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xbrli:pure
xbrli:shares
iso4217:USD
xbrli:shares
iso4217:USD
The amortized cost and estimated fair value of investment and mortgage-backed securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
|
September 30, 2020
|
|
Amortized
|
Estimated
|
(dollars in thousands)
|
Cost
|
Fair Value
|
Within one year
|
$ 1,370
|
$ 1,398
|
After one year but less than five years
|
10,341
|
10,525
|
After five years but less than ten years
|
17,180
|
17,689
|
After ten years
|
23,347
|
24,075
|
Total investment securities
|
52,238
|
53,687
|
Mortgage-backed securities
|
117,366
|
121,841
|
Total investment and mortgage-backed securities
|
$ 169,604
|
$ 175,528
|
The carrying value of investment and mortgage-backed securities pledged as collateral to secure public deposits amounted to $146.2 million at September 30, 2020 and $156.1 million at June 30, 2020. The securities pledged consist of marketable securities, including $77.3 million and $82.0 million of Mortgage-Backed Securities, $34.9 million and $41.9 million of Collateralized Mortgage Obligations, $33.0 million and $32.0 million of State and Political Subdivisions Obligations, and $1.0 million and $200,000 of Other Securities at September 30 and June 30, 2020, respectively.
-15-
The following tables show our investments’ 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 for which an ACL has not been recorded at September 30 and June 30, 2020:
|
September 30, 2020
|
|
Less than 12 months
|
12 months or more
|
Total
|
|
|
Unrealized
|
|
Unrealized
|
|
Unrealized
|
(dollars in thousands)
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions
|
$ 531
|
$ 1
|
$ -
|
$ -
|
$ 531
|
$ 1
|
Other securities
|
-
|
-
|
839
|
327
|
839
|
327
|
Mortgage-backed securities
|
8,368
|
43
|
-
|
-
|
8,368
|
43
|
Total investments and mortgage-backed securities
|
$ 8,899
|
$ 44
|
$ 839
|
$ 327
|
$ 9,738
|
$ 371
|
|
June 30, 2020
|
|
Less than 12 months
|
12 months or more
|
Total
|
|
|
Unrealized
|
|
Unrealized
|
|
Unrealized
|
(dollars in thousands)
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
Fair Value
|
Losses
|
|
|
|
|
|
|
|
Other securities
|
$ 995
|
$ 5
|
$ 643
|
$ 338
|
$ 1,638
|
$ 343
|
Mortgage-backed securities
|
9,037
|
39
|
-
|
-
|
9,037
|
39
|
Total investments and mortgage-backed securities
|
$ 10,032
|
$ 44
|
$ 643
|
$ 338
|
$ 10,675
|
$ 382
|
Mortgage-backed securities. The unrealized losses on the Company’s investments in mortgage-backed securities were caused by variations in market interest rates since purchase or acquisition. The securities are of high credit quality (AA or higher). Because the Company does not intend to sell these securities and it likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.
Other securities. At September 30, 2020 there were two pooled trust preferred securities with an estimated fair value of $654,000 and unrealized losses of $322,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the pooled trust preferred securities and a reduced demand for these securities, and concerns regarding the financial institutions that issued the underlying trust preferred securities.
The September 30, 2020, cash flow analysis for these two securities indicated it is probable the Company will receive all contracted principal and related interest projected. The cash flow analysis used in making this determination was based on anticipated default, recovery, and prepayment rates, and the resulting cash flows were discounted based on the yield spread anticipated at the time the securities were purchased. Other inputs include the actual collateral attributes, which include credit ratings and other performance indicators of the underlying financial institutions, including profitability, capital ratios, and asset quality. Assumptions for these two securities included prepayments averaging 1.6 percent, annually, annual defaults averaging 50 basis points, and a recovery rate averaging 10 percent of gross defaults, lagged two years.
One of these two securities has continued to receive cash interest payments in full since the Company’s purchase; the other security received principal-in-kind (PIK), in lieu of cash interest, for a period of time following the recession and financial crisis which began in 2008, but resumed cash interest payments during fiscal 2014. Our cash flow analysis indicates that cash interest payments are expected to continue for both securities. Because the Company does not intend to sell these securities and it is likely that the Company will not be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company has not recorded an ACL on these securities.
The Company does not believe any other individual unrealized loss as of September 30, 2020, is the result of a credit loss. However, the Company could be required to recognize an ACL in future periods with respect to its available for sale investment securities portfolio.
-16-
Credit losses recognized on investments. During fiscal 2009, the Company adopted ASC 820, formerly FASB Staff Position 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” There were no credit losses recognized in income and other losses or recorded in other comprehensive income for the three-month periods ended September 30, 2020 and 2019.
Note 4: Loans and Allowance for Credit Losses
Classes of loans are summarized as follows:
(dollars in thousands)
|
September 30, 2020
|
June 30, 2020
|
Real Estate Loans:
|
|
|
Residential
|
$ 635,718
|
$ 627,357
|
Construction
|
207,737
|
185,924
|
Commercial
|
884,835
|
887,419
|
Consumer loans
|
80,906
|
80,767
|
Commercial loans
|
481,582
|
468,448
|
|
2,290,778
|
2,249,915
|
Loans in process
|
(101,392)
|
(78,452)
|
Deferred loan fees, net
|
(3,839)
|
(4,395)
|
Allowance for credit losses
|
(35,084)
|
(25,139)
|
Total loans
|
$ 2,150,463
|
$ 2,141,929
|
The Company’s lending activities consist of origination of loans secured by mortgages on one- to four-family residences and commercial and agricultural real estate, construction loans on residential and commercial properties, commercial and agricultural business loans and consumer loans. At September 30, 2020, the Bank had purchased participations in 22 loans totaling $55.7 million, as compared to 23 loans totaling $58.2 million at June 30, 2020.
Residential Mortgage Lending. The Company actively originates loans for the acquisition or refinance of one- to four-family residences. This category includes both fixed-rate and adjustable-rate mortgage (“ARM”) loans amortizing over periods of up to 30 years, and the properties securing such loans may be owner-occupied or non-owner-occupied. Single-family residential loans do not generally exceed 90% of the lower of the appraised value or purchase price of the secured property. Substantially all of the one- to four-family residential mortgage originations in the Company’s portfolio are located within the Company’s primary lending area. General risks related to one- to four-family residential lending include stability of borrower income and collateral values.
The Company also originates loans secured by multi-family residential properties that are often located outside the Company’s primary lending area but made to borrowers who operate within our primary market area. The majority of the multi-family residential loans that are originated by the Bank are amortized over periods generally up to 25 years, with balloon maturities typically up to ten years. Both fixed and adjustable interest rates are offered and it is typical for the Company to include an interest rate “floor” and “ceiling” in the loan agreement. Generally, multi-family residential loans do not exceed 85% of the lower of the appraised value or purchase price of the secured property. General risks related to multi-family residential lending include rental demand, rental rates, and vacancies, as well as collateral values and borrower leverage.
Commercial Real Estate Lending. The Company actively originates loans secured by owner- and non-owner-occupied commercial real estate including farmland, single- and multi-tenant retail properties, restaurants, hotels, land (improved and unimproved), nursing homes and other healthcare facilities, warehouses and distribution centers, convenience stores, automobile dealerships and other automotive-related services, and other businesses. These properties are typically owned and operated by borrowers headquartered within the Company’s primary lending area, however, the property may be located outside our primary lending area. Risks to owner-occupied commercial real estate lending generally include the continued profitable operation of the borrower’s enterprise, as well as general collateral values, and may be heightened by unique, specific uses of the property serving as collateral. Non-owner-occupied commercial real estate lending risks include tenant demand and performance, lease rates, and vacancies, as well as collateral values and borrower leverage. These factors may be influenced by general economic conditions in the region, or in the United States generally. Risks to lending on farmland include unique factors such as commodity prices, yields, input costs, and weather, as well as farmland values.
-17-
Most commercial real estate loans originated by the Company generally are based on amortization schedules of up to 25 years with monthly principal and interest payments. Generally, the interest rate received on these loans is fixed for a maturity for up to ten years, with a balloon payment due at maturity. Alternatively, for some loans, the interest rate adjusts at least annually after an initial period up to seven years. The Company typically includes an interest rate “floor” in the loan agreement. Generally, improved commercial real estate loan amounts do not exceed 80% of the lower of the appraised value or the purchase price of the secured property. Agricultural real estate terms offered differ slightly, with amortization schedules of up to 25 years with an 80% loan-to-value ratio, or 30 years with a 75% loan-to-value ratio.
Construction Lending. The Company originates real estate loans secured by property or land that is under construction or development. Construction loans originated by the Company are generally to finance the construction of owner occupied residential real estate, or to finance speculative construction of residential real estate, land development, or owner-operated or non-owner occupied commercial real estate. During construction, these loans typically require monthly interest-only payments, with single-family residential construction loans having maturities ranging from six to twelve months, while multifamily or commercial construction loans typically mature in 12 to 24 months. Once construction is completed, permanent construction loans may be converted to monthly payments using amortization schedules of up to 30 years on residential and generally up to 25 years on commercial real estate. Construction and development lending risks generally include successful timely and on-budget completion of the project, followed by the sale of the property in the case of land development or non-owner-occupied real estate, or the long-term occupancy of the property by the builder in the case of owner-occupied construction. Changes in real estate values or other economic conditions may impact the ability of a borrower to sell property developed for that purpose.
While the Company typically utilizes relatively short maturity periods to closely monitor the inherent risks associated with construction loans for these loans, weather conditions, change orders, availability of materials and/or labor, and other factors may contribute to the lengthening of a project, thus necessitating the need to renew the construction loan at the balloon maturity. Such extensions are typically executed in incremental three month periods to facilitate project completion. The Company’s average term of construction loans is approximately eight months. During construction, loans typically require monthly interest only payments which may allow the Company an opportunity to monitor for early signs of financial difficulty should the borrower fail to make a required monthly payment. Additionally, during the construction phase, the Company typically performs interim inspections which further allow the Company opportunity to assess risk. At September 30, 2020, construction loans outstanding included 78 loans, totaling $36.1 million, for which a modification had been agreed to. At June 30, 2020, construction loans outstanding included 77 loans, totaling $48.8 million, for which a modification had been agreed to. In general, these modifications were solely for the purpose of extending the maturity date due to conditions described above. As these modifications were not executed due to financial difficulty on the part of the borrower, they were not accounted for as troubled debt restructurings (TDRs). Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at September 30, 2020, included drawn balances of $4.4 million in construction loans which were modified at the borrower’s request due to the current situation of heightened economic uncertainty triggered by the pandemic.
Consumer Lending. The Company offers a variety of secured consumer loans, including home equity, direct and indirect automobile loans, second mortgages, mobile home loans and loans secured by deposits. The Company originates substantially all of its consumer loans in its primary lending area. Usually, consumer loans are originated with fixed rates for terms of up to five years, with the exception of home equity lines of credit, which are variable, tied to the prime rate of interest and are for a period of ten years.
Home equity lines of credit (HELOCs) are secured with a deed of trust and are issued up to 100% of the appraised or assessed value of the property securing the line of credit, less the outstanding balance on the first mortgage and are typically issued for a term of ten years. Interest rates on the HELOCs are generally adjustable. Interest rates are based upon the loan-to-value ratio of the property with better rates given to borrowers with more equity. Risks related to HELOC lending generally include the stability of borrower income and collateral values.
Automobile loans originated by the Company include both direct loans and a smaller amount of loans originated by auto dealers. The Company generally pays a negotiated fee back to the dealer for indirect loans. Typically, automobile loans are made for terms of up to 60 months for new and used vehicles. Loans secured by automobiles
-18-
have fixed rates and are generally made in amounts up to 100% of the purchase price of the vehicle. Risks to automobile and other consumer lending generally include the stability of borrower income and borrower willingness to repay.
Commercial Business Lending. The Company’s commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory, equipment and operating lines of credit, including agricultural production and equipment loans. The Company offers both fixed and adjustable rate commercial business loans. Generally, commercial loans secured by fixed assets are amortized over periods up to five years, while commercial operating lines of credit or agricultural production lines are generally for a one year period. Commercial lending risk is primarily driven by the borrower’s successful generation of cash flow from their business enterprise sufficient to service debt, and may be influenced by factors specific to the borrower and industry, or by general economic conditions in the region or in the United States generally. Agricultural production or equipment lending includes unique risk factors such as commodity prices, yields, input costs, and weather, as well as farm equipment values.
Allowance for Credit Losses. The provision for credit losses for the three-month period ended September 30, 2020, was $774,000, relatively low as compared to earlier quarters in calendar year 2020, or as compared to the same period of the prior fiscal year. The charge was based on the estimated required ACL, reflecting management’s estimate of the current expected credit losses in the Company’s loan portfolio at September 30, 2020, and as of that date the Company’s ACL was $35.1 million. The relatively low provision was attributable primarily to the current quarter’s relatively low loan growth and stable credit quality indicators quarter-over-quarter. While uncertainty remains regarding the economic environment resulting from the COVID-19 pandemic and the potential impact on the Company’s borrowers, the Company assesses that the economic outlook is little changed as compared to June 30, 2020. However, there remains significant uncertainty regarding the possible length of the COVID-19 pandemic and the aggregate impact that it will have on global and regional economies, including uncertainty regarding the effectiveness of recent efforts by the U.S. government and the Federal Reserve to respond to the pandemic and its economic impact. Management considered the impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, including our borrowers in the retail and multi-tenant retail industry, restaurants, and hotels. To date, various relief efforts, notably including the availability of forgivable Paycheck Protection Program (PPP) loans to borrowers and deferrals or modifications available as encouraged by banking regulatory authorities and the CARES Act, have resulted in limited impact on the Company’s credit quality indicators, as is true of the industry generally. It is possible that the ongoing adverse effects of the pandemic may not be somewhat offset by future relief efforts, which could cause the outlook for economic conditions and levels and trends of past-due loans to significantly worsen, and require additions to the ACL.
The following tables present the balance in the ACL and the recorded investment in loans (excluding loans in process and deferred loan fees) based on portfolio segment as of September 30 and June 30, 2020, and activity in the ACL and ALLL for the three-month periods ended September 30, 2020 and 2019:
|
|
|
At period end and for the three months ended September 30, 2020
|
|
Residential
|
Construction
|
Commercial
|
|
|
|
(dollars in thousands)
|
Real Estate
|
Real Estate
|
Real Estate
|
Consumer
|
Commercial
|
Total
|
Allowance for credit losses:
|
|
|
|
|
|
|
Balance, beginning of period
prior to adoption of CECL
|
$ 4,875
|
$ 2,010
|
$ 12,132
|
$ 1,182
|
$ 4,940
|
$ 25,139
|
Impact of CECL adoption
|
3,521
|
(121)
|
3,856
|
1,065
|
1,012
|
9,333
|
Provision charged to expense
|
252
|
3
|
61
|
61
|
397
|
774
|
Losses charged off
|
(19)
|
-
|
-
|
(6)
|
(145)
|
(170)
|
Recoveries
|
-
|
-
|
1
|
3
|
4
|
8
|
Balance, end of period
|
$ 8,629
|
$ 1,892
|
$ 16,050
|
$ 2,305
|
$ 6,208
|
$ 35,084
|
-19-
|
At period end and for the three months ended September 30, 2019
|
|
Residential
|
Construction
|
Commercial
|
|
|
|
(dollars in thousands)
|
Real Estate
|
Real Estate
|
Real Estate
|
Consumer
|
Commercial
|
Total
|
Allowance for loan losses:
|
|
|
|
|
|
|
Balance, beginning of period
|
$ 3,706
|
$ 1,365
|
$ 9,399
|
$ 1,046
|
$ 4,387
|
$ 19,903
|
Provision charged to expense
|
(134)
|
174
|
376
|
96
|
384
|
896
|
Losses charged off
|
-
|
-
|
-
|
(72)
|
(35)
|
(107)
|
Recoveries
|
-
|
-
|
14
|
4
|
-
|
18
|
Balance, end of period
|
$ 3,572
|
$ 1,539
|
$ 9,789
|
$ 1,074
|
$ 4,736
|
$ 20,710
|
Ending Balance: individually
evaluated for impairment
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
Ending Balance: collectively
evaluated for impairment
|
$ 3,572
|
$ 1,539
|
$ 9,789
|
$ 1,074
|
$ 4,736
|
$ 20,710
|
Ending Balance: loans acquired
with deteriorated credit quality
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
|
At June 30, 2020
|
|
Residential
|
Construction
|
Commercial
|
|
|
|
(dollars in thousands)
|
Real Estate
|
Real Estate
|
Real Estate
|
Consumer
|
Commercial
|
Total
|
Allowance for loan losses:
|
|
|
|
|
|
|
Balance, end of period
|
$ 4,875
|
$ 2,010
|
$ 12,132
|
$ 1,182
|
$ 4,940
|
$ 25,139
|
Ending Balance: individually
evaluated for impairment
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
Ending Balance: collectively
evaluated for impairment
|
$ 4,875
|
$ 2,010
|
$ 12,132
|
$ 1,182
|
$ 4,940
|
$ 25,139
|
Ending Balance: loans acquired
with deteriorated credit quality
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
Loans:
|
|
|
|
|
|
|
Ending Balance: individually
evaluated for impairment
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
Ending Balance: collectively
evaluated for impairment
|
$ 626,085
|
$ 106,194
|
$ 872,716
|
$ 80,767
|
$ 463,902
|
$ 2,149,664
|
Ending Balance: loans acquired
with deteriorated credit quality
|
$ 1,272
|
$ 1,278
|
$ 14,703
|
$ -
|
$ 4,546
|
$ 21,799
|
Included in the Company’s loan portfolio are certain loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination, which are considered purchased credit deteriorated (PCD) loans. Prior to the July 1, 2020 adoption of ASU 2016-13, these loans were accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were described as purchased credit impaired (PCI) loans. Under ASC 310-30, these loans were written down at acquisition to an amount estimated to be collectible, and, unless there was further deterioration following the acquisition, an ALLL was not recognized for these loans. As a result, certain historical ratios regarding the Company’s loan portfolio and credit quality cannot be used to compare the Company to peer companies or to compare the Company’s credit quality over time. The ratios particularly affected by accounting under ASC 310-30 include the allowance as a percentage of loans, nonaccrual loans, and nonperforming assets, and nonaccrual loans and nonperforming loans as a percentage of total loans. For more information about the transition from PCI to PCD status of the Company’s acquired loans, see Note 2: Organization and Summary of Significant Accounting Policies, Loans.
Credit Quality Indicators. The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination, and is updated on a quarterly basis for loans risk rated Watch, Special Mention, Substandard, or Doubtful. In addition, lending relationships of $3 million or more, exclusive of any consumer or owner-occupied residential loan, are subject to an annual credit analysis which is prepared by the loan administration department and presented to a loan committee with appropriate lending authority. A sample of lending relationships in excess of $1 million (exclusive of
-20-
single-family residential real estate loans) are subject to an independent loan review annually, in order to verify risk ratings. The Company uses the following definitions for risk ratings:
Watch – Loans classified as watch exhibit weaknesses that require more than usual monitoring. Issues may include deteriorating financial condition, payments made after due date but within 30 days, adverse industry conditions or management problems.
Special Mention – Loans classified as special mention exhibit signs of further deterioration but still generally make payments within 30 days. This is a transitional rating and loans should typically not be rated Special Mention for more than 12 months.
Substandard – Loans classified as substandard possess weaknesses that jeopardize the ultimate collection of the principal and interest outstanding. These loans exhibit continued financial losses, ongoing delinquency, overall poor financial condition, and insufficient collateral. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful have all the weaknesses of substandard loans, and have deteriorated to the level that there is a high probability of substantial loss.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.
A periodic review of selected credits (based on loan size and type) is conducted to identify loans with heightened risk or probable losses and to assign risk grades. The primary responsibility for this review rests with loan administration personnel. This review is supplemented with periodic examinations of both selected credits and the credit review process by the Company’s internal audit function and applicable regulatory agencies. The information from these reviews assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit continues to share similar risk characteristics with collectively evaluated loan pools, or whether credit losses for the loan should be evaluated on an individual loan basis.
-21-
The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and year of origination as of September 30, 2020. This table includes PCD loans, which are reported according to risk categorization after acquisition based on the Company’s standards for such classification:
|
|
|
|
|
|
|
Revolving
|
|
|
2021
|
2020
|
2019
|
2018
|
2017
|
Prior
|
loans
|
Total
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
Pass
|
$ 123,469
|
$ 225,522
|
$ 65,243
|
$ 53,150
|
$ 38,183
|
$ 117,755
|
$ 5,416
|
$ 628,738
|
Watch
|
125
|
122
|
419
|
-
|
98
|
876
|
-
|
1,640
|
Special Mention
|
-
|
-
|
-
|
14
|
-
|
24
|
-
|
38
|
Substandard
|
145
|
1,007
|
227
|
73
|
-
|
3,818
|
-
|
5,270
|
Doubtful
|
-
|
-
|
-
|
-
|
-
|
32
|
-
|
32
|
Total Residential Real Estate
|
$ 123,739
|
$ 226,651
|
$ 65,889
|
$ 53,237
|
$ 38,281
|
$ 122,505
|
$ 5,416
|
$ 635,718
|
|
|
|
|
|
|
|
|
|
Construction Real Estate
|
|
|
|
|
|
|
|
|
Pass
|
$ 42,502
|
$ 52,358
|
$ 6,914
|
$ -
|
$ -
|
$ -
|
$ 205
|
$ 101,979
|
Watch
|
-
|
-
|
417
|
3,949
|
-
|
-
|
-
|
4,366
|
Special Mention
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Substandard
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total Construction Real Estate
|
$ 42,502
|
$ 52,358
|
$ 7,331
|
$ 3,949
|
$ -
|
$ -
|
$ 205
|
$ 106,345
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
Pass
|
$ 64,829
|
$ 222,926
|
$ 151,121
|
$ 158,268
|
$ 87,699
|
$ 117,612
|
$ 27,117
|
$ 829,572
|
Watch
|
508
|
9,348
|
10,611
|
4,956
|
14,252
|
1,493
|
904
|
42,072
|
Special Mention
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Substandard
|
1,222
|
6,149
|
560
|
285
|
2,718
|
1,369
|
-
|
12,303
|
Doubtful
|
-
|
-
|
888
|
-
|
-
|
-
|
-
|
888
|
Total Commercial Real Estate
|
$ 66,559
|
$ 238,423
|
$ 163,180
|
$ 163,509
|
$ 104,669
|
$ 120,474
|
$ 28,021
|
$ 884,835
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Pass
|
$ 7,540
|
$ 17,077
|
$ 7,148
|
$ 2,512
|
$ 1,289
|
$ 788
|
$ 44,316
|
$ 80,670
|
Watch
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Special Mention
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Substandard
|
-
|
42
|
15
|
41
|
25
|
42
|
71
|
236
|
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total Consumer
|
$ 7,540
|
$ 17,119
|
$ 7,163
|
$ 2,553
|
$ 1,314
|
$ 830
|
$ 44,387
|
$ 80,906
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
Pass
|
$ 27,116
|
$ 232,331
|
$ 37,049
|
$ 21,354
|
$ 10,050
|
$ 13,662
|
$ 130,547
|
$ 472,109
|
Watch
|
1,009
|
162
|
64
|
8
|
12
|
-
|
1,725
|
2,980
|
Special Mention
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Substandard
|
35
|
1,584
|
1,640
|
462
|
180
|
8
|
2,584
|
6,493
|
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total Commercial
|
$ 28,160
|
$ 234,077
|
$ 38,753
|
$ 21,824
|
$ 10,242
|
$ 13,670
|
$ 134,856
|
$ 481,582
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
|
|
|
|
|
|
Pass
|
$ 265,456
|
$ 750,214
|
$ 267,475
|
$ 235,284
|
$ 137,221
|
$ 249,817
|
$ 207,601
|
$ 2,113,068
|
Watch
|
1,642
|
9,632
|
11,511
|
8,913
|
14,362
|
2,369
|
2,629
|
51,058
|
Special Mention
|
-
|
-
|
-
|
14
|
-
|
24
|
-
|
38
|
Substandard
|
1,402
|
8,782
|
2,442
|
861
|
2,923
|
5,237
|
2,655
|
24,302
|
Doubtful
|
-
|
-
|
888
|
-
|
-
|
32
|
-
|
920
|
Total
|
$ 268,500
|
$ 768,628
|
$ 282,316
|
$ 245,072
|
$ 154,506
|
$ 257,479
|
$ 212,885
|
$ 2,189,386
|
At September 30, 2020, PCD loans comprised $5.6 million of credits rated “Pass”; $10.1 million of credits rated “Watch”; none rated “Special Mention”; $5.7 million of credits rated “Substandard”; and none rated “Doubtful”.
-22-
The following table presents the credit risk profile of the Company’s loan portfolio (excluding loans in process and deferred loan fees) based on rating category and payment activity as of June 30, 2020. This table includes PCI loans, which were reported according to risk categorization after acquisition based on the Company’s standards for such classification:
|
June 30, 2020
|
|
Residential
|
Construction
|
Commercial
|
|
|
(dollars in thousands)
|
Real Estate
|
Real Estate
|
Real Estate
|
Consumer
|
Commercial
|
Pass
|
$ 620,004
|
$ 103,105
|
$ 829,276
|
$ 80,517
|
$ 457,385
|
Watch
|
1,900
|
4,367
|
45,262
|
45
|
4,708
|
Special Mention
|
-
|
-
|
403
|
25
|
-
|
Substandard
|
5,453
|
-
|
11,590
|
180
|
6,355
|
Doubtful
|
-
|
-
|
888
|
-
|
-
|
Total
|
$ 627,357
|
$ 107,472
|
$ 887,419
|
$ 80,767
|
$ 468,448
|
At June 30, 2020, PCI loans comprised $5.9 million of credits rated “Pass”; $10.3 million of credits rated “Watch”, none rated “Special Mention”, $5.6 million of credits rated “Substandard” and none rated “Doubtful”.
Past-due Loans. The following tables present the Company’s loan portfolio aging analysis (excluding loans in process and deferred loan fees) as of September 30 and June 30, 2020. These tables include PCD and PCI loans, which are reported according to aging analysis after acquisition based on the Company’s standards for such classification:
|
September 30, 2020
|
|
|
|
Greater Than
|
|
|
|
Greater Than 90
|
|
30-59 Days
|
60-89 Days
|
90 Days
|
Total
|
|
Total Loans
|
Days Past Due
|
(dollars in thousands)
|
Past Due
|
Past Due
|
Past Due
|
Past Due
|
Current
|
Receivable
|
and Accruing
|
Real Estate Loans:
|
|
|
|
|
|
|
|
Residential
|
$ 974
|
$ 37
|
$ 1,343
|
$ 2,354
|
$ 633,364
|
$ 635,718
|
$ -
|
Construction
|
200
|
-
|
-
|
200
|
106,145
|
106,345
|
-
|
Commercial
|
1,008
|
9
|
760
|
1,777
|
883,058
|
884,835
|
-
|
Consumer loans
|
761
|
78
|
248
|
1,087
|
79,819
|
80,906
|
-
|
Commercial loans
|
756
|
243
|
490
|
1,489
|
480,093
|
481,582
|
-
|
Total loans
|
$ 3,699
|
$ 367
|
$ 2,841
|
$ 6,907
|
$ 2,182,479
|
$ 2,189,386
|
$ -
|
|
June 30, 2020
|
|
|
|
Greater Than
|
|
|
|
Greater Than 90
|
|
30-59 Days
|
60-89 Days
|
90 Days
|
Total
|
|
Total Loans
|
Days Past Due
|
(dollars in thousands)
|
Past Due
|
Past Due
|
Past Due
|
Past Due
|
Current
|
Receivable
|
and Accruing
|
Real Estate Loans:
|
|
|
|
|
|
|
|
Residential
|
$ 772
|
$ 378
|
$ 654
|
$ 1,804
|
$ 625,553
|
$ 627,357
|
$ -
|
Construction
|
-
|
-
|
-
|
-
|
107,472
|
107,472
|
-
|
Commercial
|
641
|
327
|
1,073
|
2,041
|
885,378
|
887,419
|
-
|
Consumer loans
|
180
|
53
|
193
|
426
|
80,341
|
80,767
|
-
|
Commercial loans
|
93
|
1,219
|
810
|
2,122
|
466,326
|
468,448
|
-
|
Total loans
|
$ 1,686
|
$ 1,977
|
$ 2,730
|
$ 6,393
|
$ 2,165,070
|
$ 2,171,463
|
$ -
|
Under the CARES Act, financial institutions have the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Loans with such modifications in effect at September 30, 2020, included $93.6 million in loans reported as current in the above table, none of which were past due. Loans with such modifications in effect at June 30, 2020, included $380.1 million in loans reported as current in the above table, while an additional $29,000 of consumer loans and $1,000 in residential real estate loans with such modifications were reported as 30-59 days past due, and $66,000 of commercial loans with such modifications were reported as 60-89 days past due.
At September 30, and June 30, 2020 there were no PCD or PCI loans that were greater than 90 days past due.
-23-
Loans that experience insignificant payment delays and payment shortfalls generally are not adversely classified or determined to not share similar risk characteristics with collectively evaluated pools of loans for determination of the ACL estimate. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Significant payment delays or shortfalls may lead to a determination that a loan should be individually evaluated for estimated credit losses.
Collateral-dependent Loans. At September 30, 2020, there were no collateral-dependent loans that were individually evaluated to determine expected credit losses.
Impairment. Prior to the July 1, 2020, adoption of ASU 2016-13, a loan was considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it was probable the Company would be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans included nonperforming loans, as well as performing loans modified in troubled debt restructurings where concessions were granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
The table below presents impaired loans (excluding loans in process and deferred loan fees) as of June 30, 2020. The table includes PCI loans at June 30, 2020 for which it was deemed probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. In an instance where, subsequent to the acquisition, the Company determined it was probable, for a specific loan, that cash flows received would exceed the amount previously expected, the Company will recalculate the amount of accretable yield in order to recognize the improved cash flow expectation as additional interest income over the remaining life of the loan. These loans, however, continued to be reported as impaired loans. In an instance where, subsequent to the acquisition, the Company determined it was probable, for a specific loan, that cash flows received would be less than the amount previously expected, the Company would allocate a specific allowance under the terms of ASC 310-10-35.
|
June 30, 2020
|
|
Recorded
|
Unpaid Principal
|
Specific
|
(dollars in thousands)
|
Balance
|
Balance
|
Allowance
|
Loans without a specific valuation allowance:
|
|
Residential real estate
|
$ 3,811
|
$ 4,047
|
$ -
|
Construction real estate
|
1,277
|
1,312
|
-
|
Commercial real estate
|
19,271
|
23,676
|
-
|
Consumer loans
|
-
|
-
|
-
|
Commercial loans
|
5,040
|
6,065
|
-
|
Loans with a specific valuation allowance:
|
|
|
|
Residential real estate
|
$ -
|
$ -
|
$ -
|
Construction real estate
|
-
|
-
|
-
|
Commercial real estate
|
-
|
-
|
-
|
Consumer loans
|
-
|
-
|
-
|
Commercial loans
|
-
|
-
|
-
|
Total:
|
|
|
|
Residential real estate
|
$ 3,811
|
$ 4,047
|
$ -
|
Construction real estate
|
$ 1,277
|
$ 1,312
|
$ -
|
Commercial real estate
|
$ 19,271
|
$ 23,676
|
$ -
|
Consumer loans
|
$ -
|
$ -
|
$ -
|
Commercial loans
|
$ 5,040
|
$ 6,065
|
$ -
|
At June 30, 2020, PCI loans comprised $21.8 million of impaired loans without a specific valuation allowance.
-24-
The following table presents information regarding interest income recognized on impaired loans:
|
For the three-month period ended
|
|
September 30, 2019
|
|
Average
|
|
(dollars in thousands)
|
Investment in
|
Interest Income
|
|
Impaired Loans
|
Recognized
|
Residential Real Estate
|
$ 1,677
|
$ 23
|
Construction Real Estate
|
1,306
|
48
|
Commercial Real Estate
|
17,721
|
335
|
Consumer Loans
|
-
|
-
|
Commercial Loans
|
5,812
|
93
|
Total Loans
|
$ 26,516
|
$ 499
|
Interest income on impaired loans recognized on a cash basis in the three-month period ended September 30, 2019, was immaterial. For the three-month period ended September 30, 2019, the amount of interest income recorded for impaired loans that represented a change in the present value of cash flows attributable to the passage of time was approximately $83,000.
Nonaccrual Loans. The following table presents the Company’s amortized cost basis of nonaccrual loans segmented by class of loans at September 30 and June 30, 2020. The table excludes performing TDRs.
(dollars in thousands)
|
September 30, 2020
|
June 30, 2020
|
Residential real estate
|
$ 4,339
|
$ 4,010
|
Construction real estate
|
-
|
-
|
Commercial real estate
|
3,052
|
3,106
|
Consumer loans
|
255
|
196
|
Commercial loans
|
1,129
|
1,345
|
Total loans
|
$ 8,775
|
$ 8,657
|
At September 30, 2020, there were no nonaccrual loans individually evaluated for which no ACL was recorded. Interest income recognized on nonaccrual loans in the three-month periods ended September 30, 2019 and 2020, was immaterial.
Troubled Debt Restructurings. Prior to the July 1, 2020, adoption of ASU 2016-13, loans restructured as TDRs were included in certain loan categories classified as impaired loans, where economic concessions have been granted to borrowers who have experienced financial difficulties. Subsequent to the adoption of ASU 2016-13, TDRs are evaluated to determine whether they share similar risk characteristics with collectively evaluated loan pools, or must be individually evaluated. These concessions typically result from our loss mitigation activities, and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. In general, the Company’s loans that have been subject to classification as TDRs are the result of guidance under ASU No. 2011-02, which indicates that the Company may not consider the borrower’s effective borrowing rate on the old debt immediately before the restructuring in determining whether a concession has been granted. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.
-25-
During the three-month periods ended September 30, 2020 and 2019, certain loans modified were classified as TDRs. They are shown, segregated by class, in the table below:
|
|
For the three-month periods ended
|
|
|
September 30, 2020
|
September 30, 2019
|
|
|
Number of
|
Recorded
|
Number of
|
Recorded
|
(dollars in thousands)
|
|
modifications
|
Investment
|
modifications
|
Investment
|
Residential real estate
|
|
1
|
$ 98
|
-
|
$ -
|
Construction real estate
|
|
-
|
-
|
-
|
-
|
Commercial real estate
|
|
2
|
1,840
|
-
|
-
|
Consumer loans
|
|
-
|
-
|
-
|
-
|
Commercial loans
|
|
1
|
36
|
-
|
-
|
Total
|
|
4
|
$ 1,974
|
-
|
$ -
|
Performing loans classified as TDRs and outstanding at September 30 and June 30, 2020, segregated by class, are shown in the table below. Nonperforming TDRs are shown as nonaccrual loans.
|
|
September 30, 2020
|
June 30, 2020
|
|
|
Number of
|
Recorded
|
Number of
|
Recorded
|
(dollars in thousands)
|
|
modifications
|
Investment
|
modifications
|
Investment
|
Residential real estate
|
|
3
|
$ 1,015
|
3
|
$ 791
|
Construction real estate
|
|
-
|
-
|
-
|
-
|
Commercial real estate
|
|
7
|
3,904
|
10
|
4,544
|
Consumer loans
|
|
-
|
-
|
-
|
-
|
Commercial loans
|
|
8
|
3,229
|
7
|
3,245
|
Total
|
|
18
|
$ 8,148
|
20
|
$ 8,580
|
Residential Real Estate Foreclosures. The Company may obtain physical possession of real estate collateralizing a residential mortgage loan or home equity loan via foreclosure or in-substance repossession. As of September 30, and June 30, 2020, the carrying value of foreclosed residential real estate properties as a result of obtaining physical possession was $565,000 and $563,000, respectively. In addition, as of September 30 and June 30, 2020, the Company had residential mortgage loans and home equity loans with a carrying value of $329,000 and $435,000, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process.
Purchased Credit Deteriorated Loans. Prior to the July 1, 2020, adoption of ASU 2016-13, loans acquired in an acquisition that had evidence of credit quality since origination and for which it was probable that the Company would be unable to collect all contractually required payments receivable were considered PCI. Subsequent to the July 1, 2020, adoption of ASU 2016-13, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. All loans considered to be PCI prior to July 1, 2020, were converted to PCD on that date.
The carrying amount of $21.8 million in PCI loans was included in the balance sheet amount of loans receivable at June 30, 2020, with no associated ACL. In accordance with ASU 2016-13, the Company did not reassess whether the PCI loans met the criteria of PCD loans as of the adoption date. The amortized cost of the PCD loans were adjusted to reflect the addition of $434,000 to the ACL. PCD loans receivable, net of ACL, totaling $20.9 million were included in the balance sheet amount of loans receivable at September 30, 2020.
During the three-month periods ended September 30, 2019 and 2020, the Company did not increase or reverse ALLL or ACL related to PCI or PCD loans.
-26-
Note 5: Premises and Equipment
Following is a summary of premises and equipment:
(dollars in thousands)
|
September 30, 2020
|
June 30, 2020
|
Land
|
$ 12,514
|
$ 12,585
|
Buildings and improvements
|
56,675
|
56,039
|
Construction in progress
|
35
|
435
|
Furniture, fixtures, equipment and software
|
18,276
|
18,109
|
Automobiles
|
120
|
120
|
Operating leases ROU asset
|
1,944
|
1,965
|
|
89,564
|
89,253
|
Less accumulated depreciation
|
25,134
|
24,147
|
|
$ 64,430
|
$ 65,106
|
Leases. The Company adopted ASU 2016-02, Leases (Topic 842), on July 1, 2019, using the modified retrospective transition approach whereby comparative periods were not restated. The Company also elected certain relief options under the ASU, including the option not to recognize right of use asset and lease liabilities that arise from short-term leases (leases with terms of twelve months or less). The Company has five leased properties and numerous office equipment lease agreements in which it is the lessee, with lease terms exceeding twelve months.
All of the leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of ASU 2016-02, these operating leases are now included as a ROU asset in the premises and equipment line item on the Company’s consolidated balance sheets. The corresponding lease liability is included in the accounts payable and other liabilities line item on the Company’s consolidated balance sheets. Because these leases are classified as operating leases, the adoption of the new standard did not have a material effect on lease expense on the Company’s consolidated statements of income.
ASU 2016-02 also requires certain other accounting elections. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning those with terms under twelve months. ROU assets or lease liabilities are not to be recognized for short-term leases. The calculated amount of the ROU assets and lease liabilities in the table below are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease
-27-
liability. Regarding the discount rate, the ASU requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception over a similar term. The discount rate utilized was 5%. The expected lease terms range from 18 months to 20 years.
|
September 30, 2020
|
June 30, 2020
|
Consolidated Balance Sheet
|
|
|
Operating leases right of use asset
|
$ 1,944
|
$ 1,965
|
Operating leases liability
|
$ 1,944
|
$ 1,965
|
|
Three Months Ended September 30,
|
|
2020
|
2019
|
Consolidated Statement of Income
|
|
|
Operating lease costs classified as occupancy and equipment expense
|
$ 72
|
$ 57
|
(includes short-term lease costs)
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$ 67
|
$ 39
|
ROU assets obtained in exchange for operating lease obligations:
|
$ -
|
$ 2,004
|
For the three months ended September 30, 2020 and 2019, lease expense was $72,000 and $57,000, respectively. At September 30, 2020, future expected lease payments for leases with terms exceeding one year were as follows:
(dollars in thousands)
|
|
2021
|
$ 269
|
2022
|
243
|
2023
|
243
|
2024
|
243
|
2025
|
242
|
Thereafter
|
2,134
|
Future lease payments expected
|
$ 3,374
|
The Company leases facilities it owns or portions of facilities it owns to other third parties. The Company has determined that all of these lease agreements, in terms of being the lessor, are classified as operating leases. For the three month periods ended September 30, 2020 and 2019, income recognized from these lessor agreements was $75,000 and $82,000, respectively, and was included in net occupancy and equipment expense.
Note 6: Deposits
Deposits are summarized as follows:
|
|
|
(dollars in thousands)
|
September 30, 2020
|
June 30, 2020
|
Non-interest bearing accounts
|
$ 307,023
|
$ 316,048
|
NOW accounts
|
789,486
|
781,937
|
Money market deposit accounts
|
234,948
|
231,162
|
Savings accounts
|
189,218
|
181,229
|
Certificates
|
647,399
|
674,471
|
Total Deposit Accounts
|
$ 2,168,074
|
$ 2,184,847
|
-28-
Note 7: Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Options outstanding at September 30, 2020 and 2019, to purchase 50,500, and 15,500 shares of common stock, respectively, were not included in the computation of diluted earnings per common share for each of the three month periods because the exercise prices of such options were greater than the average market prices of the common stock for the three months ended September 30, 2020 and 2019, respectively.
Note 8: Income Taxes
The Company and its subsidiary files income tax returns in the U.S. Federal jurisdiction and various states. The Company is no longer subject to federal and state examinations by tax authorities for tax years ending June 30, 2015 and before. The Company recognized no interest or penalties related to income taxes.
The Company’s income tax provision is comprised of the following components:
|
For the three-month periods ended
|
(dollars in thousands)
|
09/30/2020
|
September 30, 2019
|
Income taxes
|
|
|
Current
|
$ 4,750
|
$ 1,970
|
Deferred
|
(2,003)
|
6
|
Total income tax provision
|
$ 2,747
|
$ 1,976
|
-29-
The components of net deferred tax assets are summarized as follows:
(dollars in thousands)
|
September 30, 2020
|
June 30, 2020
|
Deferred tax assets:
|
|
|
Provision for losses on loans
|
$ 8,023
|
$ 5,802
|
Accrued compensation and benefits
|
539
|
825
|
NOL carry forwards acquired
|
136
|
149
|
Minimum Tax Credit
|
130
|
130
|
Unrealized loss on other real estate
|
187
|
257
|
Other
|
120
|
26
|
Total deferred tax assets
|
9,135
|
7,189
|
|
|
|
Deferred tax liabilities:
|
|
|
Purchase accounting adjustments
|
42
|
64
|
Depreciation
|
1,785
|
1,665
|
FHLB stock dividends
|
120
|
120
|
Prepaid expenses
|
208
|
259
|
Unrealized gain on available for sale securities
|
1,304
|
1,265
|
Other
|
-
|
104
|
Total deferred tax liabilities
|
3,459
|
3,477
|
|
|
|
Net deferred tax asset
|
$ 5,676
|
$ 3,712
|
As of September 30, 2020, the Company had approximately $675,000 and $119,000 in federal and state net operating loss carryforwards, respectively, which were acquired in the July 2009 acquisition of Southern Bank of Commerce, the February 2014 acquisition of Citizens State Bankshares of Bald Knob, Inc., the August 2014 acquisition of Peoples Service Company, and the June 2017 acquisition of Tammcorp, Inc. The amount reported is net of the IRC Sec. 382 limitation, or state equivalent, related to utilization of net operating loss carryforwards of acquired corporations. Unless otherwise utilized, the net operating losses will begin to expire in 2027.
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:
|
For the three-month periods ended
|
(dollars in thousands)
|
September 30, 2020
|
September 30, 2019
|
Tax at statutory rate
|
$ 2,674
|
$ 2,059
|
Increase (reduction) in taxes
resulting from:
|
|
|
Nontaxable municipal income
|
(103)
|
(113)
|
State tax, net of Federal benefit
|
241
|
109
|
Cash surrender value of
Bank-owned life insurance
|
(59)
|
(53)
|
Tax credit benefits
|
26
|
-
|
Other, net
|
(32)
|
(26)
|
Actual provision
|
$ 2,747
|
$ 1,976
|
For the three month periods ended September 30, 2020 and 2019, income tax expense at the statutory rate was calculated using a 21% annual effective tax rate (AETR).
Tax credit benefits are recognized under the deferral method of accounting for investments in tax credits.
-30-
Note 9: 401(k) Retirement Plan
The Bank has a 401(k) retirement plan that covers substantially all eligible employees. The Bank made a “safe harbor” matching contribution to the Plan of up to 4% of eligible compensation, depending upon the percentage of eligible pay deferred into the plan by the employee, and also made additional, discretionary profit-sharing contributions for fiscal 2020; for fiscal 2021, the Company has maintained the safe harbor matching contribution of up to 4%, and expects to continue to make additional, discretionary profit-sharing contributions. During the three-month period ended September 30, 2020, retirement plan expenses recognized for the Plan totaled approximately $457,000, as compared to $381,000 for the same period of the prior fiscal year. Employee deferrals and safe harbor contributions are fully vested. Profit-sharing or other contributions vest over a period of five years.
Note 10: Subordinated Debt
Southern Missouri Statutory Trust I issued $7.0 million of Floating Rate Capital Securities (the “Trust Preferred Securities”) with a liquidation value of $1,000 per share in March 2004. The securities are due in 30 years, redeemable after five years and bear interest at a floating rate based on LIBOR. At September 30, 2020, the current rate was 3.00%. The securities represent undivided beneficial interests in the trust, which was established by the Company for the purpose of issuing the securities. The Trust Preferred Securities were sold in a private transaction exempt from registration under the Securities Act of 1933, as amended (the “Act”) and have not been registered under the Act. The securities may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Southern Missouri Statutory Trust I used the proceeds from the sale of the Trust Preferred Securities to purchase Junior Subordinated Debentures of the Company. The Company used its net proceeds for working capital and investment in its subsidiaries.
In connection with its October 2013 acquisition of Ozarks Legacy Community Financial, Inc. (OLCF), the Company assumed $3.1 million in floating rate junior subordinated debt securities. The debt securities had been issued in June 2005 by OLCF in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At September 30, 2020, the current rate was 2.70%. The carrying value of the debt securities was approximately $2.7 million at September 30 and June 30, 2020.
In connection with its August 2014 acquisition of Peoples Service Company, Inc. (PSC), the Company assumed $6.5 million in floating rate junior subordinated debt securities. The debt securities had been issued in 2005 by PSC’s subsidiary bank holding company, Peoples Banking Company, in connection with the sale of trust preferred securities, bear interest at a floating rate based on LIBOR, are now redeemable at par, and mature in 2035. At September 30, 2020, the current rate was 2.05%. The carrying value of the debt securities was approximately $5.3 million at September 30, and June 30, 2020.
Note 11: Fair Value Measurements
ASC Topic 820, Fair Value Measurements, defines fair value as 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. Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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 active 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
-31-
Recurring Measurements. The following table presents the fair value measurements 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 and June 30, 2020:
|
Fair Value Measurements at September 30, 2020, Using:
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
Significant Other Observable Inputs
|
Significant Unobservable Inputs
|
(dollars in thousands)
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
State and political subdivisions
|
$ 44,487
|
$ -
|
$ 44,487
|
$ -
|
Other securities
|
9,200
|
-
|
9,200
|
-
|
Mortgage-backed GSE residential
|
121,841
|
-
|
121,841
|
-
|
|
Fair Value Measurements at June 30, 2020, Using:
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
Significant Other Observable Inputs
|
Significant Unobservable Inputs
|
(dollars in thousands)
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
State and political subdivisions
|
$ 41,988
|
$ -
|
$ 41,988
|
$ -
|
Other securities
|
7,624
|
-
|
7,624
|
-
|
Mortgage-backed GSE residential
|
126,912
|
-
|
126,912
|
-
|
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.
Available-for-sale Securities. When quoted market prices are available in an active market, securities are classified within Level 1. If quoted market prices are not available, then fair values are estimated using pricing models, or quoted prices of securities with similar characteristics. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
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Nonrecurring Measurements. The following tables present the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fell at September 30 and June 30, 2020:
|
|
Fair Value Measurements at September 30, 2020, Using:
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Active Markets for
|
Significant Other
|
Significant
|
|
|
|
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
(dollars in thousands)
|
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|
|
|
|
|
|
Foreclosed and repossessed assets held for sale
|
$ 166
|
$ -
|
$ -
|
$ 166
|
|
|
Fair Value Measurements at June 30, 2020, Using:
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
Active Markets for
|
Significant Other
|
Significant
|
|
|
|
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
(dollars in thousands)
|
|
Fair Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|
|
|
|
|
|
Foreclosed and repossessed assets held for sale
|
$ 2,211
|
$ -
|
$ -
|
$ 2,211
|
The following table presents losses recognized on assets measured on a non-recurring basis for the three-month periods ended September 30, 2020 and 2019:
|
|
|
For the three months ended
|
(dollars in thousands)
|
|
|
September 30, 2020
|
September 30, 2019
|
Foreclosed and repossessed assets held for sale
|
$ (36)
|
$ (1)
|
Total losses on assets measured on a non-recurring basis
|
$ (36)
|
$ (1)
|
The following is a description of 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 and liabilities pursuant to the valuation hierarchy. For assets classified within Level 3 of fair value hierarchy, the process used to develop the reported fair value process is described below.
Foreclosed and Repossessed Assets Held for Sale. Foreclosed and repossessed assets held for sale are valued at the time the loan is foreclosed upon or collateral is repossessed and the asset is transferred to foreclosed or repossessed assets held for sale. The value of the asset is based on third party or internal appraisals, less estimated costs to sell and appropriate discounts, if any. The appraisals are generally discounted based on current and expected market conditions that may impact the sale or value of the asset and management’s knowledge and experience with similar assets. Such discounts typically may be significant and result in a Level 3 classification of the inputs for determining fair value of these assets. Foreclosed and repossessed assets held for sale are continually evaluated for additional impairment and are adjusted accordingly if impairment is identified.
Unobservable (Level 3) Inputs. The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
(dollars in thousands)
|
|
Fair value at
September 30, 2020
|
Valuation
technique
|
Unobservable
inputs
|
Range of
inputs applied
|
Weighted-average
inputs applied
|
Nonrecurring Measurements
|
|
|
|
|
|
|
Foreclosed and repossessed assets
|
$ 166
|
Third party appraisal
|
Marketability discount
|
24.5% - 60.4%
|
41.3%
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Fair value at
June 30, 2020
|
Valuation
technique
|
Unobservable
inputs
|
Range of
inputs applied
|
Weighted-average
inputs applied
|
Nonrecurring Measurements
|
|
|
|
|
|
|
Foreclosed and repossessed assets
|
$ 2,211
|
Third party appraisal
|
Marketability discount
|
8.0% - 56.9%
|
15.7%
|
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Fair Value of Financial Instruments. The following table presents estimated fair values of the Company’s financial instruments not reported at fair value and the level within the fair value hierarchy in which the fair value measurements fell at September 30 and June 30, 2020.
|
|
September 30, 2020
|
|
|
|
Quoted Prices
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
Markets for
|
Significant Other
|
Unobservable
|
|
|
Carrying
|
Identical Assets
|
Observable Inputs
|
Inputs
|
(dollars in thousands)
|
|
Amount
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Financial assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ 41,875
|
$ 41,875
|
$ -
|
$ -
|
Interest-bearing time deposits
|
|
975
|
-
|
975
|
-
|
Stock in FHLB
|
|
6,939
|
-
|
6,939
|
-
|
Stock in Federal Reserve Bank of St. Louis
|
|
5,017
|
-
|
5,017
|
-
|
Loans receivable, net
|
|
2,150,463
|
-
|
-
|
2,167,748
|
Accrued interest receivable
|
|
13,766
|
-
|
13,766
|
-
|
Financial liabilities
|
|
|
|
|
|
Deposits
|
|
2,168,074
|
1,520,675
|
-
|
651,528
|
Advances from FHLB
|
|
85,637
|
-
|
87,514
|
-
|
Accrued interest payable
|
|
1,402
|
-
|
1,402
|
-
|
Subordinated debt
|
|
15,168
|
-
|
-
|
13,455
|
Unrecognized financial instruments (net of contract amount)
|
|
|
|
|
|
Commitments to originate loans
|
|
-
|
-
|
-
|
-
|
Letters of credit
|
|
-
|
-
|
-
|
-
|
Lines of credit
|
|
-
|
-
|
-
|
-
|
|
|
June 30, 2020
|
|
|
|
Quoted Prices
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
Markets for
|
Significant Other
|
Unobservable
|
|
|
Carrying
|
Identical Assets
|
Observable Inputs
|
Inputs
|
(dollars in thousands)
|
|
Amount
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Financial assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ 54,245
|
$ 54,245
|
$ -
|
$ -
|
Interest-bearing time deposits
|
|
974
|
-
|
974
|
-
|
Stock in FHLB
|
|
6,390
|
-
|
6,390
|
-
|
Stock in Federal Reserve Bank of St. Louis
|
|
4,363
|
-
|
4,363
|
-
|
Loans receivable, net
|
|
2,141,929
|
-
|
-
|
2,143,823
|
Accrued interest receivable
|
|
12,116
|
-
|
12,116
|
-
|
Financial liabilities
|
|
|
|
|
|
Deposits
|
|
2,184,847
|
1,508,740
|
-
|
676,816
|
Advances from FHLB
|
|
70,024
|
-
|
72,136
|
-
|
Accrued interest payable
|
|
1,646
|
-
|
1,646
|
-
|
Subordinated debt
|
|
15,142
|
-
|
-
|
11,511
|
Unrecognized financial instruments (net of contract amount)
|
|
|
|
|
|
Commitments to originate loans
|
|
-
|
-
|
-
|
-
|
Letters of credit
|
|
-
|
-
|
-
|
-
|
Lines of credit
|
|
-
|
-
|
-
|
-
|
-34-
PART I: Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
SOUTHERN MISSOURI BANCORP, INC.
General
Southern Missouri Bancorp, Inc. (Southern Missouri or Company) is a Missouri corporation and owns all of the outstanding stock of Southern Bank (the Bank). The Company’s earnings are primarily dependent on the operations of the Bank. As a result, the following discussion relates primarily to the operations of the Bank. The Bank’s deposit accounts are generally insured up to a maximum of $250,000 by the Deposit Insurance Fund (DIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). At September 30, 2020, the Bank operated from its headquarters, 46 full-service branch offices, and two limited-service branch offices. The Bank owns the office building and related land in which its headquarters are located, and 44 of its other branch offices. The remaining four branches are either leased or partially owned.
The significant accounting policies followed by Southern Missouri Bancorp, Inc. and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments, which are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported, have been included in the accompanying consolidated condensed financial statements.
The consolidated balance sheet of the Company as of June 30, 2020, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report filed with the Securities and Exchange Commission.
Management’s discussion and analysis of financial condition and results of operations 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 consolidated financial statements and accompanying notes. The following discussion reviews the Company’s condensed consolidated financial condition at September 30, 2020, and results of operations for the three-month periods ended September 30, 2020 and 2019.
Forward Looking Statements
This document contains statements about the Company and its subsidiaries which we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated to be realized by management. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by the Company and its management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of future performance. The important factors we discuss below, as well as other factors discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and identified in this filing and in our other filings with the SEC and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document:
·potential adverse impacts to the economic conditions in the Company’s local market areas, other markets where the Company has lending relationships, or other aspects of the Company’s business operations or financial markets, generally, resulting from the ongoing COVID-19 pandemic and any governmental or societal responses thereto;
·expected cost savings, synergies and other benefits from our merger and acquisition activities, including our ongoing and recently completed acquisitions, might not be realized within the anticipated time frames, to the extent anticipated, or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected;
-35-
·the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
·fluctuations in interest rates and in real estate values;
·monetary and fiscal policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the U.S. Government and other governmental initiatives affecting the financial services industry;
·the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
·our ability to access cost-effective funding;
·the timely development of and acceptance of our new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors’ products and services;
·fluctuations in real estate values and both residential and commercial real estate markets, as well as agricultural business conditions;
·demand for loans and deposits in our market area;
·legislative or regulatory changes that adversely affect our business;
·changes in accounting principles, policies, or guidelines;
·results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses or to write-down assets;
·the impact of technological changes; and
·our success at managing the risks involved in the foregoing.
The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.
The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.
Critical Accounting Policies
Accounting principles generally accepted in the United States of America are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company’s significant accounting policies, see “Notes to the Consolidated Financial Statements” in the Company’s 2020 Annual Report. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors. For a discussion of applying critical accounting policies, see “Critical Accounting Policies” beginning on page 51 in the Company’s 2020 Annual Report. On July 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses, also known as the current expected credit loss (“CECL”) standard, which created material changes to the existing critical accounting policy that existed at June 30, 2020. See Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 2: Organization and Summary of Significant Accounting Policies, for additional information.
COVID-19 Pandemic Response
Southern Missouri is committed to serving our communities in this difficult time, and to the safety of our team members and customers.
General operating conditions. Beginning Monday, March 23, 2020, the Company closed its lobbies to access except
-36-
by appointment, and encouraged customers to utilize our online, mobile, drive-thru, or integrated teller machines (ITMs) for service when possible. The Company began re-opening lobbies on Monday, May 4, 2020, subject to guidance by state and local authorities. In a limited number of instances, some facilities have again closed to the public for a short period of time due to unavailability of team members complying with quarantine orders from local health authorities. With the initial onset of the pandemic in March, and again on an ongoing basis as the number of cases and hospitalizations in our region increased over the summer months, the Company has worked to increase our telework capabilities, and we have had as many as 20% of our team members working remotely during the month of October either on a regular or rotating basis. No team members have been furloughed, and no furloughs are anticipated. Business travel has been limited where not considered urgent. A limited number of team members are on full or partial paid leave in accordance with provisions of the Families First Coronavirus Response Act (the FFCRA) or the CARES Act. The operations of the Company’s internal controls have not been significantly impacted by changes in our work environment.
SBA Paycheck Protection Program Lending. The Company originated approximately 1,700 loans totaling $138.6 million under the Small Business Administration’s Paycheck Protection Program (PPP) through September 30, 2020. A limited number were repaid by the borrower shortly after origination. At September 30, 2020, balances outstanding were $133.7 million. Through October 31, 2020, approximately 170 applications by borrowers for forgiveness totaling $11.4 million have been submitted by the Company to the SBA, but only 15 applications totaling $3.0 million have been approved by the SBA.
Deferrals and modifications. As of October 31, 2020, following regulatory guidance, the Company has agreements in place with borrowers to defer or modify payment arrangements for approximately 59 loans totaling $37.2 million, a level that is significantly reduced since June 30, 2020. These are loans that were otherwise current and performing, but anticipated difficulties in the coming months due to the pandemic response. Generally, the deferrals were initially granted for three-month periods, while interest-only modifications were for six-month periods. For more information regarding these deferrals and modifications, see discussion included at “Allowance for Credit Loss Activity.”
Executive Summary
Our results of operations depend primarily on our net interest margin, which is directly impacted by the interest rate environment. The net interest margin represents interest income earned on interest-earning assets (primarily real estate loans, commercial and agricultural loans, and the investment portfolio), less interest expense paid on interest-bearing liabilities (primarily interest-bearing transaction accounts, certificates of deposit, savings and money market deposit accounts, repurchase agreements, and borrowed funds), as a percentage of average interest-earning assets. Net interest margin is directly impacted by the spread between long-term interest rates and short-term interest rates, as our interest-earning assets, particularly those with initial terms to maturity or repricing greater than one year, generally price off longer term rates while our interest-bearing liabilities generally price off shorter term interest rates. This difference in longer term and shorter term interest rates is often referred to as the steepness of the yield curve. A steep yield curve – in which the difference in interest rates between short term and long term periods is relatively large – could be beneficial to our net interest income, as the interest rate spread between our interest-earning assets and interest-bearing liabilities would be larger. Conversely, a flat or flattening yield curve, in which the difference in rates between short term and long term periods is relatively small or shrinking, or an inverted yield curve, in which short term rates exceed long term rates, could have an adverse impact on our net interest income, as our interest rate spread could decrease.
Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, government policies and actions of regulatory authorities.
During the first three months of fiscal 2021, total assets decreased by $1.4 million. The decrease was primarily attributable to reduced cash and cash equivalent balances, and a modest decrease in available-for-sale (AFS) securities, partially offset by a modest increase in loans, net of the allowance for credit losses (ACL), and an increase in accrued interest receivable. Cash equivalents and time deposits decreased by a combined $12.4 million; AFS securities decreased $1.0 million; loans, net of the ACL, increased $8.5 million; and accrued interest receivable increased $1.7 million. The impact of the adoption of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), increased the ACL by $9.3 million, of which $434,000 related to the transition from PCI to PCD methodology, and reduced retained earnings by $6.9 million, net of deferred taxes, through a one-time cumulative effect adjustment.
-37-
Additionally, due to adoption of ASU 2016-13, the Company revised its analysis of its unused lines of credit and recorded a one-time cumulative effect adjustment to the allowance for off-balance sheet exposures totaling $268,000, offset by a reduction to retained earnings, net of deferred taxes, of $209,000. Deposits decreased $16.8 million and advances from the Federal Home Loan Bank (FHLB) increased $15.6 million, primarily attributable to the Company’s use of this funding source to fund loan growth in what is typically a seasonally slow quarter for deposit growth. Equity increased $1.6 million, attributable primarily to retention of net income, partially offset by cash dividends paid and the one-time cumulative effect adjustment on adoption of ASU 2016-13.
Net income for the first three months of fiscal 2021 was $10.0 million, an increase of $2.2 million, or 27.6% as compared to the same period of the prior fiscal year. Compared to the year-ago period, the Company’s increase in net income was the result of increases in net interest income and noninterest income, and a reduction in provision for credit losses, partially offset by increases in noninterest expense and provision for income taxes. Diluted net income available to common shareholders was $1.09 per share for the first three months of fiscal 2021, as compared to $.85 per share for the same period of the prior fiscal year. For the first three months of fiscal 2021, net interest income increased $2.5 million, or 12.8%; noninterest income increased $1.5 million, or 41.6%; provision for credit losses decreased $122,000, or 13.6%; noninterest expense increased $1.1 million, or 9.3%; and provision for income taxes increased $771,000, or 39.0%, as compared to the same period of the prior fiscal year. For more information see “Results of Operations.”
Interest rates during the first three months of fiscal 2021 were relatively unchanged. At September 30, 2020, as compared to June 30, 2020, the yield on two-year treasuries dropped from 0.16% to 0.13%; the yield on five-year treasuries dropped from 0.29% to 0.28%; the yield on ten-year treasuries increased from 0.66% to 0.69%; and the yield on 30-year treasuries increased from 1.41% to 1.46%. The spread between two- and ten-year treasuries was as low as 41 basis points and as high as 60 basis points, much higher than the range noted during the same quarter a year ago. The spread between three-month and 10-year treasuries was similar, and represented even more improvement than that noted between two- and ten-year treasuries. As compared to the first three months of the prior fiscal year, our average yield on earning assets decreased by 69 basis points, reflecting loans (including PPP loans) originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates, and reduced discount accretion on acquired assets recorded at fair value. Our cost of interest-bearing liabilities decreased by 66 basis points, as our cost of wholesale funding moved lower with market rates, and the Company reduced rates offered on certificates of deposit and nonmaturity accounts. Lower market rates reflected decreases by the Federal Reserve’s Open Market Committee (FOMC), which began at a measured pace in the quarter ended September 30, 2019, and was followed by sharp reductions in March 2020, as the FOMC reacted to reduced economic activity at the outset of the COVID-19 pandemic (see “Results of Operations: Comparison of the three-month periods ended September 30, 2020 and 2019 – Net Interest Income”). While the improved slope of the yield curve is encouraging in terms of the Company’s net interest margin, the overall low level of market interest rates is concerning, as our asset yields are expected to continue to decrease, while the Company’s ability to significantly reduce its cost of funds further may be limited.
Net interest income increased $2.5 million, or 12.8%, as the Company saw an increase of 15.2% in average interest earning assets, partially offset by a decline in the net interest margin. Our net interest margin decreased eight basis points when comparing the first three months of fiscal 2021 to the same period of the prior fiscal year. The decrease was attributable primarily to reduced benefits from the accretion of the discounts on acquired loans carried at fair value, as well as a reduction in interest income that resulted from the resolution of particular nonperforming loans during the current period. Benefits attributable to accretion of discounts on acquired loans (partially offset by the accretion of discounts on assumed time deposits) contributed six basis points to the net interest margin, a decrease from a contribution of 10 basis points in the year-ago period. The dollar impact of this component of net interest income has generally been declining each sequential quarter as assets mature or prepay, although the May 2020 acquisition of Central Federal Bancshares, Inc., (the “Central Federal Acquisition”), partially offsets that decline, as there was no comparable item in the same period a year ago, although the impact is limited due to the relative size of the acquired portfolio. The Company generally expects this component of net interest income to decline over time. Resolution of particular nonperforming loans during the quarter ended September 30, 2019, contributed another eight basis points to the net interest margin in that period, without material comparable items in the current period.
The Company’s net income is also affected by the level of its noninterest income and noninterest expenses. Non-interest income generally consists primarily of deposit account service charges, bank card interchange income, loan-related fees, earnings on bank-owned life insurance, gains on sales of loans, and other general operating income.
-38-
Noninterest expenses consist primarily of compensation and employee benefits, occupancy-related expenses, deposit insurance assessments, professional fees, advertising, postage and office expenses, insurance, the amortization of intangible assets, and other general operating expenses. During the three-month period ended September 30, 2020, noninterest income increased $1.5 million, or 41.6%, as compared to the same period of the prior fiscal year, attributable primarily to gains realized on sales of residential loans originated for that purpose, other income, loan servicing fees, other loan fees, and bank card interchange income, partially offset by decreases in deposit account service charges. Noninterest expense for the three-month period ended September 30, 2020, increased $1.1 million, or 9.3%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, provisioning for off-balance sheet credit exposure, deposit insurance premiums, data processing expenses, and occupancy, partially offset by decreases in other expenses.
Increases in net interest income, noninterest income, and noninterest expense were attributable in part to the Central Federal Acquisition, which was completed in May 2020.
We expect, over time, to continue to grow our assets through the origination and occasional purchase of loans, and purchases of investment securities. The primary funding for this asset growth is expected to come from retail deposits, brokered funding, and short- and long-term FHLB borrowings. We have grown and intend to continue to grow deposits by offering desirable deposit products for our current customers and by attracting new depository relationships. We will also continue to explore strategic expansion opportunities in market areas that we believe will be attractive to our business model.
Comparison of Financial Condition at September 30 and June 30, 2020
The Company’s consolidated balance sheet contracted slightly in the first three months of fiscal 2021, with total assets of $2.5 billion at September 30, 2020, reflecting a decrease of $1.4 million, or 0.1%, as compared to June 30, 2020. Growth in net loan balances, accrued interest receivable, and other assets was offset by reductions in cash and cash equivalents, and AFS securities.
Cash equivalents and time deposits were a combined $42.9 million at September 30, 2020, a decrease of $12.4 million, or 22.4%, as compared to June 30, 2020. AFS securities were $175.5 million at September 30, 2020, a decrease of $1.0 million, or 0.6%, as compared to June 30, 2020.
Loans, net of the ACL, were $2.2 billion at September 30, 2020, an increase of $8.5 million, or 0.4%, as compared to June 30, 2020. Gross loans increased by $18.5 million, or 0.9%, during the first three months of the fiscal year, while the ACL at September 30, 2020, reflected an increase of $9.9 million, as compared to the balance of our allowance for loan and lease losses (ALLL) at June 30, 2020. The Company adopted ASU 2016-13, Financial Instruments – Credit Losses, also known as the current expected credit loss (“CECL”) standard, effective as of July 1, 2020, the beginning of our 2021 fiscal year. Adoption resulted in an increase to the ACL of $8.9 million, related to the transition from the incurred loss model to the CECL ACL model, and an increase of $434,000 related to the transition from PCI to PCD methodology, relative to the ALLL as of June 30, 2020, while provisioning in excess of net charge offs during the first quarter of fiscal 2021 increased the ACL by an additional $612,000, as compared to July 1, 2020. The increase in loan balances in the portfolio was primarily attributable to commercial loans and residential real estate loans, partially offset by modest declines in commercial real estate loans and drawn construction loan balances. Residential real estate loans increased on growth in 1- to 4-family residential lending, partially offset by a modest decline in multifamily real estate loans. Commercial loan balances increased primarily as a result of seasonal agricultural loan draws, partially offset by a reduction in commercial and industrial loan types, and in total, commercial loan balances remained relatively high compared to recent periods as a result of the Small Business Administration’s Paycheck Protection Program (PPP) loans, which totaled $133.7 million at September 30, 2020, as compared to $132.3 million at June 30, 2020. In early October, the Company began submitting applications to the SBA for forgiveness of the loans originated under the PPP program but, to date, relatively few have been submitted, and only a small percentage of those submitted have been processed by the SBA. Loans anticipated to fund in the next 90 days stood at $122.7 million at September 30, 2020, as compared to $86.6 million at June 30, 2020, and $101.7 million at September 30, 2019.
Deposits were $2.2 billion at September 30, 2020, a decrease of $16.8 million, or 0.8%, as compared to June 30, 2020. The decrease reflected a decrease in time deposits, partially offset by an increase in nonmaturity deposits, and was inclusive of decreases of $16.9 million in public unit funds and $2.3 million in brokered time deposits. Public unit
-39-
balances were $288.3 million at September 30, 2020, as public unit depositors partially reversed growth noted over recent quarters. Brokered time deposits were $21.0 million, and brokered money market deposits were $20.0 million, at September 30, 2020. In total, deposit balances saw decreases in certificates of deposit and non-interest bearing transaction accounts, partially offset by increases in savings accounts, interest-bearing transaction accounts, and money market deposit accounts. The average loan-to-deposit ratio for the first quarter of fiscal 2021 was 99.1%, as compared to 99.2% for the same period of the prior fiscal year.
FHLB advances were $85.6 million at September 30, 2020, an increase of $15.6 million, or 22.3%, as compared to June 30, 2020, with the increase primarily attributable to the Company’s use of overnight borrowings to partially fund increases in loans and outflows in deposits.
The Company’s stockholders’ equity was $260.0 million at September 30, 2020, an increase of $1.6 million, or 0.6%, as compared to June 30, 2020. The increase was attributable primarily to earnings retained after $1.4 million in cash dividends paid, partially offset by the $7.2 million one-time negative adjustment to retained earnings resulting from the adoption of the CECL standard.
-40-
Average Balance Sheet, Interest, and Average Yields and Rates for the Three-Month Periods Ended
September 30, 2020 and 2019
The table below presents certain information regarding our financial condition and net interest income for the three-month periods ended September 30, 2020 and 2019. The table presents the annualized average yield on interest-earning assets and the annualized average cost of interest-bearing liabilities. We derived the yields and costs by dividing annualized income or expense by the average balance of interest-earning assets and interest-bearing liabilities, respectively, for the periods shown. Yields on tax-exempt obligations were not computed on a tax equivalent basis.
|
Three-month period ended
|
Three-month period ended
|
|
September 30, 2020
|
September 30, 2019
|
(dollars in thousands)
|
Average
Balance
|
Interest and Dividends
|
Yield/
Cost (%)
|
Average
Balance
|
Interest and Dividends
|
Yield/
Cost (%)
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
Mortgage loans (1)
|
$ 1,623,073
|
$ 20,392
|
5.03
|
$ 1,420,538
|
$ 19,067
|
5.37
|
Other loans (1)
|
539,052
|
5,515
|
4.09
|
444,806
|
6,573
|
5.91
|
Total net loans
|
2,162,125
|
25,907
|
4.79
|
1,865,344
|
25,640
|
5.50
|
Mortgage-backed securities
|
119,029
|
534
|
1.79
|
113,614
|
716
|
2.52
|
Investment securities (2)
|
62,506
|
490
|
3.14
|
66,009
|
520
|
3.15
|
Other interest earning assets
|
19,768
|
41
|
0.83
|
7,001
|
46
|
2.62
|
Total interest earning assets (1)
|
2,363,428
|
26,972
|
4.56
|
2,051,968
|
26,922
|
5.25
|
Other noninterest earning assets (3)
|
174,574
|
-
|
|
184,415
|
-
|
|
Total assets
|
$ 2,538,002
|
$ 26,972
|
|
$ 2,236,383
|
$ 26,922
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
Savings accounts
|
$ 185,278
|
146
|
0.32
|
$ 167,202
|
346
|
0.83
|
NOW accounts
|
784,444
|
1,248
|
0.64
|
623,895
|
1,706
|
1.09
|
Money market deposit accounts
|
233,476
|
263
|
0.45
|
196,737
|
803
|
1.63
|
Certificates of deposit
|
662,438
|
2,733
|
1.65
|
673,160
|
3,723
|
2.21
|
Total interest bearing deposits
|
1,865,636
|
4,390
|
0.94
|
1,660,994
|
6,578
|
1.58
|
Borrowings:
|
|
|
|
|
|
|
Securities sold under agreements
to repurchase
|
-
|
-
|
-
|
329
|
-
|
0.03
|
FHLB advances
|
70,272
|
380
|
2.16
|
82,192
|
522
|
2.54
|
Note Payable
|
-
|
-
|
-
|
3,000
|
37
|
4.88
|
Subordinated debt
|
15,155
|
138
|
3.63
|
15,055
|
225
|
5.99
|
Total interest bearing liabilities
|
1,951,063
|
4,908
|
1.01
|
1,761,570
|
7,362
|
1.67
|
Noninterest bearing demand deposits
|
316,996
|
-
|
|
218,755
|
-
|
|
Other noninterest bearing liabilities
|
14,673
|
-
|
|
16,014
|
-
|
|
Total liabilities
|
2,282,732
|
4,908
|
|
1,996,339
|
7,362
|
|
Stockholders’ equity
|
255,270
|
-
|
|
240,044
|
-
|
|
Total liabilities and
stockholders' equity
|
$ 2,538,002
|
$ 4,908
|
|
$ 2,236,383
|
$ 7,362
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ 22,064
|
|
|
$ 19,560
|
|
|
|
|
|
|
|
|
Interest rate spread (4)
|
|
|
3.55%
|
|
|
3.58%
|
Net interest margin (5)
|
|
|
3.73%
|
|
|
3.81%
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities
|
121.14%
|
|
|
116.49%
|
|
|
(1)Calculated net of deferred loan fees, loan discounts and loans-in-process. Non-accrual loans are not included in average loans.
(2)Includes FHLB and Federal Reserve Bank of St. Louis membership stock and related cash dividends.
(3)Includes average balances for fixed assets and BOLI of $65.1 million and $43.5 million, respectively, for the three-month period ended September 30, 2020, as compared to $63.1 million and $38.4 million, respectively, for the same period of the prior fiscal year.
(4)Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.
-41-
(5)Net interest margin represents annualized net interest income divided by average interest-earning assets.
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on the Company’s net interest income for the three-month period ended September 30, 2020, compared to the three-month period ended September 30, 2019. Information is provided with respect to (i) effects on interest income and expense attributable to changes in volume (changes in volume multiplied by the prior rate), (ii) effects on interest income and expense attributable to change in rate (changes in rate multiplied by prior volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).
|
|
Three-month period ended September 30, 2020
|
Compared to three-month period ended September 30, 2019
|
Increase (Decrease) Due to
|
(dollars in thousands)
|
|
Rate
|
Volume
|
Rate/
|
Net
|
|
|
Volume
|
|
Interest-earnings assets:
|
|
|
|
|
|
Loans receivable (1)
|
|
$ (3,289)
|
$ 4,079
|
$ (523)
|
$ 267
|
Mortgage-backed securities
|
|
(207)
|
34
|
(9)
|
(182)
|
Investment securities (2)
|
|
(3)
|
(28)
|
1
|
(30)
|
Other interest-earning deposits
|
(31)
|
84
|
(58)
|
(5)
|
Total net change in income on
|
|
|
|
|
interest-earning assets
|
|
(3,530)
|
4,169
|
(589)
|
50
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
Deposits
|
|
(2,454)
|
567
|
(301)
|
(2,188)
|
FHLB advances
|
|
(77)
|
(76)
|
11
|
(142)
|
Note Payable
|
|
(37)
|
(37)
|
37
|
(37)
|
Subordinated Debt
|
|
(89)
|
1
|
1
|
(87)
|
Total net change in expense on
|
|
|
|
|
interest-bearing liabilities
|
|
(2,657)
|
455
|
(252)
|
(2,454)
|
Net change in net interest income
|
$ (873)
|
$ 3,714
|
$ (337)
|
$ 2,504
|
(1)Does not include interest on loans placed on nonaccrual status.
(2)Does not include dividends earned on equity securities.
Results of Operations – Comparison of the three-month periods ended September 30, 2020 and 2019
General. Net income for the three-month period ended September 30, 2020, was $10.0 million, an increase of $2.2 million, or 27.6%, as compared to the same period of the prior fiscal year. The increase was attributable to increases in net interest income and noninterest income, and a decrease in provision for loan losses, partially offset by increases in noninterest expense and provision for income taxes.
For the three-month period ended September 30, 2020, basic and fully-diluted net income per share available to common shareholders was $1.09 under both measures, as compared to $0.85 under both measures for the same period of the prior fiscal year, which represented an increase of $0.24, or 28.2%. Our annualized return on average assets for the three-month period ended September 30, 2020, was 1.57%, as compared to 1.40% for the same period of the prior fiscal year. Our return on average common stockholders’ equity for the three-month period ended September 30, 2020, was 15.6%, as compared to 13.0% in the same period of the prior fiscal year.
Net Interest Income. Net interest income for the three-month period ended September 30, 2020, was $22.1 million, an increase of $2.5 million, or 12.8%, as compared to the same period of the prior fiscal year. The increase was attributable to a 15.2% increase in the average balance of interest-earning assets, partially offset by a decrease in net interest margin to 3.73% in the current three-month period, from 3.81% in the three-month period a year ago.
Loan discount accretion and deposit premium amortization related to the Company’s August 2014 acquisition of Peoples Bank of the Ozarks, the June 2017 acquisition of Capaha Bank, the February 2018 acquisition of Southern
-42-
Missouri Bank of Marshfield, the November 2018 acquisition of Gideon Bancshares Company (the “Gideon Acquisition”), and the Central Federal Acquisition resulted in $339,000 in net interest income for the three-month period ended September 30, 2020, as compared to $508,000 in net interest income for the same period a year ago. The decline is attributable to expected reductions in discount accretion as additional time has elapsed since the loan portfolios were acquired and balances have declined, partially offset by the recent Central Federal Acquisition, although the acquired loans and resulting discount accretion from that acquisition is relatively small. The Company generally expects this component of net interest income will continue to decline over time, although volatility may occur to the extent we have periodic resolutions of specific credit impaired loans. Combined, these components of net interest income contributed six basis points to net interest margin in the three-month period ended September 30, 2020, as compared to a contribution of 10 basis points in the same period of the prior fiscal year, and as compared to the six basis point contribution in the linked quarter, ended June 30, 2020, when net interest margin was 3.75%. Additionally, in the year-ago and linked periods, the Company recognized additional interest income as a result of the resolution of a limited number of nonperforming loans, with no material contribution from similar resolutions in the current period. This recognition of $414,000 in interest income in the year-ago period, and $159,000 in the linked period, contributed eight and three basis points, respectively, to net interest margin in the year-ago and linked periods.
For the three-month period ended September 30, 2020, our net interest rate spread was 3.55%, as compared to 3.58% in the year-ago period. The decrease in net interest rate spread, compared to the same period a year ago, resulted from a 69 basis point decrease in the average yield on interest-earning assets, partially offset by a 66 basis point decrease in the average cost of interest-bearing liabilities.
Interest Income. Total interest income for the three-month period ended September 30, 2020, was $27.0 million, an increase of $50,000, or 0.2%, as compared to the same period of the prior fiscal year. The increase was attributed to a 15.2% increase in the average balance of interest-earning assets, offset by a 69 basis point decrease in the average yield earned on interest-earning assets, as compared to the same period of the prior fiscal year. Increased average interest-earning balances were attributable primarily to growth in the loan portfolio, inclusive of the Central Federal Acquisition and PPP loans originated, while interest-earning cash equivalents and investment balances increased by smaller amounts. The decrease in the average yield on interest-earning assets was attributable to loans (including PPP loans) originated and renewed at lower market yields, adjustable-rate loans which re-priced at lower rates, and reduced discount accretion on acquired assets recorded at fair value.
Interest Expense. Total interest expense for the three-month period ended September 30, 2020, was $4.9 million, a decrease of $2.5 million, or 33.3%, as compared to the same period of the prior fiscal year. The decrease was attributable to a 66 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 10.8% increase in the average balance of interest-bearing liabilities, as compared to the same period of the prior fiscal year. The decrease in the average cost of interest-bearing liabilities was attributable primarily to a lower cost of wholesale funding as a result of lower market rates, and the Company offering of reduced rates on certificates of deposit and nonmaturity accounts. Increased average interest-bearing balances were attributable primarily to increases in interest-bearing transaction accounts, money market deposit accounts, and savings accounts, partially offset by lower FHLB balances, certificate of deposit balances, and other borrowings.
Provision for Credit Losses. The provision for credit losses for the three-month period ended September 30, 2020, was $774,000, as compared to $896,000 in the same period of the prior fiscal year. The decrease as compared to the same quarter a year ago was attributable primarily to the current quarter’s relatively low loan growth and stable credit quality indicators quarter-over-quarter. While uncertainty remains regarding the economic environment resulting from the COVID-19 pandemic and the potential impact on the Company’s borrowers, the Company assesses that the outlook is little changed as compared to the year ended June 30, 2020. As a percentage of average loans outstanding, the provision for credit losses in the current three-month period represented a charge of 0.14% (annualized), while the Company recorded net charge offs during the period of 0.03% (annualized). During the same period of the prior fiscal year, the provision for credit losses as a percentage of average loans outstanding represented a charge of 0.19% (annualized), while the Company recorded net charge offs of 0.02% (annualized). (See “Critical Accounting Policies”, “Allowance for Credit Loss Activity” and “Nonperforming Assets”).
Noninterest Income. The Company’s noninterest income for the three-month period ended September 30, 2020, was $4.9 million, an increase of $1.5 million, or 41.6%, as compared to the same period of the prior fiscal year. In the current period, increases in gains realized on the sale of residential real estate loans originated for that purpose, other income, loan servicing fees, other loans fees, and bank card interchange income were partially offset by
-43-
decreases in deposit account service charges. Gains realized on the sale of residential real estate loans originated for that purpose increased as originations of these loans more than tripled, remaining consistent with the linked quarter, while pricing improved slightly. As we generally retain servicing of residential real estate loans originated for sale, our portfolio of serviced loans increased by 16% during the quarter, which increased servicing income through fees received and the recognition of mortgage servicing rights at origination. Other income included a $187,000 non-recurring benefit related to a broker-dealer agreement to provide wealth management services in a new market area, with no comparable item in the year-ago period. Bank card interchange income increased as a result of an 8% increase in the number of bank card transactions and a 17% increase in bank card dollar volume.
Noninterest Expense. Noninterest expense for the three-month period ended September 30, 2020, was $13.5 million, an increase of $1.1 million, or 9.3%, as compared to the same period of the prior fiscal year. The increase was attributable primarily to increases in compensation and benefits, provisioning for off-balance sheet credit exposure, deposit insurance premiums, data processing expenses, and occupancy, partially offset by a reduction in other expenses, which included a variety of relatively small items that trended lower, including the costs of providing rewards checking products, employee travel expenses, and customer entertainment. Included in compensation expense was $150,000 in non-recurring expense related to the hiring of an investment representative for the Company’s wealth management group; otherwise, the increase over the prior year primarily reflected standard increases in compensation and an increase in employee headcount over the prior year, due in part to the Central Federal Acquisition, as well as a de novo branch opened early in the quarter. Data processing and occupancy expenses also increased in part due to the new facilities, while data processing expenses have also been higher since the implementation of a new data processing environment in the first half of fiscal 2020. Deposit insurance premiums reflected a return to a normalized level of premiums after the Company benefited from one-time assessment credits for much of the prior fiscal year. The efficiency ratio for the three-month period ended September 30, 2020, was 50.0%, as compared to 53.6% in the same period of the prior fiscal year, with the improvement attributable primarily to the current period’s increase in noninterest income.
Income Taxes. The income tax provision for the three-month period ended September 30, 2020, was $2.7 million, an increase of 39.0% as compared to the same period of the prior fiscal year, as higher pre-tax income combined with an increase in the effective tax rate, to 21.6%, as compared to 20.2% in the same period a year ago. While the Company generated higher levels of pre-tax income, investments in tax-advantaged assets were modestly reduced, resulting in a higher effective tax rate.
Allowance for Credit Loss Activity
The Company regularly reviews its ACL and makes adjustments to its balance based on management’s estimate of (1) the total expected losses included in the Company’s financial assets held at amortized cost, which is limited to the Company’s loan portfolio, and (2) any credit deterioration in the Company’s available-for-sale securities as of the balance sheet date. The Company holds no securities classified as held-to-maturity.
Although the Company maintains its ACL at a level that it considers sufficient to provide for losses, there can be no assurance that future losses will not exceed internal estimates. In addition, the amount of the ACL is subject to review by regulatory agencies, which can order the Company to record additional allowances. The required ACL has been estimated based upon the guidelines in ASC Topic 326, Financial Instruments – Credit Losses, following the July 1, 2020 adoption of ASU 2016-13, also known as the current expected credit loss, or CECL, standard.
-44-
The following table summarizes changes in the ACL over the three-month periods ended September 30, 2020 and 2019:
|
For the three months ended
|
|
September 30,
|
(dollars in thousands)
|
2020
|
2019
|
|
|
Balance, beginning of period
|
$ 25,139
|
$ 19,903
|
Impact of CECL adoption
|
9,333
|
-
|
Loans charged off:
|
|
|
Residential real estate
|
(19)
|
-
|
Construction
|
-
|
-
|
Commercial business
|
(145)
|
-
|
Commercial real estate
|
-
|
(72)
|
Consumer
|
(6)
|
(35)
|
Gross charged off loans
|
(170)
|
(107)
|
Recoveries of loans previously charged off:
|
|
|
Residential real estate
|
-
|
-
|
Construction
|
-
|
-
|
Commercial business
|
4
|
14
|
Commercial real estate
|
1
|
4
|
Consumer
|
3
|
-
|
Gross recoveries of charged off loans
|
8
|
18
|
Net charge offs
|
(162)
|
(89)
|
Provision charged to expense
|
774
|
896
|
Balance, end of period
|
$ 35,084
|
$ 20,710
|
The estimate involves the considerations of quantitative and qualitative factors relevant to the loans as segmented by the Company, and is based on an evaluation, at the reporting date, of historical loss experience, coupled with qualitative adjustments to address current economic conditions and credit quality, and reasonable and supportable forecasts. Specific qualitative factors considered include, but may not be limited to:
•Changes in lending policies and/or loan review system
•National, regional, and local economic trends and/or conditions
•Changes and/or trends in the nature, volume, or terms of the loan portfolio
•Experience, ability, and depth of lending management and staff
•Levels and/or trends of delinquent, non-accrual, problem assets, or charge offs and recoveries
•Concentrations of credit
•Changes in collateral values
•Agricultural economic conditions
•Risks from regulatory, legal, or competitive factors
At our June 30, 2020, fiscal year end, prior to the adoption of ASU 2016-13, the Company’s ALLL was $25.1 million. Upon adoption of the standard, effective July 1, 2020, the Company increased the ACL by $8.9 million, related to the transition from the incurred loss model to the CECL ACL model, increased the ACL by $434,000 related to the transition from PCI to PCD methodology, and reduced retained earnings by $6.9 million, net of deferred taxes, through a one-time cumulative effect adjustment. For the three-month period ended September 30, 2020, the ACL increased by an additional $612,000, reflecting a charge to provision for credit losses of $774,000, and net charge offs of $162,000. The charge was based on the estimated required ACL, reflecting management’s estimate of the current expected credit losses in the Company’s loan portfolio at September 30, 2020, and as of that date the Company’s ACL was $35.1 million. While the Company’s management believes the ACL at September 30, 2020, is adequate, based on that estimate, there remains significant uncertainty regarding the possible length of the COVID-19 pandemic and the aggregate impact that it will have on global and regional economies, including uncertainty regarding the effectiveness of recent efforts by the U.S. government and the Federal Reserve to respond to the pandemic and its economic impact. Management considered the impact of the pandemic on its consumer and business borrowers, particularly those business borrowers most affected by efforts to contain the pandemic, including our borrowers in the retail and multi-tenant retail industry, restaurants, and hotels.
-45-
The following table sets forth the sum of the amounts of the ACL attributable to individual loans within each category, or the loan categories in general, and the percentage of the ACL that is attributable to each category, as of the reporting date. The table also reflects the percentage of loans in each category to the total loan portfolio, as of the reporting date.
|
|
ACL as of
|
% of total
|
ALLL as of
|
% of total
|
|
|
September 30, 2020
|
ACL
|
June 30, 2020
|
ALLL
|
Real Estate Loans:
|
|
|
|
|
|
Residential
|
|
$ 8,629
|
24.6%
|
$ 4,875
|
19.4%
|
Construction
|
|
1,892
|
5.4%
|
2,010
|
8.0%
|
Commercial
|
|
16,050
|
45.7%
|
12,132
|
48.3%
|
Consumer loans
|
|
2,305
|
6.6%
|
1,182
|
4.7%
|
Commercial loans
|
|
6,208
|
17.7%
|
4,940
|
19.6%
|
|
|
$ 35,084
|
100.0%
|
$ 25,139
|
100.0%
|
For loans that do not exhibit similar risk characteristics, the Company evaluates the loan on an individual basis. Loans that are classified with an adverse internal credit rating or identified as a troubled debt restructuring (TDR) are most commonly considered for individual evaluation. The ACL for individually evaluated loans may be estimated based on the fair value of the underlying collateral, or based on the present value of expected cash flows.
In recent months, following regulatory guidance encouraging financial institutions to work with borrowers affected by the COVID-19 pandemic, the Company has granted payment deferrals or interest-only modifications for borrowers. For loans that were otherwise current and performing prior to the COVID-19 pandemic, but for which borrowers anticipated difficulties in the coming months due to impact of the pandemic, the Company elected to not apply requirements of U.S. GAAP related to TDRs, as provided in the CARES Act. At September 30, 2020, such deferrals and modifications were in effect for approximately 250 loans totaling $93.6 million, as compared to approximately 900 loans totaling $380.2 million at June 30, 2020. Generally, deferrals were granted for three-month periods, while interest-only modifications were for six-month periods. Some loans were granted additional deferrals or modifications, and these loans were generally reviewed for potential adverse credit classification. At October 31, 2020, the balance of loans for which payment deferrals or interest-only modifications were in place had declined to approximately 59 loans with balances of $37.2 million. The table below illustrates the amount of such deferrals and modifications in relation to our loan portfolio by loan type and collateral or industry.