
|
|
492
|
|
Prepaid expenses
|
|
|
302
|
|
|
|
157
|
|
Intangible assets
|
|
|
278
|
|
|
|
181
|
|
FHLB stock dividends
|
|
|
12
|
|
|
|
6
|
|
Total deferred tax liabilities
|
|
|
4,934
|
|
|
|
2,897
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,409
|
)
|
|
$
|
(547
|
)
|
The
Company has Kansas corporate net operating loss carry forwards totaling $4.7 million and $5.6 million as of December 31, 2020
and 2019, respectively, which expire between 2021 and 2027. The Company has recorded a valuation allowance against the Kansas
corporate net operating loss carry forwards. A valuation allowance related to the remaining deferred tax assets has not been provided
because management believes it is more likely than not that the results of future operations will generate sufficient taxable
income to realize the deferred tax assets at December 31, 2020.
Retained
earnings at December 31, 2020 and 2019 include approximately $6.3 million for which no provision for federal income tax had been
made. This amount represents allocations of income to bad debt deductions in years prior to 1988 for tax purposes only. Reduction
of amounts allocated for purposes other than tax bad debt losses will create income for tax purposes only, which will be subject
to the then current corporate income tax rate.
The
Company has unrecognized tax benefits representing tax positions for which a liability has been established. A reconciliation
of the beginning and ending amount of the liability relating to unrecognized tax benefits is as follows:
Schedule of Unrecognized Tax Benefits
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Unrecognized tax benefits at beginning of year
|
|
$
|
1,416
|
|
|
$
|
1,472
|
|
Gross increases to current year tax positions
|
|
|
1,100
|
|
|
|
554
|
|
Gross decreases to prior year’s tax positions
|
|
|
(26
|
)
|
|
|
(2
|
)
|
Lapse of statute of limitations
|
|
|
(352
|
)
|
|
|
(608
|
)
|
Unrecognized tax benefits at end of year
|
|
$
|
2,138
|
|
|
$
|
1,416
|
|
Tax
years that remain open and subject to audit include the years 2017 through 2020 for both federal and state tax purposes. The Company
recognized $352,000
and $608,000
of previously unrecognized tax benefits
during 2020 and 2019, respectively. The gross unrecognized tax benefits of $2.1
million and $1.4
million at December 31, 2020 and December
31, 2019, respectively, would favorably impact the effective tax rate by $1.7
million and $1.1
million, respectively, if recognized.
During 2020, the Company recorded $71,000
of income tax expense associated with
interest and penalties. During 2019 and 2018, the Company recorded an income tax benefit of $77,000
and $119,000,
respectively, associated with interest and penalties. As of December 31, 2020 and 2019, the Company has accrued interest and penalties
related to the unrecognized tax benefits of $325,000
and $254,000,
respectively, which are not included in the table above. The Company believes that it is reasonably possible that a reduction
in gross unrecognized tax benefits of up to $48,000
is possible during the next 12 months
as a result of the lapse of the statute of limitations.
(17)
Employee Benefit Plans
Employee
Retirement Plan. Substantially all employees are covered under a 401(k) defined contribution savings plan. Eligible employees
receive 100% matching contributions from the Company of up to 6% of their compensation. Matching contributions by the Company
were $750,000, $610,000 and $468,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
Split
Dollar Life Insurance Agreement. The Company has recognized a liability for future benefits payable under an agreement that
splits the benefits of a bank owned life insurance policy between the Company and a former employee. The liability totaled $42,000
at December 31, 2020 and $34,000 at December 31, 2019.
Deferred
Compensation Agreements. The Company has entered into deferred compensation and other retirement agreements with certain key
employees that provide for cash payments to be made after their respective retirements. The obligations under these arrangements
have been recorded at the present value of the accrued benefits. The Company has also entered into agreements with certain directors
to defer portions of their compensation. The balance of accrued benefits under these arrangements was $690,000 and $612,000 at
December 31, 2020 and 2019, respectively, and was included as a component of other liabilities in the accompanying consolidated
balance sheets. The Company recorded expense associated with the deferred compensation agreements of $10,000 for the year ended
December 31, 2020, income of $8,000 for the year ended December 31, 2019 and an expense of $2,000 for the year ended December
31, 2018. The liability balance is also impacted by changes in the value of the underlying assets supporting the agreements for
directors who have not retired.
(18)
Stock Compensation Plan
The
Company has a stock-based employee compensation plan which allows for the issuance of stock options and restricted common stock,
the purpose of which is to provide additional incentive to certain officers, directors, and key employees by facilitating their
purchase of a stock interest in the Company. Compensation expense related to prior awards is recognized on a straight line basis
over the vesting period, which is typically four years. The stock-based compensation cost related to these awards was
$304,000, $286,000 and $223,000 for the years ended December 31, 2020, 2019 and 2018, respectively. The Company recognized tax
benefits of $105,000, $71,000, and $194,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
For
stock options, the exercise price may not be less than 100% of the fair market value of the shares on the date of the grant, and
no option shall be exercisable after the expiration of ten years from the grant date. In determining compensation cost, the Black-Scholes
option-pricing model is used to estimate the fair value of options on date of grant. The Black-Scholes model is a closed-end model
that uses the assumptions outlined below. Expected volatility is based on historical volatility of the Company’s stock.
The Company uses historical exercise behavior and other qualitative factors to estimate the expected term of the options, which
represents the period of time that the options granted are expected to be outstanding. The risk-free rate for the expected term
is based on U.S. Treasury rates in effect at the time of grant.
On
May 20, 2015, our stockholders approved the 2015 Stock Incentive Plan which authorized the issuance of equity awards covering
335,024 shares of common stock, as adjusted for subsequent stock dividends. On August 1, 2018, the Compensation Committee awarded
12,479, as adjusted for subsequent stock dividends, shares of restricted common stock. The value of the 12,479, as adjusted for
subsequent stock dividends, shares was based on a stock price of $25.06 on the date such shares were granted, as adjusted for
subsequent stock dividends. On August 1, 2019, the Compensation Committee awarded 3,766, as adjusted for subsequent stock dividends,
shares of restricted common stock and options to acquire 71,007, as adjusted for subsequent stock dividends, shares of common
stock. The restricted stock awards vest ratably over one year and the value was based on a stock price of $21.26 per share on
the date such shares were granted, as adjusted for subsequent stock dividends. The options vest ratably over four years. On August
1, 2020, the Compensation Committee awarded 18,218, as adjusted for subsequent stock dividends, shares of restricted common stock.
The value of the 18,218, as adjusted for subsequent stock dividends, shares was based on a stock price of $19.62 on the date such
shares were granted, as adjusted for subsequent stock dividends. The fair value of the options granted were determined using the
following weighted-average assumptions as of the grant date:
Schedule of Fair Value of Options Assumed
|
|
Years ended December 31,
|
|
|
2020
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
n/a
|
|
|
1.77
|
%
|
|
|
n/a
|
|
Expected term
|
|
n/a
|
|
|
7 year
|
|
|
|
n/a
|
|
Expected stock price volatility
|
|
n/a
|
|
|
26.06
|
%
|
|
|
n/a
|
|
Dividend yield
|
|
n/a
|
|
|
3.41
|
%
|
|
|
n/a
|
|
A
summary of option activity during 2020 is presented below:
Schedule of Share-based Compensation, Stock Options, Activity
(Dollars in thousands, except per share amounts)
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
|
|
|
|
|
|
|
exercise
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
price
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
Shares
|
|
|
per share
|
|
|
term
|
|
|
value
|
|
Outstanding at January 1, 2020
|
|
|
136,340
|
|
|
$
|
19.87
|
|
|
|
6.9 years
|
|
|
$
|
714
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Effect of 5% stock dividend
|
|
|
5,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(20,174
|
)
|
|
$
|
16.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(19,030
|
)
|
|
$
|
10.41
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
102,630
|
|
|
$
|
21.26
|
|
|
|
7.3 years
|
|
|
$
|
202
|
|
Exercisable at December 31, 2020
|
|
|
38,338
|
|
|
$
|
20.33
|
|
|
|
5.9 years
|
|
|
$
|
120
|
|
Fully vested options at December 31, 2020
|
|
|
38,338
|
|
|
$
|
20.33
|
|
|
|
5.9 years
|
|
|
$
|
120
|
|
Additional
information about stock options exercised is presented below:
Schedule of Stock Option Exercised Additional Information
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Intrinsic value of options exercised (on exercise date)
|
|
$
|
430
|
|
|
$
|
42
|
|
|
$
|
1,523
|
|
Cash received from options exercised
|
|
|
42
|
|
|
|
36
|
|
|
|
534
|
|
Excess tax benefit realized from options exercised
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
136
|
|
As
of December 31, 2020, there was $193,000 of unrecognized compensation cost related to the 64,292 outstanding nonvested options
that will be recognized over the following periods:
Schedule of Share-based Compensation Arrangements by Share-based Payment Award
(Dollars in thousands)
|
|
2020
|
|
Year
|
|
Amount
|
|
2021
|
|
$
|
96
|
|
2022
|
|
|
61
|
|
2023
|
|
|
36
|
|
2024
|
|
|
|
|
Total
|
|
$
|
193
|
|
A
summary of nonvested restricted common stock activity during 2020 is presented below:
Schedule of Nonvested Share Activity
|
|
Shares
|
|
|
Weighted average grant date price per share
|
|
Nonvested restricted common stock at January 1, 2020
|
|
|
14,552
|
|
|
$
|
23.98
|
|
Granted
|
|
|
17,350
|
|
|
$
|
20.60
|
|
Vested
|
|
|
(8,711
|
)
|
|
$
|
22.41
|
|
Forfeited
|
|
|
(971
|
)
|
|
$
|
20.60
|
|
Effect of 5% stock dividend
|
|
|
1,098
|
|
|
|
|
|
Nonvested restricted common stock at December 31, 2020
|
|
|
23,318
|
|
|
$
|
21.05
|
|
As
of December 31, 2020, there was $355,000 of total unrecognized compensation cost related to the 23,318 outstanding unvested restricted
shares that will be recognized over the following periods:
Schedule of Share-based Compensation Arrangements by Share-based Payment Award
(Dollars in thousands)
|
|
2020
|
|
Year
|
|
Amount
|
|
2021
|
|
$
|
158
|
|
2022
|
|
|
96
|
|
2023
|
|
|
64
|
|
2024
|
|
|
37
|
|
Total
|
|
$
|
355
|
|
(19)
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 December 31, 2020 and 2019, including methods and assumptions
utilized, are set forth below:
Schedule of Fair Value, by Balance Sheet Grouping
(Dollars in thousands)
|
|
As of December 31, 2020
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
84,818
|
|
|
$
|
84,818
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
84,818
|
|
Investment securities available for sale
|
|
|
297,270
|
|
|
|
2,037
|
|
|
|
295,233
|
|
|
|
-
|
|
|
|
297,270
|
|
Bank stocks, at cost
|
|
|
4,473
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Loans, net
|
|
|
702,782
|
|
|
|
-
|
|
|
|
-
|
|
|
|
718,071
|
|
|
|
718,071
|
|
Loans held for sale
|
|
|
15,533
|
|
|
|
-
|
|
|
|
15,533
|
|
|
|
-
|
|
|
|
15,533
|
|
Accrued interest receivable
|
|
|
4,885
|
|
|
|
-
|
|
|
|
1,697
|
|
|
|
3,188
|
|
|
|
4,885
|
|
Derivative financial instruments
|
|
|
1,796
|
|
|
|
-
|
|
|
|
1,796
|
|
|
|
-
|
|
|
|
1,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
$
|
(882,277
|
)
|
|
$
|
(882,277
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
(882,277
|
)
|
Time deposits
|
|
|
(133,750
|
)
|
|
|
-
|
|
|
|
(134,048
|
)
|
|
|
-
|
|
|
|
(134,048
|
)
|
FHLB borrowings
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Subordinated debentures
|
|
|
(21,651
|
)
|
|
|
-
|
|
|
|
(15,232
|
)
|
|
|
-
|
|
|
|
(15,232
|
)
|
Other borrowings
|
|
|
(6,371
|
)
|
|
|
-
|
|
|
|
(6,371
|
)
|
|
|
-
|
|
|
|
(6,371
|
)
|
Accrued interest payable
|
|
|
(168
|
)
|
|
|
-
|
|
|
|
(168
|
)
|
|
|
-
|
|
|
|
(168
|
)
|
Derivative financial instruments
|
|
|
(466
|
)
|
|
|
-
|
|
|
|
(466
|
)
|
|
|
-
|
|
|
|
(466
|
)
|
(Dollars in thousands)
|
|
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
|
|
Accrued interest receivable
|
|
|
4,557
|
|
|
|
2
|
|
|
|
1,895
|
|
|
|
2,660
|
|
|
|
4,557
|
|
Derivative financial instruments
|
|
|
532
|
|
|
|
-
|
|
|
|
532
|
|
|
|
-
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 year ended December 31, 2020 or 2019.
Valuation
Methods for Instruments Measured at Fair Value on a Recurring Basis
The
following table represents the Company’s financial instruments that are measured at fair value on a recurring basis at December
31, 2020 and 2019, allocated to the appropriate fair value hierarchy:
Schedule of Fair Value, Assets Measured On Recurring Basis
(Dollars in thousands)
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. treasury securities
|
|
$
|
2,037
|
|
|
$
|
2,037
|
|
|
$
|
-
|
|
|
$
|
-
|
|
U. S. federal agency obligations
|
|
|
18,924
|
|
|
|
-
|
|
|
|
18,924
|
|
|
|
-
|
|
Municipal obligations, tax exempt
|
|
|
142,676
|
|
|
|
-
|
|
|
|
142,676
|
|
|
|
-
|
|
Municipal obligations, taxable
|
|
|
49,535
|
|
|
|
-
|
|
|
|
49,535
|
|
|
|
-
|
|
Agency mortgage-backed securities
|
|
|
78,638
|
|
|
|
-
|
|
|
|
78,638
|
|
|
|
-
|
|
Certificates of deposit
|
|
|
5,460
|
|
|
|
-
|
|
|
|
5,460
|
|
|
|
-
|
|
Loans held for sale
|
|
|
15,533
|
|
|
|
-
|
|
|
|
15,533
|
|
|
|
-
|
|
Derivative financial instruments
|
|
|
1,796
|
|
|
|
-
|
|
|
|
1,796
|
|
|
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
(466
|
)
|
|
|
-
|
|
|
|
(466
|
)
|
|
|
-
|
|
(Dollars in thousands)
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale 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
|
|
|
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
The
Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal agency securities,
municipal obligations, agency mortgage-backed securities, and certificates of deposit. 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
obligations 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 securities 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 estimated 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 or loss on loans held for sale were as follows:
Schedule of Fair Value Contractual Balance and Gain Loss On Loans Held for Sale
|
|
As of December 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
|
2019
|
|
Aggregate fair value
|
|
$
|
15,533
|
|
|
$
|
8,497
|
|
Contractual balance
|
|
|
15,151
|
|
|
|
8,316
|
|
Gain
|
|
$
|
382
|
|
|
$
|
181
|
|
The
Company’s derivative financial instruments consist of interest rate lock commitments and forward commitments for the future
delivery of these mortgage loans. 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 sale of loans, net in the consolidated statements of earnings. The total amount of gains and losses from changes in fair value
of derivative financial instruments included in earnings were as follows:
Schedule of Gains and Losses from Changes in Fair Value of Loans Held for Sale
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
As of December 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Total change in fair value
|
|
$
|
848
|
|
|
$
|
(15
|
)
|
|
$
|
102
|
|
Valuation
Methods for Instruments Measured at Fair Value on a Nonrecurring Basis
The
Company does not value 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 loan balance of the Company’s impaired loans was $12.5 million
at December 31, 2020 and $8.7 million at December 31, 2019, with an allocated allowance of $266,000 and $733,000, at December
31, 2020 and 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 table presents quantitative information about Level 3 fair value measurements for impaired loans measure at fair value
on a non-recurring basis as of December 31, 2020 and 2019.
Schedule of Fair Value Measurements On Nonrecurring, Valuation Techniques
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
Valuation technique
|
|
Unobservable inputs
|
|
Range
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
3,640
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
20
|
%
|
Commercial loans
|
|
|
74
|
|
|
Sales comparison
|
|
Adjustment to comparable sales
|
|
|
0%-69
|
%
|
Agriculture loans
|
|
|
9
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
20
|
%
|
Real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
|
48
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loans
|
|
|
678
|
|
|
Sales comparison
|
|
Adjustment to comparable sales
|
|
|
0%-75
|
%
|
Agriculture loans
|
|
|
405
|
|
|
Sales comparison
|
|
Adjustment to appraised value
|
|
|
0%-30
|
%
|
(20)
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 December 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 December 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 in effect at December 31,
2020 and 2019:
Schedule of Compliance with Regulatory Capital Requirements for Mortgage Companies
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be
|
|
|
|
|
|
|
|
|
|
For capital adequacy
|
|
|
well-capitalized under regulatory
|
|
|
|
Actual
|
|
|
purposes
|
|
|
guidelines
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio (1)
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
121,068
|
|
|
|
10.70
|
%
|
|
$
|
45,262
|
|
|
|
4.0
|
%
|
|
$
|
56,577
|
|
|
|
5.0
|
%
|
Common Equity Tier 1 Capital
|
|
|
100,068
|
|
|
|
13.77
|
%
|
|
|
50,866
|
|
|
|
7.0
|
%
|
|
|
47,233
|
|
|
|
6.5
|
%
|
Tier 1 Capital
|
|
|
121,068
|
|
|
|
16.66
|
%
|
|
|
61,766
|
|
|
|
8.5
|
%
|
|
|
58,133
|
|
|
|
8.0
|
%
|
Total Risk Based Capital
|
|
|
129,983
|
|
|
|
17.89
|
%
|
|
|
76,300
|
|
|
|
10.5
|
%
|
|
|
72,666
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
106,938
|
|
|
|
10.94
|
%
|
|
$
|
39,109
|
|
|
|
4.0
|
%
|
|
$
|
48,887
|
|
|
|
5.0
|
%
|
Common Equity Tier 1 Capital
|
|
|
85,938
|
|
|
|
13.09
|
%
|
|
|
45,952
|
|
|
|
7.0
|
%
|
|
|
42,670
|
|
|
|
6.5
|
%
|
Tier 1 Capital
|
|
|
106,938
|
|
|
|
16.29
|
%
|
|
|
55,799
|
|
|
|
8.5
|
%
|
|
|
52,517
|
|
|
|
8.0
|
%
|
Total Risk Based Capital
|
|
|
113,545
|
|
|
|
17.30
|
%
|
|
|
68,928
|
|
|
|
10.5
|
%
|
|
|
65,646
|
|
|
|
10.0
|
%
|
(1)
|
The
required percent for capital adequacy purposes includes a capital conservation buffer of 2.5%.
|
The
following is a comparison of the Bank’s regulatory capital to minimum capital requirements in effect at December 31, 2020
and 2019:
Schedule of Compliance with Regulatory Capital Requirements Under Banking Regulations
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be
|
|
|
|
|
|
|
For capital adequacy
|
|
|
well-capitalized under regulatory
|
|
|
|
Actual
|
|
|
purposes
|
|
|
guidelines
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio (1)
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
118,174
|
|
|
|
10.47
|
%
|
|
$
|
45,139
|
|
|
|
4.0
|
%
|
|
$
|
56,423
|
|
|
|
5.0
|
%
|
Common Equity Tier 1 Capital
|
|
|
118,174
|
|
|
|
16.27
|
%
|
|
|
50,829
|
|
|
|
7.0
|
%
|
|
|
47,199
|
|
|
|
6.5
|
%
|
Tier 1 Capital
|
|
|
118,174
|
|
|
|
16.27
|
%
|
|
|
61,721
|
|
|
|
8.5
|
%
|
|
|
58,091
|
|
|
|
8.0
|
%
|
Total Risk Based Capital
|
|
|
127,089
|
|
|
|
17.50
|
%
|
|
|
76,244
|
|
|
|
10.5
|
%
|
|
|
72,613
|
|
|
|
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
|
%
|
|
|
65,547
|
|
|
|
10.0
|
%
|
(1)
|
The required percent for capital adequacy
purposes includes a capital conservation buffer of 2.5%.
|
|
|
|
(21)
Parent Company Condensed Financial Statements
The
following is condensed financial information of the parent company as of December 31, 2020 and 2019 and for the years ended
December 31, 2020, 2019 and 2018:
Schedule of Condensed Financial Statements
Condensed
Balance Sheets
|
|
2020
|
|
|
2019
|
|
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
105
|
|
|
$
|
173
|
|
Investment securities
|
|
|
212
|
|
|
|
239
|
|
Investment in subsidiaries
|
|
|
146,896
|
|
|
|
129,049
|
|
Other
|
|
|
1,217
|
|
|
|
929
|
|
Total assets
|
|
$
|
148,430
|
|
|
$
|
130,390
|
|
Liabilities and stockholders’ equity:
|
|
|
|
|
|
|
|
|
Subordinated debentures
|
|
$
|
21,651
|
|
|
$
|
21,651
|
|
Other
|
|
|
107
|
|
|
|
132
|
|
Stockholders’ equity
|
|
|
126,672
|
|
|
|
108,607
|
|
Total liabilities and stockholders’ equity
|
|
$
|
148,430
|
|
|
$
|
130,390
|
|
Condensed
Statements of Earnings
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Dividends from Bank
|
|
$
|
6,900
|
|
|
$
|
4,500
|
|
|
$
|
3,200
|
|
Interest income
|
|
|
21
|
|
|
|
31
|
|
|
|
29
|
|
Other non-interest income
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
Interest expense
|
|
|
(614
|
)
|
|
|
(970
|
)
|
|
|
(1,078
|
)
|
Other expense, net
|
|
|
(352
|
)
|
|
|
(304
|
)
|
|
|
(325
|
)
|
Earnings before equity in undistributed earnings
|
|
|
5,962
|
|
|
|
3,264
|
|
|
|
1,833
|
|
Increase in undistributed equity of Bank
|
|
|
13,087
|
|
|
|
6,801
|
|
|
|
7,567
|
|
Increase in undistributed equity of Nonbank subsidiary
|
|
|
248
|
|
|
|
338
|
|
|
|
740
|
|
Earnings before income taxes
|
|
|
19,297
|
|
|
|
10,403
|
|
|
|
10,140
|
|
Income tax benefit
|
|
|
(196
|
)
|
|
|
(259
|
)
|
|
|
(286
|
)
|
Net earnings
|
|
|
19,493
|
|
|
|
10,662
|
|
|
|
10,426
|
|
Other comprehensive income (loss)
|
|
|
4,208
|
|
|
|
9,230
|
|
|
|
(3,579
|
)
|
Total comprehensive income
|
|
$
|
23,701
|
|
|
$
|
19,892
|
|
|
$
|
6,847
|
|
Condensed
Statements of Cash Flows
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
19,493
|
|
|
$
|
10,662
|
|
|
$
|
10,426
|
|
Increase in undistributed equity of subsidiaries
|
|
|
(13,335
|
)
|
|
|
(7,139
|
)
|
|
|
(8,307
|
)
|
Amortization of purchase accounting adjustment on subordinated
debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
167
|
|
Other
|
|
|
(312
|
)
|
|
|
23
|
|
|
|
381
|
|
Net cash provided by operating activities
|
|
|
5,846
|
|
|
|
3,546
|
|
|
|
2,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investment securities
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
Proceeds from sales of investments
|
|
|
28
|
|
|
|
-
|
|
|
|
7
|
|
Net cash provided by (used in) investing activities
|
|
|
26
|
|
|
|
(1
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
42
|
|
|
|
36
|
|
|
|
534
|
|
Payment of dividends
|
|
|
(3,633
|
)
|
|
|
(3,508
|
)
|
|
|
(3,325
|
)
|
Purchase of treasury stock
|
|
|
(2,349
|
)
|
|
|
-
|
|
|
|
-
|
|
Net cash used in financing activities
|
|
|
(5,940
|
)
|
|
|
(3,472
|
)
|
|
|
(2,791
|
)
|
Net (decrease) increase in cash
|
|
|
(68
|
)
|
|
|
73
|
|
|
|
(117
|
)
|
Cash at beginning of year
|
|
|
173
|
|
|
|
100
|
|
|
|
217
|
|
Cash at end of year
|
|
$
|
105
|
|
|
$
|
173
|
|
|
$
|
100
|
|
Dividends
paid by the Company are provided through dividends from the Bank. At December 31, 2020, the Bank could distribute dividends of
up to $19.9
million without regulatory approvals.
The primary source of funds for the Company is dividends from the Bank. Under the National Bank Act, a national bank may pay dividends
out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent. Without prior
OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’s
year-to-date net income plus the bank’s retained net income for the two preceding years. The payment of dividends by any
financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines
and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized.
(22)
Commitments, Contingencies and Guarantees
Commitments
to extend credit are legally binding agreements to lend to a borrower provided there are no violations of any conditions established
in the contract. The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial
and performance commercial and standby letters of credit. As many of the commitments are expected to expire without being drawn
upon, the total commitment does not necessarily represent future cash requirements (see Note 6).
There
are no pending legal proceedings to which the Company or the Bank is a party other than ordinary routine litigation incidental
to the Bank’s business. While the ultimate outcome of current legal proceedings cannot be predicted with certainty, it is
the opinion of management that the resolution of these legal actions should not have a material effect on the Company’s
consolidated financial position or results of operations.
(23)
COVID-19 Pandemic
The
COVID-19 pandemic in the United States caused a substantial disruption to the economy, employment and financial markets and 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. Additional federal government stimulus, declining COVID-19 cases and the
distribution of vaccines may lead to positive impacts on the economy and employment while new variants of COVID-19 presents risks
to the recovery. The Company’s pandemic response plan continues to focus foremost on the safety and well-being of our customers
and associates. 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.