Landmark Bancorp Inc 10-Q for FY2020 Q3
Landmark Bancorp Inc (LARK)
About this 10-Q
Landmark Bancorp Inc filed this 10-Q on November 6, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $5.43M
- up 107.7% from net income of $2.61M a year earlier
- Diluted EPS
- $1.20
- up 110.5% from $0.57 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission
File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol(s) | Name of exchange on which registered: | ||
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: as of November 5, 2020, the issuer had outstanding shares of its common stock, $0.01 par value per share.
LANDMARK BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
| Page Number | ||
| PART I | ||
| Item 1. | Financial Statements | 2-25 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26-40 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 40-41 |
| Item 4. | Controls and Procedures | 41 |
| PART II | ||
| Item 1. | Legal Proceedings | 42 |
| Item 1A. | Risk Factors | 42 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 42-43 |
| Item 3. | Defaults Upon Senior Securities | 43 |
| Item 4. | Mine Safety Disclosures | 43 |
| Item 5. | Other Information | 43 |
| Item 6. | Exhibits | 43 |
| 43 | ||
| Signature Page | 44 | |
| 1 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| (Dollars in thousands, except per share amounts) | September 30, | December 31, | ||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investment securities available-for-sale, at fair value | ||||||||
| Bank stocks, at cost | ||||||||
| Loans, net of allowance for loans
losses of $ | ||||||||
| Loans held for sale, at fair value | ||||||||
| Premises and equipment, net | ||||||||
| Bank owned life insurance | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Real estate owned, net | ||||||||
| Accrued interest and other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Deposits: | ||||||||
| Non-interest-bearing demand | $ | $ | ||||||
| Money market and checking | ||||||||
| Savings | ||||||||
| Time | ||||||||
| Total deposits | ||||||||
| Federal Home Loan Bank borrowings | ||||||||
| Subordinated debentures | ||||||||
| Other borrowings | ||||||||
| Accrued interest, taxes, and other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | - | - | ||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value per share, shares authorized; issued | - | - | ||||||
| Common stock, $par value per share, shares authorized; and shares issued at September 30, 2020 and December 31, 2019, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock, at cost: and shares at September 30, 2020 and December 31, 2019, respectively | ( | ) | - | |||||
| Accumulated other comprehensive income | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 2 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands, except per share amounts) | September 30, | September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Interest income: | ||||||||||||||||
| Loans: | ||||||||||||||||
| Taxable | $ | $ | $ | $ | ||||||||||||
| Tax-exempt | ||||||||||||||||
| Investment securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax-exempt | ||||||||||||||||
| Total interest income | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits | ||||||||||||||||
| Borrowings | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income | ||||||||||||||||
| Provision for loan losses | ||||||||||||||||
| Net interest income after provision for loan losses | ||||||||||||||||
| Non-interest income: | ||||||||||||||||
| Fees and service charges | ||||||||||||||||
| Gains on sales of loans, net | ||||||||||||||||
| Bank owned life insurance | ||||||||||||||||
| (Losses)/gains on sales of investment securities, net | - | ( | ) | |||||||||||||
| Other | ||||||||||||||||
| Total non-interest income | ||||||||||||||||
| Non-interest expense: | ||||||||||||||||
| Compensation and benefits | ||||||||||||||||
| Occupancy and equipment | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Data processing | ||||||||||||||||
| Amortization of intangibles | ||||||||||||||||
| Advertising | ||||||||||||||||
| Federal deposit insurance premiums | ( | ) | ||||||||||||||
| Foreclosure and real estate owned expense | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest expense | ||||||||||||||||
| Earnings before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic (1) | $ | $ | $ | $ | ||||||||||||
| Diluted (1) | $ | $ | $ | $ | ||||||||||||
| Dividends per share (1) | $ | $ | $ | $ | ||||||||||||
| (1) |
See accompanying notes to consolidated financial statements.
| 3 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||
| Net unrealized holding gains on available-for-sale securities | ||||||||||||||||
| Reclassification adjustment for net losses (gains) included in earnings | ( | ) | - | ( | ) | |||||||||||
| Net unrealized gains | ( | ) | ||||||||||||||
| Income tax effect on net (losses) gains included in earnings | - | ( | ) | |||||||||||||
| Income tax effect on net unrealized holding gains | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive (loss) income | ( | ) | ||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | ||||||||||||
See accompanying notes to consolidated financial statements.
| 4 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| (Dollars in thousands, except per share amounts) | Common stock | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total | ||||||||||||||||||
| Balance at July 1, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net earnings | - | - | - | - | ||||||||||||||||||||
| Other comprehensive income | - | - | - | - | ||||||||||||||||||||
| Dividends paid ($ per share) | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Exercise of stock options, 3,136 shares | ||||||||||||||||||||||||
| Dividends paid ($0.20 per share) | ||||||||||||||||||||||||
| Dividends paid ($0.57 per share) | ||||||||||||||||||||||||
| Dividends paid ($0.60 per share) | ||||||||||||||||||||||||
| Purchase of 106,894 treasury shares | ||||||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Balance at July 1, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Net earnings | - | - | - | - | ||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
| Dividends paid ($ per share) | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| (Dollars in thousands, except per share amounts) | Common stock | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total | ||||||||||||||||||
| Balance at January 1, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| Net earnings | - | - | - | - | ||||||||||||||||||||
| Other comprehensive income | - | - | - | - | ||||||||||||||||||||
| Dividends paid ($ per share) | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Balance at September 30, 2019 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net earnings | - | - | - | - | ||||||||||||||||||||
| Other comprehensive income | - | - | - | - | ||||||||||||||||||||
| Dividends paid ($ per share) | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||
| Exercise of stock options, shares | - | - | - | - | ||||||||||||||||||||
| Purchase of treasury shares | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
See accompanying notes to consolidated financial statements.
| 5 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| 2020 | 2019 | |||||||
| (Dollars in thousands) | Nine months ended September 30, | |||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net earnings | $ | $ | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Provision for loan losses | ||||||||
| Valuation allowance on real estate owned | ||||||||
| Amortization of investment security premiums, net | ||||||||
| Amortization of purchase accounting adjustment on loans | ( | ) | ( | ) | ||||
| Amortization of intangibles | ||||||||
| Depreciation | ||||||||
| Increase in cash surrender value of bank owned life insurance | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Net (gains) losses on sales of investment securities | ( | ) | ||||||
| Net loss (gain) on sales of premises, equipment and real estate owned | ( | ) | ||||||
| Net gains on sales of loans | ( | ) | ( | ) | ||||
| Proceeds from sales of loans | ||||||||
| Origination of loans held for sale | ( | ) | ( | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Accrued interest and other assets | ( | ) | ||||||
| Accrued expenses, taxes, and other liabilities | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Net increase in loans | ( | ) | ( | ) | ||||
| Maturities and prepayments of investment securities | ||||||||
| Purchases of investment securities | ( | ) | ( | ) | ||||
| Proceeds from sales of investment securities | ||||||||
| Redemption of bank stocks | ||||||||
| Purchase of bank stocks | ( | ) | ( | ) | ||||
| Proceeds from sales of premises and equipment and foreclosed assets | ||||||||
| Purchases of premises and equipment, net | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net increase in deposits | ||||||||
| Federal Home Loan Bank advance borrowings | ||||||||
| Federal Home Loan Bank advance repayments | ( | ) | ( | ) | ||||
| Proceeds from other borrowings | ||||||||
| Repayments on other borrowings | ( | ) | - | |||||
| Proceeds from exercise of stock options | - | |||||||
| Payment of dividends | ( | ) | ( | ) | ||||
| Purchase of treasury stock | ( | ) | - | |||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| 6 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
| Nine months ended | ||||||||
| (Dollars in thousands) | September 30, | |||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash payments for income taxes | $ | $ | ||||||
| Cash paid for interest | ||||||||
| Cash paid for operating leases | ||||||||
| Supplemental schedule of noncash investing and financing activities: | ||||||||
| Transfer of loans to real estate owned | ||||||||
| Operating lease asset and related lease liability recorded | - | |||||||
See accompanying notes to consolidated financial statements.
| 7 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Interim Financial Statements |
The unaudited consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and its wholly owned subsidiaries, Landmark National Bank (the “Bank”) and Landmark Risk Management Inc., have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto. The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein. The results of the three month and nine month interim periods ended September 30, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020 or any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.
| 2. | Investments |
A summary of investment securities available-for-sale is as follows:
Schedule of Available-for-sale Securities
| (Dollars in thousands) | As of September 30, 2020 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| cost | gains | losses | fair value | |||||||||||||
| U. S. treasury securities | $ | $ | $ | $ | ||||||||||||
| U. S. federal agency obligations | ( | ) | ||||||||||||||
| Municipal obligations, tax exempt | ( | ) | ||||||||||||||
| Municipal obligations, taxable | ||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| (Dollars in thousands) | As of December 31, 2019 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| cost | gains | losses | fair value | |||||||||||||
| U. S. treasury securities | $ | $ | $ | $ | ||||||||||||
| U. S. federal agency obligations | ||||||||||||||||
| Municipal obligations, tax exempt | ( | ) | ||||||||||||||
| Municipal obligations, taxable | ( | ) | ||||||||||||||
| Agency mortgage-backed securities | ( | ) | ||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| 8 |
The tables above show that some of the securities in the available-for-sale investment portfolio had unrealized losses, or were temporarily impaired, as of September 30, 2020 and December 31, 2019. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of time in a continuous unrealized loss position.
Schedule of Available for Sale Securities Continuous Unrealized Loss Position Fair Value
| (Dollars in thousands) | As of September 30, 2020 | |||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| No. of | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
| securities | value | losses | value | losses | value | losses | ||||||||||||||||||||||
| U.S. federal agency obligations | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||||||
| Municipal obligations, tax exempt | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||||||
| (Dollars in thousands) | As of December 31, 2019 | |||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| No. of | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
| securities | value | losses | value | losses | value | losses | ||||||||||||||||||||||
| Municipal obligations, tax exempt | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Municipal obligations, taxable | ( | ) | ( | ) | ||||||||||||||||||||||||
| Agency mortgage-backed securities | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
The Company’s U.S. federal agency obligations portfolio consists of securities issued by the government-sponsored agencies of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Bank (“FHLB”). The receipt of principal and interest on U.S. federal agency obligations is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its U.S. federal agency obligations do not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and its belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the U.S. federal agency obligations identified in the tables above were temporarily impaired as of September 30, 2020.
The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. The Company did not intend to sell and it was more likely than not that the Company will not be required to sell its municipal obligations in an unrealized loss position until the recovery of their costs. Due to the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and the expectation that they will continue to do so, the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily impaired as of September 30, 2020 and December 31, 2019.
The table below sets forth amortized cost and fair value of investment securities at September 30, 2020. The table includes scheduled principal payments and estimated prepayments, based on observable market inputs, for agency mortgage-backed securities. Actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
Schedule of Investments Classified by Contractual Maturity Date
| (Dollars in thousands) | Amortized | Estimated | ||||||
| cost | fair value | |||||||
| Due in less than one year | $ | $ | ||||||
| Due after one year but within five years | ||||||||
| Due after five years but within ten years | ||||||||
| Due after ten years | ||||||||
| Total | $ | $ | ||||||
| 9 |
Sales proceeds and gross realized gains and losses on sales of available-for-sale securities were as follows:
Schedule of Realized Gain (loss)
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (Dollars in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Sales proceeds | $ | $ | $ | $ | ||||||||||||
| Realized gains | $ | $ | $ | $ | ||||||||||||
| Realized losses | - | - | ( | ) | ( | ) | ||||||||||
| Net realized losses | $ | $ | $ | $ | ( | ) | ||||||||||
Securities with carrying
values of $
| 3. | Loans and Allowance for Loan Losses |
Loans consisted of the following as of the dates indicated below:
Schedule of Loans
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2020 | 2019 | ||||||
| One-to-four family residential real estate | $ | $ | ||||||
| Construction and land | ||||||||
| Commercial real estate | ||||||||
| Commercial | ||||||||
| Paycheck protection program | ||||||||
| Agriculture | ||||||||
| Municipal | ||||||||
| Consumer | ||||||||
| Total gross loans | ||||||||
| Net deferred loan (fees)/costs and loans in process | ( | ) | ||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Loans, net | $ | $ | ||||||
| 10 |
The following tables provide information on the Company’s activity in the allowance for loan losses by loan class:
Schedule of Allowance for Credit Losses on Financing Receivables
| (Dollars in thousands) | Three and nine months ended September 30, 2020 | |||||||||||||||||||||||||||||||
| One-to-four family residential real estate | Construction and land | Commercial real estate | Commercial | Agriculture | Municipal | Consumer | Total | |||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance at July 1, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision for loan losses | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | ||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Three and nine months ended September 30, 2019 | |||||||||||||||||||||||||||||||
| One-to-four family residential real estate | Construction and land | Commercial real estate | Commercial | Agriculture | Municipal | Consumer | Total | |||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance at July 1, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2019 | ||||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at September 30, 2019 | ||||||||||||||||||||||||||||||||
| 11 |
The following tables provide information on the Company’s activity in the allowance for loan losses by loan class and allowance methodology:
| (Dollars in thousands) | As of September 30, 2020 | |||||||||||||||||||||||||||||||||||
| One-to-four family residential real estate | Construction and land | Commercial real estate | Commercial | Paycheck protection loans | Agriculture | Municipal | Consumer | Total | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Loan balances: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| (Dollars in thousands) | As of December 31, 2019 | |||||||||||||||||||||||||||||||||||
| One-to-four family residential real estate | Construction and land | Commercial real estate | Commercial | Paycheck protection loans | Agriculture | Municipal | Consumer | Total | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||
| Loan balances: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Collectively evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
The Company’s impaired
loans increased from $
| 12 |
The following tables present information on impaired loans:
Schedule of Impaired Financing Receivables
| (Dollars in thousands) | As of September 30, 2020 | |||||||||||||||||||||||||||
| Unpaid contractual principal | Impaired loan balance | Impaired loans without an allowance | Impaired loans with an allowance | Related allowance recorded | Year-to-date average loan balance | Year-to-date interest income recognized | ||||||||||||||||||||||
| One-to-four family residential real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Total impaired loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Dollars in thousands) | As of December 31, 2019 | |||||||||||||||||||||||||||
| Unpaid contractual principal | Impaired loan balance | Impaired loans without an allowance | Impaired loans with an allowance | Related allowance recorded | Year-to-date average loan balance | Year-to-date interest income recognized | ||||||||||||||||||||||
| One-to-four family residential real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Total impaired loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
The Company’s key credit quality indicator is a loan’s performance status, defined as accruing or non-accruing. Performing loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have a higher risk of loss. The accrual of interest on non-performing loans is discontinued at the time the loan is ninety days delinquent, unless the credit is well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection of principal or interest is considered doubtful. There were no loans 90 days or more delinquent and accruing interest at September 30, 2020 or December 31, 2019.
| 13 |
The following tables present information on the Company’s past due and non-accrual loans by loan class:
Schedule of Past Due Financing Receivables
| (Dollars in thousands) | As of September 30, 2020 | |||||||||||||||||||||||||||
| 30-59 days delinquent and accruing | 60-89 days delinquent and accruing | 90 days or more delinquent and accruing | Total past due loans accruing | Non-accrual loans | Total past due and non-accrual loans | Total loans not past due | ||||||||||||||||||||||
| One-to-four family residential real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Paycheck protection loans | ||||||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Percent of gross loans | ||||||||||||||||||||||||||||
| (Dollars in thousands) | As of December 31, 2019 | |||||||||||||||||||||||||||
| 30-59 days delinquent and accruing | 60-89 days delinquent and accruing | 90 days or more delinquent and accruing | Total past due loans accruing | Non-accrual loans | Total past due and non-accrual loans | Total loans not past due | ||||||||||||||||||||||
| One-to-four family residential real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Percent of gross loans | ||||||||||||||||||||||||||||
Under
the original terms of the Company’s non-accrual loans, interest earned on such loans for the nine months ended September
30, 2020 and 2019 would have increased interest income by $
The Company also categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Non-classified loans generally include those loans that are expected to be repaid in accordance with contractual loan terms. Classified loans are those that are assigned a special mention, substandard or doubtful risk rating using the following definitions:
Special Mention: Loans are currently protected by the current net worth and paying capacity of the obligor or of the collateral pledged but such protection is potentially weak. These loans constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. The credit risk may be relatively minor, yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.
Substandard: Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
| 14 |
The following table provides information on the Company’s risk categories by loan class:
Schedule of Risk Categories by Loan Class
| (Dollars in thousands) | As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||
| Non-classified | Classified | Non-classified | Classified | |||||||||||||
| One-to-four family residential real estate | $ | $ | $ | $ | ||||||||||||
| Construction and land | ||||||||||||||||
| Commercial real estate | ||||||||||||||||
| Commercial | ||||||||||||||||
| Payroll protection loan | ||||||||||||||||
| Agriculture | ||||||||||||||||
| Municipal | ||||||||||||||||
| Consumer | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
At
September 30, 2020, the Company had twelve loan relationships consisting of 22 outstanding loans that were classified as TDRs.
During the three and nine months ended September 30, 2020, the Company modified the payment terms for two agriculture loans totaling
$
The Company evaluates
each TDR individually and returns the loan to accrual status when a payment history is established after the restructuring and
future payments are reasonably assured. There were no loans modified as TDRs for which there was a payment default within 12 months
of modification as of September 30, 2020 and 2019. The Company did not record any charge-offs against loans classified as TDRs
in the first nine months of 2020 or 2019. No
provision for loan losses were recorded against TDRs in the three months ended September 30, 2020 as compared to a credit
provision of $
The following table presents information on loans that are classified as TDRs:
Schedule of Troubled Debt Restructurings On Financing Receivables
| (Dollars in thousands) | As of September 30, 2020 | As of December 31, 2019 | ||||||||||||||||||||||
| Number of loans | Non-accrual balance | Accruing balance | Number of loans | Non-accrual balance | Accruing balance | |||||||||||||||||||
| One-to-four family residential real estate | $ | $ | $ | $ | ||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||
| Total troubled debt restructurings | $ | $ | $ | $ | ||||||||||||||||||||
As of September 30,
2020, the Company had 33 loan modifications on outstanding loan balances of $
| 15 |
| 4. | Goodwill and Other Intangible Assets |
The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual step one impairment test as of December 31, 2019 concluded that its goodwill was not impaired. The Company concluded there was a triggering event during the first three months of 2020 that required an interim goodwill impairment test. The Company’s interim impairment test as of March 31, 2020 concluded that its goodwill was not impaired. The Company concluded there were no additional events or circumstances during the three months ended September 30, 2020 that indicated it was more likely than not that the fair value of the Company did not exceed the carrying value.
Lease intangible assets are amortized over the life of the lease. Core deposit intangible assets are amortized over the estimated useful life of ten years on an accelerated basis. Mortgage servicing rights are amortized over the estimated life of the mortgage loan serviced for others. A summary of the other intangible assets that continue to be subject to amortization is as follows:
Schedule of Other Intangible Assets and Goodwill
| (Dollars in thousands) | As of September 30, 2020 | |||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
| Core deposit intangible assets | $ | $ | ( | ) | $ | |||||||
| Lease intangible asset | ( | ) | ||||||||||
| Mortgage servicing rights | ( | ) | ||||||||||
| Total other intangible assets | $ | $ | ( | ) | $ | |||||||
| (Dollars in thousands) | As of December 31, 2019 | |||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
| Core deposit intangible assets | $ | $ | ( | ) | $ | |||||||
| Lease intangible asset | ( | ) | ||||||||||
| Mortgage servicing rights | ( | ) | ||||||||||
| Total other intangible assets | $ | $ | ( | ) | $ | |||||||
The following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2020 and in successive years ending December 31:
Schedule of Finite-lived Intangible Assets, Future Amortization Expense
| (Dollars in thousands) | Amortization | |||
| expense | ||||
| Remainder of 2020 | $ | |||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| Total | $ | |||
Mortgage loans serviced for others are not reported as assets. The following table provides information on the principal balances of mortgage loans serviced for others:
Schedule of Participating Mortgage Loans
| (Dollars in thousands) | September 30, | December 31, | ||||||
| 2020 | 2019 | |||||||
| FHLMC | $ | $ | ||||||
| FHLB | ||||||||
| Total | $ | $ | ||||||
Custodial escrow balances
maintained in connection with serviced loans were $
| 16 |
Activity for mortgage servicing rights and the related valuation allowance was as follows:
Schedule of Servicing Asset at Amortized Cost
| (Dollars in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Mortgage servicing rights: | ||||||||||||||||
| Balance at beginning of period | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||
| Amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at end of period | $ | $ | $ | $ | ||||||||||||
The
fair value of mortgage servicing rights was $
The
Company had a mortgage repurchase reserve of $
| 5. | Earnings per Share |
Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share include the effect of all potential common shares outstanding during each period. The diluted earnings per share computations for the three months ended September 30, 2020 and 2019 excluded of unexercised stock options because their inclusion would have been anti-dilutive during such periods. The diluted earnings per share computations for the nine months ended September 30, 2020 and 2019 excluded of unexercised stock options because their inclusion would have been anti-dilutive during such periods. The shares used in the calculation of basic and diluted earnings per share are shown below:
| (Dollars in thousands, except per share amounts) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding - basic (1) | ||||||||||||||||
| Assumed exercise of stock options (1) | ||||||||||||||||
| Weighted average common shares outstanding - diluted (1) | ||||||||||||||||
| Net earnings per share (1): | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| (1) |
| 17 |
| 6. | Repurchase Agreements |
The Company has overnight repurchase agreements with certain deposit customers whereby the Company uses investment securities as collateral for non-insured funds. These balances are accounted for as collateralized financing and included in other borrowings on the balance sheet.
Repurchase
agreements are comprised of non-insured customer funds, totaling $
The following is a summary of the balances of and collateral for the Company’s repurchase agreements:
Schedule of Repurchase Agreements
| As of September 30, 2020 | ||||||||||||||||||||
| Overnight and | Greater | |||||||||||||||||||
| Continuous | Up to 30 days | 30-90 days | than 90 days | Total | ||||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| U.S. federal agency obligations | $ | $ | $ | $ | $ | |||||||||||||||
| Agency mortgage-backed securities | - | |||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||
| Overnight and | Up to | Greater | ||||||||||||||||||
| Continuous | 30 days | 30-90 days | than 90 days | Total | ||||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| U.S. treasury obligations | $ | $ | $ | $ | $ | |||||||||||||||
| U.S. federal agency obligations | ||||||||||||||||||||
| Agency mortgage-backed securities | - | |||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
The investment securities are held by a third-party financial institution in the customer’s custodial account. The Company is required to maintain adequate collateral for each repurchase agreement. Changes in the fair value of the investment securities impact the amount of collateral required. If the Company were to default, the investment securities would be used to settle the repurchase agreement with the deposit customer.
| 7. | Revenue from Contracts with Customers |
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. Items outside the scope of ASC 606 are noted as such.
Schedule of Revenue from Contracts with Customers Within Non-interest Income
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Non-interest income: | ||||||||||||||||
| Service charges on deposits | ||||||||||||||||
| Overdraft fees | $ | $ | $ | $ | ||||||||||||
| Other | ||||||||||||||||
| Interchange income | ||||||||||||||||
| Loan servicing fees (1) | ||||||||||||||||
| Office lease income (1) | ||||||||||||||||
| Gains on sales of loans (1) | ||||||||||||||||
| Bank owned life insurance income (1) | ||||||||||||||||
| Gains on sales of investment securities (1) | ( | ) | ||||||||||||||
| Gains on sales of real estate owned | ( | ) | ( | ) | ||||||||||||
| Other | ||||||||||||||||
| Total non-interest income | $ | $ | $ | $ | ||||||||||||
| (1) |
| 18 |
A description of the Company’s revenue streams within the scope of ASC 606 follows:
Service Charges on Deposit Accounts
The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM usage fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period during which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.
Interchange Income
The Company earns interchange fees from debit cardholder transactions conducted through the interchange payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Gains (Losses) on Sales of Real Estate Owned
The Company records a gain or loss from the sale of real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. There were no sales of real estate owned that were financed by the Company during the first nine months of 2020 or 2019.
| 8. | Fair Value of Financial Instruments and Fair Value Measurements |
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
| 19 |
Fair value estimates of the Company’s financial instruments as of September 30, 2020 and December 31, 2019, including methods and assumptions utilized, are set forth below:
Schedule of Fair Value, by Balance Sheet Grouping
| (Dollars in thousands) | As of September 30, 2020 | |||||||||||||||||||
| Carrying | ||||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||
| Bank stocks, at cost | n/a | n/a | n/a | n/a | ||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Loans held for sale, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Derivative financial instruments | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-maturity deposits | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Time deposits | ( | ) | ( | ) | ( | ) | ||||||||||||||
| FHLB borrowings | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Subordinated debentures | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other borrowings | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Accrued interest payable | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Derivative financial instruments | ( | ) | ( | ) | ( | ) | ||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||
| Bank stocks, at cost | n/a | n/a | n/a | n/a | ||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Derivative financial instruments | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-maturity deposits | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Time deposits | ( | ) | ( | ) | ( | ) | ||||||||||||||
| FHLB borrowings | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Subordinated debentures | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other borrowings | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Accrued interest payable | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Derivative financial instruments | ( | ) | ( | ) | ( | ) | ||||||||||||||
| 20 |
Transfers
The Company did not transfer any assets or liabilities among levels during the nine months ended September 30, 2020 or during the year ended December 31, 2019.
Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis
The following tables represent the Company’s financial instruments that are measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 allocated to the appropriate fair value hierarchy:
Schedule of Fair Value, Assets Measured On Recurring Basis
| (Dollars in thousands) | ||||||||||||||||
| As of September 30, 2020 | ||||||||||||||||
| Fair value hierarchy | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U. S. treasury securities | $ | $ | $ | $ | ||||||||||||
| U. S. federal agency obligations | ||||||||||||||||
| Municipal obligations, tax exempt | ||||||||||||||||
| Municipal obligations, taxable | ||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Loans held for sale | ||||||||||||||||
| Derivative financial instruments | ||||||||||||||||
| Liabililties: | ||||||||||||||||
| Derivative financial instruments | ( | ) | ( | ) | ||||||||||||
| As of December 31, 2019 | ||||||||||||||||
| Fair value hierarchy | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U. S. treasury securities | $ | $ | $ | $ | ||||||||||||
| U. S. federal agency obligations | ||||||||||||||||
| Municipal obligations, tax exempt | ||||||||||||||||
| Municipal obligations, taxable | ||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Loans held for sale | ||||||||||||||||
| Derivative financial instruments | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative financial instruments | ( | ) | ( | ) | ||||||||||||
The Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal agency obligations, municipal obligations, agency mortgage-backed securities and certificates of deposits. Quoted exchange prices are available for the Company’s U.S treasury securities, which are classified as Level 1. U.S. federal agency securities and agency mortgage-backed securities are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2. Municipal obligations are valued using a type of matrix, or grid, pricing in which securities are benchmarked against U.S. treasury rates based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy.
Changes in the fair value of available-for-sale securities are included in other comprehensive income to the extent the changes are not considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other-than-temporary results in a write-down of that security’s cost basis.
Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The mortgage loan valuations are based on quoted secondary market prices for similar loans and are classified as Level 2. Changes in the fair value of mortgage loans originated and intended for sale in the secondary market and derivative financial instruments are included in gains on sales of loans.
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The aggregate fair value, contractual balance (including accrued interest), and gain on loans held for sale were as follows:
Schedule of Fair Value Contractual Balance and Gain Loss On Loans Held for Sale
| As of | As of | |||||||
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2020 | 2019 | ||||||
| Aggregate fair value | $ | $ | ||||||
| Contractual balance | ||||||||
| Gain | $ | $ | ||||||
The Company’s derivative financial instruments consist of interest rate lock commitments and corresponding forward sales contracts on mortgage loans held for sale. The fair values of these derivatives are based on quoted prices for similar loans in the secondary market. The market prices are adjusted by a factor, based on the Company’s historical data and its judgment about future economic trends, which considers the likelihood that a commitment will ultimately result in a closed loan. These instruments are classified as Level 2. The amounts are included in other assets or other liabilities on the consolidated balance sheets and gains on sales of loans, net in the consolidated statements of earnings. The total amount of gains from changes in fair value of loans held for sale included in earnings were as follows:
Schedule of Gains and Losses from Changes in Fair Value of Loans Held for Sale
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Interest income | $ | $ | $ | $ | ||||||||||||
| Change in fair value | ( | ) | ||||||||||||||
| Total change in fair value | $ | $ | $ | $ | ||||||||||||
Valuation Methods for Instruments Measured at Fair Value on a Non-recurring Basis
The
Company does not record its loan portfolio at fair value. Collateral-dependent impaired loans are generally carried at the lower
of cost or fair value of the collateral, less estimated selling costs. Collateral values are determined based on appraisals performed
by qualified licensed appraisers hired by the Company and then further adjusted if warranted based on relevant facts and circumstances.
The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income
approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable
sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs
for determining fair value. Impaired loans are reviewed and evaluated at least quarterly for additional impairment and adjusted
accordingly, based on the same factors identified above. The carrying value of the Company’s impaired loans was $
Real estate owned includes assets acquired through, or in lieu of, foreclosure and land previously acquired for expansion. Real estate owned is initially recorded at the fair value of the collateral less estimated selling costs. Subsequent valuations are updated periodically and are based upon independent appraisals, third party price opinions or internal pricing models. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Real estate owned is reviewed and evaluated at least annually for additional impairment and adjusted accordingly, based on the same factors identified above.
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The following table presents quantitative information about Level 3 fair value measurements for impaired loans measured at fair value on a non-recurring basis as of September 30, 2020 and December 31, 2019.
Schedule of Fair Value Measurements On Nonrecurring, Valuation Techniques
| (Dollars in thousands) | ||||||||||||
| Fair value | Valuation technique | Unobservable inputs | Range | |||||||||
| As of September 30, 2020 | ||||||||||||
| Impaired loans: | ||||||||||||
| One-to-four family residential real estate | $ | |||||||||||
| Commercial | | |||||||||||
| Real estate owned | ||||||||||||
| As of December 31, 2019 | ||||||||||||
| Impaired loans: | ||||||||||||
| One-to-four family residential real estate | $ | | ||||||||||
| Commercial real estate | | |||||||||||
| Commercial | |
| ||||||||||
| Agriculture | | |||||||||||
| 9. | Regulatory Capital Requirements |
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believed that as of September 30, 2020, the Company and the Bank met all capital adequacy requirements to which they were subject at that time.
Prompt
corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.
If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions
are limited, as is asset growth and expansion, and capital restoration plans are required. The Company and the Bank are subject
to the Basel III Rule, which is applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank
and savings and loan holding companies other than “small bank holding companies” (generally, non-public bank holding
companies with consolidated assets of less than $
The
Basel III Rule includes a common equity Tier 1 capital to risk-weighted assets minimum ratio of
As of September 30, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action then in effect. There are no conditions or events since that notification that management believes have changed the institution’s category.
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The following is a comparison of the Company’s regulatory capital to minimum capital requirements at September 30, 2020 and December 31, 2019:
Schedule of Compliance with Regulatory Capital Requirements for Mortgage Companies
| (Dollars in thousands) | For capital | |||||||||||||||
| Actual | adequacy purposes | |||||||||||||||
| Amount | Ratio | Amount | Ratio (1) | |||||||||||||
| As of September 30, 2020 | ||||||||||||||||
| Leverage | $ | $ | ||||||||||||||
| Common Equity Tier 1 Capital | ||||||||||||||||
| Tier 1 Capital | ||||||||||||||||
| Total Risk Based Capital | ||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||
| Leverage | $ | $ | ||||||||||||||
| Common Equity Tier 1 Capital | ||||||||||||||||
| Tier 1 Capital | ||||||||||||||||
| Total Risk Based Capital | ||||||||||||||||
| (1) |
The following is a comparison of the Bank’s regulatory capital to minimum capital requirements at September 30, 2020 and December 31, 2019:
Schedule of Compliance with Regulatory Capital Requirements Under Banking Regulations
| To be well-capitalized | ||||||||||||||||||||||||
| under prompt | ||||||||||||||||||||||||
| (Dollars in thousands) | For capital | corrective | ||||||||||||||||||||||
| Actual | adequacy purposes | action provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio(1) | Amount | Ratio | |||||||||||||||||||
| As of September 30, 2020 | ||||||||||||||||||||||||
| Leverage | $ | $ | $ | |||||||||||||||||||||
| Common Equity Tier 1 Capital | ||||||||||||||||||||||||
| Tier 1 Capital | ||||||||||||||||||||||||
| Total Risk Based Capital | ||||||||||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||||||
| Leverage | $ | $ | $ | |||||||||||||||||||||
| Common Equity Tier 1 Capital | ||||||||||||||||||||||||
| Tier 1 Capital | ||||||||||||||||||||||||
| Total Risk Based Capital | ||||||||||||||||||||||||
| (1) |
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10. Impact of Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), commonly referred to as “CECL.” The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the expected term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity debt securities. Under the provisions of the update, credit losses recognized on available for sale debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan’s contractual balance is adjusted to fair value through a credit discount, and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. For public entities, the amendments of the update became effective on January 1, 2020. In October 2019, the FASB approved a change in the effective dates for CECL which delayed the effective date to fiscal years beginning after December 15, 2022 for smaller reporting companies. Because the Company is a smaller reporting company, the proposed delay is applicable to the Company, and the Company plans to delay the implementation of CECL until January 1, 2023. Management formed an implementation committee that has implemented a process to collect the data and is utilizing a vendor solution for the new standard. Initial calculations estimate the effect will be an increase to the allowance for loan losses upon adoption. However, the size of the overall increase is uncertain at this time. Management will utilize the delay to continue to refine and back test the CECL calculation. The internal controls over financial reporting specifically related to CECL are in the design stage and are currently being evaluated.
In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19-related loan modifications as TDRs. The interagency guidance was effective immediately.
11. COVID-19 Pandemic
The COVID-19 pandemic in the United States caused a substantial disruption to the economy, employment and financial markets and is expected to have a complex and significant adverse impact on the economy, the banking industry and the Company in future fiscal periods, all subject to a high degree of uncertainty. The lack of additional federal government stimulus and expectations for another surge in COVID-19 cases continue to present risks while the timeline for the development of a vaccine is still uncertain. The Company’s pandemic response plan continues to focus foremost on the safety and well-being of our customers and associates. The COVID-19 pandemic could adversely impact our customers, employees or vendors which may impact our operations and financial results. The COVID-19 pandemic may cause economic declines in excess of current projections, or if the pandemic lasts longer than currently projected, the Company’s provision for loan losses may remain elevated or increase in future periods. The Company expects to see higher loan delinquencies and defaults in future periods as a result of the COVID-19 pandemic and will continue to monitor our allowance for loan losses in light of changing economic conditions related to COVID-19. The COVID-19 pandemic may also impact the Company’s deposit balances and service charge income. In addition, the fair value of certain assets may be adversely impacted by the pandemic and the economic downturn, including the fair value of goodwill, mortgage servicing rights and other real estate. These declines could result in impairments in future periods. The pandemic has caused a significant decline in market interest rates which may cause our net interest margin to decline. At this time, the full impact of the COVID-19 pandemic on the Company’s financial statements is uncertain.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview. Landmark Bancorp, Inc. is a financial holding company incorporated under the laws of the State of Delaware and is engaged in the banking business through its wholly-owned subsidiary, Landmark National Bank, and in the insurance business through its wholly-owned subsidiary, Landmark Risk Management, Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Landmark Bancorp, Inc., Landmark National Bank and Landmark Risk Management, Inc. The Company is listed on the Nasdaq Global Market under the symbol “LARK.” The Bank is dedicated to providing quality financial and banking services to its local communities. Our strategy includes continuing a tradition of holding and acquiring quality assets while growing our commercial, commercial real estate and agriculture loan portfolios. We are committed to developing relationships with our borrowers and providing a total banking service.
The Bank is principally engaged in the business of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to originate one-to-four family residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans. Although not our primary business function, we do invest in certain investment and mortgage-related securities using deposits and other borrowings as funding sources.
Landmark Risk Management, Inc., which was formed and began operations on May 31, 2017, is a Nevada-based captive insurance company that provides property and casualty insurance coverage to the Company and the Bank for which insurance may not be currently available or economically feasible in the insurance marketplace. Landmark Risk Management, Inc. is subject to the regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. As of May 31, 2019, Landmark Risk Management, Inc. exited the pool resources relationship of which it was previously a member. On October 1, 2020, Landmark Risk Management, Inc. joined a new pool and resumed providing insurance to the Company and the Bank.
Our results of operations depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing liabilities. Our results of operations are also affected by non-interest income, such as service charges, loan fees, gains from the sale of newly originated loans, gains or losses on investments and certain other non-interest related items. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees, federal deposit insurance costs, data processing expenses and provision for loan losses.
We are significantly impacted by prevailing economic conditions, including federal monetary and fiscal policies, and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions.
Currently, our business consists of ownership of the Bank, with its main office in Manhattan, Kansas and twenty- nine additional branch offices in central, eastern, southeast and southwest Kansas, and our ownership of Landmark Risk Management, Inc.
Significant Developments – Impact of COVID-19. The COVID-19 pandemic in the United States has had and continues to have a complex and significant adverse impact on the economy, the banking industry and the Company, all subject to a high degree of uncertainty for future periods.
Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in Kansas, where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. The Governor of Kansas issued a series of orders, including an order that, subject to limited exceptions, all individuals stay at home and non-essential businesses cease all activities, which order was effective March 28, 2020. This stay at home order was lifted on May 3, 2020, with economic and social gatherings reopening in a phased-in approach since then. The re-opening of the economy in Kansas has resulted in increased cases of COVID-19, and additional restrictions have been put in place to slow the spread. These measures have had a lasting impact on the economy of and customers located in Kansas. The Bank and its branches have remained open during these orders because banks have been deemed essential businesses. The Bank is currently serving its customers through its digital banking platforms and drive-thru services, while branch lobbies recently re-opened to customers. Based on the current environment, it is unclear if the State of Kansas will tighten or relax its stay-at-home and social distancing policies going forward. The Bank will continue to monitor the situation to protect the safety and well-being of our customers and associates.
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Across the United States, as a result of stay-at-home orders and other continuing restrictions, many states have experienced a dramatic increase in unemployment levels as a result of the curtailment of business activities. The unemployment rate in Kansas was 5.9 percent in September 2020, which is an increase from 3.1% in December 2019. The unemployment rate peaked at 11.7 percent in April 2020 as a result of economic impacts of the COVID-19 pandemic.
Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:
| ● | The Federal Reserve decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%. | |
| ● | On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as the Paycheck Protection Program (“PPP”). The Bank participated as a lender in the PPP. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See footnotes 3 and 11 of the financial statements for additional information. | |
| ● | On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See footnotes 3 and 11 of the financial statements for additional information. | |
| On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility (“MSNLF”), and (2) the Main Street Expanded Loan Facility (“MSELF”). MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program is authorized up to $600 billion. | ||
| ● | In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic-related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility. |
| 27 |
Effects on Our Business. The COVID-19 pandemic and the specific developments referred to above have had, and are expected to continue to have, a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the retail, restaurant, hospitality and agriculture industries will continue to endure significant economic distress, which may cause them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and the COVID-19 pandemic is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our one-to-four family residential real estate loan business and loan portfolio, and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations will be significantly adversely affected, as described in further detail below.
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
| ● | We established a pandemic response team, which has been meeting as needed since mid-March to address changes resulting from the COVID-19 pandemic. We have a significant portion of our associates working from home, and for those that remain in our bank facilities, we have enhanced safety precautions in place for their safety. We have repositioned associates to support our customer care – call center to handle increased volumes of customer requests and to support our customers’ access to our digital banking platforms. | |
| ● | As a preferred lender with the SBA, we were able and prepared to immediately respond to help existing and new clients access the PPP authorized by the CARES Act. As of September 30, 2020, we funded 1,095 loans totaling approximately $131.0 million. We anticipate that the forgiveness process on PPP loans will begin during the fourth quarter of 2020. | |
| ● | As of September 30, 2020, we entered into short-term forbearance plans and short-term repayment plans on 8 one-to-four family residential mortgage loans totaling $982,000. We continue to work with our customers by offering loan forbearance and modifications to those impacted by COVID-19. | |
| ● | As of September 30, 2020, we had 33 loan modifications on outstanding loan balances of $22.9 million in connection with the COVID-19 pandemic. These modifications consisted of payment deferrals that were applied to either the full loan payment or just the principal component. | |
| ● | With the safety and well-being of our customers and associates foremost in mind, we initially limited access to our bank lobbies while keeping our drive-thru lanes open and encouraging our customers to use our online and mobile banking applications or call our customer care center. Currently our bank lobbies are open to customers, but we continue to evaluate this option as the number of COVID-19 cases fluctuate in our communities. |
In October 2020, we declared our 77th consecutive quarterly dividend, and we currently have no plans to change our dividend strategy given our current capital and liquidity positions. However, while we have achieved a strong capital base and expect to continue operating profitably, this is dependent upon the projected length and depth of any economic recession and effects on our operations, profitability and capital positions in future periods, which we continue to monitor closely. In addition, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, we will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if we do not maintain greater than 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.
Critical Accounting Policies. Critical accounting policies are those which are both most important to the portrayal of our financial condition and results of operations and require our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to the allowance for loan losses, the valuation of investment securities, accounting for income taxes and the accounting for goodwill, all of which involve significant judgment by our management. Information about our critical accounting policies is included under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 12, 2020.
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Summary of Results. During the third quarter of 2020, we recorded net earnings of $5.4 million, which was an increase of $2.8 million, or 107.7%, from the $2.6 million of net earnings in the third quarter of 2019. During the first nine months of 2020, we recorded net earnings of $13.9 million, which was an increase of $6.5 million, or 87.9%, from the $7.4 million of net earnings in the first nine months of 2019. The increase in net earnings was primarily driven by higher gains on sales of loans as low mortgage rates have fueled a robust housing market and refinancing activity.
The following table summarizes earnings and key performance measures for the periods presented.
| (Dollars in thousands, except per share amounts) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net earnings: | ||||||||||||||||
| Net earnings | $ | 5,427 | $ | 2,613 | $ | 13,890 | $ | 7,394 | ||||||||
| Basic earnings per share (1) | $ | 1.21 | $ | 0.57 | $ | 3.07 | $ | 1.61 | ||||||||
| Diluted earnings per share (1) | $ | 1.20 | $ | 0.57 | $ | 3.06 | $ | 1.61 | ||||||||
| Earnings ratios: | ||||||||||||||||
| Return on average assets (2) | 1.89 | % | 1.03 | % | 1.71 | % | 1.00 | % | ||||||||
| Return on average equity (2) | 18.06 | % | 9.90 | % | 16.19 | % | 10.02 | % | ||||||||
| Equity to total assets | 10.61 | % | 10.51 | % | 10.61 | % | 10.51 | % | ||||||||
| Net interest margin (2) | 3.60 | % | 3.44 | % | 3.66 | % | 3.43 | % | ||||||||
| Dividend payout ratio | 16.67 | % | 33.33 | % | 19.61 | % | 35.49 | % | ||||||||
| (1) Per share values for the periods ended September 30, 2019 have been adjusted to give effect to the 5% stock dividend paid during December 2019. |
| (2) Ratios have been annualized and are not necessarily indicative of the results for the entire year. |
Interest Income. Interest income of $9.8 million for the quarter ended September 30, 2020 increased $312,000, or 3.3%, as compared to the same period of 2019. Interest income on loans increased $902,000, or 12.7%, to $8.0 million for the quarter ended September 30, 2020, compared to the same period of 2019 due primarily to an increase in our average loan balances, which increased from $529.6 million in the third quarter of 2019 to $720.7 million in the third quarter of 2020. Our average loan balances benefited from the $131.0 million of PPP loans we originated in the second and third quarters of 2020. While the maturities of PPP loans are two or five years, we anticipate a significant amount may be forgiven prior to the end of 2020, which will increase the yield on loans and reduce the average loan balance. Partially offsetting the higher average balances were lower yields on loans, which decreased from 5.32% in the third quarter of 2019 to 4.42% in the third quarter of 2020. The Federal Reserve decreased the target federal funds interest rate by 25 basis points in each of August, September and October of 2019. In addition, in response to the COVID-19 pandemic, the Federal Reserve decreased the target federal funds interest rate by a total of 150 basis points in March 2020. These decreases impacted yields on loans between 2019 and 2020. In addition, the yield on PPP loans is lower than our typical commercial loans, resulting in a lower average yield on loans in the third quarter of 2020. We anticipate that our yield on loans will be adversely affected in future periods as a result originating PPP loans, to the extent the loans are not forgiven and remain on our books, and the impact of loans repricing lower in the current rate environment. Interest income on investment securities decreased $590,000, or 25.1%, to $1.8 million for the third quarter of 2020, as compared to $2.3 million in the same period of 2019. The decrease in interest income on investment securities was the result of lower average balances, which decreased from $381.2 million in the third quarter of 2019 to $307.9 million in the third quarter of 2020, and lower rates, which decreased from 2.68% in the third quarter of 2019 to 2.54% in the third quarter of 2020.
Interest income of $28.7 million for the nine months ended September 30, 2020 increased $1.1 million, or 4.0%, as compared to the same period of 2019. Interest income on loans increased $2.5 million, or 12.0%, to $22.9 million for the nine months ended September 30, 2020, compared to the same period of 2019 due primarily to an increase in our average loan balances, which increased from $511.3 million during the first nine months of 2019 to $647.5 million during the first nine months of 2020. Partially offsetting the higher average balances were lower yields on loans, which decreased from 5.35% during the nine months ended September 30, 2019 to 4.73% during the nine months ended September 30, 2020. Our average loan balances and yields were impacted by the same factors described in the quarter-to-quarter comparison above. Interest income on investment securities decreased $1.4 million, or 18.9%, to $5.8 million for the first nine months of 2020, as compared to $7.2 million in the same period of 2019. The decrease in interest income on investment securities was the result of lower average balances, which decreased from $386.4 million in the first nine months of 2019 compared to $327.6 million in the first nine months of 2020, and lower rates, which decreased from 2.72% in the first nine months of 2019 to 2.63% in the first nine months of 2020.
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Interest Expense. Interest expense during the quarter ended September 30, 2020 decreased $1.3 million, or 72.6%, to $490,000 as compared to the same period of 2019. Interest expense on interest-bearing deposits decreased $1.1 million, or 75.3%, to $354,000 for the quarter ended September 30, 2020 as compared to the same period of 2019. Our total cost of interest-bearing deposits decreased from 0.87% in the third quarter of 2019 to 0.20% in the third quarter of 2020 as a result of lower rates paid on money market and checking accounts, as the rates reprice based on market indexes, and lower rates on our certificates of deposit. Partially offsetting the lower interest expense rates was an increase in average interest-bearing deposit balances, which increased from $652.4 million in the third quarter of 2019 to $690.9 million in the third quarter of 2020. For the third quarter of 2020, interest expense on borrowings decreased $217,000, or 61.5%, to $136,000 as compared to the same period of 2019 due to a decrease in our average outstanding borrowings, which decreased from $52.3 million in the third quarter of 2019 to $40.1 million in the same period of 2020, and lower rates, which decreased from 2.68% in the third quarter of 2019 to 1.35% in the same period of 2020.
Interest expense during the nine months ended September 30, 2020 decreased $3.0 million, or 55.9%, to $2.3 million as compared to the same period of 2019. Interest expense on interest-bearing deposits decreased $2.3 million, or 56.6%, to $1.8 million for the nine months ended September 30, 2020 as compared to the same period of 2019. The decrease in interest expense on interest-bearing deposits was the result of lower rates paid on money market and checking accounts, as the rates reprice based on market indexes, and lower rates on our certificates of deposit. Partially offsetting the lower interest expense was an increase in average interest-bearing deposit balances, which increased from $647.9 million in the first nine months of 2019 to $663.5 million in the same period of 2020. The average rate of interest-bearing deposits decreased 0.50% to 0.36% for the first nine months of 2020 as compared to 0.86% in the same period of 2019. For the first nine months of 2020, interest expense on borrowings decreased $608,000, or 53.2%, to $534,000 as compared to the same period of 2019, due in part to a decrease in our average outstanding borrowings, which decreased from $53.6 million in the first nine months of 2019 to $40.1 million in the first nine months of 2020. Also contributing to the lower average outstanding borrowings were lower average rates on our borrowings, which decreased to 1.78% for the first nine months of 2020 compared to 2.85% for the same period of 2019.
Net Interest Income. Net interest income increased $1.6 million, or 21.0%, to $9.3 million for the third quarter of 2020 compared to the same period of 2019. The increase in net interest income was primarily a result of an increase of 15.0% in average interest-earning assets, from $911.1 million in the third quarter of 2019 to $1.0 billion for the same period of 2020. The increase in average interest-earning assets was primarily due to growth in our average loan balances. Our net interest margin, on a tax-equivalent basis, increased from 3.44% during the third quarter of 2019 to 3.60% in the same period of 2020.
Net interest income increased $4.0 million, or 18.1%, to $26.4 million for the first nine months of 2020 compared to the same period of 2019. The increase was primarily a result of a 9.9% increase in average interest-earning assets, from $898.5 million in the first nine months of 2019 to $987.4 million in the first nine months of 2020. The increase in average interest-earning assets was primarily due to growth in our average loan balances. Net interest margin, on a tax-equivalent basis, increased from 3.43% in the first nine months of 2019 to 3.66% in the same period of 2020.
As a result of the COVID-19 pandemic, we have originated approximately $131.0 million of PPP loans from April 3, 2020 through September 30, 2020. These loans have an interest rate of 1.00% plus the amortization of the origination fee, which resulted in a yield of 2.56% on PPP loans in the third quarter of 2020. The maturity date of these loans is two or five years unless the borrower’s loan is forgiven, in which case the loan may be repaid sooner. While the cost of our funds is lower than the yield on these loans, the interest rate spread is lower than we generally have received on other loans. As a result of the origination of PPP loans, to the extent PPP loans we originate are not forgiven, our net interest income may increase in future periods, but our net interest margin may be negatively affected by the lower interest rates on PPP loans. In addition, the COVID-19 pandemic could slow our origination of new loans, which may lead to lower net interest income and net interest margin in future periods as a result of lower loan volumes. The decline in market interest rates will also likely adversely impact our net interest income and net interest margin as a result of lower yields on loans and investment securities exceeding the benefit of a lower cost of funds. Our net interest margin declined to 3.60% in the third quarter of 2020 from 3.72% in the second quarter of 2020 as a result of these factors.
See the Average Assets/Liabilities and Rate/Volume tables at the end of Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details on average balances, asset yields, liability rates and net interest margin.
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Provision for Loan Losses. We maintain, and our Board of Directors monitors, an allowance for losses on loans. The allowance is established based upon management’s periodic evaluation of known and inherent risks in the loan portfolio, review of significant individual loans and collateral, review of delinquent loans, past loss experience, adverse situations that may affect the borrowers’ ability to repay, current and expected market conditions, and other factors management deems important. Determining the appropriate level of reserves involves a high degree of management judgment and is based upon historical and estimated losses in the loan portfolio and the collateral value or discounted cash flows of specifically identified impaired loans. Additionally, allowance policies are subject to periodic review and revision in response to a number of factors, including current market conditions, actual loss experience and management’s expectations.
During the third quarter of 2020, we recorded a provision for loan losses of $1.0 million compared to $400,000 in the third quarter of 2019. We recorded net loan charge-offs of $381,000 during the third quarter of 2020 compared to net loan charge-offs of $387,000 during the third quarter of 2019. The increase in our provision for loan losses during the third quarter of 2020 was primarily due to loan growth and the estimated economic impact of the COVID-19 pandemic. If the COVID-19 pandemic causes economic declines in excess of our estimations, or if the pandemic lasts longer than currently projected, our provision for loan losses may remain elevated or increase in future periods. We expect to see higher loan delinquencies and defaults in future periods as a result of the COVID-19 pandemic. We will continue to monitor our allowance for loan losses in light of changing economic conditions related to COVID-19.
During the first nine months of 2020, we recorded a provision for loan losses of $2.6 million compared to $1.0 million during the same period of 2019. We recorded net loan charge-offs of $701,000 during the nine months ended September 30, 2020 compared to $486,000 during the same period of 2019. The increase in our provision for loan losses during 2020 was primarily due to the loan growth and estimated economic impact of the COVID-19 pandemic. If the COVID-19 pandemic causes economic declines in excess of our estimations, or if the pandemic lasts longer than currently projected, our provision for loan losses may remain elevated or increase in future periods. We expect to see higher loan delinquencies and defaults in future periods as a result of the COVID-19 pandemic. We will continue to monitor our allowance for loan losses in light of changing economic conditions related to COVID-19.
For further discussion of the allowance for loan losses, refer to the “Asset Quality and Distribution” section below.
Non-interest Income. Total non-interest income was $8.2 million in the third quarter of 2020, an increase of $3.6 million, or 79.3%, from the same period in 2019, primarily as a result of an increase of $2.9 million in gains on sales of loans. Our gains on sales of loans increased as our originations of secondary market one-to-four family residential real estate loans increased due to the decline in mortgage interest rates that have fueled a robust housing market and refinancing activity. We anticipate our origination levels to remain elevated through the end of 2020 based on our current pipeline; however, the impact of the COVID-19 pandemic may slow these volumes if our borrowers are impacted by the economic slowdown. Also contributing to the increase in non-interest income was $678,000 of gains on sales of investment securities due to approximately $16.7 million of mortgage-backed investment securities sold during the third quarter of 2020. We sold higher coupon mortgage-backed investment securities after comparing the market prices to the risks of accelerating prepayment speeds due to decreasing interest rates.
Total non-interest income was $20.5 million in the first nine months of 2020, an increase of $8.7 million, or 73.7%, from the first nine months of 2019. The increase in non-interest income was primarily due to an increase of $6.0 million in gains on sales of loans, driven by higher volumes of secondary market one-to-four family residential real estate loans originated. Also contributing to the increase in non-interest income was $2.4 million of gains on sales of investment securities due to approximately $61.2 million of mortgage-backed investment securities sold during the first nine months of 2020. We sold higher coupon mortgage-backed investment securities after comparing the market prices to the risks of accelerating prepayment speeds due to decreasing interest rates. A loss of $146,000 was recorded on sales of investment securities during the nine months ended September 30, 2019.
Non-interest Expense. Non-interest expense totaled $9.5 million for the third quarter of 2020, an increase of $904,000, or 10.5%, from $8.6 million for the third quarter of 2019. The increase was primarily due to increases of $881,000 in compensation and benefits, which was driven in part by increases in our one-to-four family residential real estate lending as well as general increases in compensation. Also contributing to the increase were increases of $133,000 in amortization of intangibles resulting from accelerated prepayments on mortgage servicing rights and $130,000 in federal deposit insurance premiums as a result of utilizing assessment credits received in 2019.
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Non-interest expense totaled $26.7 million for the first nine months of 2020, an increase of $2.4 million or 10.0%, from $24.3 million for the first nine months of 2019. The increase was primarily due to increases of $2.3 million in compensation and benefits, which was driven in part by increases in our one-to-four family residential real estate lending as well as general increases in compensation. Also contributing to the increase was an increase of $279,000 in amortization of intangibles resulting from accelerated prepayments on mortgage servicing rights and $95,000 in federal deposit insurance premiums. Partially offsetting that increase was a decline of $190,000 in professional fees due primarily to a decrease in costs associated with an external audit of our internal controls over financial reporting that will no longer be required for the Company based on the fact that the Company will no longer qualify as an accelerated filer for its Form 10-K for the year ending December 31, 2020 due to the change in the definition of accelerated filer.
Income Tax Expense. During the third quarter of 2020, we recorded income tax expense of $1.5 million, compared to $583,000 during the same period of 2019. Our effective tax rate increased from 18.2% in the third quarter of 2019 to 21.5% in the third quarter of 2020, primarily due to an increase in earnings before income taxes while our tax-exempt income declined over the comparable periods.
We recorded income tax expense of $3.6 million for the first nine months of 2020 compared to $1.4 million in the same period of 2019. Our effective tax rate increased from 16.2% in the first nine months of 2019 to 20.8% in the first nine months of 2020 primarily due to an increase in earnings before income taxes while our tax-exempt income declined over the comparable periods.
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Financial Condition. Economic conditions in the United States deteriorated during the first nine months of 2020 as the impact of COVID-19 caused portions of the economy to shut down or be subject to operating restrictions. On March 28, 2020, a stay at home order was issued for the entire state of Kansas, which expanded previously issued local orders. This stay at home order was lifted on May 3, 2020 with a phased approach to reopening the Kansas economy, but the effects of the stay at home order and reopening restrictions continue to have an effect on the economies in our market areas. As the economy has reopened, the State of Kansas has experienced an increase in the number of COVID-19 cases. The State of Kansas and the geographic markets in which the Company operates have been significantly impacted by this pandemic. The Company’s allowance for loan losses at September 30, 2020 included estimates of the economic impact of COVID-19 on our loan portfolio. COVID-19 will likely continue to cause an increase in our delinquent and non-accrual loans as the economic slowdown impacts our customers. However, our loan portfolio is diversified across various types of loans and collateral throughout the markets in which we operate. Aside from a few problem loans that management is working to resolve, our asset quality has remained strong over the past few years. While we anticipate further increases in problem assets as a result of COVID-19, management believes its efforts to run a high quality financial institution with a sound asset base will continue to create a strong foundation for continued growth and profitability in the future. The table below shows additional information on the diversification of industry types within our commercial real estate and commercial loan categories:
| (dollars in thousands) | As of September 30, 2020 | |||||||
| Loan | Percent of | |||||||
| balance | total loans | |||||||
| Commercial real estate loans: | ||||||||
| Real estate rental and leasing - owner occupied | $ | 44,152 | 6.0 | % | ||||
| Real estate rental and leasing - non-owner occupied | 32,017 | 4.3 | % | |||||
| Accomodations and hotels | 15,042 | 2.0 | % | |||||
| Healthcare and social assistance | 10,925 | 1.5 | % | |||||
| Retail | 9,978 | 1.3 | % | |||||
| Other services | 7,853 | 1.1 | % | |||||
| Restaurants | 6,665 | 0.9 | % | |||||
| Construction and specialty contractors | 6,158 | 0.8 | % | |||||
| Educational services | 5,231 | 0.7 | % | |||||
| Other | 16,783 | 2.3 | % | |||||
| Total commercial real estate loans | $ | 154,804 | 20.9 | % | ||||
| Commercial loans: | ||||||||
| Finance and insurance | 20,449 | 2.8 | % | |||||
| Wholesale | 19,686 | 2.7 | % | |||||
| Auto and equipment leasing | 16,133 | 2.2 | % | |||||
| Manufacturing | 12,137 | 1.6 | % | |||||
| Construction and specialty contractors | 12,006 | 1.6 | % | |||||
| Retail | 8,359 | 1.1 | % | |||||
| Transportation | 7,777 | 1.1 | % | |||||
| Restaurants | 6,092 | 0.8 | % | |||||
| Information and telecommunications | 4,072 | 0.6 | % | |||||
| Real estate rental and leasing | 3,227 | 0.4 | % | |||||
| Other | 27,348 | 3.7 | % | |||||
| Total commercial loans | $ | 137,286 | 18.6 | % | ||||
Asset Quality and Distribution. Our primary investing activities are the origination of one-to-four family residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans and the purchase of investment securities. Total assets increased $150.5 million, or 15.1%, to $1.1 billion at September 30, 2020, compared to $998.5 million at December 31, 2019. Investment securities available for sale decreased $63.5 million, or 17.5%, to $299.5 million at September 30, 2020, from $363.0 million at December 31, 2019 primarily due to the result of the strategic sale of agency mortgage-backed investment securities during the first nine months of 2020. Net loans increased $196.0 million, or 36.8%, to $728.2 million at September 30, 2020, compared to $532.2 million at year-end 2019. Our loan growth during 2020 was primarily due to the origination of $131.0 million of PPP loans. We anticipate that loan growth will slow down in the future for our commercial and commercial real estate portfolios as a result of COVID-19 and the related decline in economic conditions in our market areas.
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The allowance for loan losses is established through a provision for loan losses based on our evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of our loan activity. This evaluation, which includes a review of all loans with respect to which full collectability may not be reasonably assured, considers the fair value of the underlying collateral, economic conditions, historical loan loss experience, level of classified loans and other factors that warrant recognition in providing for an appropriate allowance for loan losses. If the COVID-19 pandemic causes economic declines in excess of our estimations, or if the pandemic lasts longer than currently projected, our provision for loan losses may remain elevated or increase in future periods. We will continue to monitor our allowance for loan losses in light of changing economic conditions related to COVID-19. At September 30, 2020, our allowance for loan losses totaled $8.4 million, or 1.13% of gross loans outstanding, compared to $6.5 million, or 1.20% of gross loans outstanding, at December 31, 2019. The allowance for loan losses to gross loans outstanding decreased as a result of originating $131.0 million of PPP loans which are guaranteed by the SBA and have no allowance allocated as of September 30, 2020.
As of September 30, 2020 and December 31, 2019, approximately $25.1 million and $18.1 million, respectively, of loans were considered classified and assigned a risk rating of special mention, substandard or doubtful. The increase in classified loans was primarily due to the impact of COVID-19 and weakness in the agriculture industry which deteriorated further due to the pandemic. COVID-19 has also impacted our commercial and commercial real estate portfolios, with restaurants, accommodations and hotels experiencing the largest decline in revenues. These ratings indicate that these loans were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. Even though borrowers were experiencing moderate cash flow problems as well as some deterioration in collateral value, management believed the allowance for loan losses was sufficient to cover the risks and probable incurred losses related to such loans at September 30, 2020 and December 31, 2019, respectively.
Loans past due 30-89 days and still accruing interest totaled $3.7 million, or 0.50% of gross loans, at September 30, 2020, compared to $3.4 million, or 0.64% of gross loans, at December 31, 2019. At September 30, 2020, $6.3 million in loans were on non-accrual status, or 0.86% of gross loans, compared to $5.5 million, or 1.03% of gross loans, at December 31, 2019. Non-accrual loans typically consist of loans 90 or more days past due and certain impaired loans. No loans were 90 days delinquent and accruing interest at September 30, 2020 or December 31, 2019. Our impaired loans totaled $10.6 million at September 30, 2020 compared to $8.7 million at December 31, 2019. The difference in the Company’s non-accrual loan balances and impaired loan balances at September 30, 2020 and December 31, 2019 was related to TDRs that were accruing interest but still classified as impaired.
At September 30, 2020, the Company had twelve loan relationships consisting of 22 outstanding loans that were classified as TDRs. During the three and nine months ended September 30, 2020, the Company modified the payment terms for two agriculture loans totaling $571,000 and classified the restructurings as TDRs. A commercial loan totaling $33,000 and a $1.4 million loan relationship consisting of two commercial real estate loans and one construction loan were classified as TDRs during the three and nine months ended September 30, 2020 after negotiating restructuring agreements with the borrowers. One commercial loan relationship with five loans totaling $827,000 were classified as TDRs during the nine months ended September 30, 2020, after the payments were modified to interest only. All of the loans classified as TDRs were experiencing financial difficulties prior to the COVID-19 pandemic. One agriculture loan previously classified as a TDR paid off during 2020. No loan restructurings were classified as TDRs during the first nine months of 2019.
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As of September 30, 2020, the Company had 33 restructured loans totaling $22.9 million as a result of the COVID-19 pandemic. These loans are not classified as TDRs based on the CARES Act and regulatory guidance because the modifications were directly related to the impact of COVID-19. As of September 30, 2020, these loans were all performing based on the terms of their restructurings. Between March 31, 2020 and September 30, 2020, 107 loans with outstanding loan balances of $35.7 million had reached the end of their initial deferral periods and returned to their respective contractual payment terms. Additionally, as of September 30, 2020, only three borrowers with aggregate loans outstanding of $6.8 million were granted a second deferral. The following tables present additional information on these commercial and commercial real estate loan modifications by industry type:
| (dollars in thousands) | As of September 30, 2020 | |||||||||||||||
| Commercial | Other | Total COVID-19 | ||||||||||||||
| real estate | Commercial | loans | modificatons | |||||||||||||
| Real estate rental and leasing - owner occupied | $ | 368 | $ | - | $ | 1,640 | $ | 2,008 | ||||||||
| Real estate rental and leasing - non-owner occupied | 2,186 | - | 768 | 2,954 | ||||||||||||
| Accommodations and hotels | 8,544 | - | - | 8,544 | ||||||||||||
| Manufacturing | 558 | 957 | 598 | 2,113 | ||||||||||||
| Restaurants | 2,117 | 111 | - | 2,228 | ||||||||||||
| Healthcare and social assistance | 1,286 | - | 653 | 1,939 | ||||||||||||
| Professional and other services | - | 235 | 2,002 | 2,237 | ||||||||||||
| Construction and specialty contractors | - | - | 261 | 261 | ||||||||||||
| Other | 272 | 127 | 218 | 617 | ||||||||||||
| Total COVID-19 loan modifications | $ | 15,331 | $ | 1,430 | $ | 6,140 | $ | 22,901 | ||||||||
| (dollars in thousands) | As of June 30, 2020 | |||||||||||||||
| Commercial | Other | Total COVID-19 | ||||||||||||||
| real estate | Commercial | loans | modificatons | |||||||||||||
| Real estate rental and leasing - owner occupied | $ | 3,079 | $ | 91 | $ | 2,606 | $ | 5,776 | ||||||||
| Real estate rental and leasing - non-owner occupied | 8,511 | - | 4,720 | 13,231 | ||||||||||||
| Accommodations and hotels | 9,920 | - | - | 9,920 | ||||||||||||
| Manufacturing | 558 | 2,208 | 598 | 3,364 | ||||||||||||
| Restaurants | 3,779 | 820 | - | 4,599 | ||||||||||||
| Healthcare and social assistance | 2,275 | 313 | 653 | 3,241 | ||||||||||||
| Educational services | 2,009 | - | 1,089 | 3,098 | ||||||||||||
| Construction and specialty contractors | 97 | 379 | 261 | 737 | ||||||||||||
| Other | 3,558 | 2,917 | 4,269 | 10,744 | ||||||||||||
| Total COVID-19 loan modifications | $ | 33,786 | $ | 6,728 | $ | 14,196 | $ | 54,710 | ||||||||
Consistent with the CARES Act and regulatory guidance, the Company entered into short-term forbearance plans or short-term repayment plans on eight one-to-four family residential mortgage loans totaling $982,000 as of September 30, 2020. These modifications are not included in the table above.
As part of our credit risk management, we continue to manage the loan portfolio to identify problem loans and have placed additional emphasis on commercial real estate and construction and land relationships. We are working to resolve the remaining problem credits or move the non-performing credits out of the loan portfolio. At September 30, 2020, we had $1.5 million of real estate owned compared to $290,000 at December 31, 2019. As of September 30, 2020, real estate owned consisted of commercial buildings, undeveloped land and residential real estate. The Company is currently marketing all of the remaining properties in real estate owned.
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Liability Distribution. Our primary ongoing sources of funds are deposits, FHLB borrowings, proceeds from principal and interest payments on loans and investment securities and proceeds from the sale of mortgage loans and investment securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates and economic conditions. We experienced an increase of $122.9 million, or 14.7%, in total deposits during the first nine months of 2020, to $957.9 million at September 30, 2020, from $835.0 million at December 31, 2019. The increase in deposits was primarily due to increased balances of non-interest bearing, money market and checking and savings deposit accounts. This increase in deposits was primarily related to PPP funds, government stimulus payments and customers increasing liquidity. This increase was partially offset by lower balances of time deposit accounts.
Non-interest-bearing deposits at September 30, 2020, were $272.9 million, or 28.5% of deposits, compared to $182.7 million, or 21.9% of deposits, at December 31, 2019. Money market and checking deposit accounts were 45.6% of our deposit portfolio and totaled $437.1 million at September 30, 2020, compared to $405.7 million, or 48.6% of deposits, at December 31, 2019. Savings accounts increased to $120.4 million, or 12.6% of deposits, at September 30, 2020, from $99.5 million, or 11.9% of deposits, at December 31, 2019. Certificates of deposit totaled $127.6 million, or 13.3% of deposits, at September 30, 2020, compared to $147.1 million, or 17.6% of deposits, at December 31, 2019.
Certificates of deposit at September 30, 2020, scheduled to mature in one year or less, totaled $106.1 million. Historically, maturing deposits have generally remained with the Bank, and we believe that a significant portion of the deposits maturing in one year or less will remain with us upon maturity in some type of deposit account.
Total borrowings increased $7.9 million to $50.1 million at September 30, 2020, from $42.2 million at December 31, 2019. The increase in total borrowings was due to an increase in Federal Home Loan Bank borrowings from $3.0 million at December 31, 2019 to $20.1 million at September 30, 2020. This was due to increased borrowings on our line of credit and $8.0 million of FHLB advances we borrowed during the second quarter of 2020 as a result of special rate PPP funding offered by the FHLB. Partially offsetting that increase was a decrease in our other borrowings, consisting of repurchase agreements, from $17.5 million at December 31, 2019 to $8.4 million at September 30, 2020.
Cash Flows. During the nine months ended September 30, 2020, our cash and cash equivalents increased by $2.1 million. Our operating activities provided cash of $6.4 million during the first nine months of 2020 primarily as a result of the proceeds from the sale of loans held for sale. Our investing activities used net cash of $130.1 million during the first nine months of 2020, primarily as a result of funding PPP loans. Financing activities provided net cash of $125.8 million during the first nine months of 2020, primarily as a result of an increase in deposits.
Liquidity. Our most liquid assets are cash and cash equivalents and investment securities available for sale. The levels of these assets are dependent on the operating, financing, lending and investing activities during any given period. These liquid assets totaled $315.4 million at September 30, 2020 and $376.7 million at December 31, 2019. During periods in which we are not able to originate a sufficient amount of loans and/or periods of high principal prepayments, we generally increase our liquid assets by investing in short-term, high-grade investments.
Liquidity management is both a daily and long-term function of our strategy. Excess funds are generally invested in short-term investments. Excess funds are typically generated as a result of increased deposit balances, while uses of excess funds are generally deposit withdrawals and loan advances. In the event we require funds beyond our ability to generate them internally, additional funds are generally available through the use of FHLB advances, a line of credit with the FHLB, other borrowings or through sales of investment securities. At September 30, 2020, we had outstanding FHLB advances of $8.0 million and $12.1 million of borrowings against our line of credit with the FHLB. At September 30, 2020, we had collateral pledged to the FHLB that would allow us to borrow an additional $57.2 million, subject to FHLB credit requirements and policies. At September 30, 2020, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $104.7 million. We also have various other federal funds agreements, both secured and unsecured, with correspondent banks totaling approximately $30.0 million in available credit under which we had no outstanding borrowings at September 30, 2020. At September 30, 2020, we had subordinated debentures totaling $21.7 million and other borrowings of $8.4 million, which consisted of $8.4 million in repurchase agreements. The Company also has available a $7.5 million line of credit from an unrelated financial institution maturing on November 1, 2021, with an interest rate that adjusts daily based on the prime rate less 0.25%, with a floor of 3.00%. This line of credit has covenants specific to capital and other financial ratios, with which the Company was in compliance at September 30, 2020.
We have been actively monitoring our liquidity since the COVID-19 pandemic began. This includes enhanced monitoring of cash levels and unfunded loan commitments. We also increased our borrowing capacity at the Federal Reserve discount window by pledging additional municipal investment securities as collateral.
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Off Balance Sheet Arrangements. As a provider of financial services, we routinely issue financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by us generally to guarantee the payment or performance obligation of a customer to a third party. While these standby letters of credit represent a potential outlay by us, a significant amount of the commitments may expire without being drawn upon. We have recourse against the customer for any amount the customer is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by us. Most of the standby letters of credit are secured, and in the event of nonperformance by the customers, we have the right to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us, was $2.2 million at September 30, 2020.
At September 30, 2020, we had outstanding loan commitments, excluding standby letters of credit, of $139.1 million. We anticipate that sufficient funds will be available to meet current loan commitments. These commitments consist of unfunded lines of credit and commitments to finance real estate loans.
Capital. Current regulatory capital regulations require financial institutions (including banks and bank holding companies) to meet certain regulatory capital requirements. The Company and the Bank are subject to the Basel III Rules that implemented the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally, non-public bank holding companies with consolidated assets of less than $3.0 billion).
The Basel III Rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a Tier 1 capital to risk-weighted assets minimum ratio of 6.0%, a Total Capital to risk-weighted assets minimum ratio of 8.0%, and a Tier 1 leverage minimum ratio of 4.0%. A capital conservation buffer, equal to 2.5% common equity Tier 1 capital, is also established above the regulatory minimum capital requirements (other than the Tier 1 leverage ratio). As of September 30, 2020 and December 31, 2019, the Bank met the capital requirements to be deemed “well capitalized,” which is the highest rating available under the regulatory capital regulations framework for prompt corrective action. Management believed that as of September 30, 2020, the Company and the Bank met all capital adequacy requirements to which we are subject.
We believe the Company has adequate capital to withstand the impact of the COVID-19 pandemic and any economic downturn on our asset quality and net earnings. The Company performs stress tests on the loan portfolio to measure the impact of severe economic recessions on its capital levels to help it monitor capital levels in connection with the COVID-19 pandemic.
Dividends. During the quarter ended September 30, 2020, we paid a quarterly cash dividend of $0.20 per share to our stockholders.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. In addition, under the Basel III Rules, financial institutions have to maintain greater than 2.5% in common equity Tier 1 capital attributable to the capital conservation buffer in order to pay dividends and make other capital distributions. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of September 30, 2020. The National Bank Act imposes limitations on the amount of dividends that a national bank may pay without prior regulatory approval. Generally, the amount is limited to the bank’s current year’s net earnings plus the adjusted retained earnings for the two preceding years. As of September 30, 2020, approximately $23.1 million was available to be paid as dividends to the Company by the Bank without prior regulatory approval.
Additionally, our ability to pay dividends is limited by the subordinated debentures that are held by three business trusts that we control. Interest payments on the debentures must be paid before we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock.
| 37 |
Average Assets/Liabilities. The following tables reflect the tax-equivalent yields earned on average interest-earning assets and costs of average interest-bearing liabilities for the periods indicated (derived by dividing income or expense by the monthly average balance of assets or liabilities, respectively) as well as “net interest margin” (which reflects the effect of the net earnings balance) for the periods shown:
| Three months ended | Three months ended | |||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2020 | September 30, 2019 | ||||||||||||||||||||||
| Average balance | Interest | Average yield/rate | Average balance | Interest | Average yield/rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Interest-bearing deposits at banks | $ | 19,337 | $ | 5 | 0.10 | % | $ | 304 | $ | 4 | 5.22 | % | ||||||||||||
| Investment securities (1) | 307,904 | 1,967 | 2.54 | % | 381,217 | 2,571 | 2.68 | % | ||||||||||||||||
| Loans receivable, net (2) | 720,742 | 8,004 | 4.42 | % | 529,552 | 7,103 | 5.32 | % | ||||||||||||||||
| Total interest-earning assets | 1,047,983 | 9,976 | 3.79 | % | 911,073 | 9,678 | 4.21 | % | ||||||||||||||||
| Non-interest-earning assets | 96,869 | 92,886 | ||||||||||||||||||||||
| Total | $ | 1,144,852 | $ | 1,003,959 | ||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Money market and checking | $ | 442,023 | $ | 125 | 0.11 | % | $ | 362,500 | $ | 630 | 0.69 | % | ||||||||||||
| Savings accounts | 118,264 | 10 | 0.03 | % | 98,802 | 9 | 0.04 | % | ||||||||||||||||
| Time deposit | 130,613 | 219 | 0.67 | % | 191,063 | 794 | 1.65 | % | ||||||||||||||||
| Total deposits | 690,900 | 354 | 0.20 | % | 652,365 | 1,433 | 0.87 | % | ||||||||||||||||
| FHLB advances and other borrowings | 40,133 | 136 | 1.35 | % | 52,264 | 353 | 2.68 | % | ||||||||||||||||
| Total interest-bearing liabilities | 731,033 | 490 | 0.27 | % | 704,629 | 1,786 | 1.01 | % | ||||||||||||||||
| Non-interest-bearing liabilities | 294,290 | 194,655 | ||||||||||||||||||||||
| Stockholders’ equity | 119,529 | 104,675 | ||||||||||||||||||||||
| Total | $ | 1,144,852 | $ | 1,003,959 | ||||||||||||||||||||
| Interest rate spread (3) | 3.52 | % | 3.20 | % | ||||||||||||||||||||
| Net interest margin (4) | $ | 9,486 | 3.60 | % | $ | 7,892 | 3.44 | % | ||||||||||||||||
| Tax-equivalent interest - imputed | 219 | 233 | ||||||||||||||||||||||
| Net interest income | $ | 9,267 | $ | 7,659 | ||||||||||||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 143.4 | % | 129.3 | % | ||||||||||||||||||||
| (1) | Income on tax exempt securities is presented on a fully tax-equivalent basis, using a 21% federal tax rate. |
| (2) | Includes loans classified as non-accrual. Income on tax-exempt loans is presented on a fully tax-equivalent basis, using a 21% federal tax rate. |
| (3) | Interest rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. |
| (4) | Net interest margin represents annualized, tax-equivalent net interest income divided by average interest-earning assets. |
| 38 |
| Nine months ended | Nine months ended | |||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2020 | September 30, 2019 | ||||||||||||||||||||||
| Average balance | Interest | Average yield/rate | Average balance | Interest | Average yield/rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Interest-bearing deposits at banks | $ | 12,300 | $ | 19 | 0.22 | % | $ | 814 | $ | 23 | 3.78 | % | ||||||||||||
| Investment securities (1) | 327,608 | 6,452 | 2.63 | % | 386,416 | 7,850 | 2.72 | % | ||||||||||||||||
| Loans receivable, net (2) | 647,535 | 22,909 | 4.73 | % | 511,312 | 20,456 | 5.35 | % | ||||||||||||||||
| Total interest-earning assets | 987,443 | 29,380 | 3.97 | % | 898,542 | 28,329 | 4.22 | % | ||||||||||||||||
| Non-interest-earning assets | 95,030 | 93,011 | ||||||||||||||||||||||
| Total | $ | 1,082,473 | $ | 991,553 | ||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Money market and checking | $ | 416,077 | $ | 778 | 0.25 | % | $ | 373,608 | $ | 2,024 | 0.72 | % | ||||||||||||
| Savings accounts | 111,025 | 29 | 0.03 | % | 97,590 | 26 | 0.04 | % | ||||||||||||||||
| Time deposit | 136,378 | 991 | 0.97 | % | 176,655 | 2,094 | 1.58 | % | ||||||||||||||||
| Total deposits | 663,480 | 1,798 | 0.36 | % | 647,853 | 4,144 | 0.86 | % | ||||||||||||||||
| FHLB advances and other borrowings | 40,079 | 534 | 1.78 | % | 53,567 | 1,142 | 2.85 | % | ||||||||||||||||
| Total interest-bearing liabilities | 703,559 | 2,332 | 0.44 | % | 701,420 | 5,286 | 1.01 | % | ||||||||||||||||
| Non-interest-bearing liabilities | 364,306 | 191,465 | ||||||||||||||||||||||
| Stockholders’ equity | 114,608 | 98,668 | ||||||||||||||||||||||
| Total | $ | 1,182,473 | $ | 991,553 | ||||||||||||||||||||
| Interest rate spread (3) | 3.53 | % | 3.21 | % | ||||||||||||||||||||
| Net interest margin (4) | $ | 27,048 | 3.66 | % | $ | 23,043 | 3.43 | % | ||||||||||||||||
| Tax-equivalent interest - imputed | 664 | 707 | ||||||||||||||||||||||
| Net interest income | $ | 26,384 | $ | 22,336 | ||||||||||||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 140.3 | % | 128.1 | % | ||||||||||||||||||||
| (1) | Income on tax exempt securities is presented on a fully tax-equivalent basis, using a 21% federal tax rate. |
| (2) | Includes loans classified as non-accrual. Income on tax-exempt loans is presented on a fully tax-equivalent basis, using a 21% federal tax rate. |
| (3) | Interest rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. |
| (4) | Net interest margin represents annualized, tax-equivalent net interest income divided by average interest-earning assets. |
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Rate/Volume Table. The following table describes the extent to which changes in tax-equivalent interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities affected the Company’s interest income and expense for the periods indicated. The table distinguishes between (i) changes attributable to rate (changes in rate multiplied by prior volume), (ii) changes attributable to volume (changes in volume multiplied by prior rate), and (iii) net change (the sum of the previous columns). The net changes attributable to the combined effect of volume and rate that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
| (Dollars in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 vs 2019 | 2020 vs 2019 | |||||||||||||||||||||||
| Increase/(decrease) attributable to | Increase/(decrease) attributable to | |||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Interest-bearing deposits at banks | $ | 1 | $ | - | $ | 1 | $ | (4 | ) | $ | - | $ | (4 | ) | ||||||||||
| Investment securities | (475 | ) | (129 | ) | (604 | ) | (1,148 | ) | (250 | ) | (1,398 | ) | ||||||||||||
| Loans | 1,695 | (794 | ) | 901 | 4,341 | (1,888 | ) | 2,453 | ||||||||||||||||
| Total | 1,221 | (923 | ) | 298 | 3,189 | (2,138 | ) | 1,051 | ||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Deposits | 90 | (1,169 | ) | (1,079 | ) | 102 | (2,448 | ) | (2,346 | ) | ||||||||||||||
| Borrowings | (69 | ) | (148 | ) | (217 | ) | (244 | ) | (364 | ) | (608 | ) | ||||||||||||
| Total | 21 | (1,317 | ) | (1,296 | ) | (142 | ) | (2,812 | ) | (2,954 | ) | |||||||||||||
| Net interest income | $ | 1,200 | $ | 394 | $ | 1,594 | $ | 3,331 | $ | 674 | $ | 4,005 | ||||||||||||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our assets and liabilities are principally financial in nature, and the resulting net interest income thereon is subject to changes in market interest rates and the mix of various assets and liabilities. Interest rates in the financial markets affect our decisions relating to pricing our assets and liabilities, which impact net interest income, a significant cash flow source for us. As a result, a substantial portion of our risk management activities relates to managing interest rate risk.
Our Asset/Liability Management Committee monitors the interest rate sensitivity of our balance sheet using earnings simulation models. We have set policy limits of interest rate risk to be assumed in the normal course of business and monitor such limits through our simulation process.
We have been successful in meeting the interest rate sensitivity objectives set forth in our policy. Simulation models are prepared to determine the impact on net interest income for the coming twelve months, including one using rates at September 30, 2020, and forecasting volumes for the twelve-month projection. This position is then subjected to a shift in interest rates of 100 and 200 basis points with an impact to our net interest income on a one-year horizon as follows:
| Dollar change in net | Percent change in | |||||||
| Scenario | interest income ($000’s) | net interest income | ||||||
| 200 basis point rising | $ | 643 | 1.8 | % | ||||
| 100 basis point rising | $ | 160 | 0.4 | % | ||||
| 100 basis point falling | ($ | 25 | ) | (0.1 | %) | |||
| 200 basis point falling | NM | NM | ||||||
The 200 basis point falling scenario is considered to be not meaningful (“NM”) in the current low interest rate environment.
| 40 |
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Forward-Looking
Statements
This document (including information incorporated by reference) contains, and future oral and written statements by us and our management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and we undertake no obligation to update any statement in light of new information or future events.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on operations and future prospects of us and our subsidiaries include, but are not limited to, the following:
| ● | The effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic. | |
| ● | The impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges. | |
| ● | The strength of the United States economy in general and the strength of the local economies in which we conduct our operations, including the effects of the COVID-19 pandemic on such economies, which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of our assets. | |
| ● | The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, consumer protection, insurance, tax, trade and monetary and financial matters. | |
| ● | The effects of changes in interest rates (including the effects of changes in the rate of prepayments of our assets) and the policies of the Board of Governors of the Federal Reserve System including on our net interest income and the value of our securities portfolio. | |
| ● | Our ability to compete with other financial institutions due to increases in competitive pressures in the financial services sector. | |
| ● | Our inability to obtain new customers and to retain existing customers. | |
| ● | The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. | |
| ● | Technological changes implemented by us and by other parties, including third-party vendors, which may be more difficult to implement or more expensive than anticipated or which may have unforeseen consequences to us and our customers. | |
| ● | Our ability to develop and maintain secure and reliable electronic systems. | |
| ● | The effectiveness of our risk management framework. | |
| ● | The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents and our ability to identify and address such incidents. | |
| ● | Interruptions involving our information technology and telecommunications systems or third-party servicers. | |
| ● | Changes in and uncertainty related to the availability of benchmark interest rates used to price our loans and deposits, including the expected elimination of LIBOR. | |
| ● | The effects of severe weather, natural disasters, widespread disease or pandemics, and other external events. | |
| ● | Our ability to retain key executives and employees and the difficulty that we may experience in replacing key executives and employees in an effective manner. | |
| ● | Consumer spending and saving habits which may change in a manner that affects our business adversely. | |
| ● | Our ability to successfully integrate acquired businesses and future growth. | |
| ● | The costs, effects and outcomes of existing or future litigation. | |
| ● | Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the FASB, such as the implementation of CECL. | |
| ● | The economic impact of past and any future terrorist attacks, acts of war or threats thereof, and the response of the United States to any such threats and attacks. | |
| ● | Our ability to effectively manage our credit risk. | |
| ● | Our ability to forecast probable loan losses and maintain an adequate allowance for loan losses. | |
| ● | The effects of declines in the value of our investment portfolio. | |
| ● | Our ability to raise additional capital if needed. | |
| ● | The effects of declines in real estate markets. | |
| ● | The effects of fraudulent activity on the part of our employees, customers, vendors, or counterparties. |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including other factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission, including the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 12, 2020 and the “Risk Factors” section of subsequent Quarterly Reports on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of September 30, 2020. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2020 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
| 41 |
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or its subsidiaries is a party or which any of their property is subject, other than ordinary routine litigation incidental to their respective businesses.
ITEM 1A. RISK FACTORS
In addition to the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Form 10-K for the fiscal year ended December 31, 2019, the following risk factor applies to the Company:
The COVID-19 pandemic has had an adverse impact on our business and results of operations, and the duration and extent of this impact is subject to a high degree of uncertainty.
The spread of COVID-19 has led to a broad economic recession and elevated levels of unemployment, and has adversely impacted certain industries and markets in which our customers operate, particularly the accommodations and hotels, restaurants, and agriculture industries. As of September 30, 2020, the Bank’s aggregate loan exposure to the accommodations and hotels, restaurants, and agriculture industries made up approximately 17.2% of the total loan portfolio.
These developments have had, and are expected to continue to have, an adverse impact on the credit quality of our loan portfolio, our business, and results of operations. As of September 30, 2020, approximately $22.9 million, or 3.17%, of loans were in payment deferral status under COVID-19 related modifications.
The extent of the pandemic’s effect on our business will depend on many factors, primarily including the speed and extent of any recovery from the related economic recession. Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our Kansas markets, the development and distribution of vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of federal economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in our markets.
The pandemic has also increased our exposure to related business risks, including the following:
| ● | We have had to modify our business practices, including with respect to branch operations, employee travel, employee work locations, participation in meetings, events and conferences, and related changes for our vendors and other business partners. The effects of these changes on our business are uncertain and difficult to quantify, but could include decreased efficiency, lower growth and increased risks of fraud. | |
| ● | Demand for our products and services may decline, and we may determine that we are not able to prudently grow our loan portfolio. | |
| ● | If the economic downturn or high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased provisions for credit losses and charge-offs and reduced income. | |
| ● | The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us. | |
| ● | A further and sustained decline in our stock price or the occurrence of other developments could, under certain circumstances, cause our management to perform impairment testing on our goodwill or other intangibles, which could require us to record an impairment charge that would adversely impact our results of operations and the ability of the Bank to pay dividends to us. | |
| ● | As a result of the decline in the Federal Reserve’s target federal funds rate to near 0% (or possibly below 0% in the future), the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and reducing net income. |
| 42 |
| ● | Uncertainties created by the pandemic, combined with the disruptions to our own business, will negatively affect our ability to execute our acquisition strategy for the foreseeable future, limiting or delaying our future growth plans. | |
| ● | Our cybersecurity risks are increased as the result of an increase in the number of our employees and the employees of our third-party vendors and partners working remotely. | |
| ● | Federal and state taxes may increase, including as a result of the effects of the pandemic on governmental budgets, which could reduce our net income. | |
| ● | FDIC premiums could increase if the agency experiences additional resolution costs. |
In addition, we depend upon the management skills of our executive officers and directors. The unanticipated loss or unavailability of key employees due to the pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| Exhibit 10.1 | Change in Terms Agreement dated November 1, 2020, between Landmark Bancorp, Inc. and First National Bank of Omaha | ||
| Exhibit 31.1 | Certificate of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) | ||
| Exhibit 31.2 | Certificate of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) | ||
| Exhibit 32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| Exhibit 32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| Exhibit 101 | Interactive data files formatted in Inline XBRL pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Earnings for the three and nine months ended September 30, 2020 and September 30, 2019; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and September 30, 2019; (iv) Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and September 30, 2019; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 30, 2019; and (vi) Notes to Consolidated Financial Statements | ||
| Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| 43 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LANDMARK BANCORP, INC. | |
| Date: November 6, 2020 | /s/ Michael E. Scheopner |
| Michael E. Scheopner | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 6, 2020 | /s/ Mark A. Herpich |
| Mark A. Herpich | |
| Vice President, Secretary, Treasurer | |
| and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
| 44 |