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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2021

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission File Number 0-33203

 

LANDMARK BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 43-1930755
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

 

701 Poyntz Avenue, Manhattan, Kansas 66502
(Address of principal executive offices) (Zip code)

 

(785) 565-2000
(Registrant's telephone number, including area code)

 

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

 

Title of each class:   Trading Symbol(s)   Name of exchange on which registered:
Common Stock, par value $0.01 per share   LARK   Nasdaq Global Market

 

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

 

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

 

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

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company Emerging growth company

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: as of May 14, 2021, the issuer had outstanding 4,756,604 shares of its common stock, $0.01 par value per share.

 

 

 

 

 

 

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

 

Table of Contents

 

Page Number 
     
  PART I
     
Item 1. Financial Statements 2 – 24
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25 – 33
Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34 – 35
Item 4. Controls and Procedures 36
     
PART II  
     
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 36
Item 6. Exhibits 36
     
  Signature Page 37

 

  1  

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

  March 31,     December 31,  
(Dollars in thousands, except per share amounts)   2021     2020  
    (Unaudited)        
Assets                
Cash and cash equivalents   $ 109,151     $ 84,818  
Investment securities available-for-sale, at fair value     320,905       297,270  
Bank stocks, at cost     4,062       4,473  
Loans, net of allowance for loans losses of $9,271 at March 31, 2021 and $8,775 at December 31, 2020     717,809       702,782  
Loans held for sale, at fair value     13,995       15,533  
Bank owned life insurance     25,568       25,420  
Premises and equipment, net     20,320       20,493  
Goodwill     17,532       17,532  
Other intangible assets, net     168       206  
Mortgage servicing rights     3,966       3,726  
Real estate owned, net     1,474       1,774  
Accrued interest and other assets     13,925       14,000  
Total assets   $ 1,248,875     $ 1,188,027  
                 
Liabilities and Stockholders’ Equity                
Liabilities:                
Deposits:                
Non-interest-bearing demand   $ 314,616     $ 264,878  
Money market and checking     490,634       491,275  
Savings     142,507       126,124  
Certificates of deposit     123,489       133,750  
Total deposits     1,071,246       1,016,027  
                 
Subordinated debentures     21,651       21,651  
Other borrowings     4,165       6,371  
Accrued interest, taxes, and other liabilities     23,532       17,306  
Total liabilities     1,120,594       1,061,355  
                 
Commitments and contingencies     -        -   
                 
Stockholders’ equity:                
Preferred stock, $0.01 par value per share, 200,000 shares authorized; none issued     -       -  
Common stock, $0.01 par value per share, 7,500,000 shares authorized; 4,756,604 and 4,750,838 shares issued at March 31, 2021 and December 31, 2020, respectively     48       48  
Additional paid-in capital     72,336       72,230  
Retained earnings     49,363       44,947  
Accumulated other comprehensive income     6,534       9,447  
Total stockholders’ equity     128,281       126,672  
Total liabilities and stockholders’ equity   $ 1,248,875     $ 1,188,027  

 

See accompanying notes to consolidated financial statements.

 

  2  

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

    2021     2020  
    Three months ended  
(Dollars in thousands, except per share amounts)   March 31,  
    2021     2020  
Interest income:                
Loans   $ 8,404     $ 7,126  
Investment securities:                
Taxable     811       1,344  
Tax-exempt     778       848  
Total interest income     9,993       9,318  
Interest expense:                
Deposits     281       983  
Borrowings     121       233  
Total interest expense     402       1,216  
Net interest income     9,591       8,102  
Provision for loan losses     500       1,200  
Net interest income after provision for loan losses     9,091       6,902  
Non-interest income:                
Fees and service charges     2,033       1,962  
Gains on sales of loans, net     3,140       1,193  
Bank owned life insurance     148       154  
Gains on sales of investment securities, net     1,075       1,770  
Other     329       274  
Total non-interest income     6,725       5,353  
Non-interest expense:                
Compensation and benefits     4,941       4,582  
Occupancy and equipment     1,062       1,079  
Data processing     501       425  
Amortization of mortage servicing rights and intangibles     437       277  
Professional fees     392       363  
Other     1,740       1,381  
Total non-interest expense     9,073       8,107  
Earnings before income taxes     6,743       4,148  
Income tax expense     1,376       785  
Net earnings   $ 5,367     $ 3,363  
Earnings per share (1):                
Basic (1)   $ 1.13     $ 0.70  
Diluted (1)   $ 1.13     $ 0.70  
Dividends per share (1)   $ 0.20     $ 0.19  

  

(1) Per share amounts for the period ended March 31, 2020 have been adjusted to give effect to the 5% stock dividend paid during December 2020.

 

 

See accompanying notes to consolidated financial statements.

 

  3  

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

    2021     2020  
    Three months ended  
(Dollars in thousands)   March 31,  
    2021     2020  
             
Net earnings   $ 5,367     $ 3,363  
                 
Net unrealized holding (losses) gains on available-for-sale securities     (2,783 )     4,405  
Less reclassification adjustment for net gains included in earnings     (1,075 )     (1,770 )
Net unrealized (losses) gains     (3,858 )     2,635  
Income tax effect on net gains included in earnings     263       434  
Income tax effect on net unrealized holding losses (gains)     682       (1,080 )
Other comprehensive (loss) income     (2,913 )     1,989  
                 
Total comprehensive income   $ 2,454     $ 5,352  

 

See accompanying notes to consolidated financial statements.

 

  4  

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except per share amounts)   Common stock     Additional paid-in capital     Retained earnings     Treasury stock     Accumulated other comprehensive income     Total  
                                     
Balance at January 1, 2020   $ 46     $ 69,029     $ 34,293     $ -     $ 5,239     $ 108,607  
Net earnings     -       -       3,363       -       -       3,363  
Other comprehensive income     -       -       -       -       1,989       1,989  
Dividends paid ($0.19 per share)     -       -       (920 )     -       -       (920 )
Stock-based compensation     -       85       -       -       -       85  
Exercise of stock options, 3,136 shares     -       33       -       -       -       33  
Purchase of 91,137 treasury shares     -       -       -       (2,023 )     -       (2,023 )
Balance at March 31, 2020   $ 46     $ 69,147     $ 36,736     $ (2,023 )   $ 7,228     $ 111,134  
                                                 
Balance at January 1, 2021   $ 48     $ 72,230     $ 44,947     $ -     $ 9,447     $ 126,672  
Net earnings     -       -       5,367               -       5,367  
Other comprehensive loss     -       -       -               (2,913 )     (2,913 )
Dividends paid ($0.20 per share)     -       -       (951 )             -       (951 )
Stock-based compensation     -       84       -               -       84  
Exercise of stock options, 5,766 shares     -       22       -       -       -       22  
Balance at March 31, 2021   $ 48     $ 72,336     $ 49,363     $ -     $ 6,534     $ 128,281  

 

See accompanying notes to consolidated financial statements.

 

  5  

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    2021     2020  
    Three months ended  
(Dollars in thousands)   March 31,  
    2021     2020  
Cash flows from operating activities:                
Net earnings   $ 5,367     $ 3,363  
Adjustments to reconcile net earnings to net cash provided by operating activities:                
Provision for loan losses     500       1,200  
Amortization of investment security premiums, net     397       366  
Amortization of purchase accounting adjustment on loans     (8 )     (5 )
Amortization of mortgage servicing rights and other intangibles     437       277  
Depreciation     245       250  
Increase in cash surrender value of bank owned life insurance     (148 )     (154 )
Stock-based compensation     84       85  
Deferred income taxes     628       403  
Net gains on sales of investment securities     (1,075 )     (1,770 )
Net (gain) losses on sales of foreclosed assets     (5 )     1  
Net gains on sales of loans     (3,140 )     (1,193 )
Proceeds from sales of loans     100,687       45,830  
Origination of loans held for sale     (96,648 )     (45,893 )
Changes in assets and liabilities:                
Accrued interest and other assets     75       (968 )
Accrued expenses, taxes, and other liabilities     (484 )     2,948  
Net cash provided by operating activities     6,912       4,740  
Cash flows from investing activities:                
Net increase in loans     (15,519 )     (23,065 )
Maturities and prepayments of investment securities     7,720       18,948  
Purchases of investment securities     (40,854 )     (10,909 )
Proceeds from sales of investment securities     13,346       44,508  
Redemption of bank stocks     1,017       680  
Purchase of bank stocks     (606 )     (915 )
Proceeds from sales of premises and equipment and foreclosed assets     305       45  
Purchases of premises and equipment, net     (72 )     (120 )
Net cash (used in) provided by investing activities     (34,663 )     29,172  
Cash flows from financing activities:                
Net increase (decrease) in deposits     55,219       (4,568 )
Federal Home Loan Bank advance borrowings     -       101,768  
Federal Home Loan Bank advance repayments     -       (104,768 )
Proceeds from other borrowings     -       1,000  
Repayments on other borrowings     (2,206 )     (9,346 )
Proceeds from exercise of stock options     22       33  
Payment of dividends     (951 )     (920 )
Purchase of treasury stock     -       (2,023 )
Net cash provided by (used in) financing activities     52,084       (18,824 )
Net increase in cash and cash equivalents     24,333       15,088  
Cash and cash equivalents at beginning of period     84,818       13,694  
Cash and cash equivalents at end of period   $ 109,151     $ 28,782  
                 
(Continued)

 

  6  

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

 

    Three months ended  
(Dollars in thousands)   March 31,  
    2021     2020  
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 419     $ 1,258  
Cash paid for operating leases     32       44  
                 
Supplemental schedule of noncash investing and financing activities:                
Transfer of loans to real estate owned     -       314  
Investment securities purchases not yet settled     7,028       -  

 

See accompanying notes to consolidated financial statements.

 

  7  

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Interim Financial Statements

 

The unaudited consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and its wholly owned subsidiaries, Landmark National Bank (the “Bank”) and Landmark Risk Management Inc., have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2021, containing the latest audited consolidated financial statements and notes thereto. The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein. The results of the three-month interim period ended March 31, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021 or any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.

 

2. Investments

 

A summary of investment securities available-for-sale is as follows:

 

Schedule of Available-for-sale Securities

    As of March 31, 2021  
          Gross     Gross        
    Amortized     unrealized     unrealized     Estimated  
(Dollars in thousands)   cost     gains     losses     fair value  
                         
U. S. treasury securities   $ 20,330     $ 30     $ (1 )   $ 20,359  
U. S. federal agency obligations     18,748       123       (10 )     18,861  
Municipal obligations, tax exempt     138,162       4,998       (55 )     143,105  
Municipal obligations, taxable     39,866       1,376       (104 )     41,138  
Agency mortgage-backed securities     89,690       2,456       (159 )     91,987  
Certificates of deposit     5,455       -       -       5,455  
Total available-for-sale   $ 312,251     $ 8,983     $ (329 )   $ 320,905  

 

    As of December 31, 2020  
          Gross     Gross        
    Amortized     unrealized     unrealized     Estimated  
(Dollars in thousands)   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 available-for-sale   $ 284,758     $ 12,542     $ (30 )   $ 297,270  

 

The tables above show that some of the securities in the available-for-sale investment portfolio had unrealized losses, or were temporarily impaired, as of March 31, 2021 and December 31, 2020. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of time in a continuous unrealized loss position.

 

 

          As of March 31, 2021  
(Dollars in thousands)         Less than 12 months     12 months or longer     Total  
    No. of     Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    securities     value     losses     value     losses     value     losses  
U.S. treasury securities     2     $ 5,308     $ (1 )   $ -     $ -     $ 5,308     $ (1 )
U.S. federal agency obligations     3       8,712       (10 )     -       -       8,712       (10 )
Municipal obligations, tax exempt     24       9,541       (55 )     -       -       9,541       (55 )
Municipal obligations, taxable     8       5,345       (104 )     -       -       5,345       (104 )
Agency mortgage-backed securities     7       21,085       (159 )    

 

     -

           -       21,085       (159 )
Total     44     $ 49,991     $ (329 )   $ -     $ -     $ 49,991     $ (329 )

 

          As of December 31, 2020  
(Dollars in thousands)         Less than 12 months     12 months or longer     Total  
    No. of     Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    securities     value     losses     value     losses     value     losses  
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 )

 

  8  

 

 

The Company’s U.S. treasury portfolio consists of securities issued by the United States Department of the Treasury. The receipt of principal and interest on U.S. treasury securities is guaranteed by the full faith and credit of the U.S. government. 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 its cost basis, the Company believed that the U.S. treasury securities identified in the table above were temporarily impaired as of March 31, 2021.

 

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 Federal Home Loan Bank (“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 as of March 31, 2021 and December 31, 2020.

 

The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of March 31, 2021, the Company did not intend to sell and it is more likely than not that the Company will not be required to sell its municipal obligations in an unrealized loss position until the recovery of its cost. Due to the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and the expectation that they will continue to do so, the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily impaired as of March 31, 2021 and December 31, 2020.

 

The Company’s agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and the Government National Mortgage Association. The receipt of principal, at par, and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and the Company’s belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the agency mortgage-backed securities identified in the table above were temporarily impaired as of March 31, 2021.

 

The table below sets forth amortized cost and fair value of investment securities at March 31, 2021. The table includes scheduled principal payments and estimated prepayments, based on observable market inputs, for agency mortgage-backed securities. Actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

 

Schedule of Investments Classified by Contractual Maturity Date

(Dollars in thousands)   Amortized     Estimated  
    cost     fair value  
Due in less than one year   $ 28,023     $ 28,100  
Due after one year but within five years     167,223       170,860  
Due after five years but within ten years     58,457       60,891  
Due after ten years     58,548       61,054  
Total   $ 312,251     $ 320,905  

 

Sales proceeds and gross realized gains and losses on sales of available-for-sale securities were as follows for the periods indicated:

 

Schedule of Realized Gain (loss)

    2021     2020  
(Dollars in thousands)   Three months ended March 31,  
    2021     2020  
             
Sales proceeds   $ 13,346     $ 44,508  
                 
Realized gains   $ 1,075     $ 1,772  
Realized losses     0       (2 )
Net realized gains   $ 1,075     $ 1,770  

 

Securities with carrying values of $285.0 million and $282.2 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at March 31, 2021 and December 31, 2020, respectively. Except for U.S. federal agency obligations, no investment in a single issuer exceeded 10% of consolidated stockholders’ equity.

 

  9  

 

 

3. Loans and Allowance for Loan Losses

 

Loans consisted of the following as of the dates indicated below:

Schedule of Loans

 

    March 31,     December 31,  
(Dollars in thousands)   2021     2020  
             
One-to-four family residential real estate loans   $ 159,798     $ 157,984  
Construction and land loans     26,591       26,106  
Commercial real estate loans     179,781       172,307  
Commercial loans     126,998       134,047  
Paycheck protection program loans     117,297       100,084  
Agriculture loans     92,486       96,532  
Municipal loans     2,183       2,332  
Consumer loans     25,557       24,122  
Total gross loans     730,691       713,514  
Net deferred loan (fees) costs and loans in process     (3,611 )     (1,957 )
Allowance for loan losses     (9,271 )     (8,775 )
Loans, net   $ 717,809     $ 702,782  

 

The following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology:

 

    Three months ended March 31, 2021  
(Dollars in thousands)   One-to-four family residential real estate loans     Construction and land loans     Commercial real estate loans     Commercial loans     Paycheck protection program loans     Agriculture loans     Municipal loans     Consumer loans     Total  
                                                       
Allowance for loan losses:                                                                        
Balance at January 1, 2021   $ 859     $ 181     $ 2,482     $ 2,388     $       -     $ 2,690     $ 6     $ 169     $ 8,775  
Charge-offs     (23 )     -       -       -       -       -       -       (41 )     (64 )
Recoveries     1       1       -       1       -       -       6       51       60  
Provision for loan losses     60       4       775       (143 )     -       (187 )     (6 )     (3 )     500  
Balance at March 31, 2021   $ 897     $ 186     $ 3,257     $ 2,246     $ -     $ 2,503     $ 6     $ 176     $ 9,271  

 

    Three months ended March 31, 2020  
(Dollars in thousands)   One-to-four family residential real estate loans     Construction and land loans     Commercial real estate loans     Commercial loans     Paycheck protection program 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     -       (100 )     -       (33 )     -       -       -       (87 )     (220 )
Recoveries     -       -       -       1             -       -       6       25       32  
Provision for loan losses     152       54       242       642       -       34       (6 )     82       1,200  
Balance at March 31, 2020   $ 653     $ 225     $ 1,628     $ 2,425     $ -     $ 2,381     $ 7     $ 160     $ 7,479  

 

  10  

 

 

    As of March 31, 2021  
(Dollars in thousands)   One-to-four family residential real estate loans     Construction and land loans     Commercial real estate loans     Commercial loans     Paycheck protection program loans     Agriculture loans     Municipal loans     Consumer loans     Total  
                                                       
Allowance for loan losses:                                                                        
Individually evaluated for loss   $ -     $ -     $ 424     $ 28     $ -     $ 40     $ -     $ -     $ 492  
Collectively evaluated for loss     897       186       2,833       2,218       -       2,463       6       176       8,779  
Total   $ 897     $ 186     $ 3,257     $ 2,246     $ -     $ 2,503     $ 6     $ 176     $ 9,271  
                                                                         
Loan balances:                                                                        
Individually evaluated for loss   $ 956     $ 1,027     $ 7,874     $ 1,679     $ -     $ 1,182     $ 36     $ 4     $ 12,758  
Collectively evaluated for loss     158,842       25,564       171,907       125,319       117,297       91,304       2,147       25,553       717,933  
Total   $ 159,798     $ 26,591     $ 179,781     $ 126,998     $ 117,297     $ 92,486     $ 2,183     $ 25,557     $ 730,691  

 

    As of December 31, 2020  
(Dollars in thousands)   One-to-four family residential real estate loan     Construction and land loans     Commercial real estate loans     Commercial loans     Paycheck protection program loans     Agriculture loans     Municipal loans     Consumer loans     Total  
                                                       
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  

 

The Company recorded net loan charge-offs of $4,000 during the first quarter of 2021 compared to net loan charge-offs of $188,000 during the first quarter of 2020.

 

  11  

 

 

The Company’s impaired loans increased from $12.5 million at December 31, 2020 to $12.8 million at March 31, 2021. The difference between the unpaid contractual principal and the impaired loan balance is a result of charge-offs recorded against impaired loans. The difference in the Company’s non-accrual loan balances and impaired loan balances at March 31, 2021 and December 31, 2020, was related to troubled debt restructurings (“TDR”) that are current and accruing interest, but still classified as impaired. Interest income recognized on a cash basis was immaterial during the three months ended March 31, 2021 and 2020. The following tables present information on impaired loans:

 

(Dollars in thousands)   As of March 31, 2021  
    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   $ 956     $ 956     $ 956     $ -     $ -     $ 963     $ 2  
Construction and land     2,762       1,027       1,027       -       -       1,043       6  
Commercial real estate     7,874       7,874       2,404       5,470       424       7,875       9  
Commercial     2,030       1,679       1,561       118       28       1,705       10  
Agriculture     1,397       1,182       1,131       51       40       1,237       16  
Municipal     36       36       36       -       -       36       -  
Consumer     4       4       4       -       -       5       -  
Total impaired loans   $ 15,059     $ 12,758     $ 7,119     $ 5,639     $ 492     $ 12,864     $ 43  

 

(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   $ 914     $ 914     $ 914     $ -     $ -     $ 925     $ 3  
Construction and land     2,872       1,137       1,137       -       -       1,211       26  
Commercial real estate     8,119       8,119       4,302       3,817       177       8,152       8  
Commercial     1,990       1,639       1,543       96       22       1,984       43  
Agriculture     829       614       538       76       67       618       67  
Municipal     36       36       36       -       -       54       1  
Consumer     3       3       3       -       -       4       -  
Total impaired loans   $ 14,763     $ 12,462     $ 8,473     $ 3,989     $ 266     $ 12,948     $ 148  

 

The Company’s key credit quality indicator is a loan’s performance status, defined as accruing or non-accruing. Performing loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have a higher risk of loss. The accrual of interest on non-performing loans is discontinued at the time the loan is 90 days delinquent, unless the credit is well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection of principal or interest is considered doubtful. There were no loans 90 days or more delinquent and accruing interest at March 31, 2021 or December 31, 2020.

 

  12  

 

 

The following tables present information on the Company’s past due and non-accrual loans by loan class:

 

(Dollars in thousands)   As of March 31, 2021  
    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   $ 1,268     $ 124     $ -     $ 1,392     $ 793     $ 2,185     $ 157,613  
Construction and land loans     -       -       -       -       691       691       25,900  
Commercial real estate loans     -       -       -       -       7,874       7,874       171,907  
Commercial loans     1,587       -       -       1,587       947       2,534       124,464  
Paycheck protection program loans     -       -       -       -       -       -       117,297  
Agriculture loans     1,583       424       -       2,007       706       2,713       89,773  
Municipal loans     -       -       -       -       -       -       2,183  
Consumer loans     15       24       -       39       4       43       25,514  
Total   $ 4,453     $ 572     $ -     $ 5,025     $ 11,015     $ 16,040     $ 714,651  
                                                         
Percent of gross loans     0.61 %     0.08 %     0.00 %     0.69 %     1.51 %     2.20 %     97.80 %

 

(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 %

 

  13  

 

 

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the three months ended March 31, 2021 and 2020 would have increased interest income by $186,000 and $120,000, respectively. No interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2021 and 2020.

 

The Company also categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loan terms. Classified loans are those that are assigned a special mention, substandard or doubtful risk rating using the following definitions:

 

Special Mention: Loans are currently protected by the current net worth and paying capacity of the obligor or of the collateral pledged but such protection is potentially weak. These loans constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. The credit risk may be relatively minor, yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.

 

Substandard: Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

The following table provides information on the Company’s risk categories by loan class:

 

    As of March 31, 2021     As of December 31, 2020  
(Dollars in thousands)   Nonclassified     Classified     Nonclassified     Classified  
                         
One-to-four family residential real estate loans   $ 155,668     $ 4,130     $ 154,985     $ 2,999  
Construction and land loans     25,900       691       25,412       694  
Commercial real estate loans     168,909       10,872       161,661       10,646  
Commercial loans     125,069       1,929       132,023       2,024  
Paycheck protection program loans     117,297       -       100,084       -  
Agriculture loans     85,305       7,181       87,662       8,870  
Municipal loan     2,183       -       2,332       -  
Consumer loans     25,554       3       24,119       3  
Total   $ 705,885     $ 24,806     $ 688,278     $ 25,236  

 

At March 31, 2021, the Company had ten loan relationships consisting of 21 outstanding loans that were classified as TDRs. During the first quarter of 2021, one commercial loan totaling $47,000 was classified as a TDR after extending the maturity of the loan. The restructuring changed the payment terms to match the borrower’s cash flows. The Company had previously charged-off $100,000 of the loan due to a collateral shortfall. A construction and land loan previously classified as TDR in 2012 paid off during the first three months of 2021. There were no loans classified as TDRs during the first three months of 2020.

 

  14  

 

 

The Company evaluates each TDR individually and returns the loan to accrual status when a payment history is established after the restructuring and future payments are reasonably assured. There were no loans modified as TDRs for which there was a payment default within 12 months of modification as of March 31, 2021 and 2020. The Company did not record any charge-offs against loans classified as TDRs in the first quarter of 2021 or 2020. No credit provisions related to TDRs were recorded in the three months ended March 31, 2021 compared to a credit provision of $1,000 recorded in the three months ended March 31, 2020. The Company allocated $8,000 of the allowance for loan losses recorded against loans classified as TDRs at March 31, 2021 and December 31, 2020.

 

The following table presents information on loans that are classified as TDRs:

 

(Dollars in thousands)                                    
    As of March 31, 2021     As of December 31, 2020  
    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     $ -     $ 163       2     $ -     $ 165  
Construction and land loans     4       691       336       5       693       443  
Commercial real estate loans     2       1,227       -       2       1,227       -  
Commercial loans     8       80       732       7       33       765  
Agriculture loans     4       -       476       4       -       538  
Municipal loan     1       -       36       1       -       36  
Total     21     $ 1,998     $ 1,743       21     $ 1,953     $ 1,947  

 

As of March 31, 2021, the Company had 4 loan modifications on outstanding loan balances of $6.8 million in connection with the Coronavirus Disease 2019 (COVID-19) pandemic. These modifications consisted of payment deferrals that consisted of either the full loan payment or just the principal component. The Company also entered into short-term forbearance plans or short-term repayment plans on two one-to-four family residential mortgage loans totaling $250,000 as of March 31, 2021. Consistent with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Joint Interagency Regulatory Guidance, these loan modifications were not classified as TDRs and are excluded from the table above.

 

4. Goodwill and Other Intangible Assets

 

The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual step one impairment test as of December 31, 2020 concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the first three months of 2021 that required an interim goodwill impairment test.

 

Lease intangible assets are amortized over the life of the lease. Core deposit intangible assets are amortized over the estimated useful life of ten years on an accelerated basis. A summary of the other intangible assets that continue to be subject to amortization was as follows:

 

(Dollars in thousands)   As of March 31, 2021  
    Gross carrying amount     Accumulated amortization     Net carrying amount  
Core deposit intangible assets   $ 2,018     $ (1,865 )   $ 153  
Lease intangible asset     350       (335 )     15  
Total other intangible assets   $ 2,368     $ (2,200 )   $ 168  

 

(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  

 

The following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2021 and in successive years ending December 31:

 

(Dollars in thousands)   Amortization  
    expense  
Remainder of 2021   $ 84  
2022     58  
2023     26  
Total   $ 168  

 

  15  

 

 

5. 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:

 

(Dollars in thousands)   March 31,     December 31,  
    2021     2020  
FHLMC   $ 662,995     $ 639,875  
FHLB     24,865       28,157  
Total   $ 687,860     $ 668,032  

 

Custodial escrow balances maintained in connection with serviced loans were $10.0 million and $5.8 million at March 31, 2021 and December 31, 2020, respectively. Gross service fee income related to such loans was $431,000 and $357,000 for the three months ended March 31, 2021 and 2020, respectively, and is included in fees and service charges in the consolidated statements of earnings.

  

Activity for mortgage servicing rights was as follows:

 

    Three months ended  
(Dollars in thousands)   March 31,  
    2021     2020  
Mortgage servicing rights:                
Balance at beginning of period   $ 3,726     $ 2,446  
Additions     639       212  
Amortization     (399 )     (230 )
Balance at end of period   $ 3,966     $ 2,428  

 

The fair value of mortgage servicing rights was $6.0 million and $4.4 million at March 31, 2021 and December 31, 2020, respectively. Fair value at March 31, 2021 was determined using discount rates ranging from 8.65% to 12.00%; prepayment speeds ranging from 6.00% to 27.55%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 1.35%. 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%.

 

The Company had a mortgage repurchase reserve of $226,000 at March 31, 2021 and $235,000 at December 31, 2020, which represents the Company’s best estimate of probable losses that the Company will incur related to the repurchase of one-to-four family residential real estate loans previously sold or to reimburse investors for credit losses incurred on loans previously sold where a breach of the contractual representations and warranties occurred. The Company charged a $9,000 loss against the reserve during the first three months of 2021. The Company did not incur any losses charged against the reserve or make any provisions to the reserve during the first three months of 2020. As of March 31, 2021, the Company did not have any outstanding mortgage repurchase requests.

 

6. Earnings per Share

 

Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share include the effect of all potential common shares outstanding during each period. The diluted earnings per share computation for the three months ended March 31, 2021 included all unexercised stock options because no stock options were anti-dilutive during such period. The diluted earnings per share computation for the three months ended March 31, 2020 excluded 105,041 of unexercised stock options because their inclusion would have been anti-dilutive during such period. The shares used in the calculation of basic and diluted earnings per share are shown below:

 

    2021     2020  
    Three months ended  
(Dollars in thousands, except per share amounts)   March 31,  
    2021     2020  
Net earnings   $ 5,367     $ 3,363  
                 
Weighted average common shares outstanding - basic (1)     4,752,864       4,808,572  
Assumed exercise of stock options (1)     6,634       19,121  
Weighted average common shares outstanding - diluted (1)     4,759,498       4,827,693  
Earnings per share (1):                
Basic (1)  $ 1.13     $ 0.70  
Diluted  (1) $ 1.13     $ 0.70  

 

  (1) Share and per share values for the period ended March 31, 2020 have been adjusted to give effect to the 5% stock dividend paid during December 2020.

 

  16  

 

 

7. 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 $4.2 million at March 31, 2021 and $6.4 million at December 31, 2020, which were secured by $7.2 million and $8.7 million of the Company’s investment portfolio at the same dates, respectively.

 

The following is a summary of the balances and collateral of the Company’s repurchase agreements:

 

    As of March 31, 2021  
(dollars in thousands)  

Overnight and

Continuous

    Up to 30 days     30-90 days    

Greater

than 90 days

    Total  
Repurchase agreements:                                        
U.S. federal agency obligations   $ 1,989     $ -     $ -     $ -     $ 1,989  
Agency mortgage-backed securities     2,176            -             -          -       2,176  
Total   $ 4,165     $ -     $ -     $ -     $ 4,165  

 

      As of December 31, 2020  
(dollars in thousands)    

Overnight and

Continuous

     

Up to

30 days

      30-90 days      

Greater

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  

 

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.

 

8. 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.

 

    2021     2020  
    Three months ended  
(Dollars in thousands)   March 31,  
    2021     2020  
Non-interest income:                
Service charges on deposit accounts                
Overdraft fees   $ 672     $ 873  
Other     163       146  
Interchange income     724       535  
Loan servicing fees (1)     431       357  
Office lease income (1)     166       162  
Gains on sales of loans (1)     3,140       1,193  
Bank owned life insurance income (1)     148       154  
Gains on sales of investment securities (1)     1,075       1,770  
Gains (losses) on sales of real estate owned     5       (1 )
Other     201       164  
Total non-interest income   $ 6,725     $ 5,353  

 

  (1) Not within the scope of ASC 606.

 

  17  

 

 

A description of the Company’s revenue streams under ASC 606 follows:

 

Service Charges on Deposit Accounts

 

The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM usage fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period during which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

 

Interchange Income

 

The Company earns interchange fees from debit cardholder transactions conducted through the interchange payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

 

Gains (Losses) on Sales of Real Estate Owned

 

The Company records a gain or loss from the sale of real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. There were no sales of real estate owned that were financed by the Company during the first three months of 2021 or 2020.

 

9. 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.

 

  18  

 

 

Fair value estimates of the Company’s financial instruments as of March 31, 2021 and December 31, 2020, including methods and assumptions utilized, are set forth below:

 

(Dollars in thousands)   As of March 31, 2021  
    Carrying                          
    amount     Level 1     Level 2     Level 3     Total  
Financial assets:                                        
Cash and cash equivalents   $ 109,151     $ 109,151     $ -     $ -     $ 109,151  
Investment securities available-for-sale     320,905       20,359       300,546       -       320,905  
Bank stocks, at cost     4,062        n/a        n/a        n/a        n/a  
Loans, net     717,809       -       -       733,858       733,858  
Loans held for sale     13,995       -       13,995       -       13,995  
Accrued interest receivable     4,655       65       1,537       3,053       4,655  
Derivative financial instruments     1,757       -       1,757       -       1,757  
                                         
Financial liabilities:                                        
Non-maturity deposits   $ (947,757 )   $ (947,757 )   $ -     $ -     $ (947,757 )
Certificates of deposit     (123,489 )     -       (123,670 )     -       (123,670 )
Subordinated debentures     (21,651 )     -       (16,168 )     -       (16,168 )
Other borrowings     (4,165 )     -       (4,165 )     -       (4,165 )
Accrued interest payable     (151 )     -       (151 )     -       (151 )

 

    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 )
Certificates of deposit     (133,750 )     -       (134,048 )     -       (134,048 )
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 )

 

Transfers

 

The Company did not transfer any assets or liabilities among levels during the three months ended March 31, 2021 or during the year ended December 31, 2020.

 

  19  

 

 

Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis

 

The following tables represent the Company’s financial instruments that are measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020, allocated to the appropriate fair value hierarchy:

 

(Dollars in thousands)         As of March 31, 2021  
          Fair value hierarchy  
    Total     Level 1     Level 2     Level 3  
Assets:                                
Available-for-sale investment securities:                                
U. S. treasury securities   $ 20,359     $ 20,359     $ -     $ -  
U. S. federal agency obligations     18,861       -       18,861       -  
Municipal obligations, tax exempt     143,105       -       143,105       -  
Municipal obligations, taxable     41,138       -       41,138       -  
Agency mortgage-backed securities     91,987       -       91,987             -  
Certificates of deposit     5,455       -       5,455       -  
Loans held for sale     13,995       -       13,995       -  
Derivative financial instruments     1,757       -       1,757       -  

 

              As of December 31, 2020
              Fair value hierarchy  
      Total       Level 1       Level 2       Level 3  
Assets:                                
Available-for-sale investment 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       -  
Liability:                                
Derivative financial instruments     (466 )     -       (466 )     -  

 

The Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal agency obligations, municipal obligations, agency mortgage-backed securities and certificates of 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 securities are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2. Municipal obligations are valued using a type of matrix, or grid, pricing in which securities are benchmarked against U.S. treasury rates based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy.

 

Changes in the fair value of available-for-sale securities are included in other comprehensive income to the extent the changes are not considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other-than-temporary results in a write-down of that security’s cost basis.

 

Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The mortgage loan valuations are based on quoted secondary market prices for similar loans and are classified as Level 2. Changes in the fair value of mortgage loans originated and intended for sale in the secondary market and derivative financial instruments are included in gains on sales of loans.

 

  20  

 

 

The aggregate fair value, contractual balance (including accrued interest), and gain on loans held for sale were as follows:

 

    As of     As of  
    March 31,     December 31,  
(Dollars in thousands)   2021     2020  
Aggregate fair value   $ 13,995     $ 15,533  
Contractual balance     13,956       15,151  
Gain   $ 39     $ 382  

 

The Company’s derivative financial instruments consist of interest rate lock commitments and corresponding forward sales contracts on mortgage loans held for sale. The fair values of these derivatives are based on quoted prices for similar loans in the secondary market. The market prices are adjusted by a factor, based on the Company’s historical data and its judgment about future economic trends, which considers the likelihood that a commitment will ultimately result in a closed loan. These instruments are classified as Level 2. The amounts are included in other assets or other liabilities on the consolidated balance sheets and gains on sales of loans, net in the consolidated statements of earnings. The total amount of gains from changes in fair value of loans held for sale included in earnings were as follows:

 

    Three months ended  
    March 31,  
(Dollars in thousands)   2021     2020  
Total change in fair value   $ 427     $ (34 )

 

Valuation Methods for Instruments Measured at Fair Value on a Nonrecurring Basis

 

The Company does not record its loan portfolio at fair value. Collateral-dependent impaired loans are generally carried at the lower of cost or fair value of the collateral, less estimated selling costs. Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company and then further adjusted if warranted based on relevant facts and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Impaired loans are reviewed and evaluated at least quarterly for additional impairment and adjusted accordingly, based on the same factors identified above. The carrying value of the Company’s impaired loans was $12.8 million and $12.5 million, with an allocated allowance of $492,000 and $266,000, at March 31, 2021 and December 31, 2020, respectively.