Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Table Dollar Amounts in Thousands)
Note 1: Basis of Presentation
On July 1, 2019, Richmond Mutual Bancorporation, Inc., a Delaware corporation (“RMB-Delaware”), completed its reorganization from a mutual holding company form of organization to a stock form of organization (“corporate reorganization”). RMB-Delaware, which owned 100% of First Bank Richmond (the “Bank”), was succeeded by Richmond Mutual Bancorporation, Inc., a new Maryland corporation (“RMB-Maryland”). As part of the corporate reorganization, First Mutual of Richmond, Inc.’s (“MHC”) ownership interest in RMB-Delaware was sold in a public offering. Gross proceeds from the offering were $130.3 million. In conjunction with the corporate reorganization, RMB-Maryland contributed 500,000 shares and $1.25 million of cash to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”). Additionally, a “liquidation account” was established for the benefit of certain depositors of the Bank in an amount equal to MHC’s ownership interest in the retained earnings of RMB-Delaware as of December 31, 2017 and March 31, 2019. In certain circumstances, where appropriate, the terms “Company”, “we”, “us” and “our” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) RMB-Maryland and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning.
The costs of the corporate reorganization and the issuance of the common stock have been deducted from the sales proceeds of the offering.
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or note disclosures necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 30, 2020 (SEC File No. 001-38956). However, in the opinion of management, all adjustments which are necessary for a fair presentation of the consolidated financial statements have been included. Those adjustments consist only of normal recurring adjustments. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.
Loans
For all loan classes, the accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. For all loan classes, the entire balance of the loan is considered past due if the minimum payment contractually required to be paid is not received by the contractual due date. For all loan classes, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
The Company charges off residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance, which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value, less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 90 days past due, and charge down to the net realizable value when other secured loans are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off.
For all classes, all interest accrued but not collected for loans that are placed on nonaccrual 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. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
6
When cash payments are received on impaired loans in each loan class, the Company records the payment as interest income unless collection of the remaining recorded principal amount is doubtful, at which time payments are used to reduce the principal balance of the loan. Troubled debt restructured loans recognize interest income on an accrual basis at the renegotiated rate if the loan is in compliance with the modified terms, no principal reduction has been granted and the loan has demonstrated the ability to perform in accordance with the renegotiated terms for a period of at least six months.
Note 2: Accounting Pronouncements
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which provides relief from certain accounting and financial reporting requirements under U.S. GAAP. Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (TDRs) under ASC 310-40 for loan modifications related to the novel coronavirus disease of 2019 (“COVID-19”) pandemic. In addition, on April 7, 2020, a group of banking agencies issued an interagency statement (“Interagency Statement”) for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. The Interagency Statement was originally issued on March 22, 2020, but the banking agencies revised it to address the relationship between their TDR accounting and disclosure guidance and the TDR guidance in Section 4013 of the CARES Act. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. The Interagency Statement indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (e.g., six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government. Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR. The Company adopted this guidance effective March 27, 2020.
In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-08, “Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”). ASU 2020-08 clarifies that the Company should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. ASU 2020-08 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2020-08 to have a material impact on its consolidated financial statements.
The JOBS Act, which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as and has elected to be an emerging growth company under the JOBS Act. An emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief” (ASU 2019-05). This ASU provides transition relief for entities adopting
7
the FASB’s credit losses standard, ASU 2016-13 and allows companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for certain financial instruments. In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (ASU 2019-04). This ASU clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. In October 2019, the FASB voted to extend the implementation of ASU No. 2016-13 for certain financial institutions including smaller reporting companies. As a result, ASU 2016-13 will be effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is evaluating its current expected loss methodology on the loan and investment portfolios to identify the necessary modifications in accordance with this standard. The Company has not quantified the impact of these ASUs. The Company is in the early stages of evaluating its historical data available for use in adoption of the new credit loss standards. Additionally, we are forming an implementation team that will meet on a regular basis to coordinate efforts of our accounting, credit and operations areas. We will continue to evaluate methodologies available to us under the new standard.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of reference Rate Reform on Financial Reporting. This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The ASU permits an entity to make necessary modifications to eligible contracts or transactions without requiring contract remeasurement or reassessment of a previous accounting determination. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of ASU 2020-04 to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 provides that state franchise or similar taxes that are based, at least in part on an entity’s income, be included in an entity’s income tax recognized as income-based taxes. The ASU further clarifies that the effect of any change in tax laws or rates used in the computation of the annual effective tax rate are required to be reflected in the first interim period that includes the enactment date of the legislation. Technical changes to eliminate exceptions to Topic 740 related to intra-period tax allocations for entities with losses from continuing operations, deferred tax liabilities related to change in ownership of foreign entities, and interim-period tax allocations for businesses with losses where the losses are expected to be realized. The amendments in ASU 2019-12 are effective for public business entities with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company does not expect ASU 2019-12 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU contains some technical adjustments related to the fair value disclosure requirements of public companies. Included in this ASU is the additional disclosure requirement of unrealized gains and losses for the period in recurring level 3 fair value disclosures and the range and weighted average of significant unobservable inputs, among other technical changes. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB has issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. For the Company, the amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2020. Based on leases outstanding as of December 31, 2019, the new standard will not have a material impact on the Company’s balance sheet or income statement. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provide entities with an additional (and optional) transition method to adopt the new lease standard. Under this new transition method, an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with current GAAP (Topic 842, Leases). The amendments in ASU 2018-11 also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606) and certain criteria are met.
8
Note 3: Investment Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:
|
|
September 30, 2020
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
U.S. treasury securities
|
$
|
4,999
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,999
|
|
SBA Pools
|
14,907
|
|
|
97
|
|
|
100
|
|
|
14,904
|
|
Federal agencies
|
7,998
|
|
14
|
|
5
|
|
8,007
|
|
State and municipal obligations
|
74,798
|
|
1,898
|
|
263
|
|
76,433
|
|
Mortgage-backed securities -
|
|
|
|
|
|
|
|
|
government-sponsored enterprises
|
|
|
|
|
|
|
|
|
(GSE) residential
|
125,210
|
|
2,370
|
|
86
|
|
127,494
|
|
Equity securities
|
13
|
|
-
|
|
-
|
|
13
|
|
|
227,925
|
|
4,379
|
|
454
|
|
231,850
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
12,315
|
|
329
|
|
-
|
|
12,644
|
|
|
12,315
|
|
329
|
|
-
|
|
12,644
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
$
|
240,240
|
|
$
|
4,708
|
|
$
|
454
|
|
$
|
244,494
|
|
|
December 31, 2019
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,997
|
|
$
|
-
|
|
$
|
6
|
|
$
|
2,991
|
|
SBA Pools
|
14,497
|
|
-
|
|
114
|
|
14,383
|
|
Federal agencies
|
21,765
|
|
-
|
|
119
|
|
21,646
|
|
State and municipal obligations
|
45,635
|
|
357
|
|
152
|
|
45,840
|
|
Mortgage-backed securities -
|
|
|
|
|
|
|
|
|
government-sponsored enterprises
|
|
|
|
|
|
|
|
|
(GSE) residential
|
117,769
|
|
111
|
|
969
|
|
116,911
|
|
Equity securities
|
13
|
|
-
|
|
-
|
|
13
|
|
|
202,676
|
|
468
|
|
1,360
|
|
201,784
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
15,917
|
|
244
|
|
5
|
|
16,156
|
|
|
15,917
|
|
-
|
|
5
|
|
16,156
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
$
|
218,593
|
|
$
|
712
|
|
$
|
1,365
|
|
$
|
217,940
|
9
The amortized cost and fair value of securities at September 30, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
Available for Sale
|
|
Held to Maturity
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
$
|
5,933
|
|
$
|
5,940
|
|
$
|
2,442
|
|
$
|
2,455
|
|
One to five years
|
5,875
|
|
6,081
|
|
6,785
|
|
6,969
|
|
Five to ten years
|
26,270
|
|
26,715
|
|
2,028
|
|
2,141
|
|
After ten years
|
64,624
|
|
65,607
|
|
1,060
|
|
1,079
|
|
|
102,702
|
|
104,343
|
|
12,315
|
|
12,644
|
|
Mortgage-backed securities -
|
|
|
|
|
|
|
|
|
GSE residential
|
125,210
|
|
127,494
|
|
-
|
|
-
|
|
Equity securities
|
13
|
|
13
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
227,925
|
|
$
|
231,850
|
|
$
|
12,315
|
|
$
|
12,644
|
Securities with a carrying value of $99,128,000 and $114,907,000 were pledged at September 30, 2020 and December 31, 2019, respectively, to secure certain deposits and for other purposes as permitted or required by law.
Proceeds from sales of securities available for sale for the three and nine months ended September 30, 2020 were $12,560,000 and $34,738,000, respectively. For the three and nine months ended September 30, 2019, proceeds from sales of securities were $35,247,000 and $57,704,000 respectively. Gross gains were recognized on the sale of securities available-for-sale for the three and nine months ended September 30, 2020 and 2019 of $120,000, $255,000, $104,000 and $170,000, respectively. Gross losses were recognized on the sale of securities available for sale for the three and nine months ended September 30, 2020 of $3,000 and $59,000, respectively. Gross losses were recognized on the sale of securities available for sale for the three and nine months ended September 30, 2019 of $82,000 and $87,000, respectively.
Certain investments in debt securities, as reflected in the table below, are reported in the condensed consolidated financial statements and notes at an amount less than their historical cost. Total fair value of these investments at September 30, 2020 and December 31, 2019 was $42,956,000 and $138,391,000, respectively, which is approximately 18% and 63% of the Company’s aggregated available-for-sale and held-to-maturity investment portfolio at those dates, respectively. These declines primarily resulted from changes in market interest rates since their purchase.
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary.
Should the impairment of any other securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
10
The following tables show the Company’s investments by gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Description of
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Securities
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA Pools
|
$
|
6,618
|
|
$
|
53
|
|
$
|
4,742
|
|
$
|
47
|
|
$
|
11,360
|
|
$
|
100
|
|
Federal agencies
|
995
|
|
5
|
|
-
|
|
-
|
|
995
|
|
5
|
|
State and municipal obligations
|
14,278
|
|
263
|
|
-
|
|
-
|
|
14,278
|
|
263
|
|
Mortgage-backed securities -
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE residential
|
15,449
|
|
84
|
|
874
|
|
2
|
|
16,323
|
|
86
|
|
Total available-for-sale
|
37,340
|
|
405
|
|
5,616
|
|
49
|
|
42,956
|
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired securities
|
$
|
37,340
|
|
$
|
405
|
|
$
|
5,616
|
|
$
|
49
|
|
$
|
42,956
|
|
$
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Description of
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Securities
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,991
|
|
$
|
6
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,991
|
|
$
|
6
|
|
SBA Pools
|
14,262
|
|
114
|
|
-
|
|
-
|
|
14,262
|
|
114
|
|
Federal agencies
|
9,657
|
|
109
|
|
2,990
|
|
10
|
|
12,647
|
|
119
|
|
State and municipal obligations
|
12,606
|
|
130
|
|
2,948
|
|
22
|
|
15,554
|
|
152
|
|
Mortgage-backed securities -
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE residential
|
57,928
|
|
464
|
|
34,344
|
|
505
|
|
92,272
|
|
969
|
|
Total available-for-sale
|
97,444
|
|
823
|
|
40,282
|
|
537
|
|
137,726
|
|
1,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations
|
665
|
|
5
|
|
-
|
|
-
|
|
665
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired securities
|
$
|
98,109
|
|
$
|
828
|
|
$
|
40,282
|
|
$
|
537
|
|
$
|
138,391
|
|
$
|
1,365
|
Federal Agencies. The unrealized losses on the Company’s investments in direct obligations of U.S. federal agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.
Mortgage-Backed Securities – GSE Residential and SBA Pools. The unrealized losses on the Company’s investment in mortgage-backed securities and SBA pools were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.
State and Municipal Obligations. The unrealized losses on the Company’s investments in securities of state and municipal obligations were caused by interest rate changes and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2020.
11
Note 4: Loans, Leases and Allowance
The following table shows the composition of the loan and lease portfolio at September 30, 2020 and December 31, 2019:
|
|
September 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Commercial mortgage
|
$
|
245,651
|
|
$
|
229,410
|
|
Commercial and industrial
|
141,142
|
|
84,549
|
|
Construction and development
|
55,694
|
|
53,426
|
|
Multi-family
|
63,237
|
|
66,002
|
|
Residential mortgage
|
122,456
|
|
131,294
|
|
Home equity
|
6,211
|
|
6,996
|
|
Direct financing leases
|
115,108
|
|
109,592
|
|
Consumer
|
13,101
|
|
13,534
|
|
|
762,600
|
|
694,803
|
|
Less
|
|
|
|
|
Allowance for loan and lease losses
|
9,809
|
|
7,089
|
|
Deferred loan fees
|
2,145
|
|
456
|
|
|
|
|
|
|
|
$
|
750,646
|
|
$
|
687,258
|
The following tables present the activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2020 and 2019.
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
and
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage (1)
|
|
|
Industrial
|
|
|
Mortgage (2)
|
|
|
Leases
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
5,517
|
|
|
$
|
1,710
|
|
|
$
|
308
|
|
|
$
|
838
|
|
|
$
|
148
|
|
|
$
|
8,521
|
|
|
Provision (credit) for losses
|
1,509
|
|
|
(353
|
)
|
|
10
|
|
|
93
|
|
|
41
|
|
|
1,300
|
|
|
Charge-offs
|
-
|
|
|
-
|
|
|
-
|
|
|
(110
|
)
|
|
(26
|
)
|
|
(136
|
)
|
|
Recoveries
|
4
|
|
|
30
|
|
|
17
|
|
|
70
|
|
|
3
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
7,030
|
|
|
$
|
1,387
|
|
|
$
|
335
|
|
|
$
|
891
|
|
|
$
|
166
|
|
|
$
|
9,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
4,564
|
|
|
$
|
1,852
|
|
|
$
|
109
|
|
|
$
|
426
|
|
|
$
|
138
|
|
|
$
|
7,089
|
|
|
Provision (credit) for losses
|
2,426
|
|
|
(535
|
)
|
|
220
|
|
|
662
|
|
|
57
|
|
|
2,830
|
|
|
Charge-offs
|
-
|
|
|
-
|
|
|
(35
|
)
|
|
(300
|
)
|
|
(47
|
)
|
|
(382
|
)
|
|
Recoveries
|
40
|
|
|
70
|
|
|
41
|
|
|
103
|
|
|
18
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
7,030
|
|
|
$
|
1,387
|
|
|
$
|
335
|
|
|
$
|
891
|
|
|
$
|
166
|
|
|
$
|
9,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Commercial mortgage includes commercial and multifamily real estate loans.
(2) Residential mortgage includes one- to four-family and home equity loans.
12
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
and
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage (1)
|
|
|
Industrial
|
|
|
Mortgage (2)
|
|
|
Leases
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
3,892
|
|
|
$
|
1,768
|
|
|
$
|
122
|
|
|
$
|
385
|
|
|
$
|
114
|
|
|
$
|
6,281
|
|
|
Provision (credit) for losses
|
586
|
|
|
11
|
|
|
(34
|
)
|
|
71
|
|
|
71
|
|
|
705
|
|
|
Charge-offs
|
(14
|
)
|
|
-
|
|
|
(6
|
)
|
|
(107
|
)
|
|
(51
|
)
|
|
(178
|
)
|
|
Recoveries
|
4
|
|
|
2
|
|
|
22
|
|
|
54
|
|
|
6
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
4,468
|
|
|
$
|
1,781
|
|
|
$
|
104
|
|
|
$
|
403
|
|
|
$
|
140
|
|
|
$
|
6,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
3,147
|
|
|
$
|
1,817
|
|
|
$
|
139
|
|
|
$
|
389
|
|
|
$
|
108
|
|
|
$
|
5,600
|
|
|
Provision (credit) for losses
|
1,321
|
|
|
206
|
|
|
(41
|
)
|
|
121
|
|
|
108
|
|
|
1,715
|
|
|
Charge-offs
|
(14
|
)
|
|
(250
|
)
|
|
(42
|
)
|
|
(284
|
)
|
|
(100
|
)
|
|
(690
|
)
|
|
Recoveries
|
14
|
|
|
8
|
|
|
48
|
|
|
177
|
|
|
24
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
$
|
4,468
|
|
|
$
|
1,781
|
|
|
$
|
104
|
|
|
$
|
403
|
|
|
$
|
140
|
|
|
$
|
6,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Commercial mortgage includes commercial and multifamily real estate loans.
(2) Residential mortgage includes one- to four-family and home equity loans.
The following tables present the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on portfolio segment and impairment method as of September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
and
|
|
Residential
|
|
|
|
|
|
|
|
|
Mortgage (1)
|
|
Industrial
|
|
Mortgage (2)
|
|
Leases
|
|
Consumer
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
150
|
|
$
|
52
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
202
|
|
Collectively evaluated for impairment
|
6,880
|
|
1,335
|
|
335
|
|
891
|
|
166
|
|
9,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30
|
$
|
7,030
|
|
$
|
1,387
|
|
$
|
335
|
|
$
|
891
|
|
$
|
166
|
|
$
|
9,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
835
|
|
$
|
507
|
|
$
|
314
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,656
|
|
Collectively evaluated for impairment
|
398,576
|
|
127,617
|
|
102,727
|
|
115,108
|
|
16,916
|
|
760,944
|
|
Ending balance:September 30
|
$
|
399,411
|
|
$
|
128,124
|
|
$
|
103,041
|
|
$
|
115,108
|
|
$
|
16,916
|
|
$
|
762,600
|
(1) Commercial mortgage includes commercial and multifamily real estate loans.
(2) Residential mortgage includes one- to four-family and home equity loans.
|
|
December 31, 2019
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
and
|
|
Residential
|
|
|
|
|
|
|
|
|
Mortgage (1)
|
|
Industrial
|
|
Mortgage (2)
|
|
Leases
|
|
Consumer
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
-
|
|
$
|
202
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
202
|
|
Collectively evaluated for impairment
|
4,564
|
|
1,650
|
|
109
|
|
426
|
|
138
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
$
|
4,564
|
|
$
|
1,852
|
|
$
|
109
|
|
$
|
426
|
|
$
|
138
|
|
$
|
7,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
803
|
|
$
|
694
|
|
$
|
347
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,844
|
|
Collectively evaluated for impairment
|
377,494
|
|
73,920
|
|
114,061
|
|
109,592
|
|
17,892
|
|
692,959
|
|
Ending balance:December 31
|
$
|
378,297
|
|
$
|
74,614
|
|
$
|
114,408
|
|
$
|
109,592
|
|
$
|
17,892
|
|
$
|
694,803
|
(1) Commercial mortgage includes commercial and multifamily real estate loans.
(2) Residential mortgage includes one- to four-family and home equity loans.
13
The Company rates all loans and leases by credit quality using the following designations:
Grade 1 – Exceptional
Exceptional loans and leases are top-quality loans to individuals whose financial credentials are well known to the Company. These loans and leases have excellent sources of repayment, are well documented and/or virtually free of risk (i.e., CD secured loans).
Grade 2 – Quality Loans and Leases
These loans and leases have excellent sources of repayment with no identifiable risk of collection, and they conform in all respects to Company policy and Indiana Department of Financial Institutions (“IDFI”) and Federal Deposit Insurance Corporation (“FDIC”) regulations. Documentation exceptions are minimal or are in the process of being corrected and are not of a type that could subsequently expose the Company to risk of loss.
Grade 3 – Acceptable Loans
This category is for “average” quality loans and leases. These loans and leases have adequate sources of repayment with little identifiable risk of collection and they conform to Company policy and IDFI/FDIC regulations.
Grade 4 – Acceptable but Monitored
Loans and leases in this category may have a greater than average risk due to financial weakness or uncertainty but do not appear to require classification as special mention or substandard loans. Loans and leases rated “4” need to be monitored on a regular basis to ascertain that the reasons for placing them in this category do not advance or worsen.
Grade 5 – Special Mention
Loans and leases in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or in the Company’s credit position at some future date. Special Mention loans and leases are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. This special mention rating is designed to identify a specific level of risk and concern about an asset’s quality. Although a special mention loan or leases has a higher probability of default than a pass rated loan or lease, its default is not imminent.
Grade 6 – Substandard
Loans and leases in this category are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans and leases so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Substandard loans and leases have a high probability of payment default, or they have other well-defined weaknesses. Such loans and leases have a distinct potential for loss; however, an individual loan’s or lease’s potential for loss does not have to be distinct for the loan or lease to be rated substandard.
The following are examples of situations that might cause a loan or lease to be graded a “6”:
·Cash flow deficiencies (losses) jeopardize future loan or lease payments.
·Sale of non-collateral assets has become a primary source of loan or lease repayment.
·The relationship has deteriorated to the point that sale of collateral is now the Company’s primary source of repayment, unless this was the original source of loan or lease repayment.
·The borrower is bankrupt or for any other reason future repayment is dependent on court action.
14
Grade 7 – Doubtful
A loan or lease classified as doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. A doubtful loan or lease has a high probability of total or substantial loss. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, nonaccrual accounting treatment will be required for doubtful loans and leases.
Grade 8 – Loss
Loans and leases classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan or lease even though partial recovery may be effected in the future.
The risk characteristics of each loan and lease portfolio segment are as follows:
Commercial and Industrial
Commercial and industrial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may include a personal guarantee. Short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial Mortgage including Construction
Loans in this segment include commercial loans, commercial construction loans, and multi-family loans. This segment also includes loans secured by 1-4 family residences which were made for investment purposes. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The characteristics of properties securing the Company’s commercial real estate portfolio are diverse, but with geographic location almost entirely in the Company’s market area. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In general, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate versus nonowner-occupied loans.
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Residential, Brokered and Consumer
Residential, brokered and consumer loans consist of three segments – residential mortgage loans, brokered mortgage loans and personal loans. For residential mortgage loans that are secured by 1-4 family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Brokered mortgages are purchased residential mortgage loans meeting the Company’s criteria established
15
for originating residential mortgage loans. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer personal loans are secured by consumer personal assets, such as automobiles or recreational vehicles. Some consumer personal loans are unsecured, such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Leases
Lease financing consists of direct financing leases and are used by commercial customers to finance capital purchases of equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant’s financial condition and ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved.
The following tables present the credit risk profile of the Company’s loan and lease portfolio based on rating category and payment activity as of September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
|
Commercial
|
Construction
|
|
|
|
|
|
|
|
|
Commercial
|
and
|
and
|
Multi-
|
Residential
|
Home
|
|
|
|
|
|
Mortgage
|
Industrial
|
Development
|
Family
|
Mortgage
|
Equity
|
Leases
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4Pass
|
$
|
236,663
|
$
|
134,410
|
$
|
55,694
|
$
|
63,237
|
$
|
119,342
|
$
|
6,066
|
$
|
115,024
|
$
|
13,093
|
$
|
743,529
|
|
5 Special Mention
|
7,416
|
3,912
|
-
|
-
|
167
|
61
|
-
|
-
|
11,556
|
|
6 Substandard
|
1,572
|
2,820
|
-
|
-
|
2,947
|
84
|
18
|
8
|
7,449
|
|
7 Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
66
|
-
|
66
|
|
8 Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
245,651
|
$
|
141,142
|
$
|
55,694
|
$
|
63,237
|
$
|
122,456
|
$
|
6,211
|
$
|
115,108
|
$
|
13,101
|
$
|
762,600
|
|
|
December 31, 2019
|
|
|
|
Commercial
|
Construction
|
|
|
|
|
|
|
|
|
Commercial
|
and
|
and
|
Multi-
|
Residential
|
Home
|
|
|
|
|
|
Mortgage
|
Industrial
|
Development
|
Family
|
Mortgage
|
Equity
|
Leases
|
Consumer
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Pass
|
$
|
220,240
|
$
|
75,814
|
$
|
53,426
|
$
|
66,002
|
$
|
127,888
|
$
|
6,871
|
$
|
109,424
|
$
|
13,519
|
$
|
673,184
|
|
5 Special Mention
|
7,489
|
5,731
|
-
|
-
|
189
|
64
|
-
|
-
|
13,473
|
|
6 Substandard
|
1,681
|
3,004
|
-
|
-
|
3,217
|
61
|
94
|
15
|
8,072
|
|
7 Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
74
|
-
|
74
|
|
8 Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
229,410
|
$
|
84,549
|
$
|
53,426
|
$
|
66,002
|
$
|
131,294
|
$
|
6,996
|
$
|
109,592
|
$
|
13,534
|
$
|
694,803
|
The following tables present the Company’s loan and lease portfolio aging analysis of the recorded investment in loans and leases as of September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
Delinquent Loans
|
|
|
|
Total
Portfolio
|
|
Total Loans
and Leases
|
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days and
|
|
Total Past
|
|
|
|
Loans and
|
|
> 90 Days
|
|
|
Past Due
|
|
Past Due
|
|
Over
|
|
Due
|
|
Current
|
|
Leases
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
|
$
|
-
|
|
$
|
-
|
|
$
|
76
|
|
$
|
76
|
|
$
|
245,575
|
|
$
|
245,651
|
|
$
|
-
|
|
Commercial and industrial
|
65
|
|
303
|
|
452
|
|
820
|
|
140,322
|
|
141,142
|
|
-
|
|
Construction and development
|
-
|
|
-
|
|
-
|
|
-
|
|
55,694
|
|
55,694
|
|
-
|
|
Multi-family
|
-
|
|
-
|
|
-
|
|
-
|
|
63,237
|
|
63,237
|
|
-
|
|
Residential mortgage
|
972
|
|
604
|
|
2,447
|
|
4,023
|
|
118,433
|
|
122,456
|
|
2,320
|
|
Home equity
|
69
|
|
-
|
|
41
|
|
110
|
|
6,101
|
|
6,211
|
|
41
|
|
Leases
|
59
|
|
30
|
|
44
|
|
133
|
|
114,975
|
|
115,108
|
|
-
|
|
Consumer
|
101
|
|
14
|
|
8
|
|
123
|
|
12,978
|
|
13,101
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
1,266
|
|
$
|
951
|
|
$
|
3,068
|
|
$
|
5,285
|
|
$
|
757,315
|
|
$
|
762,600
|
|
$
|
2,369
|
16
|
|
December 31, 2019
|
|
|
Delinquent Loans
|
|
|
|
Total
Portfolio
|
|
Total Loans
and Leases
|
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days and
|
|
Total Past
|
|
|
|
Loans and
|
|
> 90 Days
|
|
|
Past Due
|
|
Past Due
|
|
Over
|
|
Due
|
|
Current
|
|
Leases
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
|
$
|
217
|
|
$
|
-
|
|
$
|
184
|
|
$
|
401
|
|
$
|
229,009
|
|
$
|
229,410
|
|
$
|
-
|
|
Commercial and industrial
|
220
|
|
1,092
|
|
438
|
|
1,750
|
|
82,799
|
|
84,549
|
|
3
|
|
Construction and development
|
-
|
|
257
|
|
249
|
|
506
|
|
52,920
|
|
53,426
|
|
249
|
|
Multi-family
|
-
|
|
-
|
|
-
|
|
-
|
|
66,002
|
|
66,002
|
|
-
|
|
Residential mortgage
|
762
|
|
240
|
|
2,452
|
|
3,454
|
|
127,840
|
|
131,294
|
|
2,256
|
|
Home equity
|
189
|
|
36
|
|
15
|
|
240
|
|
6,756
|
|
6,996
|
|
15
|
|
Leases
|
108
|
|
29
|
|
79
|
|
216
|
|
109,376
|
|
109,592
|
|
49
|
|
Consumer
|
271
|
|
35
|
|
15
|
|
321
|
|
13,213
|
|
13,534
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
$
|
1,767
|
|
$
|
1,689
|
|
$
|
3,432
|
|
$
|
6,888
|
|
$
|
687,915
|
|
$
|
694,803
|
|
$
|
2,587
|
The following tables present the Company’s impaired loans and specific valuation allowance at September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
|
|
Unpaid
|
|
|
|
|
Recorded
|
|
Principal
|
|
Specific
|
|
|
Balance
|
|
Balance
|
|
Allowance
|
|
|
|
|
|
|
|
|
Impaired loans without a specific
|
|
|
|
|
|
|
valuation allowance
|
|
|
|
|
|
|
Commercial mortgage
|
$
|
210
|
|
$
|
255
|
|
$
|
-
|
|
Commercial and industrial
|
452
|
|
781
|
|
-
|
|
Residential mortgage
|
259
|
|
499
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
921
|
|
$
|
1,535
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Impaired loans with a specific
|
|
|
|
|
|
|
valuation allowance
|
|
|
|
|
|
|
Commercial mortgage
|
$
|
625
|
|
$
|
625
|
|
$
|
150
|
|
Commercial and industrial
|
|
55
|
|
|
65
|
|
|
52
|
|
Residential mortgage
|
55
|
|
55
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
735
|
|
$
|
745
|
|
$
|
202
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
|
|
|
|
|
Commercial mortgage
|
$
|
835
|
|
$
|
880
|
|
$
|
150
|
|
Commercial and industrial
|
507
|
|
846
|
|
52
|
|
Residential mortgage
|
314
|
|
554
|
|
-
|
|
|
|
|
|
|
|
|
Total impaired loans
|
$
|
1,656
|
|
$
|
2,280
|
|
$
|
202
|
|
|
|
|
|
|
|
17
|
|
December 31, 2019
|
|
|
|
|
Unpaid
|
|
|
|
|
Recorded
|
|
Principal
|
|
Specific
|
|
|
Balance
|
|
Balance
|
|
Allowance
|
|
|
|
|
|
|
|
|
Impaired loans without a specific
|
|
|
|
|
|
|
valuation allowance
|
|
|
|
|
|
|
Commercial mortgage
|
$
|
803
|
|
$
|
1,256
|
|
$
|
-
|
|
Commercial and industrial
|
435
|
|
3,220
|
|
-
|
|
Residential mortgage
|
347
|
|
614
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
1,585
|
|
$
|
5,090
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Impaired loans with a specific
|
|
|
|
|
|
|
valuation allowance
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
259
|
|
$
|
266
|
|
$
|
202
|
|
|
|
|
|
|
|
|
|
$
|
259
|
|
$
|
266
|
|
$
|
202
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
|
|
|
|
|
Commercial mortgage
|
$
|
803
|
|
$
|
1,256
|
|
$
|
-
|
|
Commercial and industrial
|
694
|
|
3,486
|
|
202
|
|
Residential mortgage
|
347
|
|
614
|
|
-
|
|
|
|
|
|
|
|
|
Total impaired loans
|
$
|
1,844
|
|
$
|
5,356
|
|
$
|
202
|
|
|
|
|
|
|
|
The following tables present the Company’s average investment in impaired loans and interest income recognized for the three and nine months ended September 30, 2020 and 2019.
|
|
|
Average
|
|
|
|
|
|
Investment in
|
|
Interest
|
|
|
|
Impaired
|
|
Income
|
|
|
|
Loans
|
|
Recognized
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020:
|
|
|
|
|
|
Total impaired loans
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
841
|
|
$
|
12
|
|
Commercial and industrial
|
|
488
|
|
5
|
|
Residential mortgage
|
|
269
|
|
6
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
1,598
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Investment in
|
|
Interest
|
|
|
|
Impaired
|
|
Income
|
|
|
|
Loans
|
|
Recognized
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020:
|
|
|
|
|
|
Total impaired loans
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
819
|
|
$
|
30
|
|
Commercial and industrial
|
|
586
|
|
33
|
|
Residential mortgage
|
|
298
|
|
12
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
1,703
|
|
$
|
75
|
|
|
|
|
|
|
18
|
|
|
Average
|
|
|
|
|
|
Investment in
|
|
Interest
|
|
|
|
Impaired
|
|
Income
|
|
|
|
Loans
|
|
Recognized
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019:
|
|
|
|
|
|
Total impaired loans
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
684
|
|
$
|
10
|
|
Commercial and industrial
|
|
858
|
|
11
|
|
Residential mortgage
|
|
363
|
|
6
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
1,905
|
|
$
|
27
|
|
|
|
Average
|
|
|
|
|
|
Investment in
|
|
Interest
|
|
|
|
Impaired
|
|
Income
|
|
|
|
Loans
|
|
Recognized
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019:
|
|
|
|
|
|
Total impaired loans
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
706
|
|
$
|
32
|
|
Commercial and industrial
|
|
950
|
|
51
|
|
Residential mortgage
|
|
375
|
|
14
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
2,031
|
|
$
|
97
|
The following table presents the Company’s nonaccrual loans and leases at September 30, 2020 and December 31, 2019:
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Commercial mortgage
|
|
$
|
211
|
|
$
|
342
|
|
Commercial and industrial
|
|
507
|
|
494
|
|
Residential mortgage
|
|
219
|
|
315
|
|
Leases
|
|
66
|
|
74
|
|
|
|
|
|
|
|
|
|
$
|
1,003
|
|
$
|
1,225
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2020 and 2019, there were no newly classified troubled debt restructured loans or leases (“TDRs”). For the three and nine months ended September 30, 2020 and 2019, the Company recorded no charge-offs related to TDRs. As of both September 30, 2020 and December 31, 2019, TDRs had a related allowance of $52,000. During the three and nine months ended September 30, 2020, there were no TDRs for which there was a payment default within the first 12 months of the modification.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act if they are less than 30 days past due on their contractual payments at the time a modification program is implemented.
In March 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. As of September 30, 2020, the Company had 70 loan and lease modifications outstanding related to the COVID-19 pandemic with an outstanding loan balance totaling $35.3 million in accordance with the CARES Act. Accordingly, the Company does not account for such loan modifications as TDRs. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.
19
At September 30, 2020 and December 31, 2019, the balance of real estate owned includes $32,000 and $0, respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At September 30, 2020 and December 31, 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceeds were in process was $283,000 and $190,000, respectively.
The following lists the components of the net investment in direct financing leases:
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments to be received
|
|
|
|
$
|
126,853
|
|
|
$
|
120,570
|
|
|
Initial direct costs
|
|
|
|
6,027
|
|
|
5,720
|
|
|
|
|
|
|
132,880
|
|
|
126,290
|
|
|
Less: Unearned income
|
|
|
|
(17,772
|
)
|
|
(16,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net investment in direct finance leases
|
|
|
$
|
115,108
|
|
|
$
|
109,592
|
|
|
|
|
|
|
|
|
|
|
|
Leases serviced by First Bank Richmond for the benefit of others totaled approximately $189,000 and $715,000 at September 30, 2020 and December 31, 2019, respectively. Additionally, certain leases have been sold with partial recourse. First Bank Richmond estimates and records its obligation based upon historical loss percentages. At September 30, 2020 and December 31, 2019, First Bank Richmond has recorded a recourse obligation on leases sold with recourse of $0, and has a maximum exposure of $411,000 for these leases.
The following table summarizes the future minimum lease payments receivable subsequent to September 30, 2020:
|
|
|
|
|
2020
|
$
|
13,643
|
|
2021
|
45,969
|
|
2022
|
32,333
|
|
2023
|
20,299
|
|
2024
|
11,089
|
|
Thereafter
|
3,520
|
|
|
|
|
|
$
|
126,853
|
Note 5: Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1Quoted prices in active markets for identical assets or liabilities
Level 2Observable 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 for substantially the full term of the assets or liabilities
Level 3Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities
20
Recurring Measurements
The following tables present the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019:
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
Fair
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
4,999
|
|
$
|
-
|
|
$
|
4,999
|
|
$
|
-
|
|
SBA Pools
|
|
14,904
|
|
|
-
|
|
|
14,904
|
|
|
-
|
|
Federal agencies
|
8,007
|
|
-
|
|
8,007
|
|
-
|
|
State and municipal obligations
|
76,433
|
|
-
|
|
76,433
|
|
-
|
|
Mortgage-backed securities -
|
|
|
|
|
|
|
|
|
GSE residential
|
127,494
|
|
-
|
|
127,494
|
|
-
|
|
Equity securities
|
13
|
|
13
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
231,850
|
|
$
|
13
|
|
$
|
231,837
|
|
$
|
-
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
Fair
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
$
|
2,991
|
|
$
|
-
|
|
$
|
2,991
|
|
$
|
-
|
|
SBA Pools
|
14,383
|
|
-
|
|
14,383
|
|
-
|
|
Federal agencies
|
21,646
|
|
-
|
|
21,646
|
|
-
|
|
State and municipal obligations
|
45,840
|
|
-
|
|
45,840
|
|
-
|
|
Mortgage-backed securities -
|
|
|
|
|
|
|
|
|
GSE residential
|
116,911
|
|
-
|
|
116,911
|
|
-
|
|
Equity securities
|
13
|
|
13
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
201,784
|
|
$
|
13
|
|
$
|
201,771
|
|
$
|
-
|
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the nine months ended September 30, 2020.
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy, which includes equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include agency securities, obligations of state and political subdivisions, and mortgage-backed securities. Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on the investment securities’ relationship to other
21
benchmark quoted investment securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
Nonrecurring Measurements
The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019:
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
Fair
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
Impaired loans, collateral dependent
|
$
|
533
|
|
$
|
-
|
|
$
|
-
|
|
$
|
533
|
|
Mortgage-servicing rights
|
1,505
|
|
-
|
|
-
|
|
1,505
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Impaired loans, collateral dependent
|
$
|
57
|
|
$
|
-
|
|
$
|
-
|
|
$
|
57
|
|
Mortgage-servicing rights
|
1,033
|
|
-
|
|
-
|
|
1,033
|
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
Collateral-Dependent Impaired Loans, Net of ALLL
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results.
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
Mortgage-Servicing Rights
Mortgage-servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage-servicing rights are classified within Level 3 of the hierarchy.
Mortgage-servicing rights are tested for impairment on a quarterly basis based on an independent valuation. The valuation is reviewed by management for accuracy and for potential impairment.
22
Unobservable (Level 3) Inputs
The following tables present the fair value measurement of assets recognized in the accompanying consolidated balance sheets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2020 and December 31, 2019:
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
September 30,
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
2020
|
|
Technique
|
|
Inputs
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent
|
$
|
533
|
|
Appraisal
|
|
Marketability
|
|
0% - 12%
|
|
impaired loans
|
|
|
|
|
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-servicing rights
|
$
|
1,505
|
|
Discounted
|
|
Discount rate
|
|
10%
|
|
|
|
|
cash flow
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
December 31,
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
2019
|
|
Technique
|
|
Inputs
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
Collateral-dependent
|
$
|
57
|
|
Appraisal
|
|
Marketability
|
|
0% - 75%
|
|
impaired loans
|
|
|
|
|
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-servicing rights
|
$
|
1,033
|
|
Discounted
|
|
Discount rate
|
|
10%
|
|
|
|
|
cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Fair Value of Financial Instruments
The following tables present estimated fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019.
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
Carrying
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
16,698
|
|
$
|
16,698
|
|
$
|
-
|
|
$
|
-
|
|
Available-for-sale securities
|
231,850
|
|
13
|
|
231,837
|
|
-
|
|
Held-to-maturity securities
|
12,315
|
|
-
|
|
12,644
|
|
-
|
|
Loans and leases receivable, net
|
750,646
|
|
-
|
|
-
|
|
773,331
|
|
Federal Reserve and FHLB stock
|
9,170
|
|
-
|
|
9,170
|
|
-
|
|
Interest receivable
|
4,830
|
|
-
|
|
4,830
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
663,057
|
|
-
|
|
665,623
|
|
-
|
|
FHLB advances
|
176,000
|
|
-
|
|
183,716
|
|
-
|
|
Interest payable
|
242
|
|
-
|
|
242
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
Carrying
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
|
Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
40,597
|
|
$
|
40,597
|
|
$
|
-
|
|
$
|
-
|
|
Available-for-sale securities
|
201,784
|
|
13
|
|
201,771
|
|
-
|
|
Held-to-maturity securities
|
15,917
|
|
-
|
|
16,156
|
|
-
|
|
Loans and leases receivable, net
|
687,258
|
|
-
|
|
-
|
|
687,789
|
|
Federal Reserve and FHLB stock
|
7,600
|
|
-
|
|
7,600
|
|
-
|
|
Interest receivable
|
3,052
|
|
-
|
|
3,052
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
617,219
|
|
-
|
|
619,635
|
|
-
|
|
FHLB advances
|
154,000
|
|
-
|
|
155,304
|
|
-
|
|
Interest payable
|
297
|
|
-
|
|
297
|
|
-
|
|
|
|
|
|
|
|
|
|
24
Note 6: Earnings per Share
Basic EPS is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted EPS includes the dilutive effect of additional potential common shares from stock compensation awards, but excludes awards considered participating securities. ESOP shares are not considered outstanding for EPS until they are earned. The following table presents the computation of basic and diluted EPS for the periods indicated:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2020
|
|
September 30, 2020
|
|
|
|
|
|
|
Net income
|
$
|
2,531,553
|
|
$
|
7,489,876
|
|
Shares outstanding for Basic EPS:
|
|
|
|
|
Average shares outstanding
|
13,313,399
|
|
13,455,031
|
|
Less: average unearned ESOP Shares
|
1,032,367
|
|
1,045,788
|
|
Shares outstanding for Basic EPS
|
12,281,032
|
|
12,409,243
|
|
|
|
|
|
|
Additional Dilutive Shares
|
-
|
|
-
|
|
|
|
|
|
|
Shares outstanding for Diluted EPS
|
12,281,032
|
|
12,409,243
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
$
|
0.21
|
|
$
|
0.60
|
|
Diluted Earnings Per Share
|
$
|
0.21
|
|
$
|
0.60
|
|
|
For the Period
|
|
|
|
July 2, 2019 to
|
|
|
July 2, 2019 to September 30, 2019
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(3,250,335
|
)
|
|
Shares outstanding for Basic EPS:
|
|
|
|
Average shares outstanding
|
13,526,625
|
|
|
Less: average unearned ESOP Shares
|
1,052,804
|
|
|
Shares outstanding for Basic EPS
|
12,473,821
|
|
|
|
|
|
|
Additional Dilutive Shares
|
-
|
|
|
|
|
|
|
Shares outstanding for Diluted EPS
|
12,473,821
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (loss) Per Share
|
$
|
(0.26
|
)
|
|
Diluted Earnings (loss) Per Share
|
$
|
(0.26
|
)
|
Note 7: Employee Stock Ownership Plan
As part of the corporate reorganization and related stock offering, the Company established an Employee Stock Ownership Plan (ESOP) covering substantially all employees. The ESOP acquired 1,082,130 shares of Company common stock at an average of $13.59 per share on the open market with funds provided by a loan from the Company. Accordingly, $14,706,000 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid.
25
ESOP expense for the three months ended September 30, 2020 and 2019 was $151,548 and $121,000, respectively. ESOP expense for the nine months ended September 30, 2020 was $481,000 and $121,000, respectively.
|
|
September 30, 2020
|
|
September 30, 2019
|
|
|
|
|
|
|
Earned ESOP shares
|
63,125
|
|
9,018
|
|
Unearned ESOP shares
|
1,019,005
|
|
1,073,112
|
|
Total ESOP shares
|
1,082,130
|
|
1,082,130
|
|
|
|
|
|
|
Quoted per share price
|
$
|
10.58
|
|
$
|
13.99
|
|
Fair value of earned shares
|
$
|
667,863
|
|
$
|
126,162
|
|
Fair value of unearned shares
|
$
|
10,781,073
|
|
$
|
15,012,837
|
Note 8: Benefit Plans
The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “DB Plan”), an industry-wide, tax-qualified defined-benefit pension plan. As previously disclosed, the Company has frozen and intends to terminate the Bank’s participation in the DB Plan, which will require it to pay an amount based on the underfunded status of the plan. As of September 30, 2020, the Company has accrued $17.5 million for this expense. The actual termination expense of the DB Plan may be higher or lower than the amount currently accrued for by the Company depending on a number of factors, including but not limited to the interest rate environment and the valuation of plan assets. Due to the current low interest rate environment, terminating the DB Plan at this time would require the Company to incur a substantial additional expense, in the range of approximately $8.0 million to $10.0 million, over and above the amount presently accrued. As a result, the Company’s Board of Directors will continue to monitor and evaluate the timing of, and costs associated with, termination of the DB Plan. Any additional expenses associated with the termination of the DB Plan will negatively impact our results of operations in the future.
Note 9: Subsequent Event
Subsequent to September 30, 2020, the Company completed its previously announced stock repurchase program, repurchasing the remaining 94,232 shares at an average price of $11.07 per share. On October 21, 2020, the Board of Directors of the Company authorized a second stock repurchase program for up to 664,969 shares, or approximately 5%, of its outstanding shares.
26
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management’s discussion and analysis of financial condition of the Richmond Mutual Bancorporation, Inc. (the “Company”) at September 30, 2020, and the consolidated results of operations for the three and nine month periods ended September 30, 2020, compared to the same periods in 2019 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto appearing in Part I, Item 1, of this Form 10-Q.
The terms “we,” “our,” “us,” or the “Company” refer to Richmond Mutual Bancorporation, Inc. and its consolidated subsidiary, First Bank Richmond, which we sometimes refer to as the “Bank,” unless the context otherwise requires.
Cautionary Note Regarding Forward-Looking Statements
Certain matters in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of words such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
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You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These forward-looking statements are based on our current beliefs and expectations and, by their nature, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
Important factors that could cause our actual results to differ materially from the results anticipated or projected, include, but are not limited to, the following:
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the effect of the novel coronavirus disease of 2019 (“COVID-19”), including on the Company’s credit quality and business operations, as well as its impact on general economic and financial market conditions and other uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, and consumer and corporate clients, including economic activity, employment levels and market liquidity;
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general economic conditions, either nationally or in our market areas, that are worse than expected;
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changes in the level and direction of loan or lease delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan and lease losses;
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our ability to access cost-effective funding;
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fluctuations in real estate values and both residential and commercial real estate market conditions;
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risks associated with the relatively unseasoned nature of a significant portion of our loan portfolio;
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demand for loans and deposits in our market area;
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27
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our ability to implement and change our business strategies;
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competition among depository and other financial institutions and equipment financing companies;
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the impact of the proposed termination of our defined benefit plan;
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the deductibility of our contribution to the charitable foundation for tax purposes;
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inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans and leases we have made and make;
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adverse changes in the securities or secondary mortgage markets;
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changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements, including as a result of Basel III;
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changes in the quality or composition of our loan, lease or investment portfolios;
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technological changes that may be more difficult or expensive than expected;
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the inability of third-party providers to perform as expected;
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our ability to manage market risk, credit risk and operational risk in the current economic environment;
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our ability to enter new markets successfully and capitalize on growth opportunities;
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our ability to successfully integrate into our operations any assets, liabilities, customers, systems and management personnel we may acquire and our ability to realize related revenue synergies and cost savings within expected time frames, and any goodwill charges related thereto;
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changes in consumer spending, borrowing and savings habits;
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changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
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our ability to retain key employees;
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our compensation expense associated with equity allocated or awarded to our employees;
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changes in the financial condition, results of operations or future prospects of issuers of securities that we own;
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other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services including the Coronavirus Aid, Relief, and Economic Security Act of 2020 ("CARES Act") ; and
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the other risks detailed in this report and from time to time in our other filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”).
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We undertake no obligation to publicly update or revise any forward-looking statements included in this report or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this report might not occur and you should not put undue reliance on any forward-looking statements.
28
Overview
On February 6, 2019, the Board of Directors of First Mutual of Richmond, Inc. (the “MHC”), the parent mutual holding company of Richmond Mutual Bancorporation-Delaware, adopted a Plan of Reorganization and Stock Offering (the “Plan”). The Plan was approved by the Board of Governors of the Federal Reserve System (the “FRB”) and by the Indiana Department of Financial Institutions (the “IDFI”), as well as the voting members of the MHC at a special meeting of members held on June 19, 2019. Pursuant to the Plan, upon completion of the transaction, the MHC would convert from a mutual holding company to the stock holding company corporate structure, the MHC and Richmond Mutual Bancorporation-Delaware would cease to exist, and First Bank Richmond would become a wholly owned subsidiary of the Company, a newly formed Maryland corporation. The transaction was completed on July 1, 2019. In connection with the related stock offering, which was also completed on July 1, 2019, the Company sold 13,026,625 shares of common stock at $10.00 per share, for gross offering proceeds of approximately $130.3 million in its subscription offering and contributed 500,000 shares and $1.25 million to a newly formed charitable foundation, First Bank Richmond, Inc. Community Foundation (the “Foundation”).
In certain circumstances, where appropriate, the terms “we”, “us”, “our” and the “Company” refer collectively to (i) RMB-Delaware and First Bank Richmond with respect to discussions in this document involving matters occurring prior to completion of the corporate reorganization and (ii) the Company and First Bank Richmond with respect to discussions in this document involving matters occurring post-corporate reorganization, in each case unless the context indicates another meaning.
The Company is regulated by the FRB and the IDFI. Our corporate office is located at 31 North 9th Street, Richmond, Indiana, and our telephone number is (765) 962-2581.
First Bank Richmond is an Indiana state-chartered commercial bank headquartered in Richmond, Indiana. The Bank was originally established in 1887 as an Indiana state-chartered mutual savings and loan association and in 1935 converted to a federal mutual savings and loan association, operating under the name First Federal Savings and Loan Association of Richmond. In 1993, the Bank converted to a state-chartered mutual savings bank and changed its name to First Bank Richmond, S.B. In 1998, the Bank, in connection with its non-stock mutual holding company reorganization, converted to a national bank charter operating as First Bank Richmond, National Association. In July 2007, Richmond Mutual Bancorporation-Delaware, the Bank’s then current holding company, acquired Mutual Federal Savings Bank headquartered in Sidney, Ohio. Mutual Federal Savings Bank was operated independently as a separately chartered, wholly owned subsidiary of Richmond Mutual Bancorporation-Delaware until 2016 when it was combined with the bank through an internal merger transaction that consolidated both banks into a single, more efficient commercial bank charter. In 2017, the Bank converted to an Indiana state-chartered commercial bank and changed its name to First Bank Richmond. Mutual Federal Savings Bank continues to operate in Ohio under the name Mutual Federal, a division of First Bank Richmond.
First Bank Richmond provides full banking services through its seven full- and one limited-service offices located in Cambridge City (1), Centerville (1), Richmond (5) and Shelbyville (1), Indiana, its five full-service offices located in Piqua (2), Sidney (2) and Troy (1), Ohio, and its loan production office in Columbus, Ohio. Administrative, trust and wealth management services are conducted through First Bank Richmond’s Corporate Office/Financial Center located in Richmond, Indiana. As an Indiana-chartered commercial bank, First Bank Richmond is subject to regulation by the IDFI and the Federal Deposit Insurance Corporation (“FDIC”).
Our principal business consists of attracting deposits from the general public, as well as brokered deposits, and investing those funds primarily in loans secured by commercial and multi-family real estate, first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, direct financing leases and commercial and industrial loans. We also obtain funds by utilizing Federal Home Loan Bank (“FHLB”) advances. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and government sponsored agency and municipal bonds.
First Bank Richmond generates commercial, mortgage and consumer loans and leases and receives deposits from customers located primarily in Wayne and Shelby Counties, in Indiana and Shelby, Miami and Franklin (no deposits) Counties, in Ohio. We sometimes refer to these counties as our primary market area. First Bank Richmond’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Our leasing operation consists of direct investments in equipment that we lease (referred to as direct finance leases) to small businesses located throughout
29
the United States. Our lease portfolio consists of various kinds of equipment, generally technology-related, such as computer systems, medical equipment and general manufacturing, industrial, construction and transportation equipment. We seek leasing transactions where we believe the equipment leased is integral to the lessee's business. We also provide trust and wealth management services, including serving as executor and trustee under wills and deeds and as guardian and custodian of employee benefits, and manage private investment accounts for individuals and institutions. Total wealth management assets under management and administration were $147.8 million at September 30, 2020.
Our results of operations are primarily dependent on net interest income. Net interest income is the difference between interest income, which is the income that is earned on loans and investments, and interest expense, which is the interest that is paid on deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), and fees from sale of residential mortgage loans originated for sale in the secondary market. We also recognize income from the sale of investment securities.
Changes in market interest rates, the slope of the yield curve, and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of interest earning assets, interest bearing and noninterest bearing liabilities and shareholders’ equity, usually have the largest impact on changes in our net interest spread, net interest margin and net interest income during a reporting period. Because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address its economic consequences are unknown, including the recent 150 basis point reduction in the targeted federal funds rate, until the pandemic subsides, the Company expects its net interest income and net interest margin will be adversely affected in 2020 and possibly longer.
At September 30, 2020, on a consolidated basis, we had $1.1 billion in assets, $750.6 million in loans and leases, net of allowance, $663.1 million in deposits and $191.7 million in stockholders’ equity. At September 30, 2020, First Bank Richmond’s total risk-based capital ratio was 20.1%, exceeding the 10.0% requirement for a well-capitalized institution. For the nine months ended September 30, 2020, net income was $7.5 million, compared with a net loss of $1.5 million for the nine months ended September 30, 2019.
Critical Accounting Policies
Certain accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan and lease losses, the valuation of foreclosed assets, mortgage servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting.
Allowance for Loan and Lease Losses. We maintain an allowance for loan and lease losses to cover probable incurred credit losses at the balance sheet date. Loan and lease losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. A provision for loan and lease losses is charged to operations based on our periodic evaluation of the necessary allowance balance.
We have an established process to determine the adequacy of the allowance for loan and lease losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors, all of which may be susceptible to significant change.
Mortgage Servicing Rights (“MSRs”). MSRs associated with loans originated and sold, where servicing is retained, are capitalized and included in the consolidated balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds
30
and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income.
Securities. Under Financial Accounting Standards Board (“FASB”) Codification Topic 320 (ASC 320), Investments-Debt, investment securities must be classified as held to maturity, available for sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and we have the ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and which do not affect earnings until realized.
The fair values of our securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of our fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.
We evaluate all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if any other-than-temporary-impairments (“OTTI”) exist pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our ability and intent to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
If management determines that an investment experienced an OTTI, we must then determine the amount of the OTTI to be recognized in earnings. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.
From time to time we may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.
Deferred Tax Asset. We have evaluated our deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. Our most recent evaluation has determined that we will more likely than not be able to utilize our remaining deferred tax asset.
Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
31
COVID 19 Response
In response to the COVID-19 pandemic, the Company is offering a number of options designed to support our customers and the communities that we serve.
Paycheck Protection Program ("PPP"). The CARES Act was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a loan program called the Paycheck Protection Program, or PPP. The goal of the PPP was to avoid as many layoffs as possible, and to encourage small businesses to maintain payrolls. As a qualified SBA lender, the Company was automatically authorized to originate PPP loans upon commencement of the program in April 2020. PPP loans have: (a) an interest rate of 1.0%, (b) a five-year loan term to maturity; and (c) principal and interest payments deferred for ten months from the end of the forgiveness period. The SBA guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA. The deadline for PPP loan applications to the SBA was extended to August 8, 2020. The Bank continued to accept new PPP applications based on this extended deadline and is assisting small businesses with other borrowing options as they become available, including SBA and other government sponsored lending programs, as appropriate.
As of the conclusion of the PPP on August 8, 2020, we had funded 482 PPP loans totaling $64.9 million. Many of the PPP applications were from our existing clients but we also served those who had not had a banking relationship with us in the past. In addition to the 1% interest earned on these loans, the SBA pays us fees for processing PPP loans in the following amounts: (i) five (5) percent for loans of not more than $350,000; (ii) three (3) percent for loans of more than $350,000 and less than $2,000,000; and one (1) percent for loans of at least $2,000,000. We may not collect any fees from the loan applicants.
We may utilize the FRB's Paycheck Protection Program Liquidity Facility (“PPPLF”), pursuant to which the Company would pledge its PPP loans as collateral to obtain FRB non-recourse loans. The PPPLF will take the PPP loans as collateral at face value. As of September 30, 2020, we had not utilized the PPPLF.
Loan Modifications. Beginning in March 2020 we started receiving requests from our borrowers for loan and lease deferrals related to the effects of the COVID-19 pandemic. At September 30, 2020, 70 loans and leases aggregating $35.3 million, or 4.7% of total loans and leases, were modified. Modifications include payment deferrals, interest only or principal and interest, of up to primarily 90 days, fee waivers, extensions of repayment terms of up to six months, or other delays in payment that are considered insignificant. These modifications were not classified as TDRs at September 30, 2020 in accordance with the guidance of the CARES Act and related regulatory banking guidance. The CARES Act provides that the short-term modification of loans as a result of the COVID-19 pandemic, made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory banking guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. All loans modified due to COVID-19 will be separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in rating is appropriate. We believe the steps we are taking are necessary to effectively manage our portfolio and assist our clients through the ongoing uncertainty surrounding the duration, impact and government response to the COVID-19 pandemic.
The following table summarizes information relating to forbearances granted at September 30, 2020 and June 30, 2020:
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|
|
September 30, 2020
|
|
June 30, 2020
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|
($ in thousands)
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|
Number of Loans
|
|
Balance
|
|
Number of Loans
|
|
Balance
|
|
Commercial mortgage
|
|
24
|
|
$
|
27,767
|
|
70
|
|
$
|
98,010
|
|
Commercial and industrial
|
|
2
|
|
788
|
|
27
|
|
12,692
|
|
Construction and development
|
|
2
|
|
226
|
|
3
|
|
10,098
|
|
Multi-Family
|
|
2
|
|
2,105
|
|
13
|
|
21,197
|
|
Residential mortgage
|
|
16
|
|
3,347
|
|
88
|
|
11,198
|
|
Home equity
|
|
1
|
|
14
|
|
7
|
|
215
|
|
Direct financing leases
|
|
23
|
|
1,063
|
|
507
|
|
21,080
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|
Consumer
|
|
–
|
|
–
|
|
37
|
|
597
|
|
Total Loans
|
|
70
|
|
$
|
35,310
|
|
752
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|
$
|
175,087
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The following table summarizes information relating to hospitality loan deferments (which are included in the table above) at quarter ended September 30, 2020 and June 30, 2020:
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|
|
September 30, 2020
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|
June 30, 2020
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|
|
($ in thousands)
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|
Number
of Loans
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|
Balance
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Percent of total
loans in category
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|
|
Number
of Loans
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|
Balance
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Percent of total
loans in category
|
|
|
Restaurants
|
|
–
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|
$
|
–
|
0.00
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%
|
|
7
|
|
$
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1,356
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24.64
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%
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|
Hotels
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|
13
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|
24,384
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38.05
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%
|
|
19
|
|
44,455
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72.58
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%
|
|
Total Loans
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|
13
|
|
$
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24,384
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34.83
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%
|
|
26
|
|
$
|
45,811
|
68.62
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain customers have requested an additional 90-day deferment. Shown in the following table is a summary of currently deferred loans with more than one round of deferments granted as of September 30, 2020.
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($ in thousands)
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|
Number of Loans
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|
Amount
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|
Commercial mortgage
|
|
14
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|
$
|
20,459
|
|
Commercial and industrial
|
|
2
|
|
788
|
|
Construction and development
|
|
–
|
|
–
|
|
Multi-Family
|
|
2
|
|
2,105
|
|
Residential mortgage
|
|
7
|
|
1,303
|
|
Home equity
|
|
–
|
|
–
|
|
Direct financing leases
|
|
18
|
|
857
|
|
Consumer
|
|
–
|
|
–
|
|
Total Loans
|
|
43
|
|
$
|
25,512
|
|
|
|
|
|
|
|
Branch Operations and Additional Client Support
Many of our employees continue to work remotely or have flexible work schedules, and we have established protective measures within our offices to help ensure the safety of those employees who must work on-site. We have also taken steps to resume more normal branch activities with specific guidelines in place to ensure the safety of our clients and our personnel. We continuously monitor and conform our practices based on updates from the Center for Disease Control, World Health Organization, Financial Regulatory Agencies, and local and state health departments.
Comparison of Financial Condition at September 30, 2020 and December 31, 2019
General. Total assets increased $68.8 million, or 7.0%, to $1.1 billion at September 30, 2020 from $986.0 million at December 31, 2019. The increase was primarily a result of a $63.4 million, or 9.2%, increase in loans and leases, net of allowance to $750.6 million at September 30, 2020 from $687.3 million at December 31, 2019; and a $26.5 million, or 12.2%, increase in investment securities to $244.2 million at September 30, 2020, compared to $217.7 million at December 31, 2019. Cash and cash equivalents decreased $23.9 million, or 58.9%, to $16.7 million at September 30, 2020, from $40.6 million at December 31, 2019.
Loans and Leases. Our loan and lease portfolio, net of allowance for loan and lease losses, increased $63.4 million, to $750.6 million at September 30, 2020 from $687.3 million at December 31, 2019. The increase in loans and leases primarily was attributable to the $64.9 million of PPP loans originated. From December 31, 2019 to September 30, 2020, commercial and industrial loans increased $56.6 million or 66.9%, commercial real estate loans increased $16.2 million or 7.1%, construction and development loans increased $2.3 million or 4.3%, and leases increased $5.5 million, or 5.0%. PPP loans accounted for all of the increases in commercial and industrial loans, offsetting a decline of $8.3 million of non-PPP loans. Partially offsetting these increases were decreases in multi-family real estate loans of $2.8 million or 4.2%, residential real estate loans, including home equity loans, of $9.6 million or 7.0%, and consumer loans of $433,000 or 3.2%.
Nonperforming loans and leases, consisting of nonaccrual loans and leases and accruing loans and leases more than 90 days past due, totaled $3.4 million or 0.45% of total loans and leases at September 30, 2020, compared to $3.8 million or 0.55% of total loans and leases at December 31, 2019. The decrease in nonperforming loans and leases was primarily the
33
result of the resolution of a $1.0 million multi-family loan. Accruing loans past due more than 90 days at September 30, 2020, totaled $2.4 million, compared to $2.6 million at December 31, 2019.
At September 30, 2020, TDRs totaled $556,000, compared to $598,000 at December 31, 2019. At September 30, 2020 and December 31, 2019, the Company had TDRs that were accruing and performing in accordance with their modified terms of $556,000 and $598,000, respectively. Performing TDRs are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. The CARES Act amended generally accepted accounting principles with respect to the modification of loans to borrowers affected by the COVID-19 pandemic. Among other criteria, this guidance provided that short-term loan modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. As of September 30, 2020, the Company had outstanding 70 loan modifications qualifying under the CARES Act related to the COVID-19 pandemic with an outstanding loan balance totaling $35.3 million. This was a decrease from 752 loans with modifications totaling $175.1 million at June 30, 2020. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regards to determining whether or not a loan is deemed to be impaired.
Allowance for Loan and Lease Losses. The allowance for loan and lease losses increased $2.7 million, or 38.4%, to $9.8 million at September 30, 2020 from $7.1 million at December 31, 2019. At September 30, 2020, the allowance for loan and lease losses totaled 1.29% of total loans and leases outstanding compared to 1.02% at December 31, 2019. Excluding the $64.9 million of PPP loans from the $750.6 million of total loans and leases at September 30, 2020, the allowance for loan and lease losses to total loans and leases was 1.41% at September 30, 2020. PPP loans are fully guaranteed by the SBA and management expects that the vast majority of PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA within a short time frame, which in turn will reimburse the Bank for the amount forgiven. Net charge-offs during the first nine months of 2020 were $110,000 or 0.02% of average loans and leases outstanding, compared to net charge-offs of $419,000, or 0.08% of average loans and leases outstanding during the first nine months of 2019. The allowance for loan and lease losses to non-performing loans and leases was 290.9% at September 30, 2020, compared to 186.0% at December 31, 2019.
Management regularly analyzes conditions within its geographic markets and evaluates its loan and lease portfolio. The Company evaluated its exposure to potential loan and lease losses as of September 30, 2020, which evaluation included consideration of potential credit losses due to the deteriorating economic conditions driven by the impact of the COVID-19 pandemic. The full impact of the pandemic on the Company’s deposit and loan and lease customers is still unknown. The Company has increased its qualitative factors when determining the adequacy of its allowance for loan and lease losses. Credit metrics are being reviewed and stress testing is being performed on the loan portfolio. Potentially higher risk segments of the portfolio, such as hotels and restaurants, are being closely monitored as are loan payment deferrals.
Deposits. Total deposits increased $45.8 million, or 7.4%, to $663.1 million at September 30, 2020, from $617.2 million at December 31, 2019. This increase in deposits was primarily due to an increase in demand deposit and savings accounts primarily related to disbursements of PPP loan funds to borrowers’ deposit accounts as well as reduced withdrawals reflecting changes in customer spending habits due to the COVID-19 pandemic. Brokered deposits decreased $24.2 million to $32.4 million, or 4.9% of total deposits, at September 30, 2020, compared to $56.7 million, or 9.2% of total deposits, at December 31, 2019. The decrease in brokered deposits was due to increases in retail deposits and deposits related to PPP loans which reduced the need for brokered deposits. Demand deposit and savings accounts increased $71.9 million to $407.7 million at September 30, 2020, compared to $335.8 million at December 31, 2019. At September 30, 2020, noninterest bearing deposits totaled $88.7 million, or 13.4% of total deposits, compared to $60.3 million or 9.8% of total deposits at December 31, 2019.
Borrowings. Total borrowings, consisting solely of FHLB advances, increased $22.0 million, or 14.3%, to $176.0 million at September 30, 2020 from $154.0 million at December 31, 2019 consistent with the Company’s strategy to increase liquidity.
Stockholders’ Equity. Stockholders’ equity totaled $191.7 million at September 30, 2020, an increase of $3.9 million, or 2.1%, from December 31, 2019. The increase in stockholders’ equity primarily was the result of net income of $7.5 million in the first nine months of 2020 and a $3.8 million improvement in accumulated other comprehensive income, partially offset by $1.2 million in cash dividends paid to shareholders and $6.6 million in stock repurchases. The Company repurchased 582,079 shares of Company common stock at an average price of $11.37 per share for a total of $6.6 million during the third quarter of 2020. The Company’s equity to asset ratio was 18.2% at September 30, 2020. At September 30, 2020, the Bank’s Tier 1 capital to total assets ratio was 13.9% and the Bank’s capital was well in excess of all regulatory requirements.
34
Comparison of Results of Operations for the Three Months Ended September 30, 2020 and 2019.
General. Net income for the three months ended September 30, 2020 was $2.5 million, a $5.8 million increase from a net loss of $3.3 million recorded for the three months ended September 30, 2019. The $2.5 million in earnings equaled $0.21 diluted earnings per share for the third quarter of 2020, compared to $(0.26) diluted loss per share for the third quarter of 2019.
Interest Income. Interest income decreased $224,000, or 2.1%, to $10.6 million during the quarter ended September 30, 2020, compared to $10.8 million during the quarter ended September 30, 2019. Interest income on loans and leases increased $238,000, or 2.6%, to $9.6 million for the quarter ended September 30, 2020, from $9.3 million for the comparable quarter in 2019, due to higher average balances in the loan and lease and investment securities portfolios. The average outstanding loan and lease balances were $756.3 million for the quarter ended September 30, 2020, compared to $698.9 million for the quarter ended September 30, 2019. The average yield on loans and leases was 5.05% for the quarter ended September 30, 2020, compared to 5.33% for the comparable quarter in 2019. The yield on the loan and lease portfolio was impacted by the PPP loan activity during the third quarter of 2020 as PPP loans are originated at an interest rate of 1%, although the effective yield is slightly higher as a result of the origination fees paid to us by the SBA. The average yield on PPP loans was 2.70%, including the recognition of the net deferred fees, reducing average yield on loans and leases by 22 basis points for the three months ended September 30, 2020.
Interest income on investment securities, including FHLB stock, increased $155,000, or 18.0%, to $1.0 million during the quarter ended September 30, 2020, from $862,000 during the comparable quarter in 2019. The increase in interest income on investment securities from the comparable period in 2019 was due to higher average balances, partially offset by a lower weighted average yield. The average balance of investment securities, including FHLB stock, was $256.2 million for the quarter ended September 30, 2020, compared to $166.3 million for the quarter ended September 30, 2019. The average yield on investment securities, including FHLB stock, was 1.59% for the third quarter of 2020, compared to 2.07% for the third quarter of 2019. Interest income earned on cash and cash equivalents decreased to $9,000 in the third quarter of 2020 compared to $627,000 in the comparable quarter of 2019. The decrease in interest income earned on cash and cash equivalents in the third quarter of 2020 compared to the comparable quarter of 2019 was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in the second half of 2019 and in March 2020, as well as a $61.5 million decline in the average balance of cash and cash equivalents outstanding during the comparable periods.
Interest Expense. Interest expense decreased $590,000, or 20.3%, to $2.3 million for the quarter ended September 30, 2020, from $2.9 million for the quarter ended September 30, 2019. Interest expense on deposits decreased $488,000, or 24.0%, to $1.5 million for the quarter ended September 30, 2020, from $2.0 million for the comparable quarter in 2019. This decrease in interest expense was attributable to the lower weighted average rate paid on interest-bearing deposits, partially offset by higher average deposit balances. The weighted average rate paid on interest-bearing deposits was 1.04% for the quarter ended September 30, 2020, compared to 1.44% for the quarter ended September 30, 2019. Average balances of interest-bearing deposits increased to $595.4 million, or 5.1%, in the quarter ended September 30, 2020, compared to $566.5 million in the comparable quarter in 2019. Interest expense on FHLB borrowings decreased $102,000, or 11.8%, to $763,000 in the third quarter of 2020 compared to $865,0000 for the same quarter in 2019. The average balance of FHLB borrowings totaled $180.9 million during the quarter ended September 30, 2020, compared to $147.3 million for the quarter ended September 30, 2019. The weighted average rate paid on FHLB borrowings was 1.69% for the quarter ended September 30, 2020, a 66 basis point decline from 2.35% for the comparable quarter in 2019.
Net Interest Income. Net interest income before the provision for loan and lease losses increased $366,000, or 4.6%, to $8.3 million in the third quarter of 2020, compared to $7.9 million for the third quarter of 2019. This increase was primarily due to an increase in average interest-earning assets during the third quarter of 2020 compared to the comparable period in 2019, partially offset by a decrease in the net interest margin. Our net interest margin (annualized) was 3.18% for the three months ended September 30, 2020, compared to 3.31% for the three months ended September 30, 2019. The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities. The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decrease over the past year typically lags declines in the yield on interest earning assets. The average yield on PPP loans was 2.70% during the three months ended September 30, 2020, including the recognition of the net deferred fees, resulting in a negative impact on net interest margin.
35
Average Balances, Interest and Average Yields/Cost. The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using quarterly balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material.
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Average
Balance
Outstanding
|
|
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
Average
Balance
Outstanding
|
|
|
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases receivable
|
|
|
$
|
756,307
|
|
|
$
|
9,557
|
|
5.05
|
%
|
|
$
|
698,924
|
|
|
$
|
|
9,318
|
|
5.33
|
%
|
|
|
Securities
|
|
|
|
247,113
|
|
|
|
891
|
|
1.44
|
%
|
|
|
158,701
|
|
|
|
|
750
|
|
1.89
|
%
|
|
|
FHLB stock
|
|
|
|
9,083
|
|
|
|
126
|
|
5.55
|
%
|
|
|
7,580
|
|
|
|
|
112
|
|
5.91
|
%
|
|
|
Cash and cash equivalents and other
|
|
|
|
28,096
|
|
|
|
9
|
|
0.13
|
%
|
|
|
89,550
|
|
|
|
|
627
|
|
2.80
|
%
|
|
|
Total interest-earning assets
|
|
|
|
1,040,599
|
|
|
|
10,583
|
|
4.07
|
%
|
|
|
954,755
|
|
|
|
|
10,807
|
|
4.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market accounts
|
|
|
|
189,848
|
|
|
|
243
|
|
0.51
|
%
|
|
|
163,660
|
|
|
|
|
286
|
|
0.70
|
%
|
|
|
Interest-bearing checking accounts
|
|
|
|
123,271
|
|
|
|
68
|
|
0.22
|
%
|
|
|
104,951
|
|
|
|
|
115
|
|
0.44
|
%
|
|
|
Certificate accounts
|
|
|
|
282,306
|
|
|
|
1,234
|
|
1.75
|
%
|
|
|
297,848
|
|
|
|
|
1,632
|
|
2.19
|
%
|
|
|
Borrowings
|
|
|
|
180,913
|
|
|
|
763
|
|
1.69
|
%
|
|
|
147,302
|
|
|
|
|
865
|
|
2.35
|
%
|
|
|
Total interest-bearing liabilities
|
|
|
|
776,338
|
|
|
|
2,308
|
|
1.19
|
%
|
|
|
713,761
|
|
|
|
|
2,898
|
|
1.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
$
|
8,275
|
|
|
|
|
|
|
|
|
$
|
|
7,909
|
|
|
|
|
|
Net earning assets
|
|
|
$
|
264,261
|
|
|
|
|
|
|
|
|
$
|
240,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
|
|
|
|
2.88
|
%
|
|
|
|
|
|
|
|
|
|
2.91
|
%
|
|
|
Net interest margin(2)
|
|
|
|
|
|
|
|
|
|
3.18
|
%
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
Average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
134.04
|
%
|
|
|
|
|
|
|
|
|
133.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_____________
(1) Annualized. Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Annualized. Net interest margin represents net interest income divided by average total interest-earning assets.
Provision for Loan and Lease Losses. The provision for loan and lease losses for the three months ended September 30, 2020 totaled $1.3 million compared to $705,000 for the three months ended September 30, 2019, a $595,000 or 84.4% increase. The increased provision was primarily due to the continued uncertainty of the economic impact of the COVID-19 pandemic on the Bank’s loan and lease portfolio. Net charge-offs during the third quarter of 2020 were $12,000, compared to net charge-offs of $90,000 in the third quarter of 2019. As the COVID-19 pandemic continues, we expect to see continued pressure on asset quality. As management continues to monitor the loan and lease portfolio, additional provisions may be required.
Non-Interest Income. Non-interest income increased $1.0 million or 87.9%, to $2.2 million for the quarter ended September 30, 2020, compared to $1.1 million for the comparable quarter in 2019 The increase in noninterest income resulted primarily from the increase in the gain on sale of loans and leases, which increased $1.1 million, or 473.4%, to $1.3 million during the third quarter of 2020, compared to $232,000 during the third quarter of 2019 as a result of increased mortgage banking activity during the current quarter due to lower rates. Loan and lease servicing income decreased $110,000, to a loss of $42,000 for the third quarter of 2020 compared to income of $68,000 for the comparable quarter in 2019. Other loan fees decreased $37,000, or 17.7%, to $174,000, and were attributable to increased loan processing fees of $80,000, or 96.3%, offset by decreased miscellaneous loan fees of $118,000, or 91.8%. Service fees on deposit accounts decreased $145,000, or 49.1%, to $151,000 for the quarter ended September 20, 2020, compared to $296,000 for the quarter ended September 30, 2019 as a result of the waiving of overdraft fees for the first two months of the third quarter of 2020, and only re-instituting overdraft fees in September 2020.
36
Non-Interest Expense. Non-interest expense decreased $6.5 million, or 52.1%, to $6.0 million for the three months ended September 30, 2020, from $12.5 million for the same period in 2019. Salaries and employee benefits decreased $193,000, or 5.0%, to $3.6 million for the quarter ended September 30, 2020 from $3.8 million for the quarter ended September 30, 2019. The decrease from the third quarter of 2019 was primarily due to the lower retirement costs in the third quarter of 2020 compared to the comparable quarter of 2019 as a result of the freezing of the Company’s defined benefit plan (“DB Plan”). Deposit insurance expense increased $56,000, or 233.6% compared to the third quarter of 2019 as a result of the Bank having previously utilized all of its remaining small bank credit awarded by the FDIC. Advertising expense declined $127,000 or 64.1%, from the third quarter of 2019, as a result of a reduction in advertising occurring in 2020. In the third quarter of 2019, the Company incurred a $6.3 million non-recurring expense associated with the establishment and funding of the Foundation established in connection with the Company’s reorganization to a public company and stock offering.
Income Tax Expense. Income tax expense increased $1.5 million during the three months ended September 30, 2020, compared to the same period in 2019, primarily due to a $7.3 million increase in pre-tax income. The effective tax rate for the third quarter of 2020 was 19.5% compared to a 21.7% benefit for the same quarter a year ago.
Comparison of Results of Operations for the Nine Months Ended September 30, 2020 and 2019.
General. Net income for the nine months ended September 30, 2020 totaled $7.5 million, a $9.0 million increase from a net loss of $1.5 million for the comparable period in 2019. The $7.5 million in earnings equaled $0.60 diluted earnings per share for the first nine months of 2020. There is no comparison of earnings per share to the first nine months of 2019, as the Company’s reorganization from the mutual to stock form of ownership and related stock offering was not completed until July 1, 2019.
Interest Income. Interest income increased $570,000, or 1.8%, to $31.5 million during the nine months ended September 30, 2020, compared to $31.0 million for the comparable period in 2019. Interest income on loans and leases increased $681,000, or 2.5%, to $27.9 million for the first nine months of 2020, compared to $27.2 million for the comparable period in 2019, due to slightly higher average loan and lease balances, and a slightly higher average yield. The average outstanding loan and lease balance was $691.9 million for the first nine months of 2020, compared to $684.8 million for the first nine months of 2019. The average yield on loans and leases was 5.38% for the first nine months of 2020, compared to 5.30% for the first nine months of 2019. The yield on the loan and lease portfolio was impacted by PPP loan activity as PPP loans are originated at an interest rate of 1%, although the effective yield is slightly higher as a result of the origination fees paid to us by the SBA. The average yield on PPP loans was 2.90% in the first nine months of 2020, including the recognition of the net deferred fees, reducing average yield on loans and leases by 15 basis points during the first nine months of 2020.
Interest income on investment securities, including FHLB stock, increased $698,000, or 25.3%, to $3.5 million during the nine months ended September 30, 2020, compared to $2.8 million during the comparable period in 2019. The increase in the interest income on investment securities was due to higher average balances, partially offset by a lower weighted average yield. The average balance of investment securities, including FHLB stock, was $248.4 million for the first nine months of 2020, compared to $156.2 million for the first nine months of 2019. The average yield on investment securities, including FHLB stock, was 1.86% for the first nine months of 2020, compared to 2.36% for the first nine months of 2019. Interest income earned on cash and cash equivalents decreased to $146,000 in the first nine months of 2020 compared to $954,000 in the first nine months of 2019. This primarily was due to the significantly lower yield earned on funds at the Federal Reserve after the rate reductions experienced in the second half of 2019 and in March 2020.
Interest Expense. Interest expense decreased $1.1 million, or 13.1%, to $7.3 million for the nine months ended September 30, 2020, compared to $8.5 million for the nine months ended September 30, 2019. Interest expense on deposits decreased $953,000, or 15.8%, to $5.1 million for the first nine months of 2020, compared to $6.0 million in the first nine months of 2019. This decrease in interest expense on deposits was primarily attributable to the lower weighted average rate paid on interest-bearing deposits, offset by a slight increase in average balances of interest-bearing deposits. The weighted average rate paid on interest-bearing deposits was 1.16% for the nine months ended September 30, 2020, compared to 1.39% for the nine months ended September 30, 2019. Average balances of interest-bearing deposits increased $1.5 million, or 0.3%, to $581.5 million in the first nine months of 2020 compared to the first nine months of 2019. Interest expense on FHLB borrowings decreased $151,000, or 6.2%, to $2.3 million in the first nine months of 2020 compared to the first nine months of 2019. The average balance of FHLB borrowings totaled $175.6 million during the first nine months of 2020, compared to $143.6 million for the first nine months of 2019. The weighted average rate paid on FHLB borrowings was 1.73% for the first nine months of 2020, a 52 basis point decline from 2.25% for the first nine months of 2019.
37
Net Interest Income. Net interest income before the provision for loan and lease losses increased $1.7 million, or 7.4%, to $24.2 million in the first nine months of 2020, compared to $22.5 million for the first nine months of 2019. This increase was primarily due to an increase in average interest-earning assets during the first nine months of 2020 compared to the same period in 2019. Our net interest margin was 3.30% for the nine months ended September 30, 2020, compared to 3.34% for the nine months ended September 30, 2019. The decrease in net interest margin was primarily due to yields earned on interest-earning assets declining at a faster rate than interest rates paid on interest-bearing liabilities. The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decrease over the past year typically lags declines in the yield on interest earning assets.
Average Balances, Interest and Average Yields/Cost. The following tables set forth for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin (otherwise known as net yield on interest-earning assets), and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances have been calculated using quarterly balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Loan fees are included in interest income on loans and are not material.
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Average
Balance
Outstanding
|
|
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
Average
Balance
Outstanding
|
|
|
|
|
Interest
Earned/
Paid
|
|
Yield/
Rate
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases receivable
|
|
|
$
|
691,890
|
|
|
$
|
27,928
|
|
5.38
|
%
|
|
$
|
684,844
|
|
|
$
|
|
27,247
|
|
5.30
|
%
|
|
|
Securities
|
|
|
|
239,696
|
|
|
|
3,252
|
|
1.81
|
%
|
|
|
149,064
|
|
|
|
|
2,465
|
|
2.20
|
%
|
|
|
FHLB stock
|
|
|
|
8,681
|
|
|
|
207
|
|
3.18
|
%
|
|
|
7,140
|
|
|
|
|
296
|
|
5.53
|
%
|
|
|
Cash and cash equivalents and other
|
|
|
|
38,355
|
|
|
|
146
|
|
0.51
|
%
|
|
|
56,949
|
|
|
|
|
954
|
|
2.23
|
%
|
|
|
Total interest-earning assets
|
|
|
|
978,622
|
|
|
|
31,533
|
|
4.30
|
%
|
|
|
897,997
|
|
|
|
|
30,962
|
|
4.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market accounts
|
|
|
|
178,699
|
|
|
|
787
|
|
0.59
|
%
|
|
|
168,800
|
|
|
|
|
914
|
|
0.72
|
%
|
|
|
Interest-bearing checking accounts
|
|
|
|
114,205
|
|
|
|
216
|
|
0.25
|
%
|
|
|
102,221
|
|
|
|
|
278
|
|
0.36
|
%
|
|
|
Certificate accounts
|
|
|
|
288,571
|
|
|
|
4,071
|
|
1.88
|
%
|
|
|
308,976
|
|
|
|
|
4,835
|
|
2.09
|
%
|
|
|
Borrowings
|
|
|
|
175,620
|
|
|
|
2,273
|
|
1.73
|
%
|
|
|
143,597
|
|
|
|
|
2,424
|
|
2.25
|
%
|
|
|
Total interest-bearing liabilities
|
|
|
|
757,095
|
|
|
|
7,347
|
|
1.29
|
%
|
|
|
723,594
|
|
|
|
|
8,451
|
|
1.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
$
|
24,186
|
|
|
|
|
|
|
|
|
$
|
|
22,511
|
|
|
|
|
|
Net earning assets
|
|
|
$
|
221,527
|
|
|
|
|
|
|
|
|
$
|
174,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
|
|
|
|
3.01
|
%
|
|
|
|
|
|
|
|
|
|
3.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(2)
|
|
|
|
|
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to
average interest-bearing liabilities
|
|
|
|
129.26
|
%
|
|
|
|
|
|
|
|
|
124.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________
(1) Annualized. Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Annualized. Net interest margin represents net interest income divided by average total interest-earning assets.
Provision for Loan and Lease Losses. The provision for loan and lease losses for the nine months ended September 30, 2020 totaled $2.8 million compared to $1.7 million for the nine months ended September 30, 2019, a $1.1 million or 65.0% increase. The increased provision was primarily due to the continued uncertainty of the economic impact of the COVID-19 pandemic on the Bank’s loan portfolio. Net charge-offs during the first nine months of 2020 were $110,000, compared to net charge-offs of $419,000 in the first nine months of 2019. As the COVID-19 pandemic continues, we expect to see continued pressure on asset quality. As management continues to monitor the loan portfolio, additional provisions may be required.
Non-Interest Income. Non-interest income increased $2.2 million, or 75.9%, to $5.2 million for the first nine months of 2020, compared to $3.0 million for the same period in 2019, primarily as a result of an increase in the net gain on
38
sale of loans and leases. Net gain on sale of loans and leases increased $2.1 million in the first nine months of 2020 to $2.6 million compared to $442,000 in the comparable period of 2019 as a result of increased mortgage banking activity due to lower rates. Service charges on deposit accounts declined $268,000, or 34.4%, in the first nine months of 2020 compared to the first nine months of 2019. This decrease was the result of waiving overdraft charges in the second quarter of 2020 through August 2020. Other loan fees increased $47,000, or 10.4%, in the first nine months of 2020, primarily due to a $58,000 increase in letter of credit fees. Trust income increased $68,000, or 21.1%, in the first nine months of 2020 compared to the first nine months of 2019 due to an increase in average assets under management during the nine months ended September 30, 2020, compared to the same period in 2019.
Non-Interest Expense. Non-interest expense decreased $8.8 million, or 33.8%, to $17.2 million during the first nine months of 2020 compared to $25.9 million during the same period in 2019. Salaries and employee benefits declined $2.4 million, or 18.6%, in the first nine months of 2020 compared to the first nine months of 2019. This decrease was primarily due to the $1.7 million pre-tax expense related to the adoption of a nonqualified deferred compensation plan during the second quarter of 2019. Excluding this expense, salaries and employee benefits decreased $651,000, or 6.0%, for the first nine months of 2020 compared to the first nine months of 2019. Salary expense increased $12,000, or 0.2%, in the first nine months of 2020, while benefit expense declined $663,000 in the first nine months of 2020 compared to the first nine months of 2019 primarily due to the lower cost of the ESOP compared to the Company’s DB Plan which was frozen in October 2019 with the intent to terminate it. The freezing of the DB Plan has reduced, but not eliminated, the ongoing expenses associated with the DB Plan until it is terminated. Data processing expenses increased $115,000, or 9.0%, in the first nine months of 2020 compared to the first nine months of 2019, due to normal price increases associated with information technology services and additional digital services and products offered by the Company. Deposit insurance expense decreased $121,000, or 38.2%, in the first nine months of 2020 compared to the first nine months of 2019 due to the Bank’s higher capital ratios resulting from the Company’s injection of capital into the Bank in connection with our reorganization to a stock holding company and related stock offering. We also experienced a $234,000, or 47.2%, decline in advertising expenses. In the third quarter of 2019, the Company incurred a $6.3 million non-recurring expense associated with the establishment and funding of the Foundation established in connection with the Company’s reorganization to a public company and stock offering.
As mentioned above and disclosed in previous public filings, the Company has frozen and intends to terminate the Bank’s participation in the DB Plan, a multi-employer, tax-qualified defined benefit pension plan. Freezing the DB plan resulted in some immediate cost savings because future benefit accruals were stopped. However, the freeze did not impact unfunded liabilities or eliminate cost volatility. The frozen DB Plan remains subject to the interest rate, investment and demographic risks that apply to ongoing defined benefit plans. In addition, the frozen DB Plan is still subject to the same minimum funding, compliance, administrative and fiduciary requirements as an ongoing defined benefit plan.
The Company still intends to terminate the Bank’s participation in the DB Plan, which will require it to pay an amount based on the underfunded status of the plan. As of September 30, 2020, the Company has accrued $17.5 million for this expense. The actual termination expense of the DB Plan may be higher or lower than the amount currently accrued for by the Company depending on a number of factors, including but not limited to the interest rate environment and the valuation of plan assets. Due to the current low interest rate environment, terminating the DB Plan at this time would require the Company to incur a substantial additional expense over and above the amount presently accrued. As a result, the Company’s Board of Directors will continue to monitor and evaluate the timing of, and costs associated with, termination of the DB Plan. Any additional expenses associated with the termination of the DB Plan will negatively impact our results of operations in the future.
Income Tax Expense. Income tax expense increased $2.5 million during the first nine months of 2020, compared to the first nine months of 2019, primarily due to a $11.6 million increase in pre-tax income. The effective tax rate for the first nine months of 2020 was 20.2% compared to a benefit of 28.6% in the same period of 2019.
Liquidity
We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, liquid assets have been maintained above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.
39
Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and our ability to manage those requirements. We strive to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance in short-term investments at any given time will cover adequately any reasonably anticipated immediate need for funds. Additionally, First Bank Richmond maintains a relationship with the FHLB of Indianapolis which could provide funds on short-term notice if needed.
Liquidity management is both a daily and long-term function of the management of our business. It is overseen by the Asset and Liability Management Committee. Excess liquidity is generally invested in short-term investments, such as overnight deposits and holding excess funds at the Federal Reserve Bank. On a long-term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed and municipal securities. First Bank Richmond can also generate funds from borrowings, primarily FHLB advances. In addition, we have historically sold eligible long-term, fixed-rate residential mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. At September 30, 2020, the Bank had $141.7 million in cash and unpledged available-for-sale investment securities for its cash needs. The Bank had the ability to borrow an additional $56.3 million in FHLB advances based on existing collateral pledged. First Bank Richmond’s liquidity may be supplemented if it participates in the FRB’s PPPLF pursuant to which First Bank Richmond would pledge PPP loans as collateral to obtain FRB non-recourse loans. At September 30, 2020, we had no borrowings from the PPPLF, with the ability to borrow up to $64.9 million based on PPP loans unpledged at that date.
First Bank Richmond uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan and lease commitments. At September 30, 2020, outstanding loan and lease commitments, including unused lines and letters of credit, totaled $154.0 million, including $69.9 million of undisbursed construction and land loans. Certificates of deposit scheduled to mature in one year or less at September 30, 2020, totaled $154.1 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Bank.
Liquidity, represented by cash, cash equivalents, and investment securities, is a product of our operating, investing and financing activities. Primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, excess funds are invested in short-term interest-earning assets, which provide liquidity to meet lending requirements. Cash is also generated through borrowings. FHLB advances are utilized to leverage our capital base and provide funds for lending and investment activities, as well as to enhance interest rate risk management.
Cash and cash equivalents decreased $23.9 million to $16.7 million as of September 30, 2020, from $40.6 million as of December 31, 2019. Net cash provided by operating activities was $7.6 million for the nine months ended September 30, 2020. Net cash used in investing activities totaled $91.5 million during the nine months ended September 30, 2020 and consisted primarily of increases in net loans and available-for-sale securities. The $60.0 million of net cash provided by financing activities during the nine months ended September 30, 2020 was primarily the result of a $45.9 million net increase in deposits and $22.0 million net increase in FHLB advances.
As a separate legal entity from the Bank, the Company must provide for its own liquidity. At September 30, 2020, the Company, on an unconsolidated basis, had $34.8 million in cash, noninterest-bearing deposits and liquid investments generally available for its cash needs. The Company’s principal source of liquidity is dividends and ESOP loan repayments from the Bank.
Management believes that its primary liquidity sources of loan repayments, maturing investment securities, available FHLB borrowing, possible utilization of the PPPLF facility, and access to the brokered CD market are sufficient in the economic environment created by the COVID-19 pandemic.
Except as set forth above, management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have a material impact on liquidity, capital resources or operations. Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be implemented, would have this effect.
40
Off-Balance Sheet Activities
In the normal course of operations, we engage in a variety of financial transactions that are not recorded in our financial statements, including commitments to extend credit and unused lines of credit. These transactions involve varying degrees of off-balance sheet risks. While these commitments are contractual obligations and represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. At September 30, 2020, we had $154.0 million in loan and lease commitments and unused lines of credit.
Capital Resources
First Bank Richmond is subject to minimum capital requirements imposed by the FDIC. The FDIC may require us to have additional capital above the specific regulatory levels if it believes we are subject to increased risk due to asset problems, high interest rate risk and other risks. At September 30, 2020 First Bank Richmond’s regulatory capital exceeded the FDIC regulatory requirements, and First Bank Richmond was well-capitalized under regulatory prompt corrective action standards. Consistent with our goals to operate a sound and profitable organization, our policy is for First Bank Richmond to maintain well-capitalized status.
|
|
|
|
|
|
|
|
|
Required for
|
|
|
To Be Well
|
|
|
|
|
Actual
|
|
|
|
|
|
Adequate Capital
|
|
|
Capitalized
|
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
(Dollars in thousands)
|
|
|
Total risk-based capital (to risk weighted assets)
|
|
$
|
159,748
|
|
|
|
20.1
|
%
|
|
$
|
63,492
|
|
|
|
8.0
|
%
|
|
$
|
79,365
|
|
|
|
10.0
|
%
|
|
Tier 1 risk-based capital (to risk weighted assets)
|
|
|
149,939
|
|
|
|
19.0
|
|
|
|
47,619
|
|
|
|
6.0
|
|
|
|
63,492
|
|
|
|
8.0
|
|
|
Common equity tier 1 capital (to risk weighted assets)
|
|
|
149,939
|
|
|
|
19.0
|
|
|
|
35,714
|
|
|
|
4.5
|
|
|
|
51,587
|
|
|
|
6.5
|
|
|
Tier 1 leverage (core) capital (to adjusted tangible assets)
|
|
|
149,939
|
|
|
|
13.9
|
|
|
|
43,246
|
|
|
|
4.0
|
|
|
|
54,058
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk weighted assets)
|
|
$
|
149,137
|
|
|
|
19.5
|
%
|
|
$
|
61,304
|
|
|
|
8.0
|
%
|
|
$
|
76,629
|
|
|
|
10.0
|
%
|
|
Tier 1 risk-based capital (to risk weighted assets)
|
|
|
142,048
|
|
|
|
18.5
|
|
|
|
45,978
|
|
|
|
6.0
|
|
|
|
61,304
|
|
|
|
8.0
|
|
|
Common equity tier 1 capital (to risk weighted assets)
|
|
|
142,048
|
|
|
|
18.5
|
|
|
|
34,483
|
|
|
|
4.5
|
|
|
|
49,809
|
|
|
|
6.5
|
|
|
Tier 1 leverage (core) capital (to adjusted tangible assets)
|
|
|
142,048
|
|
|
|
14.6
|
|
|
|
39,027
|
|
|
|
4.0
|
|
|
|
48,784
|
|
|
|
5.0
|
|
Pursuant to the capital regulations of the FDIC and the other federal banking agencies, First Bank Richmond must maintain a capital conservation buffer consisting of additional common equity tier 1 (“CET1”) capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based CET1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At September 30, 2020 the Bank’s CET1 capital exceeded the required capital conservation buffer.
For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the FRB expects the holding company’s subsidiary banks to be well capitalized under the prompt corrective action regulations. If Richmond Mutual Bancorporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at September 30, 2020, it would have exceeded all regulatory capital requirements.
Impact of Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of inflationary
41
changes in the economy coincides with changes in interest rates. Since virtually all of our assets and liabilities are monetary in nature, interest rates generally have a more significant impact on our performance than does inflation.