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, 2021 and 2020, 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.
Interest-Bearing
Deposits in Banks. Interest-bearing deposits in other banks include investments in certificates of deposits with original maturities
greater than 90 days, and are carried at cost.
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 officers. 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 2021, 2020 and 2019 excluded 51,088, 99,364 and 110,293, 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 2021, 2020 and 2019, are shown below:
Schedule of Earnings Per Share, Basic and Diluted
| |
2021 | | |
2020 | | |
2019 | |
(Dollars
in thousands, except per share amounts) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Net
earnings available to common shareholders | |
$ | 18,011 | | |
$ | 19,493 | | |
$ | 10,662 | |
| |
| | | |
| | | |
| | |
Weighted
average common shares outstanding - basic | |
| 4,994,546 | | |
| 4,987,322 | | |
| 5,063,402 | |
Assumed
exercise of stock options | |
| 12,066 | | |
| 4,579 | | |
| 15,260 | |
Weighted
average common shares outstanding - diluted | |
| 5,006,612 | | |
| 4,991,901 | | |
| 5,078,662 | |
Earnings
per share: | |
| | | |
| | | |
| | |
Basic | |
$ | 3.61 | | |
$ | 3.91 | | |
$ | 2.11 | |
Diluted | |
$ | 3.60 | | |
$ | 3.91 | | |
$ | 2.10 | |
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, 2021 | |
| |
| | |
Gross | | |
Gross | | |
| |
| |
Amortized | | |
unrealized | | |
unrealized | | |
Estimated | |
| |
cost | | |
gains | | |
losses | | |
fair
value | |
| |
| | |
| | |
| | |
| |
U.
S. treasury securities | |
$ | 43,098 | | |
$ | - | | |
$ | (423 | ) | |
$ | 42,675 | |
U.
S. federal agency obligations | |
| 17,165 | | |
| 67 | | |
| (37 | ) | |
| 17,195 | |
Municipal
obligations, tax exempt | |
| 133,558 | | |
| 4,488 | | |
| (62 | ) | |
| 137,984 | |
Municipal
obligations, taxable | |
| 39,011 | | |
| 1,171 | | |
| (136 | ) | |
| 40,046 | |
Agency
mortgage-backed securities | |
| 142,747 | | |
| 1,339 | | |
| (1,269 | ) | |
| 142,817 | |
Total | |
$ | 375,579 | | |
$ | 7,065 | | |
$ | (1,927 | ) | |
$ | 380,717 | |
| |
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 | |
Total | |
$ | 279,298 | | |
$ | 12,542 | | |
$ | (30 | ) | |
$ | 291,810 | |
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, 2021 and 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.
Schedule of Available for Sale Securities Continuous Unrealized Loss Position Fair Value
(Dollars
in thousands) | |
| | |
As
of December 31, 2021 | |
| |
| | |
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 | |
| 28 | | |
$ | 42,675 | | |
$ | (423 | ) | |
$ | - | | |
$ | - | | |
$ | 42,675 | | |
$ | (423 | ) |
U.
S. federal agency obligations | |
| 6 | | |
$ | 12,073 | | |
$ | (30 | ) | |
$ | 3,048 | | |
$ | (7 | ) | |
| 15,121 | | |
| (37 | ) |
Municipal
obligations, tax exempt | |
| 37 | | |
| 12,411 | | |
| (46 | ) | |
| 1,879 | | |
| (16 | ) | |
| 14,290 | | |
| (62 | ) |
Municipal
obligations, taxable | |
| 13 | | |
| 8,802 | | |
| (136 | ) | |
| - | | |
| - | | |
| 8,802 | | |
| (136 | ) |
Agency
mortgage-backed securities | |
| 28 | | |
| 95,028 | | |
| (1,269 | ) | |
| - | | |
| - | | |
| 95,028 | | |
| (1,269 | ) |
Total | |
| 112 | | |
$ | 170,989 | | |
$ | (1,904 | ) | |
$ | 4,927 | | |
$ | (23 | ) | |
$ | 175,916 | | |
$ | (1,927 | ) |
| |
| | |
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 | ) |
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 security and its belief that it was more likely than not that the Company
will not be required to sell the security before recovery of its cost basis, the Company believed that the U.S. treasury security identified
in the tables above was temporarily impaired.
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, 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.
The
Company’s agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by
the government-sponsored agencies of FHLMC, FNMA and the Government National Mortgage Association. The receipt of principal, at par,
and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the
Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses. Based on these factors,
along with the Company’s intent to not sell the securities and the Company’s belief that it was more likely than not that
the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the agency mortgage-backed
securities identified in the tables above were temporarily impaired.
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, 2021 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 | |
$ | 18,859 | | |
$ | 18,921 | |
Due
after one year but within five years | |
| 256,749 | | |
| 257,619 | |
Due
after five years but within ten years | |
| 52,372 | | |
| 54,243 | |
Due
after ten years | |
| 47,599 | | |
| 49,934 | |
Total | |
$ | 375,579 | | |
$ | 380,717 | |
Sales
proceeds and gross realized gains and losses on sales of available-for-sale securities are as follows:
Schedule of Realized Gain (loss)
| |
2021 | | |
2020 | | |
2019 | |
(Dollars
in thousands) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Sales
proceeds | |
$ | 16,623 | | |
$ | 61,163 | | |
$ | 15,318 | |
| |
| | | |
| | | |
| | |
Realized
gains | |
$ | 1,138 | | |
$ | 2,449 | | |
$ | 2 | |
Realized
losses | |
| - | | |
| (1 | ) | |
| (179 | ) |
Net
realized gains | |
$ | 1,138 | | |
$ | 2,448 | | |
$ | (177 | ) |
Securities
with carrying values of $331.7 million and $279.2 million were pledged to secure public funds on deposit, repurchase agreements and as
collateral for borrowings at December 31, 2021 and 2020, 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, 2021 was $857,000 compared to $2.4 million at December 31, 2020. The carrying value of the FRB stock was
$1.9 million at both December 31, 2021 and 2020. 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, 2021 and 2020.
(5)
Loans and Allowance for Loan Losses
Loans
consisted of the following:
Schedule of Loans
(Dollars
in thousands) | |
2021 | | |
2020 | |
| |
As
of December 31, | |
(Dollars
in thousands) | |
2021 | | |
2020 | |
| |
| | |
| |
One-to-four
family residential real estate loans | |
$ | 166,081 | | |
$ | 157,984 | |
Construction
and land loans | |
| 27,644 | | |
| 26,106 | |
Commercial
real estate loans | |
| 198,472 | | |
| 172,307 | |
Commercial
loans | |
| 132,154 | | |
| 134,047 | |
Paycheck
protection program loans | |
| 17,179 | | |
| 100,084 | |
Agriculture
loans | |
| 94,267 | | |
| 96,532 | |
Municipal
loans | |
| 2,050 | | |
| 2,332 | |
Consumer
loans | |
| 24,541 | | |
| 24,122 | |
Total
gross loans | |
| 662,388 | | |
| 713,514 | |
Net
deferred loan (fees) costs and loans in process | |
| (380 | ) | |
| (1,957 | ) |
Allowance
for loan losses | |
| (8,775 | ) | |
| (8,775 | ) |
Loans,
net | |
$ | 653,233 | | |
$ | 702,782 | |
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, 2021 | |
| |
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, 2021 | |
$ | 859 | | |
$ | 181 | | |
$ | 2,482 | | |
$ | 2,388 | | |
$ | - | | |
$ | 2,690 | | |
$ | 6 | | |
$ | 169 | | |
$ | 8,775 | |
Charge-offs | |
| (81 | ) | |
| - | | |
| (540 | ) | |
| (72 | ) | |
| - | | |
| (50 | ) | |
| - | | |
| (235 | ) | |
| (978 | ) |
Recoveries | |
| 11 | | |
| 263 | | |
| - | | |
| 14 | | |
| - | | |
| 66 | | |
| 6 | | |
| 118 | | |
| 478 | |
Provision
for loan losses | |
| (166 | ) | |
| (306 | ) | |
| 1,109 | | |
| 283 | | |
| - | | |
| (485 | ) | |
| (6 | ) | |
| 71 | | |
| 500 | |
Balance
at December 31, 2021 | |
$ | 623 | | |
$ | 138 | | |
$ | 3,051 | | |
$ | 2,613 | | |
$ | - | | |
$ | 2,221 | | |
$ | 6 | | |
$ | 123 | | |
$ | 8,775 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance
for loan losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for loss | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 504 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 504 | |
Collectively
evaluated for loss | |
| 623 | | |
| 138 | | |
| 3,051 | | |
| 2,109 | | |
| - | | |
| 2,221 | | |
| 6 | | |
| 123 | | |
| 8,271 | |
Total | |
$ | 623 | | |
$ | 138 | | |
$ | 3,051 | | |
$ | 2,613 | | |
$ | - | | |
$ | 2,221 | | |
$ | 6 | | |
$ | 123 | | |
$ | 8,775 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loan
balances: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for loss | |
$ | 578 | | |
$ | 794 | | |
$ | 2,214 | | |
$ | 1,029 | | |
$ | - | | |
$ | 2,067 | | |
$ | 36 | | |
$ | - | | |
$ | 6,718 | |
Collectively
evaluated for loss | |
| 165,503 | | |
| 26,850 | | |
| 196,258 | | |
| 131,125 | | |
| 17,179 | | |
| 92,200 | | |
| 2,014 | | |
| 24,541 | | |
| 655,670 | |
Total | |
$ | 166,081 | | |
$ | 27,644 | | |
$ | 198,472 | | |
$ | 132,154 | | |
$ | 17,179 | | |
$ | 94,267 | | |
$ | 2,050 | | |
$ | 24,541 | | |
$ | 662,388 | |
(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 | |
The
Company’s impaired loans decreased $5.8 million from $12.5 million at December 31, 2020 to $6.7 million at December 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 December 31, 2021 and December 31,
2020 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 2021, 2020 and 2019. The following tables present information on impaired loans:
Schedule of Impaired Financing Receivables
(Dollars
in thousands) |
| |
As
of December 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 loans | |
$ | 578 | | |
$ | 578 | | |
$ | 578 | | |
$ | - | | |
$ | - | | |
$ | 590 | | |
$ | 8 | |
Construction
and land loans | |
| 2,401 | | |
| 794 | | |
| 794 | | |
| - | | |
| - | | |
| 895 | | |
| 16 | |
Commercial
real estate loans | |
| 2,214 | | |
| 2,214 | | |
| 2,214 | | |
| - | | |
| - | | |
| 2,388 | | |
| 37 | |
Commercial
loans | |
| 1,380 | | |
| 1,029 | | |
| 520 | | |
| 509 | | |
| 504 | | |
| 1,096 | | |
| 38 | |
Agriculture
loans | |
| 2,235 | | |
| 2,067 | | |
| 2,067 | | |
| - | | |
| - | | |
| 2,420 | | |
| 67 | |
Municipal
loans | |
| 36 | | |
| 36 | | |
| 36 | | |
| - | | |
| - | | |
| 36 | | |
| 1 | |
Total
impaired loans | |
$ | 8,844 | | |
$ | 6,718 | | |
$ | 6,209 | | |
$ | 509 | | |
$ | 504 | | |
$ | 7,425 | | |
$ | 167 | |
| |
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 | |
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, 2021 or December 31, 2020. 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, 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 | |
$ | 20 | | |
$ | 125 | | |
$ | - | | |
$ | 145 | | |
$ | 417 | | |
$ | 562 | | |
$ | 165,519 | |
Construction
and land loans | |
| - | | |
| - | | |
| - | | |
| - | | |
| 681 | | |
| 681 | | |
| 26,963 | |
Commercial
real estate loans | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,214 | | |
| 2,214 | | |
| 196,258 | |
Commercial
loans | |
| 289 | | |
| 340 | | |
| - | | |
| 629 | | |
| 593 | | |
| 1,222 | | |
| 130,932 | |
Paycheck
protection program loans | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 17,179 | |
Agriculture
loans | |
| 1,189 | | |
| - | | |
| - | | |
| 1,189 | | |
| 1,325 | | |
| 2,514 | | |
| 91,753 | |
Municipal
loans | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2,050 | |
Consumer
loans | |
| 18 | | |
| 9 | | |
| - | | |
| 27 | | |
| - | | |
| 27 | | |
| 24,514 | |
Total | |
$ | 1,516 | | |
$ | 474 | | |
$ | - | | |
$ | 1,990 | | |
$ | 5,230 | | |
$ | 7,220 | | |
$ | 655,168 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Percent
of gross loans | |
| 0.23 | % | |
| 0.07 | % | |
| 0.00 | % | |
| 0.30 | % | |
| 0.79 | % | |
| 1.09 | % | |
| 98.91 | % |
| |
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 | % |
Under
the original terms of the Company’s non-accrual loans, interest earned on such loans for the years 2021, 2020 and 2019, would have
increased interest income by $309,000, $380,000 and $230,000, respectively. No interest income related to non-accrual loans was included
in interest income for the years ended December 31, 2021, 2020 and 2019.
The
Company also categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their
debt such as current financial information, historical payment experience, credit documentation, public information and current economic
trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed
on a quarterly basis. 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, 2021 | | |
As
of December 31, 2020 | |
(Dollars
in thousands) | |
Nonclassified | | |
Classified | | |
Nonclassified | | |
Classified | |
| |
| | |
| | |
| | |
| |
One-to-four
family residential real estate loans | |
$ | 165,299 | | |
$ | 782 | | |
$ | 154,985 | | |
$ | 2,999 | |
Construction
and land loans | |
| 26,963 | | |
| 681 | | |
| 25,412 | | |
| 694 | |
Commercial
real estate loans | |
| 193,669 | | |
| 4,803 | | |
| 161,661 | | |
| 10,646 | |
Commercial
loans | |
| 123,609 | | |
| 8,545 | | |
| 132,023 | | |
| 2,024 | |
Paycheck
protection program loans | |
| 17,179 | | |
| - | | |
| 100,084 | | |
| - | |
Agriculture
loans | |
| 91,036 | | |
| 3,231 | | |
| 87,662 | | |
| 8,870 | |
Municipal
loans | |
| 2,050 | | |
| - | | |
| 2,332 | | |
| - | |
Consumer
loans | |
| 24,541 | | |
| - | | |
| 24,119 | | |
| 3 | |
Total | |
$ | 644,346 | | |
$ | 18,042 | | |
$ | 688,278 | | |
$ | 25,236 | |
At
December 31, 2021, the Company had 11 loan relationships consisting of 16 outstanding loans totaling $3.4 million that were classified
as TDRs compared to nine loan relationships consisting of 21 outstanding loans totaling $3.9 million that were classified as TDRs at
December 31, 2020.
During
2021, a commercial loan relationship consisting of five loans was modified after originally being classified as a TDR in 2020. The borrower
liquidated some of the collateral securing the loans and refinanced the remaining balance of $397,000 into one loan, which retained a
TDR classification. A commercial loan totaling $32,000 was classified as a TDR during 2021 after the maturity of the loan was extended.
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. An agriculture loan totaling $250,000 was also classified as a TDR during 2021 after a new
loan was originated to an existing classified loan relationship. The additional loan provided funds to stabilize the borrower’s
operations through the fall harvest. All of the loans classified as TDRs were experiencing financial difficulties prior to the COVID-19
pandemic. An agriculture loan and two construction and land loans previously classified as TDRs in 2016 and 2012, respectively, were
paid off during 2021.
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.
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, 2021, 2020 and 2019. At December 31, 2021, there were no commitments to lend additional funds on loans
classified as TDRs. The Company did not record any charge-offs against loans classified as TDRs during 2021 and recorded a credit provision
for loan loss of $6,000 against TDRs in 2021. 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 allocated
$2,000 and $8,000 of the allowance for loan losses recorded against loans classified as TDRs at December 31, 2021 and 2020, 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, 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 | | |
$ | - | | |
$ | 161 | | |
| 2 | | |
$ | - | | |
$ | 165 | |
Construction
and land loans | |
| 3 | | |
| 681 | | |
| 113 | | |
| 5 | | |
| 693 | | |
| 443 | |
Commercial
real estate loans | |
| 2 | | |
| 1,224 | | |
| - | | |
| 2 | | |
| 1,227 | | |
| - | |
Commercial
loans | |
| 4 | | |
| 33 | | |
| 436 | | |
| 7 | | |
| 33 | | |
| 765 | |
Agriculture | |
| 4 | | |
| - | | |
| 742 | | |
| 4 | | |
| - | | |
| 538 | |
Municipal
loans | |
| 1 | | |
| - | | |
| 36 | | |
| 1 | | |
| - | | |
| 36 | |
Total
troubled debt restructurings | |
| 16 | | |
$ | 1,938 | | |
$ | 1,488 | | |
| 21 | | |
$ | 1,953 | | |
$ | 1,947 | |
As
of December 31, 2021, all of the loan modifications and short-term forbearance and repayment plans in connection with the COVID-19 pandemic
returned to contractual terms.
The
Company had loans and unfunded commitments to directors and officers, and to affiliated parties, at December 31, 2021 and 2020. A summary
of such loans is as follows:
Schedule of Loan to Directors Officers and Affiliated Parties
| |
| |
(Dollars
in thousands) | |
| |
| |
| |
Balance
at December 31, 2020 | |
$ | 16,094 | |
New
loans | |
| 10,920 | |
Repayments | |
| (17,077 | ) |
Balance
at December 31, 2021 | |
$ | 9,937 | |
(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 $139.5 million and $145.1 million at December 31, 2021 and 2020, respectively, and are generally
at variable interest rates. Standby letters of credit totaled $1.9 million at December 31, 2021 and $2.2 million at December 31, 2020.
(7)
Goodwill and Intangible Assets
The
Company performed its annual impairment test as of December 31, 2021. Based on the results of the qualitative analysis, the Company concluded
it was more likely than not that 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, 2021 | |
| |
Gross
carrying amount | | |
Accumulated
amortization | | |
Net
carrying amount | |
Core
deposit intangible assets | |
$ | 2,018 | | |
$ | (1,934 | ) | |
$ | 84 | |
Lease
intangible asset | |
| - | | |
| - | | |
| - | |
Total
other intangible assets | |
$ | 2,018 | | |
$ | (1,934 | ) | |
$ | 84 | |
| |
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 intangible assets for the years ending December 31:
Schedule of Finite-lived Intangible Assets, Future Amortization Expense
(Dollars
in thousands) | |
Amortization
expense | |
(Dollars
in thousands) | |
Amortization
expense | |
2022 | |
$ | 58 | |
2023 | |
| 26 | |
Total | |
$ | 84 | |
(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, | |
| |
2021 | | |
2020 | |
FHLMC | |
$ | 697,484 | | |
$ | 639,875 | |
FHLB | |
| 18,218 | | |
| 28,157 | |
Total | |
$ | 715,702 | | |
$ | 668,032 | |
Custodial
escrow balances maintained in connection with serviced loans were $5.8 million at December 31, 2021 and 2020. Gross service fee income
related to such loans was $1.8 million, $1.5 million and $1.4 million for the years ended December 31, 2021, 2020 and 2019, 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
| |
2021 | | |
2020 | |
(Dollars
in thousands) | |
As
of December 31, | |
| |
2021 | | |
2020 | |
Mortgage
servicing rights: | |
| | | |
| | |
Balance
at beginning of year | |
$ | 3,726 | | |
$ | 2,446 | |
Additions | |
| 1,946 | | |
| 2,705 | |
Amortization | |
| (1,479 | ) | |
| (1,425 | ) |
Balance
at end of year | |
$ | 4,193 | | |
$ | 3,726 | |
At
December 31, 2021 and 2020, there was no valuation allowance related to mortgage servicing rights.
The
fair value of mortgage servicing rights was $6.7 million and $4.4 million at December 31, 2021 and 2020, respectively. Fair value at
December 31, 2021 was determined using discount rates ranging from 9.00% to 12.00%, prepayment speeds ranging from 6.02% to 23.70%, depending
on the stratification of the specific mortgage servicing right, and a weighted average default rate of 1.34%. 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 December 31, 2021 and a mortgage repurchase reserve of $235,000 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 did not make any provisions to the reserve,
but did charge a $9,000 loss against the reserve during 2021. The Company did not incur any losses charged against the reserve or make
any provisions to the reserve during 2020 and 2019. As of December 31, 2021, the Company had no outstanding mortgage repurchase requests.
(9)
Premises and Equipment
Premises
and equipment consisted of the following:
Schedule of Premises and Equipment
| |
| |
2021 | | |
2020 | |
(Dollars
in thousands) | |
Estimated | |
As
of December 31, | |
| |
useful
lives | |
2021 | | |
2020 | |
Land | |
Indefinite | |
$ | 6,279 | | |
$ | 6,279 | |
Office
buildings and improvements | |
10
- 50 years | |
| 21,097 | | |
| 21,058 | |
Furniture
and equipment | |
3
- 15 years | |
| 8,652 | | |
| 8,336 | |
Automobiles | |
2
- 5 years | |
| 556 | | |
| 567 | |
Total
premises and equipment | |
| |
| 36,584 | | |
| 36,240 | |
Accumulated
depreciation | |
| |
| (15,781 | ) | |
| (15,747 | ) |
Total
premises and equipment, net | |
| |
$ | 20,803 | | |
$ | 20,493 | |
Depreciation
expense totaled $997,000 for the year ended December 31, 2021, $987,000 for the year ended December 31, 2020, and $1.0 million during
the year ended 2019 and was included in occupancy and equipment expense on the consolidated statements of earnings.
(10)
Deposits
The
following table presents the maturities of certificates of deposit at December 31, 2021:
Schedule of Maturities of Time Deposit
Year | |
Amount | |
(Dollars
in thousands) |
|
Year | |
Amount | |
2022 | |
$ | 90,795 | |
2023 | |
| 8,918 | |
2024 | |
| 2,520 | |
2025 | |
| 1,844 | |
2026 | |
| 2,028 | |
Thereafter | |
| 2 | |
Total | |
$ | 106,107 | |
The
aggregate amount of certificate of deposit in denominations of $250,000 or more at
December 31, 2021 and 2020 was $23.4
million and $26.8
million, respectively. As of December 31,
2021 and December 2020, the Company had no
brokered deposits.
The
components of interest expense associated with deposits are as follows:
Schedule of Interest Expense Associated with Deposits
| |
2021 | | |
2020 | | |
2019 | |
(Dollars
in thousands) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Certificate
of deposit | |
$ | 476 | | |
$ | 1,166 | | |
$ | 2,751 | |
Money
market and checking | |
| 500 | | |
| 899 | | |
| 2,555 | |
Savings | |
| 47 | | |
| 40 | | |
| 35 | |
Total | |
$ | 1,023 | | |
$ | 2,105 | | |
$ | 5,341 | |
(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, 2021
and December 2020. Interest on any outstanding balance on the line of credit accrues at the federal funds rate plus 0.15% (0.26% at December
31, 2021). The Company had issued letters of credit through the FHLB totaling $25.0 million and $66.0 million at December 31 2021 and
2020, respectively to secure municipal deposits. The Company did not have any term advances from FHLB at December 31, 2021 and December
31, 2020.
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, 2021 and 2020, there was a blanket pledge of loans
and securities totaling $136.9 million and $175.7 million, respectively. At December 31, 2021 and 2020, the Bank’s total borrowing
capacity with the FHLB was approximately $93.8 million and $123.8 million, respectively. At December 31, 2021 and 2020, the Bank’s
available borrowing capacity was $67.5 million and $56.4 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, 2021 and 2020 was 2.98% and 3.06%, 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, 2021 and 2020 was 1.54% and 1.56 %, 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, 2021 and 2020 was 1.84% and 1.86% 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, 2022, 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, 2021. As of December 31, 2021 and 2020, the Company did not have an outstanding
balance on the line of credit.
At
December 31, 2021 and 2020, the Bank had no borrowings through the Federal Reserve discount window, while the borrowing capacity was
$79.3 million and $103.8 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, 2021 and 2020. As of December 31, 2021 and 2020, 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 $7.4 million at December 31, 2021, and $6.4 million at December 31,
2020, which were secured by $9.2 million and $8.7 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, | |
| |
2021 | | |
2020 | |
Average
daily balance during the year | |
$ | 5,915 | | |
$ | 11,066 | |
Average
interest rate during the year | |
| 0.19 | % | |
| 0.20 | % |
Maximum
month-end balance during the year | |
$ | 8,250 | | |
$ | 17,939 | |
Weighted
average interest rate at year-end | |
| 0.19 | % | |
| 0.18 | % |
| |
As
of December 31, 2021 | |
| |
Overnight
and Continuous | | |
Up
to 30 days | | |
30-90
days | | |
Greater
than 90 days | | |
Total | |
Repurchase
agreements: | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S.
federal treasury obligations | |
$ | 325 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 325 | |
U.S.
federal agency obligations | |
| 3,008 | | |
| - | | |
| - | | |
| - | | |
| 3,008 | |
Agency
mortgage-backed securities | |
| 4,070 | | |
| - | | |
| - | | |
| - | | |
| 4,070 | |
Total | |
$ | 7,403 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 7,403 | |
| |
As
of December 31, 2020 | |
| |
Overnight
and | | |
Up
to 30 | | |
30-90 | | |
Greater
than 90 | | |
| |
| |
Continuous | | |
days | | |
days | | |
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.
(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
| |
2021 | | |
2020 | | |
2019 | |
(Dollars
in thousands) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Non-interest
income: | |
| | | |
| | | |
| | |
Service
charges on deposits | |
| | | |
| | | |
| | |
Overdraft
fees | |
$ | 2,987 | | |
$ | 2,991 | | |
$ | 3,591 | |
Other | |
| 679 | | |
| 644 | | |
| 585 | |
Interchange
income | |
| 3,261 | | |
| 2,604 | | |
| 2,049 | |
Loan
servicing fees (1) | |
| 1,780 | | |
| 1,534 | | |
| 1,367 | |
Office
lease income (1) | |
| 574 | | |
| 652 | | |
| 642 | |
Gains
on sales of loans (1) | |
| 10,487 | | |
| 15,155 | | |
| 6,353 | |
Bank
owned life insurance income (1) | |
| 686 | | |
| 611 | | |
| 752 | |
Gains
(losses) on sales of investment securities (1) | |
| 1,138 | | |
| 2,448 | | |
| (177 | ) |
(Losses)
gains on sales of premises and equipment and foreclosed assets | |
| (4 | ) | |
| (29 | ) | |
| 52 | |
Other | |
| 673 | | |
| 748 | | |
| 595 | |
Total
non-interest income | |
$ | 22,261 | | |
$ | 27,358 | | |
$ | 15,809 | |
(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 2021, 2020 or 2019.
(16)
Income Taxes
Income
tax expense (benefit) attributable to income from operations consisted of the following:
Schedule
of Components of Income Tax Expense (Benefit)
| |
2021 | | |
2020 | | |
2019 | |
(Dollars
in thousands) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Current: | |
| | | |
| | | |
| | |
Federal | |
$ | 3,039 | | |
$ | 4,582 | | |
$ | 1,805 | |
State | |
| 967 | | |
| 708 | | |
| (157 | ) |
Total
current | |
| 4,006 | | |
| 5,290 | | |
| 1,648 | |
Deferred: | |
| | | |
| | | |
| | |
Federal | |
| 662 | | |
| (442 | ) | |
| (160 | ) |
State | |
| 196 | | |
| (8 | ) | |
| 22 | |
Total
deferred | |
| 858 | | |
| (450 | ) | |
| (138 | ) |
Deferred
tax valuation allowance | |
| (50 | ) | |
| (53 | ) | |
| (57 | ) |
Income
tax expense | |
$ | 4,814 | | |
$ | 4,787 | | |
$ | 1,453 | |
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
| |
2021 | | |
2020 | | |
2019 | |
(Dollars
in thousands) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Computed
“expected” tax expense | |
$ | 4,793 | | |
$ | 5,099 | | |
$ | 2,544 | |
(Reduction)
increase in income taxes resulting from: | |
| | | |
| | | |
| | |
Tax-exempt
interest income, net | |
| (645 | ) | |
| (695 | ) | |
| (748 | ) |
Excess
tax benefit from stock option exercise | |
| (29 | ) | |
| (26 | ) | |
| - | |
Bank
owned life insurance | |
| (156 | ) | |
| (137 | ) | |
| (165 | ) |
Reversal
of unrecognized tax benefits, net | |
| 162 | | |
| (229 | ) | |
| (558 | ) |
State
income taxes, net of federal benefit | |
| 718 | | |
| 800 | | |
| 407 | |
Investment
tax credits | |
| (19 | ) | |
| (28 | ) | |
| (15 | ) |
Other,
net | |
| (10 | ) | |
| 3 | | |
| (12 | ) |
Income
tax (benefit) expense | |
$ | 4,814 | | |
$ | 4,787 | | |
$ | 1,453 | |
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
| |
2021 | | |
2020 | |
(Dollars
in thousands) | |
As
of December 31, | |
| |
2021 | | |
2020 | |
Deferred
tax assets: | |
| | | |
| | |
Loans,
including allowance for loan losses | |
$ | 2,041 | | |
$ | 2,040 | |
Net
operating loss carry forwards | |
| 223 | | |
| 273 | |
State
taxes | |
| 534 | | |
| 614 | |
Net
deferred loan fees | |
| 125 | | |
| 432 | |
Acquisition
costs | |
| 141 | | |
| 161 | |
Deferred
compensation arrangements | |
| 64 | | |
| 66 | |
Investments | |
| 70 | | |
| 54 | |
Other,
net | |
| 184 | | |
| 158 | |
Total
deferred tax assets | |
| 3,382 | | |
| 3,798 | |
Less
valuation allowance | |
| (223 | ) | |
| (273 | ) |
Total
deferred tax assets, net of valuation allowance | |
| 3,159 | | |
| 3,525 | |
| |
| | | |
| | |
Deferred
tax liabilities: | |
| | | |
| | |
Unrealized
gain on investment securities available-for-sale | |
| 1,259 | | |
| 3,065 | |
Premises
and equipment, net of depreciation | |
| 723 | | |
| 500 | |
Mortgage
servicing rights | |
| 879 | | |
| 777 | |
Prepaid
expenses | |
| 314 | | |
| 302 | |
Intangible
assets | |
| 387 | | |
| 278 | |
FHLB
stock dividends | |
| 8 | | |
| 12 | |
Total
deferred tax liabilities | |
| 3,570 | | |
| 4,934 | |
| |
| | | |
| | |
Net
deferred tax liability | |
$ | (411 | ) | |
$ | (1,409 | ) |
The
Company has Kansas corporate net operating loss carry forwards totaling $3.8 million and $4.7 million as of December 31, 2021 and 2020,
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, 2021.
Retained
earnings at December 31, 2021 and 2020 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, | |
| |
2021 | | |
2020 | |
Unrecognized
tax benefits at beginning of year | |
$ | 2,138 | | |
$ | 1,416 | |
Gross
increases to current year tax positions | |
| 325 | | |
| 1,100 | |
Gross
decreases to prior year’s tax positions | |
| (125 | ) | |
| (26 | ) |
Lapse
of statute of limitations | |
| (48 | ) | |
| (352 | ) |
Unrecognized
tax benefits at end of year | |
$ | 2,290 | | |
$ | 2,138 | |
Tax
years that remain open and subject to audit include the years 2018 through 2021 for both federal and state tax purposes. The Company
recognized $48,000 and $352,000 of previously unrecognized tax benefits during 2021 and 2020, respectively. The gross unrecognized tax
benefits of $2.3 million and $2.1 million at December 31, 2021 and December 31, 2020, respectively, would favorably impact the effective
tax rate by $1.8 million and $1.7 million, respectively, if recognized. During 2021 and 2020, the Company recorded $298,000 and $71,000
of income tax expense respectively associated with interest and penalties. During 2019, the Company recorded an income tax benefit of
$77,000 associated with interest and penalties. As of December 31, 2021 and 2020, the Company had accrued interest and penalties related
to the unrecognized tax benefits of $623,000 and $325,000, 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 $462,000 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 $800,000,
$750,000 and $610,000 for the years ended December 31, 2021, 2020 and 2019, 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 $44,000 at December
31, 2021 and $42,000 at December 31, 2020.
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 $796,000 and $690,000 at December 31, 2021 and 2020,
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 $3,000 and $10,000 for the years ended December 31, 2021 and December
31, 2020, respectively and income of $8,000 for the year ended December 31, 2019. 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 $323,000, $304,000 and $286,000
for the years ended December 31, 2021, 2020 and 2019, respectively. The Company recognized tax benefits of $113,000, $105,000, and $71,000
for the years ended December 31, 2021, 2020 and 2019, 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 351,775
shares of common stock, as adjusted for subsequent stock dividends. On August 1, 2019, the Compensation Committee awarded 3,954, shares
of restricted common stock, as adjusted for subsequent stock dividends, and options to acquire 74,557 shares of common stock, as adjusted
for subsequent stock dividends. The restricted stock awards vest ratably over one year and the value was based on a stock price of $20.25
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 19,128 shares of restricted common stock, as adjusted for subsequent stock dividends.
The value of the 19,128 shares was based on a stock price of $18.69 on the date such shares were granted, as adjusted for subsequent
stock dividends. On August 1, 2021, the Compensation Committee awarded 3,024 shares of restricted common stock, as adjusted for subsequent
stock dividends and options to acquire 51,091 shares of common stock, as adjusted for subsequent stock dividends. The restricted stock
awards vest ratably over one year and the value was based on a stock price of $26.43 per share on the date such shares were granted,
as adjusted for subsequent stock dividends. The options vest ratably over four years. 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
| |
2021 | | |
2020 | | |
2019 | |
| |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Risk-free
interest rate | |
| 1.00 | % | |
| n/a | | |
| 1.77 | % |
Expected
term | |
| 7
year | | |
| n/a | | |
| 7
year | |
Expected
stock price volatility | |
| 28.51 | % | |
| n/a | | |
| 26.06 | % |
Dividend
yield | |
| 2.88 | % | |
| n/a | | |
| 3.41 | % |
A
summary of option activity during 2021 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, 2021 | |
| 102,630 | | |
$ | 21.26 | | |
| 7.3
years | | |
$ | 202 | |
Granted | |
| 48,658 | | |
$ | 27.75 | | |
| | | |
| | |
Effect
of 5% stock dividend | |
| 7,059 | | |
| | | |
| | | |
| | |
Forfeited/expired | |
| (3,964 | ) | |
$ | 15.62 | | |
| | | |
| | |
Exercised | |
| (6,172 | ) | |
$ | 10.78 | | |
| | | |
| | |
Outstanding
at December 31, 2021 | |
| 148,211 | | |
$ | 22.97 | | |
| 7.8
years | | |
$ | 848 | |
Exercisable
at December 31, 2021 | |
| 54,371 | | |
$ | 21.85 | | |
| 6.4
years | | |
$ | 372 | |
Fully
vested options at December 31, 2021 | |
| 54,371 | | |
$ | 21.85 | | |
| 6.4
years | | |
$ | 372 | |
Additional
information about stock options exercised is presented below:
Schedule of Stock Option Exercised Additional Information
| |
2021 | | |
2020 | | |
2019 | |
(Dollars
in thousands) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Intrinsic
value of options exercised (on exercise date) | |
$ | 141 | | |
$ | 430 | | |
$ | 42 | |
Cash
received from options exercised | |
| 22 | | |
| 42 | | |
| 36 | |
Excess
tax benefit realized from options exercised | |
$ | 21 | | |
$ | 32 | | |
$ | - | |
As
of December 31, 2021, there was $342,000 of total unrecognized compensation cost related to the 93,840 outstanding unvested options that
will be recognized over the following periods:
Schedule of Share-based Compensation Arrangements by Share-based Payment Award
Year | |
Amount | |
(Dollars
in thousands) |
|
Year | |
Amount | |
2022 | |
$ | 129 | |
2023 | |
| 104 | |
2024 | |
| 69 | |
2025 | |
| 40 | |
Total | |
$ | 342 | |
The
fair value of restricted stock on the vesting date was $229,000, $202,000 and $150,000 during the years ended December 31, 2021, 2020
and 2019 respectively. A summary of nonvested restricted common stock activity during 2021 is presented below:
Schedule of Nonvested Share Activity
| |
Shares | | |
Weighted
average grant date price per share | |
Nonvested
restricted common stock at January 1, 2021 | |
| 22,125 | | |
$ | 20.83 | |
Granted | |
| 2,880 | | |
$ | 27.75 | |
Vested | |
| (8,453 | ) | |
$ | 27.07 | |
Forfeited | |
| - | | |
$ | - | |
Effect
of 5% stock dividend | |
| 827 | | |
| | |
Nonvested
restricted common stock at December 31, 2021 | |
| 17,379 | | |
$ | 21.05 | |
As
of December 31, 2021, there was $237,000 of total unrecognized compensation cost related to the 17,379 outstanding nonvested restricted
shares that will be recognized over the following periods:
Schedule of Share-based Compensation Arrangements by Share-based Payment Award
Year | |
Amount | |
(Dollars
in thousands) |
|
Year | |
Amount | |
2022 | |
$ | 136 | |
2023 | |
| 64 | |
2024 | |
| 37 | |
Total | |
$ | 237 | |
(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, 2021 and 2020, including methods and assumptions utilized,
are set forth below:
Schedule of Fair Value, by Balance Sheet Grouping
(Dollars
in thousands) | |
As
of December 31, 2021 | |
| |
Carrying
amount | | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Financial
assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 189,213 | | |
$ | 189,213 | | |
$ | - | | |
$ | - | | |
$ | 189,213 | |
Interest-bearing
deposits at other banks | |
| 7,378 | | |
| - | | |
| 7,378 | | |
| - | | |
| 7,378 | |
Investment
securities available-for-sale | |
| 380,717 | | |
| 42,675 | | |
| 338,042 | | |
| - | | |
| 380,717 | |
Bank
stocks, at cost | |
| 2,905 | | |
| n/a
| | |
| n/a
| | |
| n/a
| | |
| n/a
| |
Loans,
net | |
| 653,233 | | |
| - | | |
| - | | |
| 663,625 | | |
| 663,625 | |
Loans
held for sale | |
| 4,795 | | |
| - | | |
| 4,795 | | |
| - | | |
| 4,795 | |
Mortgage
servicing rights | |
| 4,193 | | |
| - | | |
| 6,722 | | |
| - | | |
| 6,722 | |
Accrued
interest receivable | |
| 4,405 | | |
| 107 | | |
| 1,666 | | |
| 2,632 | | |
| 4,405 | |
Derivative
financial instruments | |
| 494 | | |
| - | | |
| 494 | | |
| - | | |
| 494 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Financial
liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-maturity
deposits | |
$ | (1,042,374 | ) | |
$ | (1,042,374 | ) | |
$ | - | | |
$ | - | | |
$ | (1,042,374 | ) |
Certificates
of deposit | |
| (106,107 | ) | |
| - | | |
| (105,935 | ) | |
| - | | |
| (105,935 | ) |
Subordinated
debentures | |
| (21,651 | ) | |
| - | | |
| (16,375 | ) | |
| - | | |
| (16,375 | ) |
Other
borrowings | |
| (7,403 | ) | |
| - | | |
| (7,403 | ) | |
| - | | |
| (7,403 | ) |
Accrued
interest payable | |
| (125 | ) | |
| - | | |
| (125 | ) | |
| - | | |
| (125 | ) |
(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 | |
Interest-bearing
deposits at other banks | |
| 5,460 | | |
| - | | |
| 5,460 | | |
| - | | |
| 5,460 | |
Investment
securities available-for-sale | |
| 291,810 | | |
| 2,037 | | |
| 289,773 | | |
| - | | |
| 291,810 | |
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 | |
Mortgage
servicing rights | |
| 3,726 | | |
| - | | |
| 4,361 | | |
| - | | |
| 4,361 | |
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 year ended December 31, 2021 or 2020.
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, 2021 and 2020, allocated to the appropriate fair value hierarchy:
Schedule of Fair Value, Assets Measured On Recurring Basis
(Dollars
in thousands) | |
| | |
As
of December 31, 2021 | |
| |
| | |
Fair
value hierarchy | |
| |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Assets: | |
| | |
| | |
| | |
| |
Available-for-sale
securities | |
| | | |
| | | |
| | | |
| | |
U.
S. treasury securities | |
$ | 42,675 | | |
$ | 42,675 | | |
$ | - | | |
$ | - | |
U.
S. federal agency obligations | |
| 17,195 | | |
| - | | |
| 17,195 | | |
| - | |
Municipal
obligations, tax exempt | |
| 137,984 | | |
| - | | |
| 137,984 | | |
| - | |
Municipal
obligations, taxable | |
| 40,046 | | |
| - | | |
| 40,046 | | |
| - | |
Agency
mortgage-backed securities | |
| 142,817 | | |
| - | | |
| 142,817 | | |
| - | |
Loans
held for sale | |
| 4,795 | | |
| - | | |
| 4,795 | | |
| - | |
Derivative
financial instruments | |
| 494 | | |
| - | | |
| 494 | | |
| - | |
(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 | | |
| - | |
Loans
held for sale | |
| 15,533 | | |
| - | | |
| 15,533 | | |
| - | |
Derivative
financial instruments | |
| 1,796 | | |
| - | | |
| 1,796 | | |
| - | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Derivative
financial instruments | |
| (466 | ) | |
| - | | |
| (466 | ) | |
| - | |
The
Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal agency securities,
municipal obligations and agency mortgage-backed securities. 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) | |
2021 | | |
2020 | |
Aggregate
fair value | |
$ | 4,795 | | |
$ | 15,533 | |
Contractual
balance | |
| 4,651 | | |
| 15,151 | |
Gain | |
$ | 144 | | |
$ | 382 | |
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
| |
| | |
| | |
| |
| |
As
of December 31, | |
(Dollars
in thousands) | |
2021 | | |
2020 | | |
2019 | |
Total
change in fair value | |
$ | (836 | ) | |
$ | 848 | | |
$ | (15 | ) |
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 $6.7 million at December 31, 2021 and $12.5 million at December
31, 2020, with an allocated allowance of $504,000 and $266,000, at December 31, 2021 and 2020, 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, 2021 and 2020.
Schedule of Fair Value Measurements On Nonrecurring, Valuation Techniques
(Dollars
in thousands) | |
| | |
| |
| |
| |
| |
Fair
value | | |
Valuation
technique | |
Unobservable
inputs | |
Range | |
As
of December 31, 2021 | |
| | | |
| |
| |
| | |
Impaired
loans: | |
| | | |
| |
| |
| | |
Commercial
loans | |
$ | 5 | | |
Sales
comparison | |
Adjustment
to comparable value | |
| 0 | % |
| |
| | | |
| |
| |
| | |
| |
| | | |
| |
| |
| | |
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 | % |
(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, 2021, 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, 2021 and December 31, 2020, 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, 2021 and
2020:
Schedule of Compliance with Regulatory Capital Requirements for Mortgage Companies
(Dollars
in thousands) | |
| | |
| | |
| | |
| |
| |
| | |
| | |
For
capital | |
| |
Actual | | |
adequacy
purposes | |
| |
Amount | | |
Ratio | | |
Amount | | |
Ratio
(1) | |
As
of December 31, 2021 | |
| | | |
| | | |
| | | |
| | |
Leverage | |
$ | 135,824 | | |
| 10.83 | % | |
$ | 50,181 | | |
| 4.0 | % |
Common
Equity Tier 1 Capital | |
| 114,824 | | |
| 15.00 | % | |
| 53,592 | | |
| 7.0 | % |
Tier
1 Capital | |
| 135,824 | | |
| 17.74 | % | |
| 65,077 | | |
| 8.5 | % |
Total
Risk Based Capital | |
| 144,739 | | |
| 18.91 | % | |
| 80,389 | | |
| 10.5 | % |
| |
| | | |
| | | |
| | | |
| | |
As
of December 31, 2020 | |
| | | |
| | | |
| | | |
| | |
Leverage | |
$ | 121,068 | | |
| 10.70 | % | |
$ | 45,262 | | |
| 4.0 | % |
Common
Equity Tier 1 Capital | |
| 100,068 | | |
| 13.77 | % | |
| 50,866 | | |
| 7.0 | % |
Tier
1 Capital | |
| 121,068 | | |
| 16.66 | % | |
| 61,766 | | |
| 8.5 | % |
Total
Risk Based Capital | |
| 129,983 | | |
| 17.89 | % | |
| 76,300 | | |
| 10.5 | % |
(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, 2021 and 2020:
Schedule of Compliance with Regulatory Capital Requirements Under Banking Regulations
(Dollars
in thousands) | |
| | |
| | |
| | |
| | |
| |
| |
Actual | | |
For
capital adequacy purposes | | |
To
be well-capitalized under regulatory guidelines | |
| |
Amount | | |
Ratio | | |
Amount | | |
Ratio
(1) | | |
Amount | | |
Ratio | |
As
of December 31, 2021 | |
| | |
| | |
| | |
| | |
| | |
| |
Leverage | |
$ | 132,313 | | |
| 10.58 | % | |
$ | 50,040 | | |
| 4.0 | % | |
$ | 62,550 | | |
| 5.0 | % |
Common
Equity Tier 1 Capital | |
| 132,313 | | |
| 17.29 | % | |
| 53,563 | | |
| 7.0 | % | |
| 49,737 | | |
| 6.5 | % |
Tier
1 Capital | |
| 132,313 | | |
| 17.29 | % | |
| 65,041 | | |
| 8.5 | % | |
| 61,215 | | |
| 8.0 | % |
Total
Risk Based Capital | |
| 141,228 | | |
| 18.46 | % | |
| 80,345 | | |
| 10.5 | % | |
| 76,519 | | |
| 10.0 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
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 | % |
(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, 2021 and 2020 and for the years ended December
31, 2021, 2020 and 2019:
Schedule of Condensed Financial Statements
Condensed
Balance Sheets
| |
| | |
| |
(Dollars
in thousands) | |
As
of December 31, | |
| |
2021 | | |
2020 | |
Assets: | |
| | | |
| | |
Cash
and cash equivalents | |
$ | 1,121 | | |
$ | 105 | |
Interest-bearing
deposits at other banks | |
| 214 | | |
| 212 | |
Investment
in subsidiaries | |
| 154,978 | | |
| 146,896 | |
Other | |
| 1,074 | | |
| 1,217 | |
Total
assets | |
$ | 157,387 | | |
$ | 148,430 | |
Liabilities
and stockholders' equity: | |
| | | |
| | |
Subordinated
debentures | |
$ | 21,651 | | |
$ | 21,651 | |
Other | |
| 93 | | |
| 107 | |
Stockholders'
equity | |
| 135,643 | | |
| 126,672 | |
Total
liabilities and stockholders' equity | |
$ | 157,387 | | |
$ | 148,430 | |
Condensed
Statements of Earnings
| |
| | |
| | |
| |
(Dollars
in thousands) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Dividends
from Bank | |
$ | 4,600 | | |
$ | 6,900 | | |
$ | 4,500 | |
Dividends
from nonbank subsidiary | |
| 1,000 | | |
| - | | |
| - | |
Interest
income | |
| 16 | | |
| 21 | | |
| 31 | |
Other
non-interest income | |
| 7 | | |
| 7 | | |
| 7 | |
Interest
expense | |
| (472 | ) | |
| (614 | ) | |
| (970 | ) |
Other
expense, net | |
| (532 | ) | |
| (352 | ) | |
| (304 | ) |
Earnings
before equity in undistributed earnings | |
| 4,619 | | |
| 5,962 | | |
| 3,264 | |
Increase
in undistributed equity of Bank | |
| 13,599 | | |
| 13,087 | | |
| 6,801 | |
(Decrease)
increase in undistributed equity of nonbank subsidiary | |
| (272 | ) | |
| 248 | | |
| 338 | |
Earnings
before income taxes | |
| 17,946 | | |
| 19,297 | | |
| 10,403 | |
Income
tax benefit | |
| (65 | ) | |
| (196 | ) | |
| (259 | ) |
Net
earnings | |
| 18,011 | | |
| 19,493 | | |
| 10,662 | |
Other
comprehensive (loss) income | |
| (5,567 | ) | |
| 4,208 | | |
| 9,230 | |
Total
comprehensive income | |
$ | 12,444 | | |
$ | 23,701 | | |
$ | 19,892 | |
Condensed
Statements of Cash Flows
| |
| | |
| | |
| |
(Dollars
in thousands) | |
Years
ended December 31, | |
| |
2021 | | |
2020 | | |
2019 | |
Cash
flows from operating activities: | |
| | | |
| | | |
| | |
Net
earnings | |
$ | 18,011 | | |
$ | 19,493 | | |
$ | 10,662 | |
Increase
in undistributed equity of subsidiaries | |
| (13,327 | ) | |
| (13,335 | ) | |
| (7,139 | ) |
Other | |
| 130 | | |
| (312 | ) | |
| 23 | |
Net
cash provided by operating activities | |
| 4,814 | | |
| 5,846 | | |
| 3,546 | |
| |
| | | |
| | | |
| | |
Cash
flows from investing activities: | |
| | | |
| | | |
| | |
Net
change in interest-bearing deposits at banks | |
| (2 | ) | |
| 26 | | |
| (1 | ) |
Net
cash (used in) provided by investing activities | |
| (2 | ) | |
| 26 | | |
| (1 | ) |
| |
| | | |
| | | |
| | |
Cash
flows from financing activities: | |
| | | |
| | | |
| | |
Proceeds
from exercise of stock options | |
| 22 | | |
| 42 | | |
| 36 | |
Payment
of dividends | |
| (3,818 | ) | |
| (3,633 | ) | |
| (3,508 | ) |
Purchase
of treasury stock | |
| - | | |
| (2,349 | ) | |
| - | |
Net
cash used in financing activities | |
| (3,796 | ) | |
| (5,940 | ) | |
| (3,472 | ) |
Net
increase (decrease) in cash | |
| 1,016 | | |
| (68 | ) | |
| 73 | |
Cash
at beginning of year | |
| 105 | | |
| 173 | | |
| 100 | |
Cash
at end of year | |
$ | 1,121 | | |
$ | 105 | | |
$ | 173 | |
Dividends
paid by the Company are provided through dividends from the Bank and dividends from nonbank subsidiaries. At December 31, 2021, the Bank
could distribute dividends of up to $26.7 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 might 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 caused our net interest margin to decline. The pandemic
has also impacted supply chains and inventory levels resulting in higher levels of inflation which may lead to higher market interest
rates or a flattening yield curve which could also cause our net interest margin to decline. Higher interest rates may also negatively
impact our loan customers and reduce their ability to repay our loans. At this time, the full impact of the COVID-19 pandemic on the
Company’s financial statements is uncertain.